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SECURITIES AND EXCHANGE COMMISSION


Washington, DC 20549


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FORM 10-K


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


|           |  |                                              
|---------- |  | ---------------------------------------------
|(Mark One) |  |                                              
|[X]        |  | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
|           |  | OF THE SECURITIES EXCHANGE ACT OF 1934       
|           |  |                                              
|           |  | For the fiscal year ended December 31, 2003  

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 1-16561


ANNUITY AND LIFE RE (HOLDINGS), LTD.

(Exact Name of Registrant as Specified in Its Charter)


|                                         |  |                    
|---------------------------------------- |  | -------------------
|BERMUDA                                  |  | 66-0619270         
|(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) |  |                    

Registrants telephone number, including area code (441) 296-7667

Securities registered pursuant to Section 12(b) of the Act:

|                               |  |                                          
|------------------------------ |  | -----------------------------------------
|Title of Each Class            |  | Name of Each Exchange on Which Registered
|                               |  |                                          
|Common Shares, $1.00 par value |  | The New York Stock Exchange              

Securities registered pursuant to Section 12(g) of the Act:

None
(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]

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

As of June 30, 2003, the aggregate market value of Common Shares, $1.00
par value, held by non-affiliates was $18,375,683.

As of March 12, 2004, 26,454,195 Common Shares, $1.00 par value, were
outstanding.

DOCUMENTS INCORPORATED BY REFERENCE.



Certain information required by Items 10, 11, 12, 13, and 14 is
incorporated by reference into Part III hereof from the registrants proxy
statement for its 2004 Annual Meeting of Shareholders, which is expected to be
filed with the Securities and Exchange Commission within 120 days of the close
of the registrants fiscal year ended December 31, 2003.




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TABLE OF CONTENTS

|         |  |                                                                                                               |  |          |    |  |  |      |  | 
|-------- |  | ------------------------------------------------------------------------------------------------------------- |  | -------- | -- |  |  | ---- |  | 
|         |  |                                                                                                               |  |          |    |  |  | Page
|         |  |                                                                                                               |  |          |    |  |  |     
|         |  |                                                                                                               |  | PART I   |    |  |  |     
|Item 1.  |  | Business                                                                                                      |  |          | 1  | 
|Item 2.  |  | Properties                                                                                                    |  |          | 23 | 
|Item 3.  |  | Legal Proceedings                                                                                             |  |          | 24 | 
|Item 4.  |  | Submission of Matters to a Vote of Security Holders                                                           |  |          | 24 | 
|         |  |                                                                                                               |  | PART II  |    |  |  |     
|Item 5.  |  | Market for Registrants Common Equity, Related
Stockholder Matters, and Issuer Purchases of
Equity Securities |  |          | 25 | 
|Item 6.  |  | Selected Financial Data                                                                                       |  |          | 26 | 
|Item 7.  |  | Managements Discussion and Analysis of Financial
Condition and Results of Operations                         |  |          | 27 | 
|Item 7A. |  | Quantitative and Qualitative Disclosures about
Market Risk                                                    |  |          | 57 | 
|Item 8.  |  | Financial Statements and Supplementary Data                                                                   |  |          | 62 | 
|Item 9.  |  | Changes in and Disagreements with Accountants on
Accounting and
Financial Disclosure                          |  |          | 92 | 
|Item 9A. |  | Controls and Procedures                                                                                       |  |          | 92 | 
|         |  |                                                                                                               |  | PART III |    |  |  |     
|Item 10. |  | Directors and Executive Officers of the Registrant                                                            |  |          | 92 | 
|Item 11. |  | Executive Compensation                                                                                        |  |          | 92 | 
|Item 12. |  | Security Ownership of Certain Beneficial Owners and Related Stockholder Matters                               |  |          | 92 | 
|Item 13. |  | Certain Relationships and Related Transactions                                                                |  |          | 92 | 
|Item 14. |  | Principal Accountant Fees and Services                                                                        |  |          | 92 | 
|         |  |                                                                                                               |  | PART IV  |    |  |  |     
|Item 15. |  | Exhibits, Financial Statement Schedules, and
Reports on Form 8-K                                              |  |          | 93 | 





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PART I

Item 1.Business.

Overview

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

As discussed in greater detail elsewhere in this report, our company
encountered significant difficulties during the last three years. In addition
to reporting significant operating losses for those years, we did not have
sufficient available cash and investments at December 31, 2002 to post as
collateral to satisfy all of our obligations under certain of our reinsurance
agreements. During 2003, we negotiated the termination or recapture of most of
our reinsurance agreements. As a result of those terminations and recaptures
and other actions taken by management, as of December 31, 2003 we had met all
the collateral obligations of our remaining ceding companies with the exception
of those asserted by Connecticut General Life Insurance Company (CIGNA), the
cedent under our only remaining guaranteed minimum death benefit (GMDB) and
guaranteed minimum income benefit (GMIB) agreement. As of December 31, 2002,
CIGNA asserted that we were required to post $59 million of collateral in
addition to the $11 million of collateral we had previously provided. As of
December 31, 2003, CIGNA was seeking $49 million of collateral in addition to
the $11 million of collateral we had previously provided. We do not agree that
the aggregate $60 million collateral requirement currently asserted by CIGNA is
required to be posted. As a result, we have not posted any additional
collateral for this agreement. If CIGNAs asserted collateral requirement is
valid, we do not have sufficient available cash and investments to satisfy
CIGNAs request. We are attempting to restructure the reinsurance agreement or
otherwise meet or reduce CIGNAs request for collateral. If these negotiations
are unsuccessful, CIGNA could initiate arbitration or litigation proceedings
against us. The specific relief sought and the outcome of any proceedings that
CIGNA could initiate cannot be determined at this time. If we do not prevail in
any such arbitration or litigation proceedings, it would have a material
adverse effect on our financial condition and we may be required to liquidate
our operations.

As a result of the termination and recapture of several of our reinsurance
agreements in 2003, our life insurance in force has declined from $117.5
billion at December 31, 2002 to $17.5 billion at December 31, 2003. In
addition, we have terminated our annuity reinsurance agreements with The Ohio
National Life Insurance Company, our then second largest annuity reinsurance
agreement, and Hartford Life, our then largest GMDB reinsurance agreement. We
are not currently seeking to negotiate the termination or recapture of any of
our remaining reinsurance agreements except that, as noted above, we are
seeking to restructure our agreement with CIGNA.

Also in 2003, we instituted substantial premium rate increases on all of
our non-guaranteed premium yearly renewable term agreements. The Metropolitan
Life Insurance Companies (MetLife), the cedent under our largest life
reinsurance agreement, objected to the premium rate increase and demanded
arbitration. On December 19, 2003, the panel in the arbitration proceeding
ruled that our rate increase was valid effective as of May 5, 2003. As a result
of the ruling, MetLife chose to recapture its reinsurance agreement. The
impact of the ruling and MetLifes recapture was to release funds we had
previously posted as collateral under that agreement. We utilized a large
portion of those funds to fully collateralize Citibanks letter of credit
facility with us and to pay Transamerica Occidental Life Insurance Company
(Transamerica) an amount that we believe was reasonably due to it as of
October 31, 2003 after deducting $5.0 million for investment related expenses
that we believe was owed to us by Transamerica. Transamerica is currently
pursuing arbitration with us asserting that the $5.0 million offset is not
justified





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and that we owe Transamerica that amount and interest on the amounts that
Transamerica previously alleged were due.

In addition to the discussions with Transamerica related to the alleged
amounts owed to it, we have been attempting to engage Transamerica, and
ultimately IL Annuity and Insurance Company (IL Annuity), the primary
insurance company under the Transamerica agreement, in discussions aimed at
improving the investment returns on the assets supporting that agreement and
potentially redesigning the VisionMark product to reduce our minimum interest
guarantee exposure. If we are not successful in convincing Transamerica and IL
Annuity to restructure the portfolio and/or to redesign the product, we may
incur additional write downs of deferred acquisition costs in the future.

We plan to continue to receive premiums and pay claims under our remaining
reinsurance treaties; however, we are not currently underwriting any new
treaties or accepting any new business from our existing treaties. We are
currently exploring whether we can, should or will begin selling new insurance
and reinsurance products in the future, but we cannot assure you that we will
be able to successfully develop, underwrite or market any products currently
being considered.

There can be no assurance that we will be able to improve our operations
and liquidity. If we are unable to reposition our investment
portfolio to achieve a substantially higher yield within our investment
guidelines, successfully defend against the pending purported shareholder class
action suit, improve the performance of our reinsurance agreement with
Transamerica and restructure our reinsurance agreement with CIGNA, we may not
be able to meet our obligations in 2004. Our failure to achieve any one of the
foregoing items could have a material adverse effect on our financial condition
and results of operations. For a more detailed discussion of certain factors
that could materially and adversely affect our financial condition and results
of operations, please see Item 7. Managements Discussion and Analysis of
Financial Condition and Results of Operations  Forward-Looking Statements.

The consolidated financial statements included in this report do
not include any adjustments that might be necessary should we be unable to
continue as a going concern.

The Reinsurance Business

The business of reinsurance generally consists of reinsurers, such as
Annuity and Life Re, entering into contractual arrangements (known as treaties)
with primary insurers (known as ceding companies or cedents) whereby the
reinsurer agrees to indemnify the ceding company for all or a portion of the
risks associated with an underlying insurance policy in exchange for a
reinsurance premium payable to the reinsurer. Reinsurers 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, the reinsurer cedes a portion of
the risk associated with an underlying reinsurance contract to other reinsurers
(known as retrocessionaires).

Reinsurance agreements may be written on an automatic treaty basis or
facultative basis. 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 that reinsurer to accept such
risks without obtaining further approval from that reinsurer. 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, or
on an excess of retention basis, where the amount of risk in excess of the
ceding companys retention is reinsured. Under either basis, premiums are paid
to the reinsurer in proportion to the risk assumed by the reinsurer.

The treaties that we have written that are still in force are generally in
the form of yearly renewable term, coinsurance, modified coinsurance or
coinsurance funds withheld. Under yearly renewable term, we share only in the
mortality risk for which we receive a premium. In coinsurance, modified
coinsurance and coinsurance funds withheld arrangements, we generally share
proportionately in all or a portion of the risks

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inherent in the underlying policies, including mortality, persistency and
fluctuations in investment results. Under such agreements, we agree to
indemnify the primary insurer for all or a portion of the risks associated with
the underlying insurance policies in exchange for a proportionate share of
premiums. Coinsurance differs from modified coinsurance and coinsurance funds
withheld with respect to ownership of the assets supporting the reserves. Under
our coinsurance arrangements, ownership of these assets is transferred to us,
whereas in modified coinsurance and coinsurance funds withheld arrangements,
the ceding company retains ownership of these assets, but we share in the
investment income and risk associated with the assets.

Certain of our remaining reinsurance treaties provide for recapture
rights, permitting the ceding company to reassume all or a portion of the risk
ceded to us after an agreed-upon period of time (generally 10 years for our
life reinsurance treaties), subject to certain other conditions. Some of our
reinsurance treaties allow the ceding company to recapture the ceded risk if we
fail to maintain a specified rating or if other financial conditions relating
to us are not satisfied. Because our financial ratings were downgraded in 2003
and subsequently withdrawn by the various rating agencies, we have had certain
treaties recaptured as a result. In 2002 and 2003, we have also sought to
negotiate the recapture of certain treaties to reduce or eliminate the
collateral requirements associated with those treaties. Recapture of business
previously ceded does not affect earned premiums paid to us prior to the
recapture of such business and may involve the payment to us of a recapture
fee. Nevertheless, we may be obligated to return unearned premiums, or pay
other penalties, and we may also have to liquidate assets in order to return
the assets supporting the reserve liabilities. In addition, we would no longer
be entitled to receive the premiums paid by the policyholders underlying the
recaptured business and would likely be required to accelerate the amortization
of any unamortized deferred acquisition costs associated with business that is
recaptured, which was the case with certain treaties recaptured during 2002 and
2003. These recaptures have had an adverse impact on our reported earnings.

Risks Reinsured

We have historically written reinsurance predominantly on a direct basis
with primary life insurance companies and other reinsurers. Our remaining
reinsurance treaties are generally for traditional life reinsurance and annuity
reinsurance, which expose us to the following categories of risks: (i)
mortality, (ii) investment, (iii) persistency (or lapse) and (iv) expense.

Mortality risk is the risk that death claims differ from what we expect.
With respect to our life segment, a greater frequency or higher average size of
death claims than we expected could cause us to pay greater death benefits,
adversely affecting the profitability of our reinsurance agreements. Even if
the total death benefits paid over the life of our contracts do not exceed the
expected amount, unexpected timing of deaths can cause us to pay more death
benefits in a given time period than expected, adversely impacting
profitability in that period. We try to address these risks by considering each
block of business based on an evaluation of the ceding companys underwriting
efficacy, history, management, target market, concentration of risk, products
and underwriting criteria relative to the industry. We have historically
targeted primarily first dollar quota share pools of top producing direct
writing companies under which we participated proportionately with other
reinsurers on all of the ceded risks, although not necessarily at the same
pricing. We have sought to mitigate our risk of exposure to any one block of
business or any one individual life by typically requiring our ceding companies
to retain at least 10% of every life insurance risk reinsured. We further
address the risk of any one large claim by generally limiting our own net
liability on any single-life risk to $1,000,000.

We are subject to investment risk with respect to our own investments and
with respect to the assets held and managed by our ceding companies or others
under our modified coinsurance and coinsurance funds withheld arrangements. Our
investments, which primarily consist of investment grade fixed income
securities, are subject to interest rate and credit risk. Significant changes
in interest rates expose us to the risk of earning less income during periods
when interest rates are falling, or realizing losses if we are forced to sell
securities during periods when interest rates are rising. We are also subject
to prepayment risk on certain securities in our investment portfolio, including
mortgage-backed securities and collateralized mortgage obligations, which
generally prepay faster during periods of falling interest rates as the

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underlying mortgage loans are repaid and refinanced by borrowers in order
to take advantage of lower interest rates. During periods when interest rates
have risen or are rising, the rate of prepayments on these types of securities
will decelerate, effectively extending maturities and increasing the potential
for losses.

As of December 31, 2003, our cedents had approximately $667.8 million in
assets that were held and managed by or for them under our modified coinsurance
and coinsurance funds withheld arrangements. The largest portion of the funds
withheld by our cedents at December 31, 2003, which amounted to $663 million,
was related to our modified coinsurance annuity reinsurance agreements. While
we do not own the assets that are held under modified coinsurance or
coinsurance funds withheld arrangements, they are used to fund our obligations
under our annuity reinsurance agreements. We record a receivable called Funds
withheld at interest based on the amounts due to us under these contracts and
are exposed to the risks associated with the securities in which the assets
supporting the receivable are invested. As of December 31, 2003, approximately
$604 million of our Funds withheld at interest was attributable to our annuity
reinsurance agreement with Transamerica. The assets supporting the receivable
under the Transamerica agreement are primarily invested in convertible bonds.
The value of convertible bonds in which these assets are invested is a function
of their investment value (determined by comparing their yield with the yields
of other securities of comparable maturity and quality that do not have a
conversion privilege) and their conversion value (their market value if
converted into the underlying common stock). The investment value of
convertible bonds is influenced by changes in interest rates, with investment
value declining as interest rates increase and increasing as interest rates
decline, and by the credit standing of the issuer and other factors. The
conversion value of convertible bonds is determined by the market price of the
underlying common stock. If the conversion price is above the market value of
the underlying common stock, the price of the convertible bonds is governed
principally by their investment value. To the extent the market price of the
underlying common stock approaches or exceeds the conversion price, the price
of the convertible bonds will be increasingly influenced by their conversion
value. Consequently, the value of convertible bonds may be influenced by
changes in the equity markets. The remainder of the assets supporting the
receivable under the Transamerica agreement are invested in fixed income
securities, including securities that are rated below investment grade. These
securities are subject to risks similar to those described above with respect
to our own investments. In addition, the below investment grade securities
generally carry greater risk.

We are also subject to investment risk based on the difference between
investment returns earned on the investments managed by us or our ceding
companies and the credited interest rates paid under policies reinsured by us.
Both rising and declining interest rates can affect the income we derive from
these interest rate spreads. During periods in which prevailing market interest
rates are falling, any new investments made in fixed income securities to
replace investments that mature or are prepaid will likely bear lower interest
rates, reducing our investment income. We may not be able to fully offset the
decline in our investment income with lower crediting rates on our annuity
reinsurance agreements or reinsurance agreements covering life insurance
policies with cash value components. During periods of rising interest rates,
our ceding companies may need to increase the crediting rates on the annuities
or life insurance policies with cash value components that we reinsure. We may
not, however, be able to acquire investments with interest rates sufficient to
offset these increased crediting rates. Significant declines in the financial
markets generally also increase our investment risk, because the return we
receive on our assets may not be sufficient to fully offset the cost of
benefits due under certain reinsured policies. Certain policy benefits, such as
guaranteed minimum death benefits, ratchet up the death benefit when
policyholder account values increase, but do not reduce the death benefit when
policyholder account values decrease. During periods in which the general value
of the financial markets and policyholder account values are falling, as was
the case in 2001 and 2002, claims from such guaranteed minimum death benefits
increase because the difference between the policyholder account value and the
ratcheted-up death benefit increases. Further, because the premiums charged for
such benefits are based on policyholder account values, we receive reduced
premiums for this benefit when financial markets are declining.

We also reinsure policies providing guaranteed minimum death benefits and
guaranteed minimum income benefits. We are subject to investment risk to the
extent that investment returns on the assets supporting the liabilities under
these policies are not sufficient to fund the obligations to policyholders.
Guaranteed minimum death benefits entitle a policyholder to a minimum benefit
if the policyholder dies

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prior to annuitizing their policy and the assets supporting that
obligation are not sufficient. As a reinsurer, we are obligated to reimburse
the issuer of such policies for our share of any shortfall between the
guaranteed minimum death benefit amount and the actual policyholder account
values upon death. Guaranteed minimum income benefits entitle a policyholder
to purchase a minimum lifetime annuity payment stream after the expiration of a
stipulated waiting period. We are subject to investment risk to the extent that
investment returns on the assets supporting the liabilities under these
policies are not sufficient to fund the payment stream the policyholder is
entitled to receive. However, because the annuity purchase rates applicable to
the guaranteed minimum income benefits are often less favorable than prevailing
annuity purchase rates when the underlying policy annuitizes, policyholders may
receive a preferable stream of annuity payments using the actual account value
at prevailing annuity purchase rates as opposed to utilizing the predetermined
guaranteed minimum income benefit purchase rate under the policy. To the degree
this occurs, any difference in annuity purchase rates will offset the
investment risk.

We may use interest rate swaps and other financial instruments as tools to
mitigate the effects of asset/liability mismatches or the effect of interest
rate changes on our balance sheet, particularly if we develop new products that
require the use of hedging strategies to manage risk. In general, however, we
do not hedge our investment risk.

Persistency or lapse risk is the risk that policyholders maintain their
policies for different periods of time than expected. This includes policy
surrenders and policy lapses. Surrenders are the voluntary termination of a
policy by the policyholder, while lapses are the termination of the policy due
to non-payment of premium. Surrender and lapse rates that are higher than what
we assumed when pricing a contract can cause us to increase the rate of
amortization of our deferred acquisition costs for the annuity policies and
certain types of life insurance that we reinsure, which would adversely affect
our results of operations. If the actual surrender and lapse rates remain too
high for too long and we conclude that the contract will be unprofitable over
its expected lifetime, we are then required to write down our deferred
acquisition costs to their estimated recoverable cost, as was the case in 2001
and 2002 with our annuity reinsurance agreement with Transamerica. Surrenders
also usually involve the return of the policys cash surrender value to the
policyholder, which reduces the asset base on which we earn investment income
and, in some cases, premiums. In addition, with respect to our Transamerica
agreement, a surrendering policyholder is entitled to a guaranteed minimum
interest rate on his or her invested premiums, and we are required to pay our
proportionate share of any shortfall between that guaranteed amount and the
actual value of the policyholders account. As discussed later in this report,
we have been required to make significant minimum interest guarantee payments
under this contract.

Certain of our life reinsurance products provide level premiums to us for
a fixed period of time, typically 10 to 20 years. The premiums we receive on
these level premium contracts are expected to exceed the death benefits payable
to the underlying policyholders during the early years of the contract. The
death benefits we expect to pay under these contracts generally increase over
time, while the premiums we receive are expected to generally remain level or
decrease over time because of surrenders, lapses, and deaths. Thus, the death
benefits payable under the policy ultimately exceed the premiums we receive in
later years. With respect to these level premium contracts, if the surrender
and lapse rates of the policies are significantly lower than we assumed when
pricing the reinsurance contracts, the profitability of the contracts may be
adversely affected.

Expense risk is the risk that our actual expenses will be higher than we
anticipated, or that our operations are less efficient than anticipated.

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Business Written

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

Policy Revenues, Insurance In Force and Annuity Reinsurance Deposits

|                                                 |                     |            |             |                         |             |      |               |            |             |   |               |            |             | 
|------------------------------------------------ | ------------------- | ---------- | ----------- | ----------------------- | ----------- | ---- | ------------- | ---------- | ----------- | - | ------------- | ---------- | ----------- | 
|                                                 |                     |            |             | Year Ended December 31,
|                                                 |                     |            |             |                        
|                                                 |                     |            |             | 2003                    |             | 2002 |               | 2001      
|                                                 |                     |            |             |                         |             |      |               |           
|Policy Revenues                                  |                     |            |             |                         |             |      |               |            |             |   |               |           
|                                                 | Life Reinsurance    |            |             |                         |             |      |               |            |             |   |               |            |            
|                                                 |                     | First Year |             | $                       | 8,060,074   |      |               | $          | 117,801,608 |   |               | $          | 94,746,734  | 
|                                                 |                     | Renewal    |             |                         | 152,355,600 |      |               |            | 215,379,401 |   |               |            | 141,607,931 | 
|                                                 | Annuity Reinsurance |            |             | 6,557,166               |             |      |               | 10,916,432 |             |   |               | 15,438,572 |            
|                                                 |                     |            |             |                         |             |      |               |            |             |   |               |            |             | 
|                                                 |                     | Total      |             | $                       | 166,972,840 |      |               | $          | 344,097,441 |   |               | $          | 251,793,237 | 
|                                                 |                     |            |             |                         |             |      |               |            |             |   |               |            |             | 
|Insurance in force at end
of year (in thousands) |                     | $          | 17,510,100  |                         |             | $    | 117,511,000   |            |             | $ | 117,400,000   |           
|                                                 |                     |            |             |                         |             |      |               |            |             |   |               |            |             | 
|Annuity Reinsurance Deposits                     |                     | $          | 670,717,546 |                         |             | $    | 1,443,143,080 |            |             | $ | 1,519,596,075 |           
|                                                 |                     |            |             |                         |             |      |               |            |             |   |               |            |             | 

We separately track the results of our life and annuity operations in
segments. Please refer to Item 7. Managements Discussion and Analysis of
Financial Condition and Results of Operations  Segment Results and Note 13 to
our consolidated financial statements for more detailed information.

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

Our annuity reinsurance segment is the reinsurance of general account
fixed deferred annuities, general account payout annuity obligations and
certain ancillary risks arising from variable annuities. With respect to the
general account fixed annuities we reinsure, our agreements generally relate to
individual general account single premium deferred annuity policies, which
involve the tax-deferred accumulation of interest on a single premium paid by
the policyholder (accumulation phase policies). In the past, our agreements
included annuities that pay fixed amounts periodically to policyholders over a
fixed period of time or their lives (payout phase policies). Accumulation phase
policies are subject primarily to investment risk and persistency (lapse) risk,
while payout phase policies are primarily subject to investment risk and
mortality (longevity) risk. All of the fixed annuities we currently reinsure
are accumulation phase policies.

The fixed annuity products we reinsure have minimum interest guarantee
provisions required under state law that entitle the policyholder to a
specified minimum annual return over the life of the policy. These lifetime
guarantees are typically 3% to 3.5% annually. Further, policyholders are
typically guaranteed interest rates in excess of the state required minimums
for the initial year of the policy. After the expiration of the period in which
the crediting rate is guaranteed, the primary insurer has the discretionary
ability to adjust the crediting rate annually to any rate at or above the
guaranteed minimum rate required under state law. Policyholders are typically
permitted to withdraw all or a part of their premium paid, plus an accumulation
amount equal to the accrued interest credited to the account, subject to the
assessment of a surrender charge for withdrawals in excess of specified limits.
Certain policies reinsured by us guarantee the policyholder a crediting rate
beyond the initial policy year, including those policies that were covered by
our annuity reinsurance agreement with Ohio National, which was terminated in
the first quarter of 2003.

Under our Transamerica annuity reinsurance agreement, the minimum interest
guarantee provisions take effect when the policyholder dies, their policy
annuitizes, or the policy is surrendered. Our aggregate

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minimum interest guarantee exposure under this contract equals our
proportionate share of the amount by which each policyholders premiums
deposited compounded at the minimum guarantee interest rate exceeds the
policyholders actual account value at the date of surrender. The actual
account value is calculated after expenses are deducted from the gross
investment returns and such expenses generally accrue at a rate of
approximately 2.75% of the assets annually. Our minimum interest guarantee
exposure is calculated on a policyholder-by-policyholder basis. The amount by
which the value of certain policyholder accounts exceeds the minimum guarantee
amount with respect to those accounts does not offset our exposure to the
amount by which the value of other policyholder accounts is less than the
minimum guarantee amount with respect to such other accounts. This exposure
generally arises during periods in which investment returns fall near or below
the minimum guaranteed rate, as has occurred in recent years.

If we conclude that we are exposed to minimum interest guarantees under a
reinsurance agreement, we then estimate the expected minimum interest guarantee
payments that we may be required to make by projecting the anticipated future
investment performance of the assets supporting the policyholder accounts and
by applying projected surrender, annuitization and mortality assumptions to the
exposed amounts. These expected future payments are utilized in determining the
amount of the deferred acquisition cost asset we can carry on our balance
sheet. Because we assume that the investment performance of the underlying
assets will exceed the minimum guaranteed interest rate on the underlying
annuity policies over their life, we anticipate that any minimum interest
guarantee exposure we have will decrease over time. The amount of expected
minimum interest guarantee payments is therefore dependent upon our estimate of
the number of policyholders that will annuitize or surrender their policy or
die prior to the value of the underlying assets increasing to a level where it
equals or exceeds the policyholders minimum guarantee amounts. If our
assumptions for investment returns prove to be inaccurate, or if lapse rates
exceed our assumptions, we may be required to make additional minimum interest
guarantee payments and record additional charges, which would adversely impact
our earnings. Our minimum interest guarantee exposure can increase during any
period in which the actual investment performance of the underlying assets less
expenses lags the minimum guaranteed interest rate.

We also reinsure certain guarantees associated with variable annuity
contracts, including guaranteed minimum death benefits and guaranteed minimum
income benefits. Under contracts with a guaranteed minimum death benefit, a
policyholders beneficiary is entitled upon the policyholders death to receive
the greater of the policyholders account value or a guaranteed minimum benefit
payment. Some of the policies underlying the guaranteed minimum death benefit
agreement we reinsure are written on a ratchet basis, which means that the
guaranteed minimum death benefit payable to the policyholders beneficiary
equals the highest policyholder account value achieved over the course of the
contract, as measured annually on each anniversary date of the policy until the
policyholder reaches the attained age under the policy (typically 80 years of
age). Other guaranteed minimum death benefit policies are written on a
roll-up basis, which means that the guaranteed minimum death benefit equals
the premiums paid by the policyholder compounded at a defined interest rate
(typically 3% to 6%), which accrues until the policyholder reaches the attained
age or the roll-up death benefit reaches a predetermined amount, typically
double the premiums paid. Regardless of whether a policy is written on a
ratchet or a roll-up basis, if the policyholder survives beyond the policy
maturity date, which is typically when the policyholder reaches 90 years of
age, he or she is no longer entitled to receive the guaranteed minimum death
benefit amount. Before that time, the issuer of the policy bears the risk that
protracted under-performance of the financial markets could result in
guaranteed minimum death benefits payable to the policyholders beneficiary
upon the policyholders death that are higher than the actual policyholder
account value. As a reinsurer, we are obligated to reimburse the issuer of such
policies for our share of any shortfall between the guaranteed minimum death
benefit amount and the actual policyholder account values upon death.

We have one remaining contract reinsuring guaranteed minimum death
benefits and guaranteed minimum income benefits. Almost all of the guaranteed
minimum death benefit policies underlying the agreement also include a
guaranteed minimum income benefit feature. Although the individual
policyholders will only be entitled to receive either the death benefit or the
income benefit under those policies, we have presented our exposure to these
benefits in Tables #1 through #4 below without any adjustment to reflect that a
policyholder will not receive both benefits. The information in each table is

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presented as of December 31, 2003 and is based on data dated September 30,
2003, which is the most recent data our ceding company under our remaining
GMDB/GMIB agreement has provided to us.

As of December 31, 2003, the guaranteed minimum death benefit net amount
at risk (i.e., the amount by which guaranteed death benefits exceed related
account values) under our remaining GMDB/GMIB agreement was approximately $133
million. This amount is an aggregate measure of our exposure to guaranteed
minimum death benefits assuming all the policyholders died on December 31,
2003. Our expected liability for future guaranteed minimum death benefit
payments, based on our mortality assumptions is substantially less. Because the
premium paid to us is derived from asset-based charges levied against the
account value, there may be circumstances during periods of reduced performance
in the financial markets when we could be under compensated for reinsuring the
guaranteed minimum death benefit.

Table #1 below summarizes key attributes of our exposure to guaranteed
minimum death benefits as of December 31, 2003.

TABLE #1

Guaranteed Minimum Death Benefit
(dollars in millions)

|                                         |  |                  |     |         |  |         |     |       |  |   |      |   |  |   |     | 
|---------------------------------------- |  | ---------------- | --- | ------- |  | ------- | --- | ----- |  | - | ---- | - |  | - | --- | 
|                                         |  | Type of Contract
|                                         |  |                 
|                                         |  | Return of        |     |         |  |         |     |       |  |   |      |   |  |  
|                                         |  | Premium          |     | Ratchet |  | Roll-Up |     | Total
|                                         |  |                  |     |         |  |         |     |      
|Policyholder account value               |  | $                | 1   |         |  | $       | 78  |       |  | $ | 185  |   |  | $ | 264 | 
|Net amount at risk                       |  | $                | 0   |         |  | $       | 35  |       |  | $ | 98   |   |  | $ | 133 | 
|Average age of policyholder              |  |                  | 87  |         |  |         | 62  |       |  |   | 64   |   |  |   | 64  | 
|Range of minimum guarantee
return rates  |  |                  | n/a |         |  |         | n/a |       |  |   | 3-6  | % |  |   | n/a | 
|Average of range of minimum return rates |  |                  | n/a |         |  |         | n/a |       |  |   | 5.83 | % |  |   | n/a | 

A guaranteed minimum income benefit entitles a policyholder to purchase a
lifetime annuity payment stream after the expiration of a stipulated waiting
period of at least 7 years based upon the initial premium paid by the
policyholder compounded at a predetermined rate, usually 3% to 6%, depending on
the age of the policyholder. The annuity purchase rate used to calculate the
income stream the policyholder is entitled to receive is a predetermined rate.
We are subject to investment risk to the extent that investment returns on the
assets supporting the liabilities under these policies are not sufficient to
fund the payment stream the policyholder is entitled to receive. However,
because the annuity purchase rates applicable to the guaranteed minimum income
benefits are often less favorable than prevailing annuity purchase rates when
the underlying policy annuitizes, policyholders may receive a preferable stream
of annuity payments using the actual account value at prevailing annuity
purchase rates as opposed to utilizing the predetermined guaranteed minimum
income benefit purchase rate under the policy. To the degree this occurs, any
difference in annuity purchase rates will offset the investment risk. Because
none of the guaranteed minimum income benefit policies we reinsure have reached
the end of the stipulated waiting period, we cannot accurately predict the
effect the unfavorable annuity purchase rates will have on policyholders
desire to utilize this benefit under various market conditions.

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Table #2 below summarizes key attributes of our exposure to guaranteed
minimum income benefits as of December 31, 2003.

TABLE #2

Guaranteed Minimum Income Benefit
(dollars in millions)

|                                                   |  |   |      |  
|-------------------------------------------------- |  | - | ---- | -
|Policyholder account value                         |  | $ | 753  |  
|Net amount at risk                                 |  | $ | 262  |  
|Average age of policyholders                       |  |   | 62   |  
|Range of minimum guarantee return rates            |  |   | 3-6  | %
|Average of range of minimum guarantee return rates |  |   | 5.91 | %
|Average years remaining until annuitization        |  |   | 3.37 |  

To determine our guaranteed minimum income benefit net amount at risk
included in Table #2 above, we assumed the net amount at risk for each policy
to be the present value of the minimum guaranteed annuity payments available to
the policyholder determined in accordance with the terms of the policy in
excess of the policyholders current account balance at the valuation date. It
has been assumed that all policies could annuitize at December 31, 2003.
Annuity purchase rates have been determined based on the 7-year treasury rate
at December 31, 2003 of 3.52%.

As noted above, guaranteed minimum income benefits entitle a policyholder
to purchase a lifetime annuity payment stream after the expiration of a
stipulated waiting period of at least 7 years. Table #3 below shows the
development of the net amount at risk, determined at December 31, 2003,
assuming all policyholders annuitize immediately at the end of their stipulated
waiting period. Note that the aggregate net amount at risk has not been
projected to increase nor decrease throughout the period presented.

TABLE #3

Guaranteed Minimum Income Benefit
Development of Net Amount at Risk
(dollars in millions)

|             |  |                    |     | 
|------------ |  | ------------------ | --- | 
|Year Waiting |  |                    |     | 
|Period Ends  |  | Net Amount at Risk
|             |  |                   
|2004         |  | $                  | 2   | 
|2005         |  |                    | 24  | 
|2006         |  |                    | 64  | 
|2007         |  |                    | 112 | 
|2008         |  |                    | 60  | 
|             |  |                    |     | 
|Total        |  | $                  | 262 | 
|             |  |                    |     | 

The guaranteed minimum income benefit net amount at risk is sensitive to a
number of factors, including changes in policyholder account values, changes in
the guaranteed minimum income benefit base, the level of the 7-year treasury
rate at the time of annuitization because that rate is used to determine the
annuity purchase rate and, therefore, the benefit payable under the reinsurance treaty,
and the persistency of the current contracts. Actual future minimum income
benefit payments will further be influenced by the number of policyholders that
actually choose to annuitize their policies. Table #4 below shows the
sensitivity of our guaranteed minimum income benefit net amount at risk to
changes in policyholder account values relative to changes in the guaranteed
minimum income benefit base and to the level of the 7-year treasury rate that
is used to determine the annuity purchase rates. For example, the column
labeled +5% shows the net amount at risk assuming the account value
immediately increased by 5% over the current level with no change to the
guaranteed minimum income benefit base itself. Each row in the table

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shows the resulting net amounts at risk for a particular 7-year treasury
rate level under a variety of account values to guaranteed minimum income
benefit base scenarios. As the 7-year treasury rate increases in the
table below, our liability decreases accordingly.

TABLE #4

Guaranteed Minimum Income Benefit Net Amount at Risk Sensitivity
(dollars in millions)

|                      |  |                                                          |     |     |  |                             |     |     |  |      |     |  |  |  |     |  |  |  |     | 
|--------------------- |  | -------------------------------------------------------- | --- | --- |  | --------------------------- | --- | --- |  | ---- | --- |  |  |  | --- |  |  |  | --- | 
|                      |  | Relative Change in Level of Account Value vs. Guaranteed
|                      |  |                                                          |     |     |  | Minimum Income Benefit Base |     |     |  |     
|7-Year Treasury       |  |                                                         
|Rate at Annuitization |  | -10%                                                     |     | -5% |  | 0% = 12/31/2003             |     | +5% |  | +10%
|                      |  |                                                          |     |     |  |                             |     |     |  |     
|3.52% = 12/31/2003    |  |                                                          | 339 |     |  |                             | 299 |     |  |      | 262 |  |  |  | 224 |  |  |  | 192 | 
|4%                    |  |                                                          | 312 |     |  |                             | 274 |     |  |      | 236 |  |  |  | 199 |  |  |  | 167 | 
|5%                    |  |                                                          | 243 |     |  |                             | 206 |     |  |      | 168 |  |  |  | 131 |  |  |  | 99  | 
|6%                    |  |                                                          | 192 |     |  |                             | 155 |     |  |      | 117 |  |  |  | 80  |  |  |  | 48  | 



|NOTE: |  | Per the reinsurance treaty, a 7-year treasury rate of at least 3% is specified for use in determining
annuity purchase rates.
|----- |  | -----------------------------------------------------------------------------------------------------------------------------

Underwriting

We currently are not accepting any additional business under existing
treaties or writing new reinsurance treaties, although we may resume writing
new reinsurance agreements in the future. Our remaining reinsurance agreements
were written in accordance with underwriting guidelines that we developed with
the objective of controlling the risks of our reinsurance policies as well as
determining appropriate pricing levels. As our business and staff grew, we
incorporated peer review procedures to enhance our pricing and risk management
controls. 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 determined whether to
assume any particular reinsurance business by considering many factors,
including the types 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 was based on actuarial and
investment models which incorporated a number of client specific factors
including mortality, expenses, demographics, persistency and investment
returns, and macroeconomic factors, such as inflation, industry regulation,
taxation and capital requirements.

The majority of our remaining life and annuity reinsurance agreements were
written on an automatic treaty quota share basis with a focus on large blocks
of business where the underlying policies met our underwriting criteria. We
also have a small number of facultative reinsurance arrangements with primary
insurers with whom we had entered into automatic treaty reinsurance business.
We generally required ceding companies to retain at least 10% of every life
insurance risk reinsured and we generally limited our own net liability on any
single-life risk to $1,000,000.

The reinsurance agreements typically remain in force for the life of the
underlying policies reinsured. However, some agreements allow the ceding
company to recapture (reassume) all or a portion of the risk ceded to us
subject to certain conditions. Recapture features were considered when we
underwrote the reinsurance agreements.

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Transamerica Contract

Historical Impact

Our largest annuity reinsurance contract, which was effective as of
September 30, 1998, is with Transamerica. The contract is a retrocessional
reinsurance arrangement covering VisionMark fixed annuity products issued by IL
Annuity and Insurance Company. Since the middle of 1999, the surrender rate of
the VisionMark policies has been higher than we had anticipated when pricing
the reinsurance contract. We made numerous requests to Transamerica to address
the surrender problem with IL Annuity, but the problem has remained unresolved.
Although we had previously increased the rate of amortization of our deferred
acquisition costs associated with this contract in light of the higher than
expected surrender rates, during 2001 we initiated a review of the
recoverability of the deferred acquisition costs associated with this contract
utilizing revised assumptions for lapse rates and expected future returns on
invested assets due to poor financial market performance. This review
ultimately resulted in $46,115,000 of write downs of deferred acquisition costs
in 2001 and, as a result of a high level of surrenders by policyholders coupled
with continued poor investment performance of the premiums paid by the holders
of policies underlying this contract, a further write down of $27,474,000 in
2002.

The VisionMark products contain a total return strategy that allows
policyholders to allocate their premium payments to different asset classes
within IL Annuitys general account. The VisionMark contracts are credited with
interest at rates that are guaranteed by IL Annuity. If a policyholder
surrenders, a total return adjustment is made to the policyholders account
value based upon the total return on the selected asset class within the
general account assets. The effect of the total return adjustment is to adjust
the policyholders account value to reflect actual asset performance. The total
return adjustment is made for a policyholder when his or her funds are accessed
upon surrender or annuitization of the policy. None of the annuity products we
reinsure allow the policyholders to direct the investment of the underlying
premiums. However, the VisionMark policyholders are able to select the category
of assets to which the crediting rate of their policies are linked. While IL
Annuity is not legally obligated to invest the policyholder premiums consistent
with the policyholders selected category of assets, it has generally conformed
its investment strategy to the policyholders selection. As with the holders of
other single premium deferred annuity policies, a VisionMark policyholder is
guaranteed a return of premiums paid plus a guaranteed minimum interest rate of
3% to 3.5% per annum over the life of the policy. For the years ended December
31, 2001, 2002 and 2003, we paid approximately $13,500,000, $26,760,000 and
$16,120,000, respectively, under our annuity reinsurance contract with
Transamerica to cover our proportionate share of the shortfall that arose
because investment returns on the assets related to these policies were not
sufficient to fund the minimum interest guarantees for surrendered policies.

The following table sets forth certain financial information relating to
our annuity reinsurance contract with Transamerica from its inception in 1998
through December 31, 2003:

|                   |  |                   |               |           |  |                    |               |                 |  |   |             |  |  |   |             |  
|------------------ |  | ----------------- | ------------- | --------- |  | ------------------ | ------------- | --------------- |  | - | ----------- |  |  | - | ----------- | -
|                   |  |                   |               |           |  | Interest Sensitive |               | Deferred        |  |   |             | 
|For the Year Ended |  | Funds Withheld    |               | Contracts |  | Acquisition        |               | Contract Income
|December 31        |  | at Interest Asset |               | Liability |  | Cost Asset         |               | (Loss)         
|                   |  |                   |               |           |  |                    |               |                
|1998               |  | $                 | 1,200,101,268 |           |  | $                  | 1,283,675,809 |                 |  | $ | 156,044,683 |  |  | $ | 2,242,600   |  
|1999               |  |                   | 1,514,093,530 |           |  |                    | 1,593,873,272 |                 |  |   | 201,473,796 |  |  |   | 13,591,600  |  
|2000               |  |                   | 1,242,788,747 |           |  |                    | 1,305,877,473 |                 |  |   | 159,438,128 |  |  |   | 14,982,540  |  
|2001               |  |                   | 962,303,099   |           |  |                    | 990,567,504   |                 |  |   | 84,754,222  |  |  |   | (52,045,952 | )
|2002               |  |                   | 733,689,256   |           |  |                    | 755,862,003   |                 |  |   | 50,020,388  |  |  |   | (26,802,520 | )
|2003               |  |                   | 603,880,707   |           |  |                    | 602,093,921   |                 |  |   | 32,903,594  |  |  |   | (3,067,220  | )

The first column in the table is the amount of the Funds withheld at
interest asset associated with the Transamerica contract that was included on
our balance sheet at the end of each of the periods indicated. The Funds
withheld at interest asset is a receivable equal to our portion of
Transamericas statutory reserves related to the underlying policies. The
second column sets forth our Interest sensitive contracts liability included on
our balance sheet at the end of each of the periods indicated. This is our
proportionate

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share of the liability to policyholders for their account values. The
third column sets forth the value of the deferred acquisition cost asset
related to the Transamerica contract at the end of each period indicated. When
we write a reinsurance contract, a portion of our acquisition costs (primarily
commissions) associated with the new business is capitalized. The resulting
deferred acquisition costs asset is recorded on our balance sheet and amortized
over future periods based on our estimates of expected gross profits from the
contract. The amounts deferred vary with the structure, size and type of
contract written. For our investment related products, we adjust our
amortization when we revise our estimate of expected gross profits. The effects
of such adjustments are reflected in our earnings in the period in which we
revise our estimates of expected gross profits. The final column sets forth
contract income or loss for each of the periods indicated.

The Funds withheld at interest asset associated with the Transamerica
contract has been a significant portion of our total assets since the
contracts inception, representing 70% of our total assets at December 31, 1998
and 59% of our total assets at December 31, 2003. In similar fashion, the
Interest sensitive contract liability associated with the contract has been a
significant portion of our total liabilities, representing 96% of our total
liabilities at December 31, 1998 and 67% of our total liabilities at December
31, 2003. The deferred acquisition costs associated with the contract have
declined from over 97% of our total Deferred policy acquisition costs asset at
December 31, 1998 and 1999 to 48% of our total Deferred acquisition costs at
December 31, 2003, primarily because of the 2001 and 2002 write downs.

As a result of the changes to our remaining book of business, especially
the termination of our annuity reinsurance contract with Ohio National in
February 2003, we expect that the assets and liabilities associated with the
Transamerica contract will continue to represent a significant portion of our
total assets and liabilities in future periods. We do not expect the
Transamerica contract to generate significant net income in future periods. The
amount of deferred acquisition costs we record as an asset on our balance sheet
related to the Transamerica contract is based on a series of assumptions
related to the investment performance of the assets supporting our liabilities
under the contract, as well as future lapse rates for the underlying policies.
These assumed lapse rates include assumptions regarding future full surrenders,
partial withdrawals, annuitizations and policyholder deaths. While we believe
the investment and lapse estimates to be reasonable, they are estimates of
future events and we cannot assure you that they will prove to be accurate. If
such assumptions turn out to be inaccurate, we could be required to write off
additional deferred acquisition costs, which would have a significant adverse
impact on our net income in future periods.

Minimum Interest Guarantees

As with the holders of other single premium deferred annuity policies, a
VisionMark policyholder is guaranteed a minimum return of premiums paid plus a
guaranteed minimum interest rate of 3% to 3.5% per annum over the life of the
policy. During 2001, we paid approximately $13,500,000 under our annuity
reinsurance contract with Transamerica to cover our proportionate share of the
shortfall that arose because the net investment returns on the assets related
to these policies substantially underperformed the minimum interest guarantees
for surrendered policies. In addition, during 2001, we recorded a charge of
approximately $19,500,000 related to expected future minimum interest
guarantees. The $13,500,000 expense for minimum interest guarantees for the
year ended December 31, 2001 was comprised of payments of $1,600,000,
$3,300,000, $4,400,000, and $4,200,000 with respect to the first, second,
third, and fourth quarters of 2001, respectively. Although certain of those
payments were actually made in prior quarters of 2001, we originally recorded
the full expense and the related $19,500,000 charge for expected future minimum
interest guarantee payments in the fourth quarter of 2001 because that was the
quarter in which we first received data that enabled us to estimate these
payments accurately. During 2002, we restated our financial statements for the
fiscal year ended December 31, 2001 to record the $13,500,000 expense in the
quarterly periods in 2001 in which the payments were made. In addition, as part
of the restatement of our financial statements for the fiscal year ended
December 31, 2001, portions of the $19,500,000 charge originally taken in the
fourth quarter of 2001, and a similar charge of $24,700,000 taken in the third
quarter of 2001, were allocated to prior quarters of 2001. We also restated our
financial statements for the fiscal year ended December 31, 2000 to record
approximately $2,800,000 of minimum interest guarantee payments that were made
in 2000.

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We have received monthly settlement reports from Transamerica since the
inception of the contract, but those reports did not disclose minimum interest
guarantee payments as a separate line item. Instead, the minimum interest
guarantee payments were included as a small percentage of the Total Benefits
Paid line item on the settlement reports. We reviewed the monthly settlement
reports received from Transamerica and analyzed policyholder surrenders and
settlements, as well as the performance of the investments underlying our
obligations under the contract. In addition, periodic conference calls were
held with Transamerica to discuss significant developments under the contract,
as well as mutually agreed upon plans for future management activities relating
to the contract. These settlement reports, together with our supplemental
analysis and discussions with Transamerica, formed the basis for reporting
financial results under the contract. As is customary in the reinsurance
industry, particularly for retrocessionaires, we relied on Transamerica and IL
Annuity to monitor investment performance, surrenders and other activity under
the contract and advise us of trends and developments, including whether
minimum interest guarantee payments were being made. We were not specifically
informed by Transamerica that minimum interest guarantee payments had been made
until the third quarter of 2001, and, consequently, did not know that monthly
cash settlements with Transamerica included a minimum interest guarantee
payment component until that time.

We periodically requested additional information from Transamerica since
the contracts inception, including information related to possible minimum
interest guarantee payments, and Transamerica did deliver a file in June 2000
that contained the information needed to estimate expected minimum interest
guarantee payments as of December 31, 1999. At the time, we believed that the
financial results under the contract were being adversely affected by high
surrender rates on the underlying policies, but we did not believe that we had
any meaningful exposure to minimum interest guarantee payments. Using
assumptions based on information available to us at the time this file was
received, the filed indicated that expected minimum interest guarantee payments
would have been approximately $100,000 as of December 31, 1999, which is
consistent with our belief at the time that our exposure to minimum interest
guarantee payments was not significant. Further, based on data now available to
us, we do not believe that the amount of these potential payments increased
significantly during the course of 2000.

During the fourth quarter of 2000, we entered into discussions with
Transamerica relating to the possibility of auditing IL Annuitys experience
relating to the policies underlying our reinsurance contract with Transamerica,
primarily to understand the reasons for the continuing higher than expected
surrender rates for those policies and what was being done to address the same,
as well as to review the validity of unexpected increases in asset management
expenses under the contract. Under our reinsurance treaty with Transamerica, we
did not have a direct right to audit IL Annuitys records. Therefore, over the
following months, we worked together with Transamerica to organize an on-site
audit of IL Annuitys records related to the contract, which was conducted in
the summer of 2001. The audit did not detect the potential liability for
minimum interest guarantee payments because it focused on the reasons for the
higher than expected surrender rates and the increases in asset management
expenses, which ultimately were the subjects of arbitration entered into with
Transamerica.

We also did not believe that we had any liability for minimum interest
guarantee payments because from the inception of the contract through the first
three quarters of 2000, the investment performance of the assets supporting the
liabilities under the Transamerica contract had generally exceeded or was only
slightly less than the minimum guaranteed interest rate. During October and
November of 2000, the performance of the assets did decline significantly, but
rebounded in December 2000 and January 2001. Subsequent to January 2001, the
assets began producing negative returns. In light of this declining
performance, our pricing actuary for this contract began to focus on the
possibility that minimum interest guarantee payments might be being made by IL
Annuity, and he questioned Transamerica as to whether minimum interest
guarantee payments were causing unanticipated shifts in the monthly cash flows
at the end of the second quarter of 2001. He was advised by Transamerica that
it did not think that the shift in cash flows was the result of minimum
interest guarantee payments.

As noted above, our primary basis for reporting the financial results
under the Transamerica contract was the monthly settlement reports that were
provided to us by Transamerica, along with our supplemental

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analysis of the monthly settlement reports and discussions held with
Transamerica about those reports. Until the third quarter of 2001, based on our
inquiries of Transamerica and our review of and discussions regarding the
monthly settlement reports, we did not believe that any minimum interest
guarantee payments had been made under the contract or that a separate analysis
of our potential liability for minimum interest guarantee payments was
necessary. We were notified by Transamerica in September 2001 that minimum
interest guarantee payments had been made under this contract, but that
Transamerica was unable to quantify the amount or timing of the payments made.
Therefore, we requested additional detailed information regarding the payments
that had been made and our exposure to future minimum interest guarantee
payments. Between November 7, 2001 and December 5, 2001, we received files
containing detailed policyholder information that enabled us to perform our own
analysis of our minimum interest guarantee obligations and to estimate expected
future minimum interest guarantee payments. Using these files and with the
assistance of third-party consultants, we developed, refined and tested models
to estimate past minimum interest guarantee payments and expected future
minimum interest guarantee payments.

We now receive a file each month containing information to monitor our
minimum interest guarantee exposure on the Transamerica contract. In addition,
Transamerica began reporting minimum interest guarantee information to us in
its December 2001 settlement report, which was received by us in January 2002.

Policy Benefit Liabilities and Interest Sensitive Contracts Liabilities

Policy benefit liabilities and interest sensitive contracts liabilities
comprise the majority of our financial obligations. Policy benefit liabilities
for our products other than annuities are based upon our estimates of
mortality, persistency, investment income and expenses, with allowances for
adverse deviation. The liabilities for policy benefits established by us with
respect to individual risks or classes of business may be greater or less than
those established by our ceding companies due to their use of different
mortality and other assumptions. Policy benefit liabilities include both
mortality and morbidity claims in the process of settlement and an estimate of
claims that have been incurred by our cedents but not yet reported to us.
Actual experience in a particular period may be worse than assumed experience
and, consequently, may adversely affect our operating results for the period.

Our
obligations arising from our fixed annuity reinsurance agreements are reflected on our balance
sheet as Interest sensitive contracts liability and are reported at the
accumulated policyholder balance of these accounts.

Investments

Invested Assets

Our investments are governed by investment guidelines established and
approved by our Board of Directors. Our investment objectives are to achieve
above average risk-adjusted total returns, maintain a high quality portfolio,
maximize current income, maintain an adequate level of liquidity in our
portfolio and match the cash flows of our investments to our related insurance
liabilities. Our investment guidelines require our overall fixed income
portfolio to maintain a minimum weighted average credit quality of A and
currently prohibit us from investing in fixed income securities that are rated
below investment grade at the time of purchase. In 2004, we expect to begin to
make limited investments in securities that are rated below investment grade or
unrated at the time of their purchase. While any investment carries some risk,
the risks associated with lower-rated securities generally are greater than the
risks associated with investment grade securities. A fixed income security
rated A by Standard & Poors is considered to be somewhat more susceptible to
the adverse effects of changes in circumstances and economic conditions than
higher-rated issuers; however, the issuers capacity to meet its financial
commitment on the security is still considered to be strong. We currently do
not invest in any fixed income securities in emerging markets or securities
that are not rated by a major rating agency.

We terminated our investment management agreement with Alliance Capital
Management Corporation effective September 30, 2003 and Prudential Investment
Corporation became the sole advisor to our investment portfolio effective
October 1, 2003. The termination of our agreement with Alliance was solely

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an effort by us to manage costs and was not the result of performance. Our
management agreement with Prudential may be terminated by either party with 45
days notice. Our Board of Directors periodically reviews the performance of
Prudential and the fees associated with this arrangement.

At December 31, 2003, our invested assets, including cash and cash
equivalents, had an aggregate fair value of $197,880,755, including unrealized
gains of $1,840,849. At December 31, 2003, our fixed-income portfolio was
comprised of fixed income securities with a weighted average credit quality
rating of AA and a weighted average duration of 3.9 years. The effective
yield rate earned on our total invested assets was approximately 2.53% for the
year ended December 31, 2003. The yield on our fixed income portfolio was 5.22%
for the same period. The effective yield rate equals net investment income
divided by the average of our total adjusted invested assets at the end of each
calendar quarter in the year ended December 31, 2003. The effective yield rate
on our total invested assets is significantly lower than the yield on our
fixed-income portfolio because approximately 40% of the total portfolio was in
cash and cash equivalents for the majority of the year. At December 31, 2003,
we continued to hold a large portion of our invested assets in short
duration investments because of the low interest rate environment and the risk
that interest rates may rise.

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
prematurely 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 such 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 liabilities are not significant. For interest sensitive
liabilities, we are primarily dependent upon asset/ liability matching or other
strategies to minimize the impact of changes in interest rates. If we do not
appropriately match the asset management strategy to our obligations, we could
sustain losses. We may use interest rate swaps and other financial instruments
as tools to mitigate the effects of asset/liability mismatches or the effect of
interest rate changes on our balance sheet, particularly if we develop new
products that require the use of hedging strategies to manage risk. In general,
however, we do not hedge our investment risk. Our results of operations are
also significantly affected by the performance of assets held and managed by
our ceding companies or others under modified coinsurance and coinsurance funds
withheld arrangements, as discussed below under Funds Withheld at Interest.

Funds Withheld at Interest

As of December 31, 2003, our cedents had approximately $667.8 million in
assets that were held and managed by or for them under our modified coinsurance
and coinsurance funds withheld arrangements. The largest portion of the funds
withheld by our cedents at December 31, 2003, which amounted to $663 million,
was related to our modified coinsurance annuity reinsurance agreements.

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

Historically, when a ceding company enters into an annuity reinsurance
contract structured as a modified coinsurance arrangement with us, a portion of
the ceding companys liability to the policyholders is ceded to us. Our
remaining modified coinsurance arrangements are on a quota share basis, so the
portion that is ceded to us is a fixed percentage of the liabilities arising
from the underlying policies. Our share of the ceding companys liability is
included on our balance sheet as Interest sensitive contracts liabilities.
However, unlike other reinsurance arrangements in which we receive cash or
investments as consideration

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for assuming a portion of the ceding companys liability, under these
types of arrangements, we have established a receivable called Funds withheld
at interest that is equal to our fixed portion of the statutory reserves
carried by the ceding company. We are allocated our share of the investment
income and realized capital gains and losses that arise from the securities in
the investment portfolio underlying the statutory reserve.

At December 31, 2003, our Funds withheld at interest receivable related to
our remaining annuity reinsurance agreements had a carrying value of
approximately $663 million. Our contract with Transamerica accounted for
approximately 91% of our Funds withheld at interest receivable
related to our annuity reinsurance agreements as of that date.
At December 31, 2003, the assets held and managed by our ceding companies were
invested in convertible bonds and fixed income securities having a weighted
average credit quality of A- and a weighted average
duration of 5.9 years. In
addition, at December 31, 2003 approximately 5.5% of such assets were invested
in below investment grade securities. The average yield rate earned on the
assets held and managed by our ceding companies was approximately 2.68% for the
year ended December 31, 2003. The average yield rate earned on the invested
premiums funding our annuity obligations to Transamerica was approximately
2.24% for the year ended December 31, 2003. The average yield rate earned on
the invested premiums funding our annuity obligations for the other annuity
reinsurance agreement was approximately 5.28% for the year ended December 31,
2003. For purposes of
calculating the average yield rates earned on assets held and managed by our
ceding companies, including Transamerica, we only include net realized capital
gains and losses as reported to us through our settlements with our ceding
companies. For more information regarding the
performance of the assets held and managed by Transamerica, see Item 7.
Managements Discussion and Analysis of Financial Condition and Results of
Operations  Financial Condition  Transamerica. As noted elsewhere in this report, on February 14, 2003, we
terminated our annuity reinsurance contract with Ohio National, and, as a
result, the aforementioned yields exclude the yield earned on invested premiums
that funded our obligations under the Ohio National reinsurance contract.

The performance of the assets held and managed by our ceding companies
depends to a great extent on the ability of the ceding company and its
investment managers to make appropriate investments consistent with their
investment guidelines. If these assets do not achieve investment returns
sufficient to meet our obligations on the underlying policies, we could
experience unexpected losses, as has happened under our annuity reinsurance
agreement with Transamerica, where the minimum interest guarantees on the
underlying policies have exceeded the underlying policyholder account values
due to poor investment performance, and we have been forced to fund our
proportionate share of the shortfall.

Our policy has been to seek counterparties for our annuity reinsurance
treaties that have strong financial strength and credit ratings. Although such
ratings are assigned by independent ratings agencies and are generally regarded
as reliable, there can be no assurance that they accurately reflect the
financial condition of any of our counterparties. At December 31, 2003,
approximately $604 million of our Funds withheld at interest receivable and
$602 million of our Interest sensitive contracts liability related to our
reinsurance contract with Transamerica, which is a retrocessional reinsurance
arrangement covering policies issued by IL Annuity. Transamericas agreement
with IL Annuity is also structured on a modified coinsurance basis, so IL
Annuity maintains ownership and control of the assets supporting our
obligations to Transamerica. As of December 31, 2003, IL Annuity has financial
strength or claims paying ratings of BB+ from Standard & Poors. As of
February 28, 2004, Transamerica has financial strength or claims paying ratings
of A+, AA, Aa3 and AA+ (with a negative outlook) from A.M. Best,
Standard & Poors, Moodys Ratings and Fitch Ratings, respectively.

Under the terms of our annuity reinsurance treaties, mutual debts and
credits are offset between the counterparties to each treaty and ourselves as
part of a monthly net settlement process. The terms of our annuity reinsurance
treaties and applicable state insurance insolvency laws also allow us to offset
mutual debts and credits between us and the counterparties to each treaty in
the event of a counterpartys insolvency. Therefore, if such counterparty were
to become insolvent, we are entitled to offset our Funds withheld at interest
receivable against our Interest sensitive contracts liabilities to such
counterparty.

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Separate financial statements for our ceding companies are not included in
this report as information related to the financial condition or results of
operations of those companies is not meaningful to our investors because we do
not have any material counterparty risk to those companies. In addition, we do
not want our investors to improperly conclude that the financial statements of
our ceding companies provide information relevant to an assessment of our own
financial condition or results of operations. Further, although we have little,
if any, control over the specific investment decisions of our ceding companies
(or their investment advisors), the assets supporting our annuity obligations
under our reinsurance contracts are generally held and managed by or on behalf
of our ceding companies in accordance with investment guidelines set forth in
the reinsurance agreements or the underlying insurance policies. Therefore,
information regarding the investment policies, strategies or results for the
total general account assets of such companies presented in their financial
statements is not meaningful to our investors in analyzing the investment risk
related to the actual assets managed by those companies or their investment
advisors that fund our annuity obligations under our reinsurance agreements.
However, information regarding the types, ratings and maturities of the
securities that fund our annuity obligations to Transamerica is presented under
Item 7. Managements Discussion and Analysis of Financial Condition and Results
of Operations  Financial Condition  Transamerica to assist our investors. In
addition, we have provided information regarding the investment objectives and
guidelines followed for the investment of the assets supporting our obligations
under that contract.

Embedded Derivatives

We have concluded that there is an embedded derivative within the Funds
withheld at interest receivable related to one of our annuity reinsurance
contracts written on a modified coinsurance basis that requires bifurcation and
separate accounting under Statement of Financial Accounting Standards No. 133 
Accounting for Derivative Instruments and Hedging Activities. This embedded
derivative is similar to a total return swap arrangement on the underlying
assets held by our ceding company under the agreement. The fair value of the
embedded derivative is classified as part of our Funds withheld asset on our
balance sheet. We have developed a cash flow model with the assistance of
outside advisors to arrive at an estimate of the fair value of this total
return swap that uses various assumptions regarding future cash flows under the
affected annuity reinsurance agreement. The fair value of the embedded
derivative is influenced by changes in credit risk, changes in expected future
cash flows under the annuity reinsurance agreement and interest rates. The
change in fair value of the embedded derivative is recorded in our statement of
operations as Net change in fair value of embedded derivatives, which is a
non-cash item. The change in fair value of the embedded derivative also impacts
the emergence of expected gross profits for purposes of amortizing deferred
acquisition costs associated with the contract. The application of this
accounting policy has increased the volatility of our reported earnings. While
we have made an estimate of the fair value of the embedded derivative using a
model that we believe to be appropriate and based upon reasonable assumptions,
the assumptions used are subjective and may require adjustment in the future.
In addition, as industry standards for estimating the fair value of embedded
derivatives develop, it is possible that we may modify our methodology. Changes
in our assumptions and industry standards could have a significant impact on
the fair value of the embedded derivative and our reported earnings. We do not
bifurcate and separately account for the embedded derivatives contained in our
Transamerica annuity reinsurance agreement or our guaranteed minimum income
benefit reinsurance agreement with CIGNA, because we acquired those agreements
prior to the transition date elected by us under FAS 133, as amended, and
neither agreement has been substantially modified since that date. To the
extent we substantially modify the terms of these agreements, FAS 133, as
amended, may require us to bifurcate and separately account for the embedded
derivatives they contain. Because of the nature of the assets underlying our
Transamerica contract, which were roughly 64% convertible bonds at December 31,
2003, the bifurcation and separate accounting for the embedded derivatives
contained in that contract could add significant volatility to our reported
results. If we bifurcated and separately accounted for the embedded derivatives
contained in our guaranteed minimum income benefit reinsurance agreement with
CIGNA, it also could add volatility to our reported results.

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Competition

The reinsurance industry is highly competitive. We have historically
competed with approximately 20 reinsurers, both domestic and foreign, of
annuity or life insurance products in our traditional target market of North
America. Reinsurers in our market typically compete on the basis of many
factors, including premium charges, terms and conditions of reinsurance
policies, financial ratings, reputation, claims adjudication philosophy and
general industry experience. In the event we resume writing new business in the
future, other reinsurance industry participants will likely have stronger
financial ratings, better operating histories and substantially greater
financial and management resources than our company.

Financial Ratings

The financial strength ratings of the Companys operating subsidiaries
were downgraded in 2002 and 2003 by A.M. Best, Standard & Poors, and Fitch
Ratings to C+, BB-, and C, respectively, as last reported. At the Companys
request, all three financial ratings have been withdrawn. Although we
currently are not writing new reinsurance treaties, in the event that we are
able to position ourselves to write new business in the future, we cannot
provide assurance that we will be able to attract and retain new customers if
we are not able to obtain adequate financial ratings as part of a plan to write
new business or products.

Employees

As of December 31, 2003, we had nine employees located in Bermuda and
three employees located in the United States.

Investor Relations Information on Internet Website

We maintain an Internet website at www.alre.bm, although the information
contained on our Internet website is not part of this report. We make our
annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on
Form 8-K, and amendments to those reports filed with, or furnished to, the
Securities and Exchange Commission (the SEC) pursuant to Section 13(a) or
15(d) of the Securities Exchange Act of 1934, as amended, available free of
charge on or through our Internet website as soon as reasonably practicable
after each is filed with or furnished to the SEC. In addition, on our Internet
website, you may view the following corporate governance materials: the
Companys Corporate Governance Guidelines, the Code of Business Conduct and
Ethics, and the Audit, Compensation and Corporate Governance Committee
Charters. Note that our Code of Business Conduct and Ethics contains a code of
ethics, as defined under SEC regulations, applicable to our Principal Executive
Officer, Principal Financial Officer and Principal Accounting Officer. We will
voluntarily provide electronic or paper copies of our SEC reports (other than
exhibits) and our corporate governance materials free of charge upon request to
Investor Relations, Annuity and Life Re (Holdings), Ltd., P.O. Box HM 98,
Hamilton, HM AX, Bermuda; (telephone number (441) 296-7667).

In addition to posting our corporate governance materials on our Internet
website, we intend to satisfy new Item 10 of Form 8-K, regarding amendments to
and waivers under our Code of Business Conduct and Ethics applicable to our
Principal Executive Officer, Principal Financial Officer and Principal
Accounting Officer, by providing the relevant information on our Internet
website within five days of the amendment or waiver and by keeping the
information posted for at least 12 months thereafter. In addition, any waivers
granted to directors and executive officers under, and any amendments to, the
Code of Business Conduct and Ethics will be promptly disclosed on our Internet
website. If we do not post on our website any such waiver or amendment, we
will file a Form 8-K to disclose that waiver or amendment, as applicable.

NYSE Corporate Governance Certification

Our Chief Executive Officer intends to submit to the New York Stock
Exchange (NYSE) a certification concerning compliance with NYSE corporate
governance listing standards within 30 days of our annual meeting of
shareholders.

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Regulation

Bermuda

As a holding company, Annuity and Life Re (Holdings) is not subject to
Bermuda insurance regulations. Annuity and Life Reassurance, our Bermuda
operating subsidiary, 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 shall carry on an
insurance business in Bermuda unless registered as an insurer under the
Insurance Act by the Bermuda Monetary Authority (the Authority). 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 Authority may impose
at any time.

The Insurance Act imposes on Bermuda insurance companies solvency and
liquidity standards and auditing and reporting requirements and grants to the
Authority powers to supervise, investigate and intervene in the affairs of
insurance companies. Further deterioration of our financial condition will
likely expose our operations in Bermuda to an increased level of regulatory
scrutiny and could possibly lead to the Authority petitioning for the winding
up of our company. Some of the significant aspects of the Bermuda insurance
regulatory framework are set forth below.

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 is registered as a
long-term insurer.

Cancellation of Insurers Registration.An insurers registration may be
cancelled by the Authority on certain grounds specified in the Insurance Act.
These grounds include failure of the insurer to comply with its obligations
under the Insurance Act or with a condition imposed on its registrations or, if
in the opinion of the Authority, the insurer has not been carrying on business
in accordance with sound insurance principles.

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 Authority in Bermuda. The
independent auditor of the insurer must be approved by the Authority and may be
the same person or firm that audits the insurers financial statements and
reports for presentation to its shareholders. Annuity and 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 Authority.
Annuity and Life Reassurances approved actuary is Robert P. Mills.

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.

Minimum Solvency Margin.Under the Insurance Act, Annuity and Life
Reassurance must ensure that the value of its long-term business assets exceeds
the amount of its long-term business liabilities by at least $250,000. Further,
Annuity and Life Reassurance is prohibited from declaring or paying any
dividends

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during any financial year if it is in breach of its minimum solvency
margin, or if the declaration or payment of such dividends would cause it to
fail to meet such margin. If Annuity and Life Reassurance fails to meet its
minimum solvency margin on the last day of any year, it will be prohibited,
without the approval of the Authority, from declaring or paying any dividends
during the next financial year. Also, under the Insurance Act, Annuity and Life
Reassurance is prohibited, without the approval of the Authority, from reducing
by 15% or more its total statutory capital as set out in its previous years
financial statements.

Annual Statutory Financial Return.Annuity and Life Reassurance is
required to file with the Authority in Bermuda a Statutory Financial Return no
later than four months after its fiscal 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, Statutory Financial
Statements, and a certificate of the approved actuary. The solvency certificate
must be signed by our Principal Representative and at least two directors. The
directors are required to certify whether the minimum margin of solvency has
been met and the independent auditor is required to state whether in his
opinion it was reasonable for the directors to so certify. Where 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.

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

If it appears to the Authority 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 Authority 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 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.

Principal Representative.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 and Life Reassurance is at our offices in Hamilton,
Bermuda, and John F. Burke, our Chief Executive Officer and President, is the
principal representative of Annuity and Life Reassurance. Without a reason
acceptable to the Authority, 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 Authority 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 of the insurer becoming
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 Authority 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 Authority relating to a solvency margin or
certain other ratios.

Long-term Business Fund.An insurer carrying on long-term business is
required to keep its accounts in respect of its long-term business separate
from any accounts kept in respect of any other business. All receipts of
Annuity and Life Reassurances long-term business form part of its long-term
business fund. No payment may be made directly or indirectly from an insurers
long-term business fund for any purpose other than a purpose related to the
insurers long-term business, unless such payment can be made out of any
surplus (certified by the insurers approved actuary) to be available for
distribution otherwise than to policyholders. Annuity and Life Reassurance may
not declare or pay a dividend to any person other than a policyholder unless
the value of the assets in its long-term business fund (as certified by the
insurers approved actuary) exceeds the liabilities of the insurers long-term
business (as certified by the insurers approved actuary) by the amount of the
dividend and at least the $250,000 minimum solvency margin

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prescribed by the Insurance Act, and the amount of any such dividend may
not exceed the aggregate of that excess (excluding the said $250,000) and any
other funds properly available for payment of dividends, such as funds arising
out of the business of the insurer other than long-term business.

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

We have the consent from the Authority under the Exchange Control Act 1972
and regulations thereunder allowing for 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, provided that the
shares remain listed on an appointed stock exchange. On April 8, 2003, we
received notice from the New York Stock Exchange that we did not satisfy the
continued listing standards as of that date because the average closing price
of our common shares had been below $1.00 for a 30 consecutive trading day
period. The notice stated that if we did not achieve (i) a $1.00 average share
price for the 30 consecutive trading days prior to October 7, 2003, the
expiration of the six month period following the date of the receipt of the
notification, and (ii) a $1.00 share price on October 7, 2003, then the NYSE
would commence suspension and delisting procedures with respect to our common
shares. In addition, the NYSE informed us that it was considering whether we
continued to meet certain of the NYSEs qualitative continued listing standards
due to concerns over our financial condition. On October 14, 2003, the NYSE
informed us that we had satisfied the NYSEs continued listing standards, and
as a result our shares would not be delisted from the Exchange.

In addition, 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. The common shares of
Annuity and Life Reassurance cannot be transferred without the consent of the
Authority.

As exempted companies, Annuity and Life Re (Holdings) and Annuity and
Life Reassurance are exempt from Bermuda laws restricting the percentage of
share capital that may be held by non-Bermudians, but as exempted companies
they may not participate in certain business transactions, including (i) the
acquisition or holding of 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) the
taking of mortgages on land in Bermuda to secure an amount in excess of $50,000
without the consent of the Bermuda Minister of Finance, (iii) the acquisition
of any bonds or debentures secured by any land in Bermuda, other than certain
types of Bermuda government securities, or (iv) the carrying on of business of
any kind in Bermuda, including insuring domestic risks, except in furtherance
of their business carried on outside Bermuda, and, in the case of Annuity and
Life Reassurance, reinsuring any long-term business risks undertaken by any
company incorporated in Bermuda and permitted to engage in the insurance and
reinsurance business, or under a license granted by the Bermuda Minister of
Finance.

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 their jurisdiction by reinsurers, such as
Annuity and Life Reassurance, which are not licensed or admitted to do business
within such jurisdiction. Annuity and Life Reassurance conducts its business
through its Bermuda office. Annuity and Life Reassurance does not maintain an
office, and its personnel do not solicit, advertise, settle claims or conduct
other activities that may constitute the transaction of the business of
insurance, in any jurisdiction in which it is not licensed or otherwise
authorized to engage in such activities.

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Our United States operating subsidiary, Annuity and Life Reassurance
America is licensed and authorized to conduct life insurance business in over
40 states of the United States and the District of Columbia. The insurance laws
and regulations, as well as the supervisory authority that may be exercised by
the various insurance departments in the United States, 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 the conduct of their insurance business. These laws and regulations
generally require insurance companies to meet certain solvency standards, asset
tests, standards of business conduct, guarantee fund assessments, and to file
certain reports with regulatory authorities, including information concerning
their capital structure, ownership, and financial condition. The insurance laws
of Connecticut have the most significant impact on Annuity and Life Reassurance
America because that is its state of domicile.

Annuity and Life Re America (our wholly-owned U.S. holding company) 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 because it is not an insurer and because Annuity
and Life Reassurance America is not required to file registration statements
with the Delaware Insurance Commissioner under applicable provisions of such
laws and regulations. The books and records of Annuity and Life Re America may
be subject to inspection by the Connecticut insurance regulators because
Annuity and Life Re America is an affiliate of Annuity and Life Reassurance
America, which is subject to Connecticuts laws governing insurance company
systems.

The Connecticut insurance laws (applicable to Annuity and Life Reassurance
America) require that transactions between or among Annuity and Life
Reassurance America and any of its affiliates, including the payment of
ordinary dividends to shareholders, shall be subject to the following
requirements: (i) the terms shall be fair and reasonable; (ii) charges or fees
for services performed shall be reasonable; (iii) expenses incurred and payment
received shall be allocated to Annuity and Life Reassurance America in
conformity with customary insurance accounting practices consistently applied;
(iv) the books, accounts and records of each party shall be so maintained as to
clearly and accurately disclose the precise nature and details of the
transactions, including such accounting information as is necessary to support
the reasonableness of the charges or fees to the respective parties; and (v)
Annuity and Life Reassurance Americas surplus with respect to policyholders
shall be reasonable in relation to its outstanding liabilities and adequate to
meet its financial needs. In addition, certain transactions between or among
Annuity and Life Reassurance America may not be entered into until notice of
such transactions has been provided to the Connecticut Insurance Commissioner,
and the Commissioner either approves the transaction or a thirty-day waiting
period has passed during which the Commissioner has not disapproved the
transaction.

Current Connecticut law 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 Annuity and Life Reassurance
Americas statutory surplus as regards policyholders as of the immediately
preceding December 31, or (ii) statutory net gain from operations for the
immediately preceding calendar year, excluding pro rata distributions of any
class of Annuity and Life Reassurance Americas 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 the Connecticut Insurance Commissioner has not disapproved
the dividend. In addition, except as otherwise provided by law, no dividend or
other distribution exceeding an amount equal to Annuity and Life Reassurance
Americas earned surplus may be paid without the prior approval of the
Connecticut Insurance Commissioner.

If the Connecticut Insurance Commissioner determines that Annuity and Life
Reassurance America paid or is about to pay a dividend, or committed or is
about to commit another act, in violation of the Connecticut insurance laws
referenced above, the Commissioner may, among other things, apply for an order
enjoining Annuity and Life Reassurance America from violating or continuing
such violation of the insurance laws. The Connecticut Insurance Commissioner
has the authority to apply for an order authorizing him to rehabilitate an
insurer if the Connecticut Insurance Commissioner determines that such insurer
is in such condition that the further transaction of business would be
hazardous, financially, to its policyholders, creditors or the public. If the
Connecticut Insurance Commissioner finds, among other

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things, that further attempts to rehabilitate the insurer are futile, he
may request a petition for an order of liquidation from a Connecticut court.

On November 20, 2002, the State of Connecticut Insurance Department and
Annuity and Life Reassurance America entered into a letter agreement that
acknowledged that the Department was monitoring the financial condition of
Annuity and Life Reassurance America and such letter agreement required that
certain financial transactions that Annuity and Life Reassurance America enters
into, including disposal of assets, payment of dividends and settlement of
inter-company balances with Annuity and Life Reassurance, be pre-approved by
the Department. In addition, the Department had requested weekly reports from
senior management of Annuity and Life Reassurance America on our status and any
changes in the status of Annuity and Life Reassurance America. The letter
agreement was in effect until March 1, 2004 and was not renewed by the
Department. While the Department has withdrawn formal restrictions on the
operations of our U.S. operating subsidiary, we will keep the Department
informed and involved in the future actions of all our companies.

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
governing credit for reinsurance which are imposed on its ceding companies.
In general, a ceding company which obtains reinsurance from a reinsurer that is
licensed, accredited or approved by the insurance regulator of the ceding
companys domiciliary jurisdiction 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 such reinsurer. Many
jurisdictions permit ceding companies to take credit on their statutory
financial statements for reinsurance obtained from unlicensed or non-admitted
reinsurers only if adequate security is posted. Because our operating
subsidiary Annuity and Life Reassurance is not licensed, accredited or approved
in any jurisdiction except Bermuda, its reinsurance contracts typically require
it to post a letter of credit or other security.

At December 31, 2003, virtually all of our cash and investments were
posted as collateral to secure our obligations under reinsurance agreements and
letter of credit facilities. We did not have sufficient available cash and
investments at December 31, 2002 to post as collateral to satisfy all of our
obligations under certain of our reinsurance agreements. During 2003, we
negotiated the termination or recapture of most of our reinsurance agreements.
As a result of those terminations and recaptures and other actions taken by
management, as of December 31, 2003, we had met all the collateral obligations
of our remaining ceding companies with the exception of those asserted by
CIGNA, the cedent under our only remaining guaranteed minimum death benefit and
guaranteed minimum income benefit agreement. As of December 31, 2002, CIGNA
asserted that we were required to post $59 million of collateral in addition to
the $11 million of collateral we had previously provided. As of December 31,
2003, CIGNA was seeking $49 million of collateral in addition to the $11
million of collateral we had previously provided. We do not agree that the
aggregate $60 million collateral requirement currently asserted by CIGNA is
required to be posted. As a result, we have not posted any additional
collateral for this agreement. If CIGNAs asserted collateral requirement is
valid, we do not have sufficient available cash and investments to satisfy
CIGNAs request. We are attempting to restructure the reinsurance agreement or
otherwise meet or reduce CIGNAs request for collateral. If these negotiations
are unsuccessful, CIGNA could initiate arbitration or litigation proceedings
against us. The specific relief sought and the outcome of any proceedings that
CIGNA could initiate cannot be determined at this time. If we do not prevail
in any such arbitration or litigation proceedings, it would have a material
adverse effect on our financial condition and we may be required to liquidate
our operations.

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 280 Trumbull Street,
Hartford, Connecticut, USA. We believe our space is adequate to meet our
current and future needs.

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Item 3.Legal Proceedings.

On April 23, 2002, we served written notice of arbitration on MetLife, the
ceding company under our largest life reinsurance agreement, seeking equitable
relief and monetary damages based on MetLifes misrepresentation of and failure
to disclose material facts relating to the agreement. In January 2003, we also
provided written notice to MetLife of a premium rate increase, effective March
5, 2003, which also became a subject of this arbitration. On October 3, 2003,
MetLife drew approximately $7.4 million of assets held in trust for its
benefit. We believed the draw was inappropriate due to the pending
arbitration, but chose not to attempt to challenge the draw. On December 19,
2003, the arbitration panel ruled that the rate increase implemented by us was
valid, and as a result MetLife elected to recapture the agreement effective May
5, 2003.

On and since December 4, 2002, certain of our shareholders filed purported
shareholder class action lawsuits against us and certain of our present and
former officers and directors in the United States District Court for the
District of Connecticut seeking unspecified monetary damages. The plaintiffs
claim that the defendants violated certain provisions of the United States
securities laws by making various alleged material misstatements and omissions
in public filings and press releases. The plaintiffs filed a single
consolidated amended complaint in July 2003, adding as defendants XL Capital
Ltd and two additional directors. On October 1, 2003, we answered the amended
and consolidated complaint and denied liability on the claims the plaintiffs
have asserted. In January 2004, the court ordered that a related action that
the plaintiffs filed against KPMG LLP (United States) and KPMG in Bermuda be consolidated with the
action against us. In February 2004, the court denied certain individual
defendants motions to dismiss the action. In March 2004, the court denied
motions to dismiss filed by certain other individual defendants and XL Capital
Ltd. The court has not yet ruled on one individual defendants
motion to dismiss. No assurance can be given that we will not be required to pay monetary
damages in connection with this lawsuit.

Transamerica has alleged that we, as of October 31, 2003, owed $17.6
million under our annuity reinsurance agreement with Transamerica. On February
3, 2004, we paid Transamerica $12.6 million, representing the net amount we
believed was due under the reinsurance agreement as of October 31, 2003 after
deducting $5.0 million for investment related expenses that we believe was owed
to us by Transamerica. Transamerica is currently pursuing arbitration with us,
asserting that the $5.0 million offset is not justified and that we owe it that
amount and interest on the amounts that Transamerica previously alleged were
due.

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

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

Item 4.Submission of Matters to a Vote of Security Holders.

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

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PART II

|        |                                                                                                            
|------- | -----------------------------------------------------------------------------------------------------------
|Item 5. | Market for Registrants Common Equity, Related Stockholder Matters
and Issuer Purchase of Equity Securities

Market Information

Our common shares are traded on the New York Stock Exchange under the
ticker symbol ANR. Based upon publicly available information on trading in
our shares, the high and low sales prices of our common shares for each
calendar quarter for the years 2003 and 2002 were as follows:

|                        |  |      |      |      |  |      |      |     |  |   |       |  |  |   |       | 
|----------------------- |  | ---- | ---- | ---- |  | ---- | ---- | --- |  | - | ----- |  |  | - | ----- | 
|                        |  | 2003 |      | 2002
|                        |  |      |      |     
|Period                  |  | High |      | Low  |  | High |      | Low
|                        |  |      |      |      |  |      |      |    
|January 1  March 31    |  | $    | 5.19 |      |  | $    | 0.42 |     |  | $ | 26.09 |  |  | $ | 15.55 | 
|April 1  June 30       |  |      | 1.67 |      |  |      | 0.55 |     |  |   | 21.20 |  |  |   | 16.60 | 
|July 1  September 30   |  |      | 1.39 |      |  |      | 0.90 |     |  |   | 18.50 |  |  |   | 3.60  | 
|October 1  December 31 |  |      | 1.80 |      |  |      | 1.06 |     |  |   | 5.35  |  |  |   | 1.80  | 

As of March 4, 2004, there were approximately 2,700 record holders of our
outstanding common shares, excluding participants in securities position
listings. At March 5, 2004, the closing price of our stock was $1.49 per
common share.

Dividends

There were no dividends declared in any quarter of 2003, however,
quarterly cash dividends of $0.05 per common share were declared and paid in
each quarter of 2002. Both we and our Bermuda operating subsidiary, Annuity and
Life Reassurance, are required to comply with the provisions of the Bermuda
Companies Act that regulate the payment of dividends and the making of
distributions from contributed surplus. Neither we nor Annuity and Life
Reassurance may declare or pay a dividend, or make a distribution out of
contributed surplus, if there are reasonable grounds for believing that: (i)
the relevant company is, or would be after the payment, unable to pay its
liabilities as they become due; or (ii) the realizable value of the relevant
companys assets would thereby be less than the aggregate of its liabilities
and its issued share capital and share premium accounts. As of and since
December 31, 2002, we have not declared a dividend to shareholders and we do
not expect to declare or pay dividends to shareholders in the near future. The
declaration and payment of future dividends to holders of our common shares
will be at the discretion of our Board of Directors and will depend upon our
earnings and financial condition, capital requirements of our subsidiaries, the
ability of our operating subsidiaries to pay dividends to us, regulatory
considerations and other factors the Board of Directors deems relevant. For a
discussion of other factors affecting our ability to pay dividends, see Item 1.
Business  Regulation, Item 7. Managements Discussion and Analysis of
Financial Condition and Results of Operations  Liquidity and Capital Resources
and Note 15 to our Consolidated Financial Statements included elsewhere in this
report. Currently, there is no Bermuda withholding tax on dividends paid by us
to shareholders.

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Item 6.Selected Financial Data.

The following table sets forth selected financial data and other operating
information. The selected financial data has been derived from our consolidated
financial statements and should be read in conjunction with our consolidated
financial statements and accompanying notes and Item 7. Managements Discussion
and Analysis of Financial Condition and Results of Operations included in this
report.

|                                                                               |  |                                                       |                             |   |                                 |             |              |   |             |             |             |   |             |             |            |   |             |             |            |   |             |             | 
|------------------------------------------------------------------------------ |  | ----------------------------------------------------- | --------------------------- | - | ------------------------------- | ----------- | ------------ | - | ----------- | ----------- | ----------- | - | ----------- | ----------- | ---------- | - | ----------- | ----------- | ---------- | - | ----------- | ----------- | 
|                                                                               |  |                                                       |                             |   | For the Year Ended December 31,
|                                                                               |  |                                                       |                             |   |                                
|                                                                               |  |                                                       |                             |   | 2003                            |             | 2002         |   | 2001        |             | 2000        |   | 1999       
|                                                                               |  |                                                       |                             |   |                                 |             |              |   |             |             |             |   |            
|Income Statement Data                                                          |  |                                                       |                             |   |                                 |             |              |   |             |             |             |   |             |             |            |   |             |             |            |  
|Revenues                                                                       |  |                                                       |                             |   |                                 |             |              |   |             |             |             |   |             |             |            |   |             |             |            |  
|                                                                               |  | Net premiums                                          |                             | $ | 166,972,840                     |             |              | $ | 344,097,441 |             |             | $ | 251,793,237 |             |            | $ | 168,404,022 |             |            | $ | 100,835,007 |            
|                                                                               |  | Investment income, net of related
expenses            |                             |   | 29,042,223                      |             |              |   | 102,138,985 |             |             |   | 91,128,696  |             |            |   | 136,648,327 |             |            |   | 85,089,811  |            
|                                                                               |  | Net realized investment gains (losses)                |                             |   | 6,406,587                       |             |              |   | 19,749,266  |             |             |   | 1,230,038   |             |            |   | (4,817,121  | )           |            |   | (1,284,769  | )          
|                                                                               |  | Net change in fair value of embedded
derivatives      |                             |   | 16,692,688                      |             |              |   | (25,846,110 | )           |             |   | 5,029,027   |             |            |   |            |             |            |   |            |            
|                                                                               |  | Surrender fees and other revenues                     |                             |   | 7,297,015                       |             |              |   | 16,156,437  |             |             |   | 18,519,701  |             |            |   | 6,915,870   |             |            |   | 3,215,429   |            
|                                                                               |  |                                                       |                             |   |                                 |             |              |   |             |             |             |   |             |             |            |   |             |             |            |   |             |            
|                                                                               |  |                                                       | Total Revenues              |   | $                               | 226,411,353 |              |   | $           | 456,296,019 |             |   | $           | 367,700,699 |            |   | $           | 307,151,098 |            |   | $           | 187,855,478 | 
|                                                                               |  |                                                       |                             |   |                                 |             |              |   |             |             |             |   |             |             |            |   |             |             |            |   |             |            
|Benefits and Expenses                                                          |  |                                                       |                             |   |                                 |             |              |   |             |             |             |   |             |             |            |   |             |             |            |  
|                                                                               |  | Claim and policy benefits                             |                             | $ | 198,002,905                     |             |              | $ | 352,408,801 |             |             | $ | 216,025,010 |             |            | $ | 132,810,192 |             |            | $ | 79,953,160  |            
|                                                                               |  | Interest credited to interest
sensitive products      |                             |   | 13,980,723                      |             |              |   | 71,370,616  |             |             |   | 49,258,418  |             |            |   | 65,842,303  |             |            |   | 22,312,684  |            
|                                                                               |  | Policy acquisition costs and other
insurance expenses |                             |   | 128,549,288                     |             |              |   | 125,877,980 |             |             |   | 126,580,549 |             |            |   | 58,985,523  |             |            |   | 42,200,688  |            
|                                                                               |  | Collateral costs                                      |                             |   |                                |             |              |   | 12,948,115  |             |             |   | 1,200,000   |             |            |   |            |             |            |   |            |            
|                                                                               |  | Operating expenses                                    |                             |   | 18,034,021                      |             |              |   | 22,577,792  |             |             |   | 11,552,418  |             |            |   | 10,411,344  |             |            |   | 7,685,802   |            
|                                                                               |  |                                                       |                             |   |                                 |             |              |   |             |             |             |   |             |             |            |   |             |             |            |   |             |            
|                                                                               |  |                                                       | Total Benefits and Expenses |   | $                               | 358,566,937 |              |   | $           | 585,183,304 |             |   | $           | 404,616,395 |            |   | $           | 268,049,362 |            |   | $           | 152,152,334 | 
|                                                                               |  |                                                       |                             |   |                                 |             |              |   |             |             |             |   |             |             |            |   |             |             |            |   |             |            
|Net (loss) income before cumulative
effect in a change in accounting
principle |  | $                                                     | (132,155,584                | ) |                                 | $           | (128,887,285 | ) |             | $           | (36,915,696 | ) |             | $           | 39,101,736 |   |             | $           | 35,703,144 |  
|Cumulative effect of a change in
accounting principle                          |  |                                                       |                            |   |                                 |             |             |   |             |             | (3,665,735  | ) |             |             |           |   |             |             |           |  
|                                                                               |  |                                                       |                             |   |                                 |             |              |   |             |             |             |   |             |             |            |   |             |             |            |   |             |            
|Net (loss) income                                                              |  | $                                                     | (132,155,584                | ) |                                 | $           | (128,887,285 | ) |             | $           | (40,581,431 | ) |             | $           | 39,101,736 |   |             | $           | 35,703,144 |  
|                                                                               |  |                                                       |                             |   |                                 |             |              |   |             |             |             |   |             |             |            |   |             |             |            |   |             |            
|Basic (loss) income per common share                                           |  | $                                                     | (5.11                       | ) |                                 | $           | (5.01        | ) |             | $           | (1.59       | ) |             | $           | 1.53       |   |             | $           | 1.40       |  
|Diluted (loss) income per common share                                         |  | $                                                     | (5.11                       | ) |                                 | $           | (5.01        | ) |             | $           | (1.59       | ) |             | $           | 1.42       |   |             | $           | 1.31       |  
|Dividends per common share                                                     |  | $                                                     | 0.00                        |   |                                 | $           | 0.20         |   |             | $           | 0.20        |   |             | $           | 0.16       |   |             | $           | 0.16       |  
|Weighted average shares outstanding                                            |  |                                                       | 25,880,202                  |   |                                 |             | 25,738,724   |   |             |             | 25,602,664  |   |             |             | 25,499,999 |   |             |             | 25,499,999 |  
|Balance Sheet Data (in thousands)                                              |  |                                                       |                             |   |                                 |             |              |   |             |             |             |   |             |             |            |   |             |             |            |  
|Invested assets, including cash and cash
equivalents                           |  | $                                                     | 197,881                     |   |                                 | $           | 306,346      |   |             | $           | 423,780     |   |             | $           | 321,819    |   |             | $           | 304,060    |  
|Funds withheld                                                                 |  | $                                                     | 667,825                     |   |                                 | $           | 1,427,093    |   |             | $           | 1,489,689   |   |             | $           | 1,530,110  |   |             | $           | 1,532,653  |  
|Total assets                                                                   |  | $                                                     | 1,029,882                   |   |                                 | $           | 2,044,698    |   |             | $           | 2,310,773   |   |             | $           | 2,226,602  |   |             | $           | 2,056,086  |  
|Stockholders equity                                                           |  | $                                                     | 135,173                     |   |                                 | $           | 268,337      |   |             | $           | 402,189     |   |             | $           | 440,330    |   |             | $           | 392,055    |  
|Other Financial Data                                                           |  |                                                       |                             |   |                                 |             |              |   |             |             |             |   |             |             |            |   |             |             |            |  
|Book value per common share (1)                                                |  | $                                                     | 5.11                        |   |                                 | $           | 10.28        |   |             | $           | 15.65       |   |             | $           | 17.27      |   |             | $           | 15.37      |  
|Life insurance in force (in thousands)                                         |  | $                                                     | 17,510,000                  |   |                                 | $           | 117,511,000  |   |             | $           | 117,400,000 |   |             | $           | 77,019,000 |   |             | $           | 45,407,000 |  



---

|(1) |  | Book value per share is computed by dividing stockholders equity at the end of the period by the number of common shares then outstanding.
|--- |  | -------------------------------------------------------------------------------------------------------------------------------------------

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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 Item 6. Selected Financial
Data and the consolidated financial statements and accompanying notes included
elsewhere in this report.

Forward-Looking Statements

This report, together with other statements and information we may
provide, contains forward-looking statements within the meaning of Section
27A of the Securities Act of 1933 and Section 21E of the Securities Exchange
Act of 1934. These statements may include, but are not limited to, projections
of revenues, income or loss, capital expenditures, plans for future operations
and financing needs or plans, as well as assumptions relating to the foregoing.
The words expect, project, estimate, predict, anticipate, believe,
and similar expressions are intended to identify forward-looking statements,
although not all forward-looking statements include these expressions.
Forward-looking statements are inherently subject to risks and uncertainties,
some of which cannot be predicted or quantified. Future events and actual
results, performance and achievements could differ materially from those set
forth in, contemplated by or underlying the forward-looking statements. 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.

Factors that could materially and adversely affect our operations and
financial condition and/or cause our actual results of operations or financial
condition to differ from those expressed or implied in our forward-looking
statements include, but are not necessarily limited to, the following:



| |  |  | As a Bermuda reinsurer, we are required to post collateral for the
statutory reserves ceded to us by U.S. based insurers and reinsurers.
We do not have sufficient available cash and investments to satisfy
the collateral requirements asserted by Connecticut General Life
Insurance Company (CIGNA), the cedent under our only remaining
guaranteed minimum death benefit (GMDB) and guaranteed minimum
income benefit (GMIB) agreement. We are attempting to restructure
the reinsurance agreement or otherwise meet or reduce CIGNAs request
for collateral. We also continue to attempt to raise additional
capital, but we presently have no commitments to raise capital and
have been unable to do so since beginning such efforts in early 2002.
There can be no assurance that we will be able improve our operations
or liquidity. If we cannot do so, or we are unable to raise capital,
we will not be able to satisfy our obligations and will likely be
required to liquidate our business if we cannot successfully pursue
any other strategic alternative. If we are required to liquidate, we
can give you no assurance that we will be able to realize the book
value of our assets or that investors in our common shares will
realize any value on those shares.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | Under Bermuda law, a single creditor could make a statutory demand
upon us for satisfaction of obligations owed to that creditor. If the
statutory demand is held to be valid, and we are unable to satisfy our
obligations to that creditor, the creditor may institute proceedings
seeking the liquidation of our business. As of the date of this
report, we have been served with three statutory demands under Bermuda
law and have satisfied or otherwise eliminated our obligations to two
of the parties making those demands. The third statutory demand
related to amounts that Imagine Group Holdings Limited, a Bermuda based reinsurer, alleges we
are obligated to reimburse it for expenses it incurred in connection
with a December 2002 capital raising transaction that was not
consummated. Imagine has withdrawn its statutory demand, but has instituted civil proceedings against us for the amounts it alleges we owe.
 If a creditor of ours successfully pursues this statutory
process and we are unable to discharge our obligations, liquidation
proceedings could be commenced against us.                                                                                                                                                                      

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| |  |  | We have ceased to write new reinsurance agreements and are not
accepting new business on existing agreements. We do not anticipate
resuming to write new reinsurance agreements in the foreseeable
future, unless we are able to increase our cash and liquidity
positions. As a result, our cash flow and results of operations in the
near future will be based solely upon the performance of our remaining
book of business and the returns generated from our invested assets.
Of our remaining book of business, we have a few large reinsurance
contracts that represent a material concentration of our net premiums,
funds withheld at interest asset, deferred policy acquisition costs
and interest sensitive contract liabilities. We have experienced
substantial losses on our annuity reinsurance contract with
Transamerica Occidental Life Insurance Company (Transamerica) over the last three years, which
remains in force as of today. In addition, we recorded losses of
approximately $7.0 million in 2003 on our remaining three largest life reinsurance agreements.
Unless these contracts perform
substantially better than they have in past periods, the losses from these
contracts will have an increasingly significant adverse impact on our
results of operations.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | Prior to requesting their withdrawal, the financial strength ratings
of both our operating subsidiaries had been downgraded to a level that
effectively precluded them from writing new business. We cannot assure
you that we will be able to obtain sufficient financial strength
ratings or increase our cash and liquidity positions to a level where
we can resume writing new business. If we are able to position
ourselves to write new business in the future, we cannot assure you
that we will be able to attract or retain customers.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|
| |  |  | A purported shareholder class action lawsuit has been filed against us
and certain of our present and former officers and directors alleging
violations of United States securities laws. In addition, Transamerica
has asserted that we are in breach of our reinsurance agreement with
them and has demanded arbitration. We cannot assure you that we will
be successful in the defense of any of our current or future
litigation or arbitration proceedings. If the outcome in any such
proceeding is adverse to us, our results of operations and financial
condition would be adversely impacted.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|
| |  |  | On April 8, 2003, we received notice from the New York Stock Exchange
that we did not satisfy its continued listing standards as of that
date because the average closing price of our common shares had been
below $1.00 for a 30 consecutive trading day period. The notice
indicated that if we could not achieve (i) a $1.00 average share price
for the 30 consecutive trading days prior to October 7, 2003, the
expiration of the six month period following the date of the receipt
of the notification, and (ii) a $1.00 share price on October 7, 2003,
then the NYSE would commence suspension and delisting procedures with
respect to our common shares. In addition, the NYSE informed us that
it was considering whether we continued to meet certain of the NYSEs
qualitative continued listing standards due to concerns over our
financial condition. On October 14, 2003, the NYSE informed us that
we had satisfied the NYSEs continued listing standards, and as a
result would not be delisted from the Exchange. There can be no
assurance, however, that we will be able to continue to meet the
NYSEs qualitative or quantitative listing standards.                                                                                                                      
|
| |  |  | In preparing our financial statements, we use estimates and
assumptions based upon the best information available and managements
best judgment at the time our financial statements are prepared. The
most significant estimates relate to policyholder benefit reserves for
both the life and annuity business, the recoverability of deferred
acquisition costs and the fair value of the embedded derivatives
related to one of our annuity reinsurance contracts. These estimates
require us to make assumptions about, among other things, future
mortality, persistency, lapses, expenses and investment performance
based upon historical results and information provided to us by our
cedents. While we believe these estimates to be reasonable, we cannot
assure you that they will be accurate. If these estimates prove to be
inaccurate, they could have a significant adverse impact on our
financial condition and results of operations.                                                                                                                                                                                                                                                                                                                                           

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| |  |  | We are exposed to the risk that the level of death claims we receive
will exceed that which we assumed in pricing our reinsurance
contracts. In 2001, 2002 and 2003, we had substantial unexpected
adverse mortality experience compared to our original pricing
assumptions under many of our life reinsurance contracts. Mortality
experience that is less favorable than we assumed in pricing a
reinsurance agreement will negatively affect our net income.
Furthermore, even if the total benefits paid over the life of a
contract do not exceed the expected amount, unexpected increases in
the incidence of deaths or the size of individual claims can cause us
to pay more benefits in a given accounting period than expected,
adversely impacting the earnings of our business in any particular
quarter or year.                                                                                                                                                                                                         
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | Our continued operations are dependent on our ability, and the ability
of our ceding companies, to manage investment risks. Unexpected
volatility or illiquidity in the markets in which we directly or
indirectly hold positions could adversely affect our business. Our
investments and the assets held and managed by our ceding companies
include a limited amount of investments in below investment grade
fixed income securities. While any investment carries some risk, the
risks associated with lower-rated securities generally are greater
than the risks associated with investment grade securities. We also
may be exposed to equity related investment risk associated with
certain of our products. If we fail to match the equity related asset
risk accurately with the equity related liabilities, we could be
exposed to the volatility of the equity markets. This could result in
losses, such as those experienced under our Transamerica contract,
which in turn would further adversely affect our business.
|
| |  |  | As of the date of this report, approximately $667.8 million of the
assets supporting the policies we reinsure were held and managed by
our ceding companies or their investment managers under modified
coinsurance and coinsurance funds withheld arrangements. A significant
portion of our total investments is therefore dependent upon the
investment decisions of third parties over whom we have limited, if
any, control.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|
| |  |  | Our ability to satisfy our obligations under our reinsurance contracts
is significantly affected by the performance of our investments and
the invested assets held and managed by our ceding companies. For
example, if the invested assets held and managed by our ceding
companies or their investment managers in connection with our
remaining annuity reinsurance contracts do not accumulate at rates
sufficient to allow us to meet our obligations to make certain
guaranteed payments, we could be forced to fund any shortfalls in
these policy benefits, as we had to do in recent years with respect to
our annuity reinsurance contract with Transamerica and a large
guaranteed minimum death benefit contract which has since been
recaptured. If we are required to fund similar shortfalls in the
future, it would adversely affect our business.                                                                                                                                                                     
|
| |  |  | Significant changes in interest rates expose us to the risk of reduced
investment income when interest rates are falling and to greater
realized losses from the sale of securities when interest rates are
rising. In addition, changes in interest rates can negatively affect
the income we derive from the spreads between the interest rates
earned on investments and the credited interest rates paid on the
policies that we reinsure. If interest rates remain at their current
low levels, our investment yields likely will be insufficient to cover
the credited interest rates paid under the policies we reinsure, which
would adversely affect our business.                                                                                                                                                                                                                                                                                                                                                             
|
| |  |  | Pursuant to FAS 133  Accounting for Derivative Instruments and
Hedging Activities, one of our annuity reinsurance contracts is deemed
to host an embedded derivative that must be bifurcated and accounted
for separately. The change in the fair value of the embedded
derivative is primarily driven by credit risk related changes in the
market value of assets underlying the contract, changes in expected
future cash flows under the annuity reinsurance agreement and changes
in interest rates. The change in fair value is reported as a component
of our results of operations, thereby increasing the volatility of our reported net
income (loss). If prevailing market conditions or other factors adversely
impact the value of the embedded derivative, it could have a
substantial effect on our results of operations.                                                                                                                                                                                              

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| |  |  | All of the annuity products we reinsure allow policyholders to
withdraw their funds under certain circumstances. In addition, certain
of our life and annuity reinsurance agreements provide recapture
rights that allow the ceding company to reassume all or a portion of
the risk formerly ceded to us. Because our financial strength ratings
have been withdrawn, certain of these agreements can be recaptured.
Although we attempt to manage our investment portfolio so that we have
sufficient liquidity to support anticipated withdrawals and
recaptures, we cannot assure you that we will be able to dispose of
assets on favorable terms in the future to support withdrawals and
recaptures.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | The American Institute of Certified Public Accountants has issued
Statement of Position (SOP) 03-1 that will set new standards for
accounting for Certain Nontraditional Long-Duration Contracts and for
Separate Accounts effective for fiscal periods beginning after
December 15, 2003. We anticipate that this new standard may increase
the volatility of our reserves for our reinsurance contracts covering
guaranteed minimum benefits related to variable annuity contracts, and
deferred acquisition costs and interest sensitive contracts liability
related to our Transamerica agreement, each of which will affect our
future results of operations. In addition, we expect the adoption of
the SOP will negatively affect our tangible book value, which we
define as GAAP book value excluding deferred acquisition costs.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|
| |  |  | Terrorist attacks may negatively affect our results of operations in
that we may experience higher than expected death claims in a given
period, such as occurred in 2001 with the attack on the World Trade
Center. There can be no assurance that there will not be further
terrorist attacks against the United States or United States
businesses. In addition, the United States has entered into armed
conflicts, which could have a further impact on our business in ways
we cannot currently anticipate. Political and economic instability in
some regions of the world may also result and could negatively impact
our business.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|
| |  |  | The loss of any member of our management team, particularly John F.
Burke, our current Chief Executive Officer, or John W. Lockwood, our
recently appointed Chief Financial Officer, could adversely affect our
business.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|
| |  |  | When we purchase reinsurance from another reinsurance company, known
as a retrocessionaire, to cover certain risks that we have ourselves
reinsured, we are subject to the risk that the retrocessionaire will
be unable to pay amounts due to us because of its own financial
troubles. The failure of a retrocessionaire to pay amounts due to us
will not absolve us of our responsibility to pay our customers for
risks that we have insured. Failure of our retrocessionaires to pay us
could have a material adverse effect on our business, results of
operations and financial condition. In particular, when we purchased
our United States based operating subsidiary, Annuity and Life
Reassurance America, Inc., 100% of the risks related to the directly
written life and annuity policies existing at the date of our purchase
transaction were ceded to Reassure America Life Insurance Company, a
subsidiary of the seller, Swiss Re Life and Health, America. As the
direct issuer of those policies, Annuity and Life Reassurance America
remains liable to policyholders in the event the reinsurer is unable
to pay its obligations to us under the reinsurance agreement.
Reserves ceded under this reinsurance agreement amounted to
approximately $88.2 million and $93.4 million at December 31, 2003 and
December 31, 2002, respectively. Reassure America Life Insurance
Company currently is rated A+g (superior) by AM Best.
|
| |  |  | We are subject to the laws and regulations of the jurisdictions in
which we conduct business. These laws and regulations cover many
aspects of our business, including licensure, premium rates, marketing
practices and capital adequacy. Recently, the insurance and
reinsurance regulatory framework has become subject to increased
scrutiny in many jurisdictions and regulators have started to
reexamine existing laws and regulations. Changes in these laws and
regulations could have an adverse affect on our operations. Further
deterioration in our financial condition could expose our operations
in the United States and Bermuda to increased levels of regulatory
scrutiny and possibly to the winding up of our operations.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|
| |  |  | As a holding company, we have no significant operations or assets
other than our ownership of the capital stock of our subsidiaries.
Dividends and other permitted payments from our subsidiaries are our                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 

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| |   |  | sole source of funds to pay expenses and dividends, and any
limitations imposed on our subsidiaries to make such payments to us,
especially our Bermuda operating subsidiary, may cause us to have
insufficient funds to operate our business and satisfy our
obligations.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | We, along with Annuity and Life Reassurance, are Bermuda corporations
that we believe are not subject to United States income tax because
neither engages in business in the United States. However, because
there is no definitive guidance as to what constitutes being engaged
in trade or business in the United States, there can be no assurance
that in the future the Internal Revenue Service may not contend that
we are engaged in trade or business in the United States. The
United States Internal Revenue Service (IRS) is currently conducting an audit of our
United States based subsidiaries. Those companies currently have a
significant tax based net operating loss carryforward. In addition,
the IRS has requested certain information and documents related to
our Bermuda based operations. While our United States based
subsidiaries have complied with the IRS requests for
information, both our Bermuda holding company and our Bermuda
operating subsidiary have declined to supply the IRS with the
information it has requested based on the IRS lack of
jurisdiction over those entities. If the IRS were to determine that
our Bermuda based companies were engaged in business in the United
States, we could be subject to United States tax at regular corporate
rates on our taxable income that is attributable to the Bermuda
companies permanent establishment, if any, in the United States
plus an additional 30% branch profits tax on
such income remaining after the regular tax. Such taxes, if levied,
could have an adverse effect on our business.

General

Our company has encountered significant difficulties during the last three
years. In addition to reporting significant operating losses for those years,
we did not have sufficient available cash and investments at December 31, 2002
to post as collateral to satisfy all of our obligations under certain of our
reinsurance agreements. During 2003, we negotiated the termination or recapture
of most of our reinsurance agreements. As a result of those terminations and
recaptures and other actions taken by management, as of December 31, 2003 we
had met all the collateral obligations of our remaining ceding companies with
the exception of those asserted by CIGNA, the cedent under our only remaining
GMDB and GMIB agreement. As of December 31, 2002, CIGNA asserted that we were
required to post $59 million of collateral in addition to the $11 million of
collateral we had previously provided. As of December 31, 2003, CIGNA was
seeking $49 million of collateral in addition to the $11 million of collateral
we had previously provided. We do not agree that the aggregate $60 million
collateral requirement currently asserted by CIGNA is required to be posted. As
a result, we have not posted any additional collateral for this agreement. If
CIGNAs asserted collateral requirement is valid, we do not have sufficient
available cash and investments to satisfy CIGNAs request. We are attempting to
restructure the reinsurance agreement or otherwise meet or reduce CIGNAs
request for collateral. If these negotiations are unsuccessful, CIGNA could
initiate arbitration or litigation proceedings against us. The specific relief
sought and the outcome of any proceedings that CIGNA could initiate cannot be
determined at this time. If we do not prevail in any such arbitration or
litigation proceedings, it would have a material adverse effect on our
financial condition and we may be required to liquidate our operations.

As a result of the termination and recapture of several or our reinsurance
agreements in 2003, our life insurance in force has declined from $117.5
billion at December 31, 2002 to $17.5 billion at December 31, 2003. In
addition, we have terminated our annuity reinsurance agreements with The Ohio
National Life Insurance Company, our then second largest annuity reinsurance
agreement, and Hartford Life, our then largest GMDB reinsurance agreement. We
are not currently seeking to negotiate the termination or recapture of any of
our remaining reinsurance agreements except that, as noted above, we are
seeking to restructure our agreement with CIGNA.

Also in 2003, we instituted substantial premium rate increases on all of
our non-guaranteed premium yearly renewable term agreements. The Metropolitan
Life Insurance Companies (MetLife), the cedent under our largest life
reinsurance agreement, objected to the premium rate increase and demanded
arbitration. On December 19, 2003, the panel in the arbitration proceeding
ruled that our rate increase was valid effective as of May 5, 2003. As a result
of the ruling, MetLife chose to recapture its reinsurance agreement. The
impact of the ruling and MetLifes recapture was to release funds we had
previously posted as collateral under that agreement. We utilized a large
portion of those funds to fully collateralize Citibanks letter of credit
facility with us and to pay Transamerica an amount that we believe was due to
it as of October 31, 2003 after deducting $5.0 million for investment related
expenses that we believe was

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owed to us by Transamerica. Transamerica is currently pursuing
arbitration with us, asserting that the $5.0 million offset is not justified
and that we owe it that amount and interest on the amounts that Transamerica
previously alleged were due.

In addition to the discussions with Transamerica related to the alleged
amounts owed to it, we have been attempting to engage Transamerica, and
ultimately IL Annuity and Insurance Company (IL Annuity), the primary
insurance company under the Transamerica agreement, in discussions aimed at
improving the investment returns on the assets supporting that agreement and
potentially redesigning the VisionMark product to reduce our minimum interest
guarantee exposure. If we are not successful in convincing Transamerica and IL
Annuity to restructure the portfolio and/or to redesign the product, we may
incur additional write downs of deferred acquisition costs in the future.

We plan to continue to receive premiums and pay claims under our remaining
reinsurance treaties; however, we are not currently underwriting any new
treaties or accepting any new business from our existing treaties. We are
currently exploring whether we can, should or will begin selling new insurance
and reinsurance products in the future, but we cannot assure you that we will
be able to successfully develop, underwrite or market any products currently
being considered.

There can be no assurance that we will be able to improve our operations
and liquidity. If we are unable to reposition our investment
portfolio to achieve a substantially higher yield within our investment
guidelines, successfully defend against the pending purported shareholder class
action suit, improve the performance of our reinsurance agreement with
Transamerica and restructure our reinsurance agreement with CIGNA, we may not
be able to meet our obligations in 2004. Our failure to achieve any one of the
foregoing items could have a material adverse effect on our financial condition
and results of operations. For a more detailed discussion of certain factors
that could materially and adversely affect our financial condition and results
of operations, please see  Forward-Looking Statements.

In light of the foregoing, the discussion of our results of operations for
the year ended December 31, 2003 presented in this report is not likely to be
indicative of our future operating results.

Our remaining life reinsurance agreements continue to be reinsurance of
ordinary life insurance, primarily for mortality risk. Profitability of our
life reinsurance line depends in large part on the volume and amount of death
claims incurred. While death claims are reasonably predictable over a long time
horizon, they are less predictable over shorter periods and are subject to
fluctuation from quarter to quarter and year to year. Significant fluctuations
from period to period could adversely affect the results of our operations, as
occurred in 2003 and 2002. At December 31, 2003 and 2002, the total face amount
of our life insurance in force amounted to approximately $17.5 billion and
$117.5 billion, respectively. At December 31, 2003 and 2002, we had retroceded
approximately $0.38 billion and $1.26 billion, respectively, of our in force
business under our life reinsurance agreements to other reinsurers, or 2.16%
and 1.07% of our life insurance in force, respectively.

Our remaining annuity products are reinsurance of general account fixed
deferred annuities and certain ancillary risks arising from variable annuities.
Profitability of the annuity reinsurance line is primarily dependent on earning
a spread between the interest rate earned on the assets under management and
the interest rate credited to the policyholder. This product line is market and
interest rate sensitive. Fluctuations in the general level of interest rates,
fixed income markets, and equity markets from period to period may cause
fluctuations in the results of our operations. The combined effects of poor
market performance and excessive surrender rates can adversely impact this
product line, such as occurred in 2001 and 2002. At December 31, 2003 and 2002,
our liability for annuity reinsurance agreements amounted to approximately $671
million and $1.4 billion, respectively.

Critical Accounting Policies

Annuity and Life Re (Holdings), Ltd. is a Bermuda holding company with
operating subsidiaries in Bermuda and the United States. We consolidate the
operations of all of our subsidiaries in accordance with accounting principles
generally accepted in the United States. The preparation of financial
statements in

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conformity with generally accepted accounting principles requires the use
of estimates and assumptions developed by our management. Any adjustments to
the reported amounts 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. Our ceding companies periodically update, refine and revise
the reinsurance information they provide to us. This revised data is reflected
in earnings as changes in estimates.

Set forth below is a summary of the accounting policies that management
believes are critical to the preparation of our consolidated financial
statements. This summary should be read in conjunction with the discussion of
our accounting policies included in Note 3 to the consolidated financial
statements included elsewhere in this report.

Deferred Policy Acquisition Costs.The costs of acquiring new business,
principally allowances, which vary with and are primarily related to the
production of new business, are deferred.

For traditional life and annuity policies with life contingencies,
deferred policy acquisition costs are charged to expense using assumptions
consistent with those used in computing policy reserves. Assumptions as to
anticipated premiums are estimated at the date of the policy issuance, or the
effective date of the most recent premium rate increase, and are consistently
applied during the life of the contracts. Deviations from estimated experience
are reflected in earnings in the period such deviations occur. For these
contracts, the amortization periods are generally the estimated life of the
policies. As discussed elsewhere in this report, we terminated or recaptured
several of our reinsurance agreements during 2003. These terminations and
recaptures have caused us to incur significant deferred acquisition cost
write-downs. While we believe that there will be minimal, if any, termination
or recapture activity in the future, we will consider transactions in
connection with the resolution of outstanding disputes with certain of our
ceding companies, or that are otherwise economically beneficial to us, which
may require further write downs of deferred acquisition costs.

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

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

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of expected gross profits for purposes of amortizing deferred acquisition
costs associated with the contract. The application of this accounting policy
has increased the volatility of our reported earnings. While we have made an
estimate of the fair value of the embedded derivative using a model that we
believe to be appropriate and based upon reasonable assumptions, the
assumptions used are subjective and may require adjustment in the future. In
addition, as industry standards for estimating the fair value of embedded
derivatives develop, it is possible that we may modify our methodology. Changes
in our assumptions and industry standards could have a significant impact on
the fair value of the embedded derivative and our reported earnings. We do not
bifurcate and separately account for the embedded derivatives contained in our
Transamerica annuity reinsurance agreement or our GMDB/GMIB reinsurance
agreement with CIGNA because we acquired those agreements prior to the
transition date elected by us under FAS 133, as amended. Because of the nature
of the assets underlying our Transamerica contract, which were roughly 64%
convertible bonds at December 31, 2003, the bifurcation and separate accounting
for the embedded derivatives contained in that contract could add significant
volatility to our reported results. If we bifurcated and separately accounted
for the embedded derivatives contained in our GMDB/GMIB reinsurance agreement
with CIGNA, it also could add volatility to our reported results.

Recognition of Revenues and Expenses.Reinsurance premium revenues from
life products with mortality risk are recognized when due from the
policyholders. Premiums from universal life and investment-type contracts are
recorded on our balance sheet as interest sensitive contracts liability.
Revenues from these investment-type contracts consist of income earned on the
assets and amounts assessed during the period against policyholders account
balances for mortality charges, policy administration charges and surrender
charges. Items that are charged to expense represent interest credited to
policyholder accounts and other benefits in excess of related policyholders
account balances, including minimum interest guarantee payments (LMIG). Such
LMIG payments are recognized as an expense when paid upon the surrender of the
underlying policy and are not charged to the policyholders account balances.
We make estimates at the end of each reporting period regarding premiums and
benefits for ceding companies who do not report such information in a timely
manner. These estimates can have a significant effect on the amounts we report
in our financial statements.

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

We reinsure certain minimum guarantees associated with variable annuity
agreements. These have historically included GMDB, GMIB and enhanced earnings
benefits contracts, although, as of December 31, 2003, our combined GMDB/GMIB
agreement with CIGNA was the only reinsurance agreement we had covering minimum
guarantees associated with variable annuity agreements. Our accounting policy
is designed to establish reserves for expected claim payments based upon the
view of expected losses over the life of the underlying policies, based upon
the original pricing assumptions. Our reserving policy allows us to increase
reserves if reported claim amounts or claims volume exceed what was anticipated
in pricing.

Our
obligations arising from our fixed annuity reinsurance agreements are reflected on
our balance sheet as Interest sensitive contracts liability and are reported
at the accumulated policyholder balances of these accounts.

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

AICPA Statement of Position (SOP 03-1)In July 2003, the Accounting
Standards Executive Committee of the AICPA issued Statement of Position (SOP)
03-1, Accounting and Reporting by Insurance Enterprises for Certain
Non-Traditional Long-Duration Contracts and for Separate Accounts. The SOP

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provides guidance on accounting and reporting by insurance enterprises for
certain nontraditional long-duration contracts and for separate accounts. The
SOP will change the manner in which life insurance companies account for
certain types of insurance and reinsurance contracts including those that cover
risks such as guaranteed minimum death benefits and guaranteed minimum income
benefits. Additionally, the SOP provides accounting guidance for sales
inducements paid to contract holders and provides guidance for establishing
liabilities for contracts with features that may result in more than one
potential account balance. The SOP is effective for financial statements for
fiscal years beginning after December 15, 2003. The SOP may not be applied
retroactively to prior years financial statements, and initial application
should be as of the beginning of an entitys fiscal year.

We have a combined GMDB/GMIB contract with CIGNA and an annuity
reinsurance agreement with Transamerica that will be affected by the adoption
of this new SOP. The SOP provides guidance for reserving for contracts with
guaranteed minimum death and guaranteed minimum income benefits. The
methodology is based on projection of a wide number of future scenarios
regarding the present value of premiums earned and claims incurred. Based on
this future projection and actual past experience of premiums and claims, a
Benefit Ratio percentage is determined. The reserve is then determined by
applying the Benefit Ratio percentage to actual premiums received less actual
claims, both with interest. Management does not expect the amount of reserves
carried for our GMDB/GMIB reinsurance agreement to change significantly as a
result of the adoption of the SOP. The SOP also provides guidance for
reserving for annuity agreements with more than one potential account balance.
Such reserves should be based upon the highest contractually determinable
balance, without consideration of surrender fees. Upon adoption of the SOP,
there is a one-time transition adjustment to the amount of carried deferred
acquisition costs. Management is
currently analyzing the impact of the adoption of the SOP on our accounting for
the Transamerica annuity reinsurance agreement.

For further information about the market risk sensitivity of minimum
guarantee associated with variable annuity products, see Item 7A. Quantitative
and Qualitative Disclosures about Market Risk.

Operating Results

Year Ended December 31, 2003 Compared to Year Ended December 31, 2002

Net (Loss).For the year ended December 31, 2003, we had a consolidated
net loss of $(132,155,584), or $(5.11) per primary and fully diluted common
share, as compared to a net loss of $(128,887,285), or $(5.01) per primary and
fully diluted common share for the year ended December 31, 2002. The loss for
2003 was primarily the result of losses associated with recaptures and
terminations of life and annuity reinsurance agreements, as well as adverse
claims experience under our life reinsurance agreements. Reduced investment
gains and significant operating expenses due to litigation costs and employee
retention and severance costs also contributed to our net loss for the year
ended December 31, 2003.

During the year ended December 31, 2003, we negotiated the recapture and
termination of most of our life and annuity reinsurance agreements. As a
result, we incurred charges from the write down of deferred acquisition costs
and cash payments made to ceding companies in excess of reserve releases
associated with the recaptured contracts aggregating to approximately
$90,830,000. These charges include costs of approximately $20,400,000
associated with Hartford Lifes recapture of our then largest GMDB agreement,
the net costs of approximately $11,680,000 due to the recapture of our 50%
quota share reinsurance agreement with XL Life, a net charge of
approximately $5,020,000
related to the termination of our annuity reinsurance agreement with Ohio
National, the recapture cost of our MetLife agreement of approximately
$3,540,000 and the cost of recapture transactions completed with 25 additional
ceding companies that totaled approximately $50,190,000 in the aggregate.

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In addition to the costs associated with the recapture and termination of
those agreements, we experienced losses during 2003 amounting to approximately
$24,843,000 on the agreements that were recaptured or terminated during the
year. This includes a loss of approximately $6,379,000 for our contract with
MetLife and a net loss of approximately $5,866,000 for our
reinsurance agreements with XL Life. We also recorded a net loss related to the
recaptured Hartford Life treaty amounting to $6,537,000 in 2003. The remaining
business recaptured in 2003 generated approximately $6,062,000 in net losses.

We
recorded a loss of approximately $3,067,000 for our annuity
reinsurance agreement with Transamerica during 2003. This agreement is our
largest annuity reinsurance agreement, and represented approximately $604
million, or approximately 90%, of our Funds withheld at interest receivable as
of December 31, 2003. Our GMDB/GMIB contract with CIGNA resulted
in a loss of approximately $1,934,000 in 2003. Other life and annuity
reinsurance agreements that were not recaptured in 2003 resulted in
losses of approximately $5,778,000, and operating expenses exceeded
investment income and net realized investment gains by
approximately $5,703,000 in 2003.

Net Premiums.Net premium revenue for the year ended December 31, 2003 was
$166,972,840, a decrease of 51% from net premium revenue of $344,097,441 for
the year ended December 31, 2002. The majority of premium revenue in both years
was derived from traditional ordinary life reinsurance. The decline in premium
revenue reflects the decision to cease writing new business in 2003 and the
significant reduction of business in force resulting from the recapture and
termination of reinsurance agreements in the fourth quarter of 2002 and during
2003. Net premiums for 2003 related to agreements that were
recaptured or terminated in 2003 were approximately $103,876,000. At December
31, 2003, the total face amount of life insurance in force was approximately
$17.5 billion, as compared with approximately $117.5 billion at December 31,
2002. Our now largest life reinsurance agreement represented
approximately $7.9 billion of life insurance in force at December 31, 2003. We have stopped
writing new reinsurance agreements and are not accepting any new business under
existing treaties. The recaptures and terminations of reinsurance agreements
during 2003 will further reduce net premiums in future periods.

Net
Investment Income.Net investment income for the year ended
December 31, 2003 was $29,042,223, a decrease of 72% from net investment income of
$102,138,985 for the year ended December 31, 2002. The decrease in net
investment income was primarily the result of a significant decrease in
invested assets underlying our Funds withheld receivable as a result of the
termination of several annuity reinsurance contracts, including our agreement
with Ohio National, and lapses on policies underlying our annuity reinsurance
agreement with Transamerica. Net investment income earned on Funds withheld
for the year ended December 31, 2003 was $22,106,000, as compared with
$76,208,000 for the year ended December 31, 2002. The decrease in net
investment income for the year ended December 31, 2003 was also the result of
our return of approximately $147,000,000 of invested assets on December 31,
2002 in connection with the termination of a reinsurance agreement that
provided cash deposits to us that were used to secure collateral obligations of
our U.S. based cedents. Lower investment returns resulting from our decision
to shift a large portion of our invested assets into short duration
assets also contributed to the reductions in net investment income. The
average yield rate earned on our general account assets declined to
approximately 2.53% for the year ended December 31, 2003, as compared with
5.28% for the year ended December 31, 2002. The average yield rate earned on
Funds withheld was 2.68% for the year ended December 31, 2003, as compared with
5.25% for the year ended December 31, 2002. This reduction in yield rates is
primarily the result of the termination of our annuity reinsurance agreement
with Ohio National in the first quarter of 2003 and a lower yield on the assets
supporting our obligations under our Transamerica annuity reinsurance
agreement. For purposes of calculating the average yield rates earned on our
Funds withheld at interest, we only include net realized capital gains and
losses as reported to us through our settlements with our ceding companies.
Net investment income for 2003 related to agreements that were recaptured or
terminated in 2003 was $4,777,000. Because the amount of our cash and invested
assets has decreased significantly due to operating losses, and because the
amount of invested assets underlying our Funds withheld receivable has
decreased significantly due to the recapture and termination of certain of our
reinsurance agreements, we expect our net investment income for 2004 to be less
than 2003.

Net Realized Investment Gains.Net realized investment gains were
$6,406,587 for the year ended December 31, 2003, as compared with realized
gains of $19,749,266 for the year ended December 31, 2002. The decrease in net
realized investment gains for the year ended December 31, 2003 was the result
of

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a smaller invested asset base and the decision to maintain a significant
portion of our portfolio in short duration investments. We plan to continue to
hold a relatively large portion of our assets in short duration investments
until interest rate rise or we conclude they are not going to rise in the
foreseeable future. Accordingly, although realized gains and losses will
fluctuate from period to period, we do not anticipate realizing significant
investment gains or losses in 2004 due to our smaller invested asset base and
our current decision to hold those assets predominantly in short duration
investments. However, we will adjust our investment strategy based on
developments in the markets and our business and those adjustments may result
in realized gains or losses being recognized. We make decisions concerning the
sales of invested assets based on a variety of market, business and other
factors.

Net Change in Fair Value of Embedded Derivatives.Under FAS 133, we are
required to bifurcate and separately account for the embedded derivatives
contained in certain of our annuity reinsurance contracts, and unrealized
changes in the fair value of those embedded derivatives are reflected in our
results of operations. The net change in fair value of embedded derivatives for the year
ended December 31, 2003 was an unrealized gain of $16,692,688, as compared to
an unrealized loss of $25,846,110 for the year ended December 31, 2002. The
unrealized gain during 2003 includes the reversal of previously reported losses
of $12,323,000 upon the termination of our agreement with Ohio National in
February 2003 and the termination of other annuity reinsurance agreements in
2003, including the termination of our annuity reinsurance agreements with an
affiliate of XL Life as part of our comprehensive
settlement with XL Life. Widening credit spreads and bond defaults in the
portfolio of assets supporting these agreements had caused unrealized losses in
our embedded derivatives in prior years. As of December 31, 2003, we have one remaining embedded
derivative related to an annuity reinsurance agreement that we must bifurcate
and separately account for, and that embedded derivative had an unrealized loss
of approximately $7,790,000 at December 31, 2003.

Surrender Fees and Other Revenue. Surrender fees and other revenue were
$7,297,015 for the year ended December 31, 2003, as compared with $16,156,437
for the year ended December 31, 2002. This income is primarily derived from
surrender fees related to our annuity reinsurance agreement with Transamerica.
The decrease in revenue is due to a smaller policyholder base resulting in a
lower absolute level of withdrawals and lower surrender rates during
2003, both
as compared with the prior year.

Claims and Policy Benefits.Claims and policy benefits includes both life
and variable annuity benefits, including guaranteed minimum death benefits,
guaranteed minimum income benefits and enhanced earnings benefits. Claims and
policy benefits for the year ended December 31, 2003 were $198,002,905 or 119%
of net premium, as compared with $352,408,801 or 102% of net premium for the
year ended December 31, 2002. The absolute declines in claim and policy
benefits in 2003 were the result of the significant reduction of life insurance
in force from $117.5 billion at December 31, 2002 to approximately $17.5
billion at December 31, 2003 and the termination of several annuity reinsurance
agreements during 2003. Claims and policy benefits for 2003 related to
agreements that were recaptured or terminated in 2003 were
$143,179,000. As a result of the recaptures and terminations of
reinsurance agreements during 2003, we began 2004 with a book of business that
is significantly smaller than we had during 2003. This will reduce claims and
policy benefits in absolute terms in future periods, but may increase
volatility in the level of claims and policy benefits as a percentage of
premiums.

We continue to monitor and analyze our experience under our remaining life
and annuity reinsurance agreements. During 2003, we decreased our reserves associated with
variable annuity reinsurance products by $7,400,000, bringing our total carried
reserve for these products to $11,000,000 at December 31, 2003. The decrease
was a direct result of the recapture by Hartford Life in the second quarter of
2003 of its agreement with us, which was previously our largest variable
annuity reinsurance agreement. The reduction in the reserves caused by the recapture of the
Hartford Life agreement was partially offset by a $3,180,000 increase in
reserves associated with our guaranteed minimum death benefit and guaranteed
minimum income benefit agreement with CIGNA.

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Throughout 2003, we updated our analysis of carried reserves for incurred
but not reported (IBNR) claims. In determining the amount of IBNR required
at December 31, 2003, we considered the full trending of claims reported
through December 31, 2003. As a result of our review and
reflecting the decrease in life reinsurance in force, our reserve for IBNR at
December 31, 2003 was $4,500,000, as compared to $9,000,000 at December 31,
2002. We will continue to examine these IBNR reserve levels in relation to
past experience each quarter.

Interest Credited to Interest Sensitive Products.Interest credited to
interest sensitive products, which represents liabilities to policyholders we
assume under certain annuity reinsurance agreements, was $13,980,723 for the
year ended December 31, 2003, as compared with $71,370,616 for the year ended
December 31, 2002. The decline in Interest credited to interest sensitive
contracts liabilities for the year ended December 31, 2003 was primarily the
result of the termination and recapture of several annuity reinsurance
agreements, particularly our agreements with Ohio National and an affiliate of
XL Life during 2003. We terminated our annuity reinsurance agreement with Ohio
National on February 14, 2003, another large annuity reinsurance agreement on
April 1, 2003 and two annuity reinsurance agreements with an affiliate of XL
Life effective as of July 1, 2003. In 2003, we recorded $6,595,000 of interest
credited to interest sensitive products related to agreements that were
recaptured or terminated. Interest credited to interest sensitive products in
2003 includes approximately $16,120,000 in minimum interest guarantee payments,
which was partially offset by a $10,000,000 deemed recovery of minimum interest
guarantee payments in connection with the comprehensive settlement with XL
Life. We incurred approximately $26,760,000 of minimum interest guarantee
payments in 2002. The minimum interest guarantee payments in both years
resulted from prior poor investment performance of the invested premiums
managed by the primary insurance company under our annuity reinsurance contract
with Transamerica. The reduction in minimum interest guarantee payments in
2003 was primarily due to improving lapse and total returns on our
annuity reinsurance contract with Transamerica during 2003.

Policy Acquisition Costs and Other Insurance Expenses.Policy acquisition
costs and other insurance expenses, consisting primarily of allowances and
amortization or write downs of deferred policy acquisition costs, were
$128,549,288 for the year ended December 31, 2003, as compared with
$125,877,980 for the year ended December 31, 2002. The expense is primarily
comprised of the write-downs of deferred acquisition costs associated with the
recaptures and terminations of life and annuity reinsurance agreements during
2003 of approximately $85,931,000. In addition to those write downs, we also
amortized $17,400,000 of deferred acquisition costs associated with our
Transamerica annuity reinsurance agreement, of which $10,000,000 was a result
of our deemed recovery of minimum interest guarantee payments in connection
with the comprehensive settlement with XL Life. In 2002, we wrote down
deferred acquisition costs on our Transamerica contract by approximately
$27,474,000. This write down was the result of higher than expected surrender
rates on the policies underlying our reinsurance agreement with Transamerica,
and our reduced estimate of expected gross profits under the contract in future
periods due to minimum interest guarantee payments. The change in amortization
of the deferred acquisition cost as a result of the change in the fair value of
our embedded derivatives was an increase of approximately $6,954,000 in 2003,
as compared to a reduction in amortization of approximately $8,274,000 in 2002.

Collateral Costs.Collateral costs in 2002 comprised fees charged by a
reinsurer to provide cash deposits to us and other related expenses. This
arrangement was terminated as of December 31, 2002 and we therefore recorded no
such collateral costs in 2003. In 2002, these deposits had been used to fund
excess statutory reserve requirements of our clients and had been recorded on
our consolidated balance sheet as a deposit liability. Collateral costs were
$12,948,115 for the year ended December 31, 2002.

Operating Expenses.Operating expenses were $18,034,021 or 9% of total
revenue (excluding the net change in fair value of embedded derivatives) for
the year ended December 31, 2003, as compared to $22,577,792 or 5% of total
revenue (excluding the net change in fair value of embedded derivatives) for
the year ended December 31, 2002. Our expense ratio deteriorated due to our
significantly reduced revenue base. Operating expenses for 2003 include the
write off of approximately $2,100,000 of goodwill associated with our United
States operating subsidiary in the second quarter of 2003, costs associated
with renegotiating employment arrangements and other employee compensation,
increased costs of directors and officers liability insurance coverage and
increased legal and audit fees.

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Year Ended December 31, 2002 Compared to Year Ended December 31, 2001

Net (Loss).For the year ended December 31, 2002, we had a consolidated
net loss of $(128,887,285) or $(5.01) per primary and fully diluted common
share, as compared to a net loss of $(40,581,431), or $(1.59) per primary and
fully diluted common share for the year ended December 31, 2001. Our loss for
the year ended December 31, 2002 was primarily the result of adverse mortality
experience in the fourth quarter of 2002, a transaction involving the novation
of certain of our reinsurance contracts to XL Life Ltd and our assumption of a
portion of certain of those contracts back from XL Life, the write down of
deferred acquisition costs related to our annuity reinsurance contract with
Transamerica, reserve increases related to minimum guarantees on variable
annuity contracts, unrealized losses on embedded derivatives and collateral
costs.

Our net loss for the year ended December 31, 2002 was significantly
affected by adverse mortality experience driven by an unexpected increase in
the number of reported claims during the fourth quarter of 2002. In addition to
the increase in the number of claims, the aggregate average claim size was 31%
greater than expected. We increased our pending claim liability by
approximately $39,531,000 as a result of the increased volume and size of
reported claims. Our analysis of the claim activity indicated that the
incidence of late reported claims as a percentage of total reported claims had
increased during the latter half of 2002. As a result of the increase in the
percentage of late reported claims identified by us, we increased our reserves
for incurred but not reported claims by approximately $4,000,000 in the fourth
quarter of 2002 to reflect a longer than expected reporting lag and a higher
average death benefit.

On December 31, 2002, we entered into a transaction with XL Life Ltd, a
subsidiary of XL Capital Ltd, a related party, pursuant to which we transferred
certain blocks of life reinsurance business to XL Life. The transaction enabled
us to reduce a substantial portion of our 2002 year end collateral requirements
under our reinsurance agreements and to repay deposits received under a
reinsurance agreement that had been used to satisfy certain of our cedents
collateral requirements. We novated five blocks of life reinsurance business to
XL Life, which in turn entered into a 50% quota share reinsurance contract with
us with respect to four of those blocks of business. As a result of the
transaction, we incurred a loss of approximately $26,382,000, primarily as a
result of a write down of deferred acquisition costs of approximately
$38,700,000 (which was partially offset by a net ceding commission paid by XL
Life to us of approximately $18,000,000), a write off of prepaid expenses of
approximately $2,400,000 related to the reinsurance agreement that was
terminated in connection with the transaction and transaction costs of
approximately $3,200,000. We also incurred losses of approximately $10,435,000
in connection with the termination or recapture of other reinsurance contracts
during the year ended December 31, 2002, resulting from the write down of
deferred acquisition costs and cash payments made to cedents net of reserve
releases associated with those terminations or recaptures.

Our net loss in 2002 was also significantly affected by our annuity
reinsurance contract with Transamerica, which is our largest annuity
reinsurance contract and represented approximately $734 million or
approximately 51%, of our Funds withheld at interest receivable as of December
31, 2002. We wrote down approximately $27,474,000 of deferred acquisition costs
associated with the contract during the year ended December 31, 2002 as a
result of higher than expected surrender rates on the underlying policies and
our reduced estimate of expected gross profits under the contract in future
periods due to expected minimum interest guarantee payments. Similar
write-downs of deferred acquisition costs of approximately $46,115,000 were
made during the year ended December 31, 2001.

We increased our minimum guarantee reserves associated with variable
annuity reinsurance products by $7,760,000 and $10,740,000 during the third and
fourth quarters of 2002, respectively, bringing our total carried balance of
these reserves to $18,500,000 at December 31, 2002. These reserves are for
expected claim payments associated with our guaranteed minimum death benefit,
guaranteed minimum income benefit and enhanced earnings benefit contracts. This
increase in reserves is the result of increasing claim activity in the second
half of 2002 and continuing deterioration of the financial markets during the
year. This increase in claims activity also resulted in payments in excess of
premiums earned of $3,620,153 and $5,791,853 on our contracts reinsuring such
guarantees during the three months and year ended December 31, 2002,
respectively.

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Under FAS 133, we were required during 2002 and 2001 to bifurcate and
separately account for the embedded derivatives contained in certain of our
annuity reinsurance contracts, and unrealized changes in the fair value of
those embedded derivatives are reflected in our results of operations. For the year ended
December 31, 2002, we experienced a net loss of approximately $17,572,000
(which is net of a related reduction in the amount of deferred acquisition cost
amortization of approximately $8,274,000) in connection with our embedded
derivatives, as compared to a net gain of approximately $43,000 (which is net
of related deferred acquisition cost amortization of approximately $1,320,000)
for the year ended December 31, 2001. The net gain for the year ended December
31, 2001 includes the cumulative effect of adopting the change in accounting
principle, which was a loss of $3,665,735. The change in fair value of the
embedded derivatives is influenced by changes in credit risk, changes in
expected future cash flows under the annuity reinsurance contracts and interest
rate changes.

Net Premiums.Net premium revenue for the year ended December 31, 2002 was
$344,097,441, an increase of 37% over net premium revenue of $251,793,237 for
the year ended December 31, 2001. The majority of premium revenue in both years
was derived from traditional ordinary life reinsurance. The growth reflects the
level of new business written and the increase in the face amount of insurance
in force during the year 2002, prior to the novations, terminations and
recaptures of certain life reinsurance treaties that took place in the fourth
quarter of 2002. At December 31, 2002, the total face amount of life insurance
in force was approximately $117.5 billion, as compared with approximately
$117.4 billion at December 31, 2001. The level of life insurance in force at
December 31, 2002 reflects the novation of five large blocks of reinsurance to
XL Life and our subsequent assumption of a portion of four of those blocks of
reinsurance from XL Life pursuant to a 50% quota share reinsurance contract.
Because the reinsurance agreements were novated as of December 31, 2002, net
premium revenue for the year ended December 31, 2002 reflects the entire
premium earned on the novated contracts for the full year 2002, while life
insurance in force at December 31, 2002 reflects the full effect of the
reduction in insurance in force relating to the novations. As a result,
insurance in force at December 31, 2002 was essentially flat as compared to
December 31, 2001.

Net Investment Income.Net investment income for the year ended December
31, 2002 was $102,138,985, an increase of 12% from net investment income of
$91,128,696 for the year ended December 31, 2001. The increase in net
investment income was partially the result of a significant increase in our
invested assets during 2002 as a result of cash deposited with us at the end of
2001 through a reinsurance agreement that was designed to fund the collateral
requirements of our cedents. This reinsurance agreement was terminated in
December 2002, and we returned all cash that had been deposited with us to the
reinsurer. The average yield rate earned on our invested assets was
approximately 5.28% for the year ended December 31, 2002 compared with 5.74%
for the year ended December 31, 2001, reflecting the overall decline in
interest rates. The increase in net investment income was also due to an
increase in the portion of our Funds withheld asset related to our Ohio
National annuity reinsurance contract during 2002, which yielded higher rates
than our Transamerica annuity reinsurance contract. Net investment income
earned on Funds withheld for the year ended December 31, 2002 was $76,208,000,
as compared with $70,963,000 for the year ended December 31, 2001. As noted
above, we terminated our annuity reinsurance contract with Ohio National in
February 2003. The average yield rate earned on Funds withheld was 5.25% for
the year ended December 31, 2002, as compared with 4.6% for the year ended
December 31, 2001. For purposes of calculating the average yield
rates earned on
our Funds withheld at interest, we only include net realized capital gains and
losses as reported to us through our settlements with our ceding companies.

Net Change in Fair Value of Embedded Derivatives.Embedded derivative
gains and losses result primarily from credit risk related changes in the
market value of assets underlying certain of our fixed annuity reinsurance
contracts, changes in expected future cash flows and changes in interest rates.
Net change in fair value of embedded derivatives for the year ended December
31, 2002 was an unrealized loss of $(25,846,110), as compared to an unrealized
gain of $5,095,027 for the year ended December 31, 2001. The unrealized loss
during the year ended December 31, 2002 was primarily due to credit spreads
widening. In particular, the embedded derivatives associated with our annuity
reinsurance contract with Ohio National were responsible for more than 50% of
the loss due to credit spreads widening and bond

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defaults within the portfolio of assets supporting the contract. We
terminated our annuity reinsurance contract with Ohio National in February
2003.

Net Realized Investment Gains.Net realized investment gains were
$19,749,266 for the year ended December 31, 2002, as compared with realized
gains of $1,230,038 for the year ended December 31, 2001. The increase in net
realized investment gains for the year ended December 31, 2002 was the result
of the strong credit quality of our investment portfolio, the low interest rate
environment and significant sales from our investment portfolio in connection
with the novation, termination and recapture of a number of our reinsurance
agreements and to meet the collateral requirements of certain of our cedents.
We make decisions concerning the sales of invested assets based on a variety of
market, business and other factors.

Claims and Policy Benefits.Claims and policy benefits includes both life
and variable annuity benefits, including guaranteed minimum death benefits,
guaranteed minimum income benefits and enhanced earnings benefits. Claims and
policy benefits for the year ended December 31, 2002 were $352,408,801 or 102%
of net premium, as compared with $216,025,010 or 86% of net premium for the
year ended December 31, 2001. We experienced an unexpected increase in the
number and size of claims during the latter half of 2002, particularly in the
fourth quarter. In the fourth quarter of 2002, Claims and policy benefits were
$127,768,226 or 143% of premium, as compared to $54,325,088 or 78% of premium
for the fourth quarter of 2001. As of December 31, 2002, our cedents had
reported to us pending claims, meaning our cedents had received notification
that policyholders covered by the cedents insurance policies had died, of
approximately $77,000,000, as compared to approximately $39,000,000 as of
December 31, 2001. We performed a detailed analysis of the claim activity,
which indicated that the incidence of late reported claims as a percentage of
total reported claims increased during the latter half of 2002. As a result, we
increased our reserves for incurred but not reported claims by approximately
$4,000,000 in the fourth quarter of 2002 to reflect a longer than expected
reporting lag and a higher average death benefit.

We also increased our reserves for expected claim payments associated with
our guaranteed minimum death benefit, guaranteed minimum income benefit and
enhanced earnings benefit contracts by approximately $18,500,000 during the
year ended December 31, 2002, which was comprised of reserve increases of
approximately $7,760,000 and $10,740,000 in the third and fourth quarters of
2002, respectively. This reserve increase was made in response to increasing
claim activity in the second half of 2002 and the continuing deterioration of
the financial markets during the year.

Interest Credited to Interest Sensitive Products.Interest credited to
interest sensitive products, which represents liabilities to policyholders we
assume under certain annuity reinsurance agreements, was approximately
$71,370,616 for the year ended December 31, 2002, as compared with
approximately $49,258,418 for the year ended December 31, 2001. The 2002
expense includes approximately $26,760,000 in minimum interest guarantee
payments, as compared to approximately $13,500,000 of minimum interest
guarantee payments in 2001. These minimum interest guarantee payments resulted
from poor investment performance of invested premiums managed by the primary
insurance company under our annuity reinsurance contract with Transamerica and
higher than expected surrender rates on policies underlying that contract.

Policy Acquisition Costs and Other Insurance Expenses.Policy acquisition
costs and other insurance expenses, consisting primarily of allowances and
amortization or write downs of deferred policy acquisition costs, were
approximately $125,877,980 for the year ended December 31, 2002, as compared
with $126,580,549 for the year ended December 31, 2001. During the year ended
December 31, 2002, we wrote down $27,474,000 of deferred acquisition costs
associated with our Transamerica annuity reinsurance contract. In 2001, we
wrote down deferred acquisition costs on our Transamerica contract by
approximately $46,115,000. The write downs are the result of higher than
expected surrender rates on the policies underlying our reinsurance agreement
with Transamerica, and our reduced estimate of expected gross profits under the
Transamerica contract in future periods due to minimum interest guarantee
payments. In addition, as a result of the year end 2002 transaction with XL
Life, we wrote down additional deferred acquisition costs of approximately
$38,700,000, offset in part by a net ceding commission we received from XL Life
of $18,000,000. The change in amortization of deferred acquisition costs as a
result

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of our embedded derivatives was a reduction in amortization of
approximately $8,274,000 in 2002, compared to an increase in amortization of
approximately $1,320,000 in 2001.

Collateral Costs.Collateral costs comprise fees charged by a reinsurer to
provide cash deposits to us and other related expenses. These deposits had been
used to fund excess statutory reserve requirements of our clients and were
recorded on our consolidated balance sheet as a deposit liability. Collateral
costs were $12,948,115 for the year ended December 31, 2002, as compared with
$1,200,000 for the year ended December 31, 2001, which reflects in part, the
fact that the reinsurance agreement was only in place during November and
December of 2001. The agreement pursuant to which the reinsurer provided the
cash deposits was terminated in December 2002 in connection with the novation
of certain of our life reinsurance contracts to XL Life. Approximately
$2,378,000 in fees paid to XL Life and one of its affiliates in connection with
those novations is included in our collateral costs in 2002, as is the write
off of approximately $2,380,000 in prepaid amounts associated with the
agreement. Further, in the third quarter of 2002, we entered into two interest
rate swap agreements to manage the interest rate risk associated with the
deposits. The cost of these swap agreements, which did not quality for hedge
accounting, was approximately $2,570,000, and is included in our collateral
costs. These swap agreements were terminated in January 2003.

Operating Expenses.Operating expenses were approximately $22,577,792 or
5% of total revenue (excluding the net change in fair value of embedded
derivatives) for the year ended December 31, 2002, as compared to $11,552,418
or 3% of total revenue (excluding the net change in fair value of embedded
derivatives) for the year ended December 31, 2001. The increase in our
operating expenses and the ratio of operating expenses to total revenue in 2002
is primarily due to costs associated with our attempts to raise capital, the
transaction with XL Life, significant incremental legal, accounting, and
consulting expenses incurred in connection with the restatement of our
financial statements for the years ended December 31, 2001 and 2000 and certain
quarterly financial statements for 2002 and costs incurred in our search for a
new Chief Executive Officer.

Segment Results

During the first quarter of 2002, we began to separately present financial
results of our life and annuity operations in segments. Each segment is defined
by a dominant risk characteristic inherent in products in that segment. The
life segment consists of all products where the dominant risk characteristic is
mortality risk. The annuity segment comprises all products where the dominant
risk characteristic is investment risk. In addition, certain of our remaining
modified coinsurance annuity reinsurance agreements have features that
constitute embedded derivatives that require bifurcation and separate
accounting under FAS 133  Accounting for Derivative Instruments and Hedging
Activities. The change in the fair value of these embedded derivatives is
included in the annuity segment. Both the life and annuity segments have
specific assets, liabilities, stockholders equity, revenue, benefits and
expenses that apply only to them. The corporate segment contains all
stockholders equity not otherwise deployed to the life or annuity segment. In
addition, the corporate segment includes all capital gains and losses from
sales of securities in our portfolio and investment income on undeployed
invested assets. Operating expenses are generally allocated to the segments
proportionately based upon the amount of stockholders equity deployed to the
segment. Segment results are reported in Note 13 to our consolidated financial
statements.

Life Segment.Our life segment is our largest segment as measured by
revenues. Our segment loss for the twelve months ended December 31, 2003 was
$(90,436,276) compared to segment loss for the twelve months ended December 31,
2002 of $(67,181,153). Our life segment loss for the year ended December 31,
2003 reflects charges for recaptures of life reinsurance agreements of
approximately $60,510,000. These charges reflect net costs of approximately
$60,510,000 due to the recapture of our 50% quota share reinsurance agreement
with XL Life, the recapture cost of our MetLife agreement of approximately
$3,540,000 and the cost of recapture transactions completed with 22 additional
ceding companies totaling approximately $45,290,000 in the aggregate.

In addition to the recapture costs described above, we experienced losses
during 2003 amounting to approximately $20,157,000 on the life reinsurance
agreements recaptured during the year. This includes a

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loss of approximately $6,379,000 for our contract with MetLife and a loss
of approximately $6,082,000 for our 50% quota share treaty with XL Life. The
remaining life business recaptured in 2003 generated approximately $7,696,000
in losses.

We experienced losses during 2003
aggregating approximately $5,980,000 on our remaining life
reinsurance agreements. Operating expenses allocated to the life
segment exceeded allocated investment income by approximately
$3,790,000 in 2003.

Life segment revenues declined 53% to $166,333,033 for the year ended
December 31, 2003, as compared with $352,183,178 for the year ended December
31, 2002. The revenue decline was primarily related to a 52% reduction in life
premium revenue to approximately $160,415,700 for the year ended December 31,
2003, as compared to approximately $333,181,000 for 2002. The decline reflects
our reduced levels of life reinsurance in force as a result of novation of five
reinsurance agreements at December 31, 2002 and numerous recaptures of life
reinsurance agreements during 2003. We anticipate further declines in segment
revenue during 2004, relative to prior periods, as the full impact of all
recapture activity flows through 2004 revenues. In addition, net investment
income attributable to the life segment for 2003 decreased approximately
$13,400,000, as compared with 2002, reflecting a significant reduction in
invested assets in the segment and lower asset yields.

Life segment policy benefits and expenses for the year ended December 31,
2003 declined 39% to $256,769,309 from $419,364,331 for the year ended December
31, 2002. The absolute declines in claim and policy benefits in 2003 were the
result of the significant reduction of life insurance in force from $117.5
billion at December 31, 2002 to approximately $17.5 billion at December 31,
2003. Claims and policy benefits for 2003 related to agreements that were
recaptured in 2003 were $103,586,000. The recaptures of life reinsurance
agreements during 2003 will reduce claims and policy benefits in 2004, but may
increase volatility in the level of claims and policy benefits as a percentage
of premiums.

Annuity Segment.Our annuity segment contains the majority of our assets.
Our annuity segment loss for the twelve months ended December 31, 2003 was
$(44,370,938) compared to a segment loss for the twelve months ended December
31, 2002 of $(78,246,399). The 2003 loss includes Hartford Lifes recapture of
its GMDB reinsurance agreement, which generated a $20,400,000 loss, a net
charge of approximately $5,020,000 related to the termination of our annuity reinsurance
agreement with Ohio National, a net cost of $4,900,000 from the recapture of
three smaller annuity contracts, losses of $4,687,000 on annuity
reinsurance agreements terminated or recaptured during 2003, a $1,934,000 loss under our GMDB/GMIB
contract with CIGNA, as well as a loss of $3,067,000 on our annuity reinsurance
agreement with Transamerica. Operating expenses allocated to the
annuity segment exceeded allocated investment income by approximately
$4,565,000 in 2003.

Our annuity reinsurance contract with Transamerica is our largest annuity
reinsurance contract and represented approximately $604 million, or
approximately 91% of our Funds withheld at interest receivable
related to our annuity reinsurance agreements as of December
31, 2003. We amortized approximately $17,400,000 of deferred acquisition costs
associated with the contract during the year ended December 31, 2003, of which
$10,000,000 was a result of our deemed recovery of minimum interest guarantee
payments in connection with the comprehensive settlement with XL Life. In
2002, we wrote down deferred acquisition costs on our Transamerica
contract by approximately $27,474,000. This write down was the result of
higher than expected surrender rates on the policies underlying our reinsurance
agreement with Transamerica, and our reduced estimate of expected gross profits
under the contract in future periods due to expected minimum interest guarantee
payments.

During 2003, we decreased our reserves associated with variable
annuity reinsurance products by $7,400,000, bringing our total carried reserve
for these products to $11,000,000 at December 31, 2003. The decrease was a
direct result of the recapture by Hartford Life in the second quarter of 2003
of its agreement with us, which was previously our largest variable annuity
agreement. These reserves are for expected claim payments in excess of expected
future premiums associated with our GMDB/GMIB agreement with CIGNA.

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Annuity segment revenue for the year ended December 31, 2003 declined 34%
to $52,122,419 from $78,427,733 for the year ended December 31, 2002. This
decline is due to reduced investment income, lower surrender fees, and lower
policy premiums, partially offset by the favorable change in the fair value of
embedded derivatives during 2003 of $16,692,688 as compared to a loss of
$25,846,110 for year ended December 31, 2002.

The net unrealized gain on our embedded
derivatives during the year ended December 31, 2003 was approximately
$16,693,000 and largely reflects the reversal of previously reported losses
caused by the termination of our annuity reinsurance agreement with Ohio
National and certain of other annuity reinsurance agreements during the year,
including our annuity reinsurance agreements with an affiliate of XL Life.
This gain was partially offset by a related increase in the amortization of
deferred acquisition costs of approximately $6,954,000. The segment
loss for 2002 includes a net loss on embedded derivatives of
approximately $17,400,000, which is net of a related reduction in the
amortization of deferred acquisition costs of approximately
$8,274,000.

Policy benefits and expenses for the annuity segment decreased 38% to
approximately $96,493,357 for the year ended December 31, 2003, compared to
$156,674,132 for the year ended December 31, 2002. The primary components of
these expenses are interest credited to policyholders, payments for minimum
interest guarantees, payments and reserve changes for minimum guarantees
associated with variable annuity contracts and write downs and amortization of
deferred acquisition costs. As a result of a smaller base of policyholders,
improved investment returns and lower lapse rates on the Transamerica annuity
reinsurance agreement, LMIG payments under the contract declined from
approximately $26,760,000 for 2002 to approximately $16,120,000 for 2003, a
decrease of approximately $10,640,000. The remainder of the decline in policy
benefits and expenses is due the recapture of our second largest annuity
agreement with Ohio National in the first quarter of the year, and several of
other annuity reinsurance agreements during the year, partially offset by the
cost of recapture of our guaranteed minimum death benefit agreement with
Hartford Life and losses on our GMDB/GMIB contract with CIGNA.

Corporate Segment.The corporate segment includes all capital gains and
losses from our invested assets, investment income on undeployed
invested assets, and a proportionate share of operating expenses based upon how
stockholders equity is deployed to the life and annuity segments. As a result,
the corporate segment, while small relative to the Companys total activity,
will likely have volatile results. For the year ended December 31, 2003 segment
income declined to $2,651,630 from $16,540,267 for the year ended December 31,
2002, primarily as a result of net realized investment gains declining to
$6,406,587 for the year ended December 31, 2003, as compared to $19,749,266 for
the year 2002. The year ended December 31, 2002 includes $5,210,000 of capital
raising costs, which did not recur in 2003.

Pro Forma Effect of Recaptures and Terminations

During 2003, we recaptured or terminated a significant amount of our
reinsurance business whether measured by number of agreements, revenues or
exposure. Our consolidated statement of operations for the year ended
December 31, 2003 included in this report reflects revenues and expenses from
each recaptured or terminated agreement from January 1, 2003 through the
effective date of its recapture or termination, as well as the cost of its
recapture or termination. We expect that our statement of operations will be
substantially different in 2004 and subsequent as a result of these recapture
and termination transactions. Accordingly, we have prepared the pro forma
statement of operations presented below to assist you in understanding the
operating results generated in 2003 by our remaining book of business. The pro
forma statement of operations adjusts the reported consolidated statement of operations
by assuming that (1) all of the recapture and termination transactions that
occurred during 2003 occurred on January 1, 2003 (which removes from reported
net (loss) actual performance for each agreement through its recapture or
termination date), and (2) there was no gain or loss from the recapture or
termination transactions. No attempt is made to estimate the impact of the
aforementioned adjustments on cash flow for the period or related net
investment income, nor on operating expenses. The full effect of the recapture
and termination transactions is reflected in our consolidated balance sheet as
of December 31, 2003, and, consequently, no adjustments are required to
highlight the impact of these recapture and termination transactions on our
consolidated balance sheet.

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The following pro forma figures should not be considered indicative of our
expected results of operations in 2004. For a discussion of certain factors
that could materially and adversely affect our operations, please see
Forward-Looking Statements above.

Annuity and Life Re (Holdings), Ltd.
Pro Forma Consolidated Statement of Operations
for the Year Ended December 31, 2003
(Unaudited and in U.S. Dollars)

|                                                      |  |          |              |                 |  |           |              |   |  |   |             |  
|----------------------------------------------------- |  | -------- | ------------ | --------------- |  | --------- | ------------ | - |  | - | ----------- | -
|                                                      |  | Reported |              | Adjustments (1) |  | Pro Forma
|                                                      |  |          |              |                 |  |          
|Revenues                                              |  |          |              |                 |  |           |              |   |  |   |             |  
|Net premiums                                          |  | $        | 166,972,840  |                 |  | $         | 103,876,148  |   |  | $ | 63,096,692  |  
|Investment income, net of related expenses            |  |          | 29,042,223   |                 |  |           | 4,776,844    |   |  |   | 24,265,379  |  
|Net realized investment gains                         |  |          | 6,406,587    |                 |  |           |             |   |  |   | 6,406,587   |  
|Net change in fair value of embedded derivatives      |  |          | 16,692,688   |                 |  |           | 12,322,688   |   |  |   | 4,370,000   |  
|Surrender fees and other revenues                     |  |          | 7,297,015    |                 |  |           | (943,955     | ) |  |   | 8,240,970   |  
|                                                      |  |          |              |                 |  |           |              |   |  |   |             |  
|Total Revenues                                        |  | $        | 226,411,353  |                 |  | $         | 120,031,725  |   |  | $ | 106,379,628 |  
|                                                      |  |          |              |                 |  |           |              |   |  |   |             |  
|Benefits and Expenses                                 |  |          |              |                 |  |           |              |   |  |   |             |  
|Claims and policy benefits                            |  | $        | 198,002,905  |                 |  | $         | 143,178,971  |   |  | $ | 54,823,934  |  
|Interest credited to interest sensitive products      |  |          | 13,980,723   |                 |  |           | 6,595,271    |   |  |   | 7,385,452   |  
|Policy acquisition costs and other insurance
expenses |  |          | 128,549,288  |                 |  |           | 85,930,720   |   |  |   | 42,618,568  |  
|Operating expenses                                    |  |          | 18,034,021   |                 |  |           |             |   |  |   | 18,034,021  |  
|                                                      |  |          |              |                 |  |           |              |   |  |   |             |  
|Total Benefits and Expenses                           |  |          | 358,566,937  |                 |  |           | 235,704,962  |   |  |   | 122,861,975 |  
|                                                      |  |          |              |                 |  |           |              |   |  |   |             |  
|Net (Loss)                                            |  | $        | (132,155,584 | )               |  | $         | (115,673,237 | ) |  | $ | (16,482,347 | )
|                                                      |  |          |              |                 |  |           |              |   |  |   |             |  
|Net (loss) per common share:                          |  |          |              |                 |  |           |              |   |  |   |             |  
|Basic                                                 |  | $        | (5.11        | )               |  | $         | (4.47        | ) |  | $ | (0.64       | )
|Diluted                                               |  | $        | (5.11        | )               |  | $         | (4.47        | ) |  | $ | (0.64       | )



---

|(1) |  | To reflect the recapture and termination of life and annuity reinsurance
agreements with 29 ceding companies during the year ended December 31,
2003. Adjustments include amounts for revenues and expenses associated
with the recaptured and terminated agreements from January 1, 2003 through
their respective date of recapture or termination, as well as write downs
of deferred acquisition costs and cash payments made to cedents, net of
reserve releases, in connection with the recaptures and terminations.
|--- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Financial Condition

Investments

Our invested assets, including cash and cash equivalents, had an aggregate
fair value of approximately $197,880,755, including unrealized gains of
$1,840,849, at December 31, 2003 as compared with $306,346,337 at
December 31, 2002. Virtually all of our cash and investments are posted as
collateral to secure our obligations under reinsurance agreements and letter of
credit facilities or are required to maintain the statutory capital and surplus
requirements of our U.S. operating subsidiary. The decline in our invested
assets during 2003 was primarily the result of claim payments on recaptured or
terminated reinsurance agreements and unearned premium payments made to affect
those recaptures. At December 31, 2003, unrealized gains totaled $1,840,849,
as compared to $6,162,525 at December 31, 2002. At December 31, 2003 and 2002,
the weighted average duration of the fixed income securities included in our
invested assets was 3.9 and 3.8 years, respectively, and the weighted average
investment quality rating was AA at the end of each period.

Our investments are governed by investment guidelines established and
approved by our Board of Directors. Our investment objectives are to achieve
above average risk-adjusted total returns, maintain a high quality portfolio,
maximize current income, maintain an adequate level of liquidity in our
portfolio and match the cash flows of our investments to our related insurance
liabilities. Our investment guidelines require our overall fixed income
portfolio to maintain a minimum weighted average credit quality of A

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and currently prohibit us from investing in fixed income securities that
are rated below investment grade at the time of purchase. In 2004, we may
begin to make limited investments in securities that are rated below investment
grade or unrated at the time of their purchase. While any investment carries
some risk, the risks associated with lower-rated securities generally are
greater than the risks associated with investment grade securities. A fixed
income security rated A by Standard & Poors is considered to be somewhat
more susceptible to the adverse effects of changes in circumstances and
economic conditions than higher-rated issuers; however, the issuers capacity
to meet its financial commitment on the security is still considered to be
strong. We currently do not invest in any fixed income securities in emerging
markets or securities that are not rated by a major rating agency.

We terminated our investment management agreement with Alliance Capital
Management Corporation effective September 30, 2003 and Prudential Investment
Corporation became the sole advisor to our investment portfolio effective
October 1, 2003. The termination of our agreement with Alliance was solely an
effort by us to manage costs and was not the result of performance. Our
management agreement with Prudential may be terminated by either party with 45
days notice. Our Board of Directors periodically reviews the performance of
Prudential and the fees associated with this arrangement.

We do not engage in trading activities to generate 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 was the case in 2003. As a result,
our securities are classified as available for sale and are carried at fair
value on our balance sheet.

At both December 31, 2003 and 2002, less than 1% of our fixed income
securities consisted of below investment grade securities. The fair value of
such investments varies depending on economic and market conditions, the level
of interest rates and the perceived creditworthiness of the issuer. As noted
above, our investment guidelines require our overall fixed income portfolio to
maintain a minimum weighted average credit quality of A and prohibit us from
investing in fixed income securities that are rated below investment grade at
the time of purchase. We monitor the creditworthiness of the portfolio as a
whole, and when the fair market value of a security declines for reasons other
than changes in interest rates or other perceived temporary conditions, the
security is written down to its fair value. At December 31, 2003, there were no
impaired securities in our portfolio. At December 31, 2002, there was one
impaired security in our portfolio, which was written down in 2002 by $900,000
to its fair value. This security was subsequently sold in the first quarter of
2003 for more than its revised carrying value.

At December 31, 2003, mortgage backed securities represented approximately
11% of our invested assets, including cash and cash equivalents, as compared
with approximately 10% at December 31, 2002. Investors in these securities are
compensated primarily for reinvestment risk rather than credit quality risk.
Investments in mortgage-backed securities include collateralized mortgage
obligations (CMOs) and mortgage backed pass-through securities. Mortgage
backed securities generally are collateralized by mortgages issued by the
Government National Mortgage Association (GNMA), the Federal National
Mortgage Association (FNMA) and the Federal Home Loan Mortgage Corporation
(FHLMC). Of these, only GNMA mortgages are backed by the full faith and
credit of the U.S. government. Credit risk generally is not a consideration
when investing in agency mortgage backed securities. Our mortgage backed
securities portfolio had a weighted average investment quality rating of AAA
at both December 31, 2003 and 2002.

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

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
prematurely sold, called, prepaid or redeemed, we may be unable to reinvest the
proceeds

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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 such 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
liabilities are not significant. For interest sensitive liabilities, we are
primarily dependent upon asset/ liability matching or other strategies to
minimize the impact of changes in interest rates. If we do not appropriately
match our asset management strategy to our obligations, we could sustain
losses. We may use interest rate swaps and other financial instruments as tools
to mitigate the effects of asset/liability mismatches or the effect of interest
rate changes on our balance sheet, particularly if we develop new products that
require the use of hedging strategies to manage risk. In general, however, we
do not hedge our investment risk. Our results of operations are also
significantly affected by the performance of assets held and managed by our
ceding companies or others under modified coinsurance and coinsurance funds
withheld arrangements, as discussed below under Funds Withheld at Interest.

The
following table summarizes the investment results of our invested
assets for the periods indicated:

Investment Results

|                                                          |  |                                  |         |      |  |      |         |   |  |   |         |  
|--------------------------------------------------------- |  | -------------------------------- | ------- | ---- |  | ---- | ------- | - |  | - | ------- | -
|                                                          |  | Twelve Months Ended December 31,
|                                                          |  | 2003                             |         | 2002 |  | 2001
|                                                          |  |                                  |         |      |  |     
|                                                          |  | (Dollars in thousands)          
|Total invested assets, including cash and equivalents (1) |  | $                                | 197,881 |      |  | $    | 306,346 |   |  | $ | 423,780 |  
|Investment income, net of related expenses                |  | $                                | 5,924   |      |  | $    | 25,931  |   |  | $ | 20,165  |  
|Effective yield rate (2)                                  |  |                                  | 2.53    | %    |  |      | 5.28    | % |  |   | 5.74    | %
|Realized investment gains                                 |  | $                                | 6,407   |      |  | $    | 19,749  |   |  | $ | 1,230   |  



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

Funds Withheld at Interest

As of December 31, 2003, our cedents had approximately $667.8 million in
assets that were held and managed by or for them under our modified coinsurance
and coinsurance funds withheld arrangements. The largest portion of the funds
withheld by our cedents at December 31, 2003, which amounted to approximately
$663 million, is related to our modified coinsurance annuity reinsurance
agreements.

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

Historically, when a ceding company enters into an annuity reinsurance
contract structured as a modified coinsurance arrangement with us, a portion of
the ceding companys liability to the policyholders is ceded to us. Our
remaining modified coinsurance arrangements are on a quota share basis, so the
portion that is ceded to us is a fixed percentage of the liabilities arising
from the underlying policies. Our share of the ceding companys liability is
included on our balance sheet as Interest sensitive contracts liabilities.
However, unlike other reinsurance arrangements in which we receive cash or
investments as consideration for assuming a portion of the ceding companys
liability, under these types of arrangements, we have

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established a receivable called Funds withheld at interest that is equal
to our fixed portion of the statutory reserves carried by the ceding company.
We are allocated our share of the investment income and realized capital gains
and losses that arise from the securities in the investment portfolio
underlying the statutory reserve.

At December 31, 2003, our Funds withheld at interest receivable related to
our remaining annuity reinsurance contracts had a carrying value of
approximately $663 million. Our contract with Transamerica accounted for
approximately 91% of our Funds withheld at interest receivable
related to our annuity reinsurance agreements as of that date.
At December 31, 2003, the assets held and managed by our ceding companies were
invested in convertible bonds and fixed income securities having a weighted
average credit quality of A- and a weighted average
duration of 5.9 years. In
addition, at December 31, 2003 approximately 5.5% of such assets were invested
in below investment grade securities. The average yield rates earned on the
assets held and managed by our ceding companies was approximately 2.68% for the
year ended December 31, 2003. The average yield rate earned on the invested
premiums funding our annuity obligations to Transamerica was approximately
2.24% for the year ended December 31, 2003. The average yield rate earned on
the invested premiums funding our annuity obligations for the other annuity
reinsurance agreement was approximately 5.28% for the year ended December 31,
2003. For purposes of calculating the average yield
rate earned on assets held and managed by our ceding companies, including
Transamerica, we only include net realized capital gains and losses as reported
to us through our settlements with our ceding companies.  For more information regarding the
performance of the assets held and managed by Transamerica, see
 Transamerica. As noted elsewhere in
this report, on February 14, 2003, we terminated our annuity reinsurance
contract with Ohio National, and as a result the aforementioned yields exclude
the yield earned on invested premiums that funded our obligations under the
Ohio National reinsurance contract.

The performance of the assets held and managed by our ceding companies
depends to a great extent on the ability of the ceding company and its
investment managers to make appropriate investments consistent with their
investment guidelines. If these assets do not achieve investment returns
sufficient to meet our obligations on the underlying policies, we could
experience unexpected losses, as has happened under our annuity reinsurance
agreement with Transamerica, where the minimum interest guarantees on the
underlying policies have exceeded the underlying policyholder account values
due to poor investment performance, and we have been forced to fund our
proportionate share of the shortfall.

Our policy has been to seek counterparties for our annuity reinsurance
treaties that have strong financial strength and credit ratings. Although such
ratings are assigned by independent ratings agencies and are generally regarded
as reliable, there can be no assurance that they accurately reflect the
financial condition of any of our counterparties. At December 31, 2003,
approximately $604 million of our Funds withheld at interest receivable and
$602 million of our Interest sensitive contracts liability related to our
reinsurance contract with Transamerica, which is a retrocessional reinsurance
arrangement covering policies issued by IL Annuity. Transamericas agreement
with IL Annuity and Insurance Company is also structured on a modified
coinsurance basis, so IL Annuity maintains ownership and control of the assets
supporting our obligations to Transamerica. As of December 31, 2003, IL Annuity
has financial strength or claims paying ratings of BB+ from Standard &
Poors. As of February 28, 2004, Transamerica has financial strength or claims
paying ratings of A+, AA, Aa3 and AA+ (with a negative outlook) from
A.M. Best, Standard & Poors, Moodys Ratings and Fitch Ratings, respectively.

Under the terms of our annuity reinsurance treaties, mutual debts and
credits are offset between the counterparties to each treaty and ourselves as
part of a monthly net settlement process. The terms of our annuity reinsurance
treaties and applicable state insurance insolvency laws also allow us to offset
mutual debts and credits between us and the counterparties to each treaty in
the event of a counterpartys insolvency. Therefore, if such counterparty were
to become insolvent, we are entitled to offset our Funds withheld at interest
receivable against our Interest sensitive contracts liabilities to such
counterparty. Separate financial statements for our ceding companies are not
included in this report as information related to the financial condition or
results of operations of those companies is not meaningful to our investors

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because we do not have any material counterparty risk to those companies.
In addition, we do not want our investors to improperly conclude that the
financial statements of our ceding companies provide information relevant to an
assessment of our own financial condition or results of operations. Further,
although we have little, if any, control over the specific investment decisions
of our ceding companies (or their investment advisors), the assets supporting
our annuity obligations under our reinsurance contracts are generally held and
managed by or on behalf of our ceding companies in accordance with investment
guidelines set forth in the reinsurance agreements or the underlying insurance
policies. Therefore, information regarding the investment policies, strategies
or results for the total general account assets of such companies presented in
their financial statements is not meaningful to our investors in analyzing the
investment risk related to the actual assets managed by those companies or
their investment advisors that fund our annuity obligations under our
reinsurance contracts. However, information regarding the types, ratings and
maturities of the securities that fund our annuity obligations to Transamerica
is presented below to assist our investors. In addition, we have provided
information regarding the investment objectives and guidelines followed with
respect to the investment of the assets supporting our obligations under that
contract.

Transamerica

Our annuity reinsurance contract with Transamerica is our largest annuity
reinsurance contract and, as of December 31, 2003, approximately $604 million,
or 90%, of our Funds withheld at interest receivable, approximately $602
million, or 90%, of our Interest sensitive contracts liability, and
approximately $33 million of the deferred acquisition costs on our balance
sheet related to this contract. As a result of the changes to our remaining
book of business, especially the termination of our annuity reinsurance
contract with Ohio National in February 2003, we expect that the assets and
liabilities associated with the Transamerica contract will continue to
represent a significant portion of our total assets and liabilities in future
periods. We do not expect the Transamerica contract to generate significant net
income in future periods. The amount of deferred acquisition costs we record as
an asset on our balance sheet related to the Transamerica contract is based on
a series of assumptions related to the investment performance of the assets
supporting our liabilities under the contract, as well as future lapse rates
for the underlying policies. These assumed lapse rates include assumptions
regarding future full surrenders, partial withdrawals, annuitizations and
policyholder deaths. While we believe the investment and lapse estimates to be
reasonable, they are estimates of future events and we cannot assure you that
they will prove to be accurate. If such assumptions turn out to be inaccurate,
we could be required to write off additional deferred acquisition costs, which
would have a significant adverse impact on our net income in future periods.

The assets funding the policyholder obligations under the Transamerica
contract have an average credit quality of A- and an average duration of 6.1
years. The contract is a retrocessional arrangement covering VisionMark fixed
annuity products issued by IL Annuity, the primary insurance company. The
assets underlying the Transamerica contract are managed by AmerUS Capital
Management, the investment manager appointed by IL Annuity, which has invested
approximately 64% of the premiums paid in connection with the underlying
policies in investment grade convertible bonds, and has invested the remaining
premiums in investment grade bonds, high yield bonds and mortgage backed
securities. While convertible bonds would typically be expected to produce
lower investment income than other fixed income securities, convertible bonds
provide the potential for higher total returns through the underlying equity
component of the bonds, which are passed on to VisionMark policyholders through
the total return adjustment upon surrender of the policies. As with the holders
of other single premium deferred annuity policies, a VisionMark policyholder is
guaranteed a return of premiums paid plus a guaranteed minimum interest rate of
3% to 3.5% per annum over the life of the policy. For the years ended December
31, 2001, 2002 and 2003, we paid approximately $13,500,000, $26,760,000 and
$16,120,000, respectively, under our annuity reinsurance contract with
Transamerica to cover our proportionate share of the shortfall that arose
because investment returns on the assets related to these policies were not
sufficient to fund the minimum interest guarantees for surrendered policies.

The Transamerica contract differs significantly from the other annuity
contract we reinsure in that the annuity products reinsured under the contract
allow policyholders to select an investment strategy that then determines the
crediting rate that IL Annuity guarantees the policyholders. The four
investment strategies available to the policyholder are (1) convertible
bonds, (2) high yield bonds, (3) investment

- 49 -



---



##### 



grade bonds, and (4) a guaranteed one year strategy. While IL Annuity is
not obligated to invest the premiums funding these policyholder obligations
consistent with the policyholders selection of an investment strategy, it
has historically done so. The credited interest rates on the policies are
established at the discretion of IL Annuity, subject to the lifetime minimum
guaranteed interest rate required under state law, and we have no influence
over the credited rates established. Historically, the credited rates have been
established on an annual basis on each policys anniversary for each
investment strategy. These credited rates reflect the yield on assets then
supporting the investment strategy less IL Annuitys targeted gross margin. The
invested premiums are held as part of IL Annuitys general account, but are
managed separately. In the event of IL Annuitys insolvency, any claim that
Transamerica, as reinsurer, might have to these invested premiums would likely
be treated as the claim of an unsecured general creditor. We, as
retrocessionaire, would, in turn, have an unsecured contract claim against
Transamerica for our proportionate share of the premiums. Nonetheless, our
annuity reinsurance agreement with Transamerica and applicable state insurance
insolvency law would entitle us to offset our obligation to pay our
proportionate share of policyholder claims against the Funds withheld at
interest receivable owed to us by Transamerica.

As noted in the table below, at December 31, 2003, approximately 64% of
the premiums held and managed by IL Annuity were invested in convertible bonds,
with the remaining 36% in fixed income securities. The value of convertible
bonds is a function of their investment value (determined by comparing their
yield with the yields of other securities of comparable maturity and quality
that do not have a conversion privilege) and their conversion value (their
market value if converted into the underlying common stock). The investment
value of convertible bonds is influenced by changes in interest rates, with
investment value declining as interest rates increase and increasing as
interest rates decline, and by the credit standing of the issuer and other
factors. The conversion value of convertible bonds is determined by the market
price of the underlying common stock. If the conversion value is above the
market value of the underlying common stock, the price of the convertible bonds
is governed principally by their investment value. To the extent the market
price of the underlying common stock approaches or exceeds the conversion
price, the price of the convertible bonds will be increasingly influenced by
their conversion value. Consequently, the value of convertible bonds may be
influenced by changes in the equity markets. The Transamerica portfolio also
includes investment grade and below investment grade fixed income securities.
The risks of investing in these securities are similar to those described above
with respect to our own investments, except that the assets held and managed by
Transamerica include a greater percentage of below investment grade fixed
income securities, which are subject to a higher degree of credit risk than
investment grade securities.

- 50 -



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##### 



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

|                                           |                                                         |               |             |              |  |              |             |             |  |  |            |     |  
|------------------------------------------ | ------------------------------------------------------- | ------------- | ----------- | ------------ |  | ------------ | ----------- | ----------- |  |  | ---------- | --- | -
|                                           |                                                         |               |             |              |  |              |             |             |  |  | % of Total
|Type of Security                           |                                                         | Book Value(1) |             | Market Value |  | Market Value
|                                           |                                                         |               |             |              |  |             
|Investment grade convertible bonds         |                                                         | $             | 386,145,029 |              |  | $            | 393,162,573 |             |  |  | 63.9       | %  
|Investment grade U.S. corporate
bonds      |                                                         |               | 121,646,012 |              |  |              | 124,517,264 |             |  |  | 20.2       | %  
|Below investment grade U.S
corporate bonds |                                                         |               | 32,614,780  |              |  |              | 34,322,321  |             |  |  | 5.6        | %  
|Mortgage securities                        |                                                         |               | 24,486,953  |              |  |              | 24,484,460  |             |  |  | 4.0        | %  
|Short term securities                      |                                                         |               | 38,886,109  |              |  |              | 38,590,527  |             |  |  | 6.3        | %  
|                                           |                                                         |               |             |              |  |              |             |             |  |  |            |    
|                                           | Total invested assets                                   |               | $           | 603,778,883  |  |              | $           | 615,077,145 |  |  |            | 100 | %
|                                           |                                                         |               |             |              |  |              |             |             |  |  |            |    
|Accrued investment income                  |                                                         |               |             |              |  |              | 4,379,880   |             |  |  |            |    
|                                           |                                                         |               |             |              |  |              |             |             |  |  |            |    
|                                           | Total market value, including
accrued investment income |               |             |              |  |              | $           | 619,457,025 |  |  |            |     |  
|                                           |                                                         |               |             |              |  |              |             |             |  |  |            |    



---

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

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

|                          |                                                         |                |             |              |  |              |             |             |  |  |            |       |  
|------------------------- | ------------------------------------------------------- | -------------- | ----------- | ------------ |  | ------------ | ----------- | ----------- |  |  | ---------- | ----- | -
|                          |                                                         |                |             |              |  |              |             |             |  |  | % of Total
|Ratings (1)               |                                                         | Book Value (2) |             | Market Value |  | Market Value
|                          |                                                         |                |             |              |  |             
|AAA                       |                                                         | $              | 81,985,485  |              |  | $            | 81,291,961  |             |  |  | 13.2       | %    
|AA                        |                                                         |                | 39,401,136  |              |  |              | 39,820,004  |             |  |  | 6.5        | %    
|A                         |                                                         |                | 162,699,741 |              |  |              | 163,011,078 |             |  |  | 26.5       | %    
|BBB                       |                                                         |                | 285,726,549 |              |  |              | 295,308,347 |             |  |  | 48.0       | %    
|BB and below              |                                                         |                | 33,965,972  |              |  |              | 35,645,755  |             |  |  | 5.8        | %    
|                          |                                                         |                |             |              |  |              |             |             |  |  |            |      
|                          | Total invested assets                                   |                | $           | 603,778,883  |  |              | $           | 615,077,145 |  |  |            | 100.0 | %
|                          |                                                         |                |             |              |  |              |             |             |  |  |            |      
|Accrued investment income |                                                         |                |             |              |  | $            | 4,379,880   |             |  |  |            |      
|                          | Total market value,
including accrued
investment income |                |             |              |  |              | $           | 619,457,025 |  |  |            |       |  
|                          |                                                         |                |             |              |  |              |             |             |  |  |            |      



---

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

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---



##### 



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

|                       |                 |                |             |              |  |            |             |             |  |  |            |       |  
|---------------------- | --------------- | -------------- | ----------- | ------------ |  | ---------- | ----------- | ----------- |  |  | ---------- | ----- | -
|                       |                 |                |             |              |  |            |             |             |  |  | % of Total
|Maturity               |                 | Book Value (1) |             | Market Value |  | Book Value
|                       |                 |                |             |              |  |           
|Within one year        |                 | $              | 18,671,983  |              |  | $          | 18,758,652  |             |  |  | 3.0        | %    
|From one to five years |                 |                | 96,235,464  |              |  |            | 100,006,395 |             |  |  | 16.3       | %    
|From six to ten years  |                 |                | 134,301,355 |              |  |            | 138,517,211 |             |  |  | 22.5       | %    
|More than ten years    |                 |                | 354,570,081 |              |  |            | 357,794,887 |             |  |  | 58.2       | %    
|                       |                 |                |             |              |  |            |             |             |  |  |            |      
|                       | Total all years |                | $           | 603,778,883  |  |            | $           | 615,077,145 |  |  |            | 100.0 | %
|                       |                 |                |             |              |  |            |             |             |  |  |            |      



---

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

The investment objectives and general guidelines for each of IL Annuitys
investment strategies that may be selected by policyholders are as follows:

The Convertible Bond Strategy represented 65% of the assets under
management as of December 31, 2003. These assets are invested with the primary
objective of maximizing total return from investments made in investment grade
bonds and investment grade convertible bond securities. The strategy is limited
primarily to investment grade convertible bonds of companies having an issue
size of $100 million or more, although some investments in short-term money
market instruments and U.S. government obligations are permitted as deemed
appropriate. No more than 5% of the assets invested pursuant to the strategy
may be invested in convertible preferred stock, and generally no more than 2%
of the assets can be invested in non-investment grade convertible securities.
No single corporate issuer at purchase may exceed the greater of $2 million or
10% of the total assets invested pursuant to the strategy. During 2003, this
strategys total investment return was 10.36%.

The Investment Grade Bond Strategy represented 16% of the assets under
management as of December 31, 2003. These assets are heavily weighted towards
securities rated BBB or better, and all securities must be dollar denominated
and reasonably liquid. Non-investment grade or derivative securities are not
permitted investments under the strategy. No more than the greater of $2
million or 5% of the assets invested pursuant to the strategy may be invested
in the securities of a single corporate issuer, and the allocation of invested
assets to any sector of the corporate bond market may not exceed the greater of
twice the market weight of that sector or 10% of the assets invested pursuant
to the strategy. During 2003, this strategys total investment return was
4.53%.

The High Yield Bond Strategy represented 6% of the assets under management
as of December 31, 2003. These assets are invested with the primary objective
to maximize total return through fixed income or high yielding securities. At
least 80% of the assets are to be invested in securities that have been
assigned a designation of 2, 3 or 4 by the National Association of Insurance
Commissioners. No more than 10% of the assets invested pursuant to the strategy
may be invested in non-rated or lower rated (CCC and lower) investments. No
more than the greater of $2 million or 5% of the assets invested pursuant to
the strategy may be invested in any single security, and investments in any one
sector may not exceed the greater of 10% of the assets invested pursuant to the
strategy or the market weight of such industry. The NAIC assigns designations
to obligations that range from 1 to 6, with a designation of 1 being assigned
to obligations of the highest quality and a designation of 6 being assigned to
obligations that are in or near

- 52 -



---



##### 



default. An obligation assigned an NAIC designation of 2 is considered by
NAIC to be of high quality, having low credit risk and an issuer with a
reasonably stable credit profile. An obligation assigned an NAIC designation of
3 is considered by NAIC to be of medium quality, with intermediate credit risk
and an issuer having a credit profile with elements of instability. An
obligation assigned an NAIC designation of 4 is considered by NAIC to be of low
quality, with high credit risk and an issuer with a volatile credit profile. An
obligation rated CCC by Standard & Poors is considered by Standard & Poors
to be vulnerable to nonpayment and is dependent upon favorable business,
financial and economic conditions for the obligor to meet its financial
commitment on the obligation. During 2003, this strategys total investment
return was 16.13%.

The Guaranteed One Year Strategy represented 13% of the assets under
management as of December 31, 2003. These assets are invested with the primary
objectives of risk management and return through securities offering a
combination of high current income and capital appreciation. The assets are to
be invested primarily in government and public bonds, although limited
investments in mortgage backed or equity related securities are permitted. The
average credit quality of the securities in which the assets are invested is to
be A- or better, with each security purchased having a minimum quality of at
least BBB- or better from both Moodys and Standard & Poors. No more than
20% of the assets invested pursuant to the strategy may be invested in any
single security (other than direct or guaranteed obligations of the U.S.
government), and no more than 25% of the assets invested pursuant to the
strategy may be invested in any one industry. In addition, no more than 5% of
the assets invested pursuant to the strategy may be invested with any single
non-government issuer.

Other Annuity Reinsurance Contract

At December 31, 2003, we had one other annuity reinsurance contract. At
December 31, 2003, the assets funding the policyholder obligations under this
contract had an average credit quality of A and an average duration of
approximately 3.95 years.

According to information provided by the ceding company under this annuity
reinsurance contract, at December 31, 2003 the assets held and managed by this
ceding company were comprised of the following:

|                                    |                                                         |                |            |              |  |              |            |            |  |  |            |       |  
|----------------------------------- | ------------------------------------------------------- | -------------- | ---------- | ------------ |  | ------------ | ---------- | ---------- |  |  | ---------- | ----- | -
|                                    |                                                         |                |            |              |  |              |            |            |  |  | % of Total
|Type of Security                    |                                                         | Book Value (1) |            | Market Value |  | Market Value
|                                    |                                                         |                |            |              |  |             
|Investment grade US corporate bonds |                                                         | $              | 55,408,690 |              |  | $            | 58,526,123 |            |  |  | 82.7       | %    
|Mortgage backed securities          |                                                         |                | 6,725,658  |              |  |              | 7,277,199  |            |  |  | 10.3       | %    
|Short-term securities               |                                                         |                | 2,942,006  |              |  |              | 2,942,006  |            |  |  | 4.2        | %    
|Below Investment grade bonds        |                                                         |                | 2,051,213  |              |  |              | 2,055,309  |            |  |  | 2.9        | %    
|                                    |                                                         |                |            |              |  |              |            |            |  |  |            |      
|                                    | Total invested assets                                   |                | $          | 67,127,567   |  |              | $          | 70,800,637 |  |  |            | 100.0 | %
|                                    |                                                         |                |            |              |  |              |            |            |  |  |            |      
|Accrued investment income           |                                                         |                |            |              |  |              | 993,863    |            |  |  |            |      
|                                    |                                                         |                |            |              |  |              |            |            |  |  |            |      
|                                    | Total market value, including accrued investment income |                |            |              |  |              | $          | 71,794,500 |  |  |            |       |  
|                                    |                                                         |                |            |              |  |              |            |            |  |  |            |      



---

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

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---



##### 



According to information provided by the ceding company under this annuity
reinsurance contract, at December 31, 2003 the credit ratings of the invested
premiums of the assets (excluding accrued investment income) held and managed
by the ceding company were approximately as follows:

|                          |                                                         |                |            |              |  |              |            |            |  |  |            |       |  
|------------------------- | ------------------------------------------------------- | -------------- | ---------- | ------------ |  | ------------ | ---------- | ---------- |  |  | ---------- | ----- | -
|                          |                                                         |                |            |              |  |              |            |            |  |  | % of Total
|Ratings (1)               |                                                         | Book Value (2) |            | Market Value |  | Market Value
|                          |                                                         |                |            |              |  |             
|AAA                       |                                                         | $              | 5,791,861  |              |  | $            | 5,763,192  |            |  |  | 8.1        | %    
|AA                        |                                                         |                | 3,619,828  |              |  |              | 3,770,682  |            |  |  | 5.3        | %    
|A                         |                                                         |                | 22,237,743 |              |  |              | 23,621,373 |            |  |  | 33.4       | %    
|BBB                       |                                                         |                | 33,342,280 |              |  |              | 35,526,600 |            |  |  | 50.2       | %    
|BB and below              |                                                         |                | 2,135,855  |              |  |              | 2,118,790  |            |  |  | 3.0        | %    
|                          |                                                         |                |            |              |  |              |            |            |  |  |            |      
|                          | Total invested assets                                   |                | $          | 67,127,567   |  |              | $          | 70,800,637 |  |  |            | 100.0 | %
|                          |                                                         |                |            |              |  |              |            |            |  |  |            |      
|Accrued investment income |                                                         |                |            |              |  |              | 993,863    |            |  |  |            |      
|                          |                                                         |                |            |              |  |              |            |            |  |  |            |      
|                          | Total market value,
including accrued
investment income |                |            |              |  |              | $          | 71,794,500 |  |  |            |       |  
|                          |                                                         |                |            |              |  |              |            |            |  |  |            |      



---

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

According to information provided by the ceding company under this annuity
reinsurance contract, at December 31, 2003 the maturity distribution of the
assets held and managed by the ceding company was approximately as follows:

|                       |                 |                |            |              |  |            |            |            |  |  |            |       |  
|---------------------- | --------------- | -------------- | ---------- | ------------ |  | ---------- | ---------- | ---------- |  |  | ---------- | ----- | -
|                       |                 |                |            |              |  |            |            |            |  |  | % of Total
|Maturity               |                 | Book Value (1) |            | Market Value |  | Book Value
|                       |                 |                |            |              |  |           
|Within one year        |                 | $              | 10,452,654 |              |  | $          | 10,619,890 |            |  |  | 15.0       | %    
|From one to five years |                 |                | 22,352,420 |              |  |            | 24,069,159 |            |  |  | 34.0       | %    
|From six to ten years  |                 |                | 27,342,225 |              |  |            | 28,853,502 |            |  |  | 40.8       | %    
|More than ten years    |                 |                | 6,980,268  |              |  |            | 7,258,086  |            |  |  | 10.2       | %    
|                       |                 |                |            |              |  |            |            |            |  |  |            |      
|                       | Total all years |                | $          | 67,127,567   |  |            | $          | 70,800,637 |  |  |            | 100.0 | %
|                       |                 |                |            |              |  |            |            |            |  |  |            |      



---

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

- 54 -



---



##### 



Off Balance Sheet Arrangements

We have no material off balance sheet arrangements.

Contractual Obligations and Commitments

The following table shows our contractual obligations and commitments
including our payments due by period:

|                 |  |           |         |           |  |           |         |         |  |       |   |           |  |  |   |  |  |   |         | 
|---------------- |  | --------- | ------- | --------- |  | --------- | ------- | ------- |  | ----- | - | --------- |  |  | - |  |  | - | ------- | 
|                 |  | Less Than |         |           |  |           |         |         |  |       |   | More Than |  |  |   | 
|                 |  | 1 Year    |         | 1-3 Years |  | 3-5 Years |         | 5 Years |  | Total
|                 |  |           |         |           |  |           |         |         |  |      
|Operating Leases |  | $         | 322,720 |           |  | $         | 289,340 |         |  |       |  |           |  |  |  |  |  | $ | 612,060 | 

We lease office space in Bermuda and the United States; these leases
expire in March 2006 and April 2005, respectively.

The preceding table does not include any obligations under our annuity and
life 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, and cash and short-term investments. The principal obligations and uses
of the funds are to post collateral for the statutory reserves ceded to us by
U.S. based insurers and reinsurers, the payment of policy benefits, acquisition
and operating expenses, and the purchase of investments. For the twelve months
ended December 31, 2003, we utilized $112,176,985 of our cash and cash
equivalents to fund our operating activities, as compared with utilizing
$33,187,656 for the twelve months ended December 31, 2002. The utilization of
our cash and cash equivalents during 2003 was primarily the result of claim
payments on recaptured or terminated reinsurance agreements and the repayment
of unearned premiums to effect the recaptures and terminations.

Under the terms of our reinsurance agreements, we are required to provide
letters of credit or fund trust accounts with liquid assets to satisfy the
collateral requirements of our cedents. At December 31, 2003 and 2002, letters
of credit totaling $54,000,000 and $174,000,000, respectively, had been issued
in the ordinary course of our business by our bankers in favor of certain
ceding insurance companies (including our U.S. operating subsidiary) to provide
security and meet regulatory requirements. At December 31, 2003 and 2002, cash
and investments of approximately $56,000,000 and $115,000,000, respectively,
were pledged as collateral for letters of credit. At December 31, 2003 and
2002, cash and investments of $96,000,000 and $125,000,000, respectively, were
held in trust for the benefit of certain of our ceding insurance companies to
provide security and to meet regulatory requirements.

We have two reinsurance operating subsidiaries, the largest of which is
based in and operates out of Bermuda. Our other reinsurance operating
subsidiary is based in and operates out of the United States. Our Bermuda
operating subsidiary reinsures a large portion of the reinsurance business
written by our U.S. operating subsidiary. The primary purpose of this
reinsurance is to provide underwriting capacity to our U.S. operating
subsidiary so that it can compete in its market place. Our Bermuda operating
subsidiary also has made capital infusions into our U.S. operating subsidiary
to allow the U.S. operating company to maintain targeted statutory surplus
levels and to provide cash and securities as collateral for the reinsurance
cessions our U.S. operating subsidiary makes to our Bermuda operating
subsidiary. At December 31, 2003, approximately $49,000,000 of our cash and
cash equivalents and fixed income securities were held by our U.S. operating
subsidiary and was not available to us or our Bermuda operating subsidiary to
maintain its statutory capital and surplus or to fund liquidity or collateral
needs.

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We did not have sufficient available cash and investments at December 31,
2002 to post as collateral to satisfy all of our obligations under certain of
our reinsurance agreements. During 2003, we negotiated the termination or
recapture of most of our reinsurance agreements. As a result of those
terminations and recaptures and other actions taken by management, as of
December 31, 2003 we had met all the collateral obligations of our remaining ceding companies with the exception of those asserted by CIGNA, the
cedent under our only remaining GMDB/GMIB agreement. As of December 31, 2002,
CIGNA asserted that we were required to post $59 million of collateral in
addition to the $11 million of collateral we had previously
provided. As of
December 31, 2003, CIGNA was seeking $49 million of collateral in addition to
the $11 million of collateral we had previously provided. We do not agree that
the aggregate $60 million collateral requirement currently asserted by CIGNA is
required to be posted. As a result, we have not posted any additional
collateral for this agreement. If CIGNAs asserted collateral requirement is
valid, we do not have sufficient available cash and investments to satisfy
CIGNAs request. We are attempting to restructure the reinsurance agreement or
otherwise meet or reduce CIGNAs request for collateral. If these negotiations
are unsuccessful, CIGNA could initiate arbitration or litigation proceedings
against us. The specific relief sought and the outcome of any proceedings that
CIGNA could initiate cannot be determined at this time. If we do not prevail
in any such arbitration or litigation proceedings, it would have a material
adverse effect on our financial condition and we may be required to liquidate
our operations.

Also in 2003, we instituted substantial premium rate increases on all of
our non-guaranteed premium yearly renewable term agreements. MetLife, the
cedent under our largest life reinsurance agreement, objected to the premium
rate increase and demanded arbitration. On December 19, 2003, the panel in the
arbitration proceeding ruled that our rate increase was valid effective as of
May 5, 2003. As a result of the ruling, MetLife chose to recapture its
reinsurance agreement. The impact of the ruling and MetLifes recapture was to
release funds we had previously posted as collateral under that agreement. We
utilized a large portion of those funds to fully collateralize Citibanks
letter of credit facility with us and to pay Transamerica an amount that we
believe was reasonably due to it as of October 31, 2003 after deducting $5.0
million for investment related expenses that we believe was owed to us by
Transamerica. Transamerica is currently pursuing arbitration with us asserting
that the $5.0 million offset is not justified and that we owe Transamerica that
amount and interest on the amounts that Transamerica previously alleged were
due.

In addition to the discussions with Transamerica related to the alleged
amounts owed to it, we have been attempting to engage Transamerica, and
ultimately IL Annuity, the primary insurance company under the Transamerica
agreement, in discussions aimed at improving the investment returns on the
assets supporting that agreement and potentially redesigning the VisionMark
product to reduce our minimum interest guarantee exposure. If we are not
successful in convincing Transamerica and IL Annuity to restructure the
portfolio and/or to redesign the product, we may incur additional write downs
of deferred acquisition costs in the future.

On November 20, 2002, the State of Connecticut Insurance Department and
Annuity and Life Reassurance America entered into a letter agreement that
acknowledged that the Department was monitoring the financial condition of
Annuity and Life Reassurance America. The letter agreement required that
certain financial transactions that Annuity and Life Reassurance America enters
into, including disposal of assets, payment of dividends and settlement of
inter-company balances with Annuity and Life Reassurance, be pre-approved by
the Department. In addition, the Department had requested weekly reports from
senior management of Annuity and Life Reassurance America on our status and any
changes in the status of Annuity and Life Reassurance America. The letter
agreement was in effect until March 1, 2004 and was not renewed by the Department. While the Department has withdrawn formal
restrictions on the operations of our U.S. operating subsidiary, we have
undertaken to keep the Department informed and involved in the future actions
of all our companies.

At December 31, 2003, our total capitalization, which consisted entirely
of equity, was $135,172,579. On March 1, 2002, we filed a shelf registration
statement on Form S-3 to register under the Securities Act of 1933, as amended,
$200,000,000 of senior debt to be sold in one or more transactions on a delayed
basis. We subsequently determined that we would not utilize the shelf
registration and requested that the Securities and Exchange Commission withdraw
the registration statement in March 2003.

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

We have no material commitments for capital expenditures as of December
31, 2003, but as noted above, we would not be able to meet the collateral
requirements asserted by CIGNA if they were deemed valid. In addition, since
beginning our efforts in September 2002 we have been unable to raise capital
that could be used to satisfy the asserted collateral requirements.

We plan to continue to receive premiums and pay claims under our remaining
reinsurance treaties; however, we are not currently underwriting any new
treaties or accepting any new business from our existing treaties. We are
currently exploring whether we can, should or will begin selling new insurance
and reinsurance products in the future, but we cannot assure you that we will
be able to successfully develop, underwrite or market any products currently
being considered.

There can be no assurance that we will be able to improve our operations
and liquidity. If we are unable to reposition our investment
portfolio to achieve a substantially higher yield within our investment
guidelines, successfully defend against the pending purported shareholder class
action suit, improve the performance of our reinsurance agreement with
Transamerica and restructure our reinsurance agreement with CIGNA, we may not
be able to meet our obligations in 2004. Our failure to achieve any one of the
foregoing items could have a material adverse effect on our financial condition
and results of operations. For a more detailed discussion of certain factors
that could materially and adversely affect our financial condition and results
of operations, please see  Forward-Looking Statements.

Both we and our Bermuda operating subsidiary, Annuity and Life
Reassurance, are required to comply with the provisions of the Bermuda
Companies Act that regulate the payment of dividends and the making of
distributions from contributed surplus. Neither we nor Annuity and Life
Reassurance may declare or pay a dividend, or make a distribution out of
contributed surplus, if there are reasonable grounds for believing that: (i)
the relevant company is, or would be after the payment, unable to pay its
liabilities as they become due; or (ii) the realizable value of the relevant
companys assets would thereby be less than the aggregate of its liabilities
and its issued share capital and share premium accounts. As of and since
December 31, 2002, we have not declared a dividend to shareholders and we do
not expect to declare or pay dividends to shareholders in the near future. The
declaration and payment of future dividends to holders of our common shares
will be at the discretion of our Board of Directors and will depend upon our
earnings and financial condition, capital requirements of our subsidiaries, the
ability of our operating subsidiaries to pay dividends to us, regulatory
considerations and other factors the Board of Directors deems relevant. For a
discussion of other factors affecting our ability to pay dividends, see Item 1.
Business  Regulation and Results of Operations  Liquidity and Capital
Resources and Note 15 to our consolidated financial statements included
elsewhere in this report. We do not expect to declare or pay dividends in the
near future.

Item 7A.Quantitative and Qualitative Disclosures about Market Risk.

Market risk is the risk of loss arising from adverse changes in market
rates and prices, such as interest rates, foreign currency exchange rates, and
other relevant market rate or price changes. The following is a discussion of
our primary market risk exposures and how those exposures are currently managed
as of December 31, 2003.

On our general fixed-income portfolio, our major market risk exposure is
changing interest rates, primarily in the United States. We have a portfolio of
fixed income investments. Changes 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 have
no equity securities in our investment portfolio. We have significant
market risk, including equity risk, from our largest annuity reinsurance
contract and our combined guaranteed minimum death benefit

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and guaranteed minimum income benefit contract. We do not currently use
derivative financial instruments such as futures and options to manage risk in
our investment portfolio or assumed through our reinsurance agreements, although we
may do so in the future. We manage other risks, including credit and liquidity,
in the normal course of business. In managing credit risk, we establish overall
quality and rating guidelines and place limits on credit exposure by issuer and
industry to achieve appropriate diversification in the portfolio. We do not
have a trading portfolio and are not exposed to market risk from trading
activities.

Our primary market risk exposures for the year ended December 31, 2003
have changed since the year ended December 31, 2002 as a result of a decrease
in the amount of our invested assets and funds withheld. In addition, the
recapture of our GMDB reinsurance agreement with Hartford Life has
significantly decreased our market risk exposures. For example, the amount by which
guaranteed death benefits exceeded related account values at December 31, 2002
was approximately $1.2 billon, but was approximately $133 million at December 31,
2003.

The table below presents as of December 31, 2003 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 anticipated year of maturity.

|                           |  |                        |        |                  |  |             |      |          |  |       |         |         |  |          |      |  
|-------------------------- |  | ---------------------- | ------ | ---------------- |  | ----------- | ---- | -------- |  | ----- | ------- | ------- |  | -------- | ---- | -
|                           |  |                        |        |                  |  |             |      |          |  |       |         |         |  | Weighted
|                           |  |                        |        |                  |  |             |      |          |  | Fixed |         | Average
|Weighted Average           |  | Cash and Cash          |        | Weighted Average |  | Maturity    |      | Interest
|Interest Rates By Maturity |  | Equivalents            |        | Interest Rate    |  | Investments |      | Rate    
|                           |  |                        |        |                  |  |             |      |         
|                           |  | (dollars in thousands)
|2004                       |  | $                      | 80,068 |                  |  |             | 0.78 | %        |  | $     | 6,028   |         |  |          | 5.85 | %
|2005                       |  |                        |        |                  |  |             |      |          |  |       | 7,065   |         |  |          | 5.43 | %
|2006                       |  |                        |        |                  |  |             |      |          |  |       | 11,131  |         |  |          | 5.21 | %
|2007                       |  |                        |        |                  |  |             |      |          |  |       | 8,935   |         |  |          | 5.76 | %
|2008                       |  |                        |        |                  |  |             |      |          |  |       | 5,355   |         |  |          | 4.03 | %
|Thereafter                 |  |                        |        |                  |  |             |      |          |  |       | 77,080  |         |  |          | 4.64 | %
|                           |  |                        |        |                  |  |             |      |          |  |       |         |         |  |          |      |  
|Total                      |  | $                      | 80,068 |                  |  |             | 0.78 | %        |  | $     | 115,594 |         |  |          |      |  
|                           |  |                        |        |                  |  |             |      |          |  |       |         |         |  |          |      |  
|Fair value                 |  | $                      | 80,068 |                  |  |             |      |          |  | $     | 117,812 |         |  |          |      |  
|                           |  |                        |        |                  |  |             |      |          |  |       |         |         |  |          |      |  

Sensitivity analysis and duration modeling are used to estimate changes in
fair values of fixed income investments and the potential effects on operating
earnings and cash flows resulting from possible near term changes in interest
rates. The term near term means a period of time going forward up to one year
from the date of our consolidated financial statements. Durations of fixed
income investments are adjusted for call, put and reset features. Portfolio
durations are calculated on a market value weighted basis, including accrued
investment income. Our duration model uses a 100 basis point change in interest
rates to measure the hypothetical change in fair value of financial instruments
included in the model. The duration model produces a loss in fair value of the
fixed income investments of approximately $4,556,000 based on a 100 basis point
increase in interest rates as of December 31, 2003. Conversely, the model
produces gains of similar amounts with a 100 basis point decrease in interest
rates. Actual results may differ from the hypothetical change in fair values
assumed in this disclosure, especially since the analysis does not and cannot
reflect the results of any actions that would be taken by us to mitigate losses
or to optimize gains in fair values.

We believe that our life insurance liabilities are not highly interest
rate sensitive as they arise from traditional reinsurance arrangements and,
therefore, the effects of fluctuating interest rates on these liability cash
flows are not significant. Our annuity reinsurance contracts are generally
regarded as market and interest rate sensitive. The future earnings and cash
flows of the annuity product line are primarily dependent on earning a spread
(the difference between the interest earned on the supporting asset base and
the rate credited to policyholders) and persistency of the underlying business.
Our ceding companies, or their designated asset managers, manage all assets
supporting our interest sensitive contracts liabilities. If these assets do not
achieve investment returns at rates sufficient to meet our obligations on the
underlying policies, we could experience unexpected losses. For example, under
our annuity reinsurance agreement with Transamerica, the minimum interest
guarantees on the underlying policies have exceeded the underlying policyholder
account values due to poor investment performance, and we have been forced to

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fund our proportionate share of the shortfall out of our general assets,
which has resulted in significant losses.

In determining the level of our deferred acquisition costs relating to our
Transamerica contract at December 31, 2003, we assumed future total returns on convertible bonds of 8.01% for 2004 and each year
thereafter. Additionally, we assumed future average total returns
of 6.24% for 2004 and each year thereafter for the other asset classes in which
policyholder premiums have been invested. We also assumed a future lapse rate
for the underlying policies of approximately 21% in 2004, 18% in 2005 and
annual rates of 12% to 17% thereafter. These assumed lapse rates include
assumptions regarding full surrenders, partial withdrawals, annuitizations and
policyholder deaths. Consistent with our accounting policies, we review the key
assumptions used in determining the carrying value of our deferred acquisition
cost each quarter. A change in these assumptions could result in additional
charges that would adversely impact future earnings. If our assumptions for
total returns prove to be inaccurate, or if lapse rates exceed our
assumptions, we may be required to make additional minimum interest guarantee
payments and record additional write downs of deferred acquisition costs, which
would adversely impact future earnings. Assuming no change in lapse
assumptions, the net impact of a 100 basis point decrease in our total
return assumptions in all future years would have required an additional write
down of deferred acquisition costs of approximately $11,170,000 as of December
31, 2003. Assuming no change in our total return assumptions, a 1%
increase in our lapse assumptions on our Transamerica annuity contract in all
future years would have required an additional write down of deferred
acquisition costs of approximately $1,360,000 as of December 31, 2003.
Additional increases in our lapse assumptions might result in larger
incremental increases in the required write downs of deferred acquisition
costs.

One of our modified coinsurance annuity reinsurance agreements has
features that constitute an embedded derivative that requires bifurcation and
separate accounting under FAS 133  Accounting for Derivative Instruments and
Hedging Activities. We have identified an embedded derivative, similar to a
total return swap arrangement, within our funds withheld at interest receivable
asset that we record in connection with this agreement. The valuation of this
embedded derivative requires complex cash flow modeling and assumptions, most
notably with respect to expected future cash flows under the reinsurance
agreement. The net fair value of this derivative is classified on our balance
sheet as a component of our Funds withheld asset. Changes in the fair value of
the derivative are reported in net income as Net change in fair value of
embedded derivatives. While we believe these estimates of future cash flows and
other assumptions in our models are reasonable when made, the assumptions used
are subjective and may require adjustment in the future. In addition, as
industry standards for estimating the fair value of embedded derivatives
develop, we may modify our methodology.

The methodology we use to determine the fair value of the embedded
derivative in our annuity reinsurance agreement that requires bifurcation and
separate accounting under FAS 133 is to determine the fair value of the host
contract (notional asset) based upon expected future cash flows under the
annuity contract. The fair value of the embedded derivative is calculated as
being the market value of the actual assets less the fair value of the notional
asset. The change in fair value of the embedded derivative is influenced by
changes in credit risk, changes in expected future cash flows under the annuity
contracts and interest rate changes. This methodology results in a valuation of
the embedded derivative reflecting the market risk inherent in the underlying
contract. Sensitivity analysis on the assets and liabilities associated with
the underlying reinsurance agreement is conducted periodically.

As of December 31, 2003, the net impact on our embedded derivative of a 20
basis point increase or decrease in credit spreads is a loss or gain on the
embedded derivative of approximately $250,000. The net impact on our embedded
derivative of a 50 basis point increase or decrease in interest rates as a
result of duration mismatching is a gain or loss on the embedded derivative of
approximately $201,000. The duration of the actual assets is approximately 3.95
years and the duration of the notional asset is approximately 3.98 years. As a
result, we believe the impact of interest rate movements on the embedded
derivative will be small.

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The table below shows the change in our embedded derivatives by quarter
for 2003 and 2002:

|                       |  |                    |             |                     |  |   |             |  
|---------------------- |  | ------------------ | ----------- | ------------------- |  | - | ----------- | -
|                       |  | Change in Embedded |             | Embedded Derivative
|                       |  | Derivative Value   |             | at Fair Value      
|                       |  |                    |             |                    
|First Quarter 2002     |  | $                  | 1,590,098   |                     |  | $ | 2,953,390   |  
|Second Quarter 2002    |  | $                  | (6,566,805  | )                   |  | $ | (3,613,415  | )
|Third Quarter 2002     |  | $                  | (13,277,823 | )                   |  | $ | (16,891,238 | )
|Fourth Quarter 2002    |  | $                  | (7,591,581  | )                   |  | $ | (24,482,819 | )
|First Quarter 2003     |  | $                  | 13,754,859  |                     |  | $ | (10,727,960 | )
|Second Quarter 2003    |  | $                  | (1,717,537  | )                   |  | $ | (12,445,497 | )
|Third Quarter 2003     |  | $                  | 2,808,427   |                     |  | $ | (9,637,070  | )
|Fourth Quarter 2003(1) |  | $                  | 1,846,939   |                     |  | $ | (7,790,131  | )



---

|(1) |  | As of December 31, 2003, one contract remains in which the embedded derivative
requires bifurcation and separate accounting under FAS 133.
|--- |  | ------------------------------------------------------------------------------------------------------------------------------------------

We do not bifurcate and separately account for the embedded derivatives
contained in our annuity reinsurance agreement with Transamerica or our
GMDB/GMIB agreement with CIGNA because we acquired those agreements prior to
the transition date we elected under FAS 133, as amended.

Our accounting policy for guaranteed minimum death benefits and guaranteed
minimum income benefits is discussed in Note 3 to our consolidated financial
statements for the fiscal year ended December 31, 2003. As of December 31,
2003, we had established reserves of approximately $11,000,000 related to these
types of minimum guarantees associated with variable annuity products. These
reserves are calculated on the basis of actuarial assumptions related to
projected benefits and related contract charges over the lives of the
contracts. Our reserve methodology for these variable annuity minimum guarantee
products is not directly market sensitive, although we do make assumptions
about the future performance of the financial markets when we establish our
reserves for these exposures. For further discussion regarding the sensitivity
of our guaranteed minimum income benefit net amount at risk to certain material
factors, please see Table #4 and the related discussion in Item 1. Business 
Business Written.

In July 2003, the Accounting Standards Executive Committee of the AICPA
issued Statement of Position (SOP) 03-1, Accounting and Reporting by Insurance
Enterprises for Certain Non-Traditional Long-Duration Contracts and for
Separate Accounts. The SOP provides guidance on accounting and reporting by
insurance enterprises for certain nontraditional long-duration contracts and
for separate accounts. The SOP will change the manner in which life insurance
companies account for certain types of insurance and reinsurance contracts
including those that cover risks such as guaranteed minimum death benefits and
guaranteed minimum income benefits. Additionally, the SOP provides accounting
guidance for sales inducements paid to contract holders and provides guidance
for establishing liabilities for contracts with features that may result in
more than one potential account balance. The SOP is effective for financial
statements for fiscal years beginning after December 15, 2003. The SOP may not
be applied retroactively to prior years financial statements, and initial
application should be as of the beginning of an entitys fiscal year.

We have a combined GMDB/GMIB contract with CIGNA and an annuity
reinsurance agreement with Transamerica that will be affected by the adoption
of this new SOP. The SOP provides guidance for reserving for contracts with
guaranteed minimum death and guaranteed minimum income benefits. The
methodology is based on projection of a wide number of future scenarios
regarding the present value of premiums earned and claims incurred. Based on
this future projection and actual past experience of premiums and claims, a
Benefit Ratio percentage is determined. The reserve is then determined by
applying the Benefit Ratio percentage to actual premiums received less actual
claims, both with interest. Management does not expect the amount of reserves
carried for our GMDB/GMIB reinsurance agreement to change significantly as a
result of the adoption of the SOP. The SOP also provides guidance for reserving
for annuity agreements with more than one potential account balance. Such
reserves should be based upon the highest contractually determinable balance,
without consideration of surrender fees. Upon

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adoption of the SOP, there is a one-time transition adjustment to the
amount of carried deferred acquisition costs. Management is
currently analyzing the impact of the adoption of the SOP on our accounting for
the Transamerica annuity reinsurance agreement.

The statements above are forward-looking statements within the meaning of
the Private Securities Litigation Reform Act. See Forward-Looking Statements
beginning on page 27.

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Item 8.Financial Statements and Supplementary Data.

INDEX TO FINANCIAL STATEMENTS AND

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

|                                                                                                                |  |      |    | 
|--------------------------------------------------------------------------------------------------------------- |  | ---- | -- | 
|                                                                                                                |  | Page
|                                                                                                                |  |     
|Financial Statements                                                                                            |  |      |    | 
|Report of Management                                                                                            |  |      | 63 | 
|Independent Auditors Report                                                                                    |  |      | 64 | 
|Consolidated Balance Sheets at December 31, 2003 and 2002                                                       |  |      | 65 | 
|Consolidated Statements of Operations for the years ended December 31, 2003, 2002 and 2001                      |  |      | 66 | 
|Consolidated Statements of Comprehensive (Loss) for the years ended December 31, 2003, 2002 and 2001            |  |      | 67 | 
|Consolidated Statements of Changes in Stockholders Equity for the years ended December 31, 2003, 2002 and 2001 |  |      | 68 | 
|Consolidated Statements of Cash Flows for the years ended December 31, 2003, 2002 and 2001                      |  |      | 69 | 
|Notes to Consolidated Financial Statements                                                                      |  |      | 70 | 
|Financial Statement Schedule                                                                                    |  |      |    | 
|Schedule II Condensed Financial Information of Registrant                                                       |  |      | 89 | 

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.

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REPORT OF MANAGEMENT

Management of the Company has primary responsibility for preparing the
accompanying consolidated financial statements and for their integrity and
objectivity. The consolidated financial statements included in this report were
prepared in accordance with accounting principles generally accepted in the
United States of America applied on a consistent basis. The consolidated
financial statements include amounts that are based on managements best
estimates and judgments. Management also prepared the other information
presented in the annual report and is responsible for its accuracy and
consistency with the consolidated 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 consolidated financial statements, the protection of
assets from unauthorized use or disposition and the prevention and detection of
fraudulent financial reporting.

Our independent auditors, KPMG, have audited the Companys consolidated
financial statements. 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, and results and to discuss other auditing and financial reporting
matters. Our auditors have direct access to and meet privately with the Audit
Committee.

JOHN F. BURKE
Chief Executive Officer

JOHN LOCKWOOD
Chief Financial Officer

March 5, 2004

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INDEPENDENT AUDITORS REPORT

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 auditing standards generally
accepted in the United States of America. 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 of December 31, 2003 and 2002 and the results of their
operations and cash flows for the years ended December 31, 2003, 2002 and 2001
in conformity with accounting principles generally accepted in the United
States of America. Also in our opinion, the related financial statement
schedule, when considered in relation to the basic consolidated financial
statements taken as a whole, presents fairly, in all material respects, the
information set forth therein.

The accompanying consolidated financial statements and financial statement
schedule have been prepared assuming that the Company will continue as a going
concern. As discussed in Note 2 to the consolidated financial statements, the
Company has suffered significant losses from operations and experienced
liquidity demands that raise substantial doubt about its ability to continue as
a going concern. Managements plans with regard to these matters are also
described in Note 2. The consolidated financial statements and financial
statement schedule do not include any adjustments that might result from the
outcome of this uncertainty.

As
discussed in Note 3(k) to the consolidated financial statements,
as of January 1, 2001, the Company changed its method of
accounting for derivative financial instruments and hedging
activities.

KPMG

Chartered Accountants
Hamilton, Bermuda
March 5, 2004

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ANNUITY AND LIFE RE (HOLDINGS), LTD.

CONSOLIDATED BALANCE SHEETS
(U.S. Dollars)

|                                                                                                                                                        |                                            |   |                                 |               |      |   |               |               | 
|------------------------------------------------------------------------------------------------------------------------------------------------------- | ------------------------------------------ | - | ------------------------------- | ------------- | ---- | - | ------------- | ------------- | 
|                                                                                                                                                        |                                            |   | For the Year Ended December 31,
|                                                                                                                                                        |                                            |   |                                
|                                                                                                                                                        |                                            |   | 2003                            |               | 2002
|                                                                                                                                                        |                                            |   |                                 |               |     
|Assets                                                                                                                                                  |                                            |   |                                 |               |      |   |               |              
|Cash and cash equivalents                                                                                                                               |                                            | $ | 80,068,310                      |               |      | $ | 152,930,908   |              
|Fixed income investments at fair value (amortized cost
of $115,594,199 and $146,487,903 at December 31, 2003
and December 31, 2002)                     |                                            |   | 117,812,445                     |               |      |   | 153,415,429   |              
|Funds withheld at interest                                                                                                                              |                                            |   | 667,824,819                     |               |      |   | 1,427,093,380 |              
|Accrued investment income                                                                                                                               |                                            |   | 1,491,170                       |               |      |   | 2,141,338     |              
|Receivable for reinsurance ceded                                                                                                                        |                                            |   | 88,480,172                      |               |      |   | 93,669,173    |              
|Deposits and other reinsurance receivables                                                                                                              |                                            |   | 4,580,745                       |               |      |   | 25,025,453    |              
|Deferred policy acquisition costs                                                                                                                       |                                            |   | 68,942,628                      |               |      |   | 187,913,648   |              
|Other assets                                                                                                                                            |                                            |   | 682,050                         |               |      |   | 2,508,858     |              
|                                                                                                                                                        |                                            |   |                                 |               |      |   |               |              
|                                                                                                                                                        | Total Assets                               |   | $                               | 1,029,882,339 |      |   | $             | 2,044,698,187 | 
|                                                                                                                                                        |                                            |   |                                 |               |      |   |               |              
|Liabilities                                                                                                                                             |                                            |   |                                 |               |      |   |               |              
|Reserves for future policy benefits                                                                                                                     |                                            | $ | 161,105,541                     |               |      | $ | 269,619,809   |              
|Interest sensitive contracts liability                                                                                                                  |                                            |   | 670,717,546                     |               |      |   | 1,443,143,080 |              
|Other reinsurance liabilities                                                                                                                           |                                            |   | 55,826,940                      |               |      |   | 51,139,164    |              
|Accounts payable and accrued expenses                                                                                                                   |                                            |   | 7,059,733                       |               |      |   | 12,459,423    |              
|                                                                                                                                                        |                                            |   |                                 |               |      |   |               |              
|                                                                                                                                                        | Total Liabilities                          |   | $                               | 894,709,760   |      |   | $             | 1,776,361,476 | 
|                                                                                                                                                        |                                            |   |                                 |               |      |   |               |              
|Stockholders Equity                                                                                                                                    |                                            |   |                                 |               |      |   |               |              
|Preferred shares (par value $1.00; 50,000,000 shares
authorized; no shares outstanding)                                                                 |                                            | $ |                                |               |      | $ |              |              
|Common shares (par value $1.00; 100,000,000 shares
authorized; 26,454,195 and 26,106,328 shares outstanding
at December 31, 2003 and December 31, 2002) |                                            |   | 26,454,195                      |               |      |   | 26,106,328    |              
|Additional paid-in capital                                                                                                                              |                                            |   | 334,418,029                     |               |      |   | 335,334,932   |              
|Notes receivable from stock sales                                                                                                                       |                                            |   |                                |               |      |   | (1,626,493    | )            
|Unamortized stock-based compensation                                                                                                                    |                                            |   | (1,509,022                      | )             |      |   | (2,514,693    | )            
|Stock warrants                                                                                                                                          |                                            |   | 1,250,000                       |               |      |   |              |              
|Accumulated other comprehensive income                                                                                                                  |                                            |   | 1,840,849                       |               |      |   | 6,162,525     |              
|(Deficit)                                                                                                                                               |                                            |   | (227,281,472                    | )             |      |   | (95,125,888   | )            
|                                                                                                                                                        |                                            |   |                                 |               |      |   |               |              
|                                                                                                                                                        | Total Stockholders Equity                 |   | $                               | 135,172,579   |      |   | $             | 268,336,711   | 
|                                                                                                                                                        |                                            |   |                                 |               |      |   |               |              
|                                                                                                                                                        | Total Liabilities and Stockholders Equity |   | $                               | 1,029,882,339 |      |   | $             | 2,044,698,187 | 
|                                                                                                                                                        |                                            |   |                                 |               |      |   |               |              

See accompanying notes to consolidated financial statements.

- 65 -



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##### 



ANNUITY AND LIFE RE (HOLDINGS), LTD.

CONSOLIDATED STATEMENTS OF OPERATIONS
(U.S. Dollars)

|                                                                                         |            |   |                                 |              |      |   |              |              |   |   |             |             |  
|---------------------------------------------------------------------------------------- | ---------- | - | ------------------------------- | ------------ | ---- | - | ------------ | ------------ | - | - | ----------- | ----------- | -
|                                                                                         |            |   | For the Year Ended December 31,
|                                                                                         |            |   |                                
|                                                                                         |            |   | 2003                            |              | 2002 |   | 2001        
|                                                                                         |            |   |                                 |              |      |   |             
|Revenues                                                                                 |            |   |                                 |              |      |   |              |              |   |   |             |            
|Net premiums                                                                             |            | $ | 166,972,840                     |              |      | $ | 344,097,441  |              |   | $ | 251,793,237 |            
|Investment income, net of related expenses                                               |            |   | 29,042,223                      |              |      |   | 102,138,985  |              |   |   | 91,128,696  |            
|Net realized investment gains                                                            |            |   | 6,406,587                       |              |      |   | 19,749,266   |              |   |   | 1,230,038   |            
|Net change in fair value of embedded derivatives                                         |            |   | 16,692,688                      |              |      |   | (25,846,110  | )            |   |   | 5,029,027   |            
|Surrender fees and other revenues                                                        |            |   | 7,297,015                       |              |      |   | 16,156,437   |              |   |   | 18,519,701  |            
|                                                                                         |            |   |                                 |              |      |   |              |              |   |   |             |            
|Total Revenues                                                                           |            | $ | 226,411,353                     |              |      | $ | 456,296,019  |              |   | $ | 367,700,699 |            
|                                                                                         |            |   |                                 |              |      |   |              |              |   |   |             |            
|Benefits and Expenses                                                                    |            |   |                                 |              |      |   |              |              |   |   |             |            
|Claims and policy benefits                                                               |            | $ | 198,002,905                     |              |      | $ | 352,408,801  |              |   | $ | 216,025,010 |            
|Interest credited to interest sensitive products                                         |            |   | 13,980,723                      |              |      |   | 71,370,616   |              |   |   | 49,258,418  |            
|Policy acquisition costs and other insurance expenses                                    |            |   | 128,549,288                     |              |      |   | 125,877,980  |              |   |   | 126,580,549 |            
|Collateral costs                                                                         |            |   |                                |              |      |   | 12,948,115   |              |   |   | 1,200,000   |            
|Operating expenses                                                                       |            |   | 18,034,021                      |              |      |   | 22,577,792   |              |   |   | 11,552,418  |            
|                                                                                         |            |   |                                 |              |      |   |              |              |   |   |             |            
|Total Benefits and Expenses                                                              |            | $ | 358,566,937                     |              |      | $ | 585,183,304  |              |   | $ | 404,616,395 |            
|                                                                                         |            |   |                                 |              |      |   |              |              |   |   |             |            
|Net (loss) before cumulative effect of a
change in accounting principle                  |            | $ | (132,155,584                    | )            |      | $ | (128,887,285 | )            |   | $ | (36,915,696 | )          
|Cumulative effect of a change in accounting principle                                    |            |   |                                |              |      |   |             |              |   |   | (3,665,735  | )          
|                                                                                         |            |   |                                 |              |      |   |              |              |   |   |             |            
|                                                                                         | Net (Loss) |   | $                               | (132,155,584 | )    |   | $            | (128,887,285 | ) |   | $           | (40,581,431 | )
|                                                                                         |            |   |                                 |              |      |   |              |              |   |   |             |            
|Net (loss) per common share before cumulative effect
of a change in accounting principle |            |   |                                 |              |      |   |              |              |   |   |             |            
|                                                                                         | Basic      |   | $                               | (5.11        | )    |   | $            | (5.01        | ) |   | $           | (1.45       | )
|                                                                                         | Diluted    |   | $                               | (5.11        | )    |   | $            | (5.01        | ) |   | $           | (1.45       | )
|Cumulative effect of a change in accounting
principle per common share                   |            |   |                                 |              |      |   |              |              |   |   |             |            
|                                                                                         | Basic      |   | $                               |             |      |   | $            |             |   |   | $           | (0.14       | )
|                                                                                         | Diluted    |   | $                               |             |      |   | $            |             |   |   | $           | (0.14       | )
|Net (loss) per common share                                                              |            |   |                                 |              |      |   |              |              |   |   |             |            
|                                                                                         | Basic      |   | $                               | (5.11        | )    |   | $            | (5.01        | ) |   | $           | (1.59       | )
|                                                                                         | Diluted    |   | $                               | (5.11        | )    |   | $            | (5.01        | ) |   | $           | (1.59       | )

See accompanying notes to consolidated financial statements.

- 66 -



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##### 



ANNUITY AND LIFE RE (HOLDINGS), LTD.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS)
(U.S. Dollars)

|                                                                  |  |                                 |              |      |  |      |              |   |  |   |             |  
|----------------------------------------------------------------- |  | ------------------------------- | ------------ | ---- |  | ---- | ------------ | - |  | - | ----------- | -
|                                                                  |  | For the Year Ended December 31,
|                                                                  |  |                                
|                                                                  |  | 2003                            |              | 2002 |  | 2001
|                                                                  |  |                                 |              |      |  |     
|Net (loss) for the period                                         |  | $                               | (132,155,584 | )    |  | $    | (128,887,285 | ) |  | $ | (40,581,431 | )
|Other comprehensive (loss) income:                                |  |                                 |              |      |  |      |              |   |  |   |             |  
|Unrealized holding gains on
securities arising during the
period  |  |                                 | 2,084,911    |      |  |      | 19,493,322   |   |  |   | 5,583,536   |  
|Less reclassification adjustment
for realized gains in net (loss) |  |                                 | 6,406,587    |      |  |      | 19,749,266   |   |  |   | 1,230,038   |  
|                                                                  |  |                                 |              |      |  |      |              |   |  |   |             |  
|Other comprehensive (loss) income                                 |  | $                               | (4,321,676   | )    |  | $    | (255,944     | ) |  | $ | 4,353,498   |  
|                                                                  |  |                                 |              |      |  |      |              |   |  |   |             |  
|Total Comprehensive (Loss)                                        |  | $                               | (136,477,260 | )    |  | $    | (129,143,229 | ) |  | $ | (36,227,933 | )
|                                                                  |  |                                 |              |      |  |      |              |   |  |   |             |  

See accompanying notes to consolidated financial statements.

- 67 -



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##### 



ANNUITY AND LIFE RE (HOLDINGS), LTD.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS EQUITY
(U.S. Dollars)

|                                            |  |                                 |              |      |  |      |              |   |  |   |             |  
|------------------------------------------- |  | ------------------------------- | ------------ | ---- |  | ---- | ------------ | - |  | - | ----------- | -
|                                            |  | For the Year Ended December 31,
|                                            |  |                                
|                                            |  | 2003                            |              | 2002 |  | 2001
|                                            |  |                                 |              |      |  |     
|Preferred shares par value $1.00            |  |                                 |              |      |  |      |              |   |  |   |             |  
|Balance at beginning and end of period      |  | $                               |             |      |  | $    |             |   |  | $ |            |  
|                                            |  |                                 |              |      |  |      |              |   |  |   |             |  
|Common shares par value $1.00               |  |                                 |              |      |  |      |              |   |  |   |             |  
|Balance at beginning of period              |  | $                               | 26,106,328   |      |  | $    | 25,705,328   |   |  | $ | 25,499,999  |  
|Issuance of shares                          |  |                                 | 575,000      |      |  |      | 401,000      |   |  |   | 205,329     |  
|Cancellation of shares                      |  |                                 | (227,133     | )    |  |      |             |   |  |   |            |  
|                                            |  |                                 |              |      |  |      |              |   |  |   |             |  
|Balance at end of period                    |  | $                               | 26,454,195   |      |  | $    | 26,106,328   |   |  | $ | 25,705,328  |  
|                                            |  |                                 |              |      |  |      |              |   |  |   |             |  
|Additional paid-in capital                  |  |                                 |              |      |  |      |              |   |  |   |             |  
|Balance at beginning of period              |  | $                               | 335,334,932  |      |  | $    | 332,447,062  |   |  | $ | 329,496,091 |  
|Issuance of shares                          |  |                                 | 426,700      |      |  |      | 2,887,870    |   |  |   | 2,950,971   |  
|Cancellation of shares                      |  |                                 | (1,343,603   | )    |  |      |             |   |  |   |            |  
|                                            |  |                                 |              |      |  |      |              |   |  |   |             |  
|Balance at end of period                    |  | $                               | 334,418,029  |      |  | $    | 335,334,932  |   |  | $ | 332,447,062 |  
|                                            |  |                                 |              |      |  |      |              |   |  |   |             |  
|Notes receivable from stock sales           |  |                                 |              |      |  |      |              |   |  |   |             |  
|Balance at beginning of period              |  | $                               | (1,626,493   | )    |  | $    | (1,317,259   | ) |  | $ | (1,367,241  | )
|Repayments (Issuances)                      |  |                                 | 1,250,000    |      |  |      | (250,000     | ) |  |   | 150,000     |  
|Interest collected on notes receivable      |  |                                 | 420,491      |      |  |      | 38,620       |   |  |   |            |  
|Accrued interest during period              |  |                                 | (43,998      | )    |  |      | (97,854      | ) |  |   | (100,018    | )
|                                            |  |                                 |              |      |  |      |              |   |  |   |             |  
|Balance at end of period                    |  | $                               |             |      |  | $    | (1,626,493   | ) |  | $ | (1,317,259  | )
|                                            |  |                                 |              |      |  |      |              |   |  |   |             |  
|Unamortized stock-based compensation        |  |                                 |              |      |  |      |              |   |  |   |             |  
|Balance at beginning of period              |  | $                               | (2,514,693   | )    |  | $    |             |   |  | $ |            |  
|Cancellation of stock-based compensation    |  |                                 | 1,570,736    |      |  |      |             |   |  |   |            |  
|(Issuance) of stock-based compensation      |  |                                 | (1,001,700   | )    |  |      | (3,288,870   | ) |  |   |            |  
|Amortization of stock-based compensation    |  |                                 | 436,635      |      |  |      | 774,177      |   |  |   |            |  
|                                            |  |                                 |              |      |  |      |              |   |  |   |             |  
|Balance at end of period                    |  | $                               | (1,509,022   | )    |  | $    | (2,514,693   | ) |  | $ |            |  
|                                            |  |                                 |              |      |  |      |              |   |  |   |             |  
|Stock warrants                              |  |                                 |              |      |  |      |              |   |  |   |             |  
|Issuance of warrants                        |  | $                               | 1,250,000    |      |  | $    |             |   |  | $ |            |  
|                                            |  |                                 |              |      |  |      |              |   |  |   |             |  
|Accumulated other comprehensive income      |  |                                 |              |      |  |      |              |   |  |   |             |  
|Balance at beginning of period              |  | $                               | 6,162,525    |      |  | $    | 6,418,469    |   |  | $ | 2,064,971   |  
|Net unrealized (losses) gains on securities |  |                                 | (4,321,676   | )    |  |      | (255,944     | ) |  |   | 4,353,498   |  
|                                            |  |                                 |              |      |  |      |              |   |  |   |             |  
|Balance at end of period                    |  | $                               | 1,840,849    |      |  | $    | 6,162,525    |   |  | $ | 6,418,469   |  
|                                            |  |                                 |              |      |  |      |              |   |  |   |             |  
|(Deficit) Retained earnings                 |  |                                 |              |      |  |      |              |   |  |   |             |  
|Balance at beginning of period              |  | $                               | (95,125,888  | )    |  | $    | 38,935,242   |   |  | $ | 84,636,497  |  
|Net (loss)                                  |  |                                 | (132,155,584 | )    |  |      | (128,887,285 | ) |  |   | (40,581,431 | )
|Stockholder dividends                       |  |                                 |             |      |  |      | (5,173,845   | ) |  |   | (5,119,824  | )
|                                            |  |                                 |              |      |  |      |              |   |  |   |             |  
|Balance at end of period                    |  | $                               | (227,281,472 | )    |  | $    | (95,125,888  | ) |  | $ | 38,935,242  |  
|                                            |  |                                 |              |      |  |      |              |   |  |   |             |  
|Total Stockholders Equity                  |  | $                               | 135,172,579  |      |  | $    | 268,336,711  |   |  | $ | 402,188,842 |  
|                                            |  |                                 |              |      |  |      |              |   |  |   |             |  

See accompanying notes to consolidated financial statements.

- 68 -



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##### 



ANNUITY AND LIFE RE (HOLDINGS), LTD

CONSOLIDATED STATEMENTS OF CASH FLOWS
(U.S. Dollars)

|                                                                                     |                                                  |   |                                 |              |      |   |              |              |   |   |              |             |  
|------------------------------------------------------------------------------------ | ------------------------------------------------ | - | ------------------------------- | ------------ | ---- | - | ------------ | ------------ | - | - | ------------ | ----------- | -
|                                                                                     |                                                  |   | For the Year Ended December 31,
|                                                                                     |                                                  |   |                                
|                                                                                     |                                                  |   | 2003                            |              | 2002 |   | 2001        
|                                                                                     |                                                  |   |                                 |              |      |   |             
|Cash flows from operating activities                                                 |                                                  |   |                                 |              |      |   |              |              |   |   |              |            
|Net (loss)                                                                           |                                                  | $ | (132,155,584                    | )            |      | $ | (128,887,285 | )            |   | $ | (40,581,431  | )          
|Adjustments to reconcile net (loss) to cash
(used) provided by operating activities: |                                                  |   |                                 |              |      |   |              |              |   |   |              |            
|Net realized investment (gains)                                                      |                                                  |   | (6,406,587                      | )            |      |   | (19,749,266  | )            |   |   | (1,230,038   | )          
|Net change in fair value of embedded derivatives                                     |                                                  |   | (16,692,688                     | )            |      |   | 25,846,110   |              |   |   | (5,029,027   | )          
|Cumulative effect of change in accounting principle                                  |                                                  |   |                                |              |      |   |             |              |   |   | 3,665,735    |            
|Amortization of stock-based compensation                                             |                                                  |   | 436,635                         |              |      |   | 774,177      |              |   |   |             |            
|Stock warrants expense                                                               |                                                  |   | 1,250,000                       |              |      |   |             |              |   |   |             |            
|Changes in:                                                                          |                                                  |   |                                 |              |      |   |              |              |   |   |              |            
|Accrued investment income                                                            |                                                  |   | 650,168                         |              |      |   | 2,755,725    |              |   |   | (1,136,925   | )          
|Deferred policy acquisition costs                                                    |                                                  |   | 118,971,020                     |              |      |   | 21,160,544   |              |   |   | 21,568,744   |            
|Deposits and other reinsurance receivables                                           |                                                  |   | 25,633,710                      |              |      |   | 14,502,125   |              |   |   | 851,422      |            
|Other assets                                                                         |                                                  |   | 1,826,808                       |              |      |   | 6,852,113    |              |   |   | (3,139,723   | )          
|Reserves for future policy benefits                                                  |                                                  |   | (108,514,268                    | )            |      |   | 47,754,054   |              |   |   | 46,912,737   |            
|Interest sensitive contracts, net of funds withheld                                  |                                                  |   | 3,535,715                       |              |      |   | (39,703,138  | )            |   |   | (36,548,945  | )          
|Other reinsurance liabilities                                                        |                                                  |   | 4,687,776                       |              |      |   | 33,798,860   |              |   |   | 9,716,482    |            
|Accounts payable                                                                     |                                                  |   | (5,399,690                      | )            |      |   | 1,708,325    |              |   |   | 5,011,192    |            
|                                                                                     |                                                  |   |                                 |              |      |   |              |              |   |   |              |            
|                                                                                     | Net cash (used) provided by operating activities |   | $                               | (112,176,985 | )    |   | $            | (33,187,656  | ) |   | $            | 60,223      |  
|                                                                                     |                                                  |   |                                 |              |      |   |              |              |   |   |              |            
|Cash flows from investing activities                                                 |                                                  |   |                                 |              |      |   |              |              |   |   |              |            
|Proceeds from sales of fixed maturity investments                                    |                                                  | $ | 336,303,814                     |              |      | $ | 336,648,268  |              |   | $ | 320,615,200  |            
|Purchase of fixed maturity investments                                               |                                                  |   | (298,615,920                    | )            |      |   | (153,589,644 | )            |   |   | (362,910,836 | )          
|                                                                                     |                                                  |   |                                 |              |      |   |              |              |   |   |              |            
|                                                                                     | Net cash provided (used) by investing activities |   | $                               | 37,687,894   |      |   | $            | 183,058,624  |   |   | $            | (42,295,636 | )
|                                                                                     |                                                  |   |                                 |              |      |   |              |              |   |   |              |            
|Cash flows from financing activities                                                 |                                                  |   |                                 |              |      |   |              |              |   |   |              |            
|Issuance of shares                                                                   |                                                  | $ |                                |              |      | $ |             |              |   | $ | 3,156,300    |            
|Interest accrued on notes
receivable                                                 |                                                  |   | (43,998                         | )            |      |   | (97,854      | )            |   |   | (100,018     | )          
|Interest collected on notes
receivable                                               |                                                  |   | 420,491                         |              |      |   | 38,620       |              |   |   |             |            
|Repayment (issuance) of notes receivable                                             |                                                  |   | 1,250,000                       |              |      |   | (250,000     | )            |   |   | 150,000      |            
|Dividends paid to stockholders                                                       |                                                  |   |                                |              |      |   | (5,173,845   | )            |   |   | (5,119,824   | )          
|(Decrease) increase in deposit liability                                             |                                                  |   |                                |              |      |   | (96,250,000  | )            |   |   | 96,250,000   |            
|                                                                                     |                                                  |   |                                 |              |      |   |              |              |   |   |              |            
|                                                                                     | Net cash provided (used) by financing activities |   | $                               | 1,626,493    |      |   | $            | (101,733,079 | ) |   | $            | 94,336,458  |  
|                                                                                     |                                                  |   |                                 |              |      |   |              |              |   |   |              |            
|(Decrease) increase in cash and cash equivalents                                     |                                                  | $ | (72,862,598                     | )            |      | $ | 48,137,889   |              |   | $ | 52,101,045   |            
|Cash and cash equivalents, beginning of period                                       |                                                  |   | 152,930,908                     |              |      |   | 104,793,019  |              |   |   | 52,691,974   |            
|                                                                                     |                                                  |   |                                 |              |      |   |              |              |   |   |              |            
|Cash and cash equivalents, end period                                                |                                                  | $ | 80,068,310                      |              |      | $ | 152,930,908  |              |   | $ | 104,793,019  |            
|                                                                                     |                                                  |   |                                 |              |      |   |              |              |   |   |              |            

See accompanying notes to consolidated financial statements.

- 69 -



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##### 



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., which is licensed under the laws of Bermuda
as a long term insurer; and Annuity and Life Re America, Inc., an insurance
holding company based in the United States, and Annuity and Life Reassurance
America, Inc., a life insurance company domiciled in the United States.
Holdings, Annuity and Life Reassurance, Annuity and Life Re America and Annuity
and Life Reassurance America are collectively referred to herein as the
Company. The Company completed an initial public offering of its equity
securities and commenced operations on April 17, 1998.

2. Going Concern Basis of Presentation

The accompanying consolidated financial statements have been prepared on a
going concern basis, which contemplates the realization of assets and the
satisfaction of liabilities in the normal course of business. However, the
Company has incurred significant operating losses. Further, the
financial strength ratings of the Companys operating subsidiaries were
downgraded in 2002 and 2003 by A.M. Best, Standard & Poors, and Fitch Ratings
to C+, BB-, and C, respectively. At the Companys request, all three financial
ratings have been withdrawn.

In addition, the Company is required to post collateral for the statutory
reserves ceded to it by U.S. based insurers and did not have sufficient
available cash and investments at December 31, 2003 to satisfy the collateral
requirements asserted by Connecticut General Life Insurance Company (CIGNA),
the ceding company under the Companys remaining guaranteed minimum death
benefit (GMDB) and guaranteed minimum income benefit (GMIB) agreement. As
of December 31, 2002, CIGNA had asserted that the Company was required to post
$59 million of collateral in addition to the $11 million of collateral the
Company had previously provided. As of December 31, 2003, CIGNA was seeking
$49 million of collateral in addition to the $11 million of collateral the
Company had previously provided. The Company does not agree that the aggregate
$60 million collateral requirement currently asserted by CIGNA is required to
be posted, and has not posted any additional collateral for the agreement. As
a result, CIGNA may institute arbitration or litigation proceedings against the
Company. If the Company does not prevail in any such arbitration or litigation
proceedings, it would have a material adverse effect on the Companys financial
condition and the Company may be required to liquidate its operations. As of
December 31, 2003, the Company had met all the collateral obligations of its
remaining ceding companies with the exception of those asserted by CIGNA.

Transamerica Occidental Life Insurance Company (Transamerica) has
alleged that the Company, as of October 31, 2003, owed $17.6 million under its
annuity reinsurance agreement with Transamerica. On February 3, 2004, the
Company paid Transamerica $12.6 million representing the net amount the Company
believed was due under the reinsurance agreement as of October 31, 2003 after
deducting $5.0 million for investment related expenses that the Company
believes was owed to it by Transamerica. Transamerica is currently pursuing
arbitration with the Company, asserting that the $5.0 million offset is not
justified and that the Company owes Transamerica that amount and interest on
the amounts that Transamerica previously alleged were due.

In addition, the Company has been attempting to engage Transamerica, and
ultimately IL Annuity and Insurance Company, the primary insurance company
under the Transamerica agreement, in discussions aimed at improving investment
returns from the convertible bond portfolio and potentially redesigning the
VisionMark product to reduce the minimum guarantee exposures from the
Transamerica agreement. If the

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##### 



Company is not successful in convincing Transamerica and IL Annuity to
restructure the portfolio and/or to redesign the product, it may incur
additional losses on the agreement in the future.

The Company continues to consider its strategic alternatives, including
the possibility of raising new capital, but has not been able to successfully
raise new capital to date. The Company is currently not writing new reinsurance
agreements and is not accepting any new business under existing treaties. In
addition, the Company is a defendant in a purported shareholder class action
suit. The plaintiffs have not disclosed the damages sought.

There can be no assurance that the Company will be able to maintain its
operations and liquidity. The Companys plans involve repositioning its investment portfolio to achieve a substantially higher yield within its
investment guidelines, and seeking to successfully defend itself against the pending purported
shareholder class action suit, improve the performance of its reinsurance
agreement with Transamerica and restructure its reinsurance agreement with
CIGNA. If the Company is not successful in implementing its plans, management believes the Company may not be able to meet its obligations in 2004. The Companys
failure to achieve any one of the foregoing items could have a material adverse
effect on its financial condition and results of operations. These
aforementioned factors raise substantial doubt about the Companys ability to
continue as a going concern. The accompanying consolidated financial
statements do not include any adjustments that might be necessary should the
Company be unable to continue as a going concern.

3. Summary of Significant Accounting Policies

The accompanying consolidated financial statements are prepared in
accordance with accounting principles generally accepted in the United States
of America 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 consolidated 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, Annuity and Life Re America and
Annuity and Life Reassurance 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, where premiums collected match the period over which benefits
are provided, are 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 revenue 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 in
the balance sheet as interest sensitive contracts liability. Revenues from
these investment-type contracts consist of income earned on the assets and
amounts assessed during the period against policyholders account balances for
mortality charges, policy administration charges and surrender charges. Policy
benefits and claims that are charged to expense include benefit claims incurred
in the period in excess of related policyholders account balances.

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##### 



Deposit accounting procedures are applied to considerations received or
paid relating to reinsurance contracts that do not qualify for reinsurance
accounting, with any revenue or expense associated with such deposits reflected
in net investment income and other insurance expenses, respectively.

(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.
Where a ceding company pays a bonus interest amount in the first year of a
policy to induce a policyholder to acquire the product, and this bonus interest
amount is distinct from and incremental to the expected ongoing interest
crediting amount, the bonus interest is capitalized and amortized to income in
a manner similar to deferred acquisition costs. Deferred policy acquisition
costs are subject to recoverability testing at the time of policy issuance and
loss recognition testing at the end of each accounting period.

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

For universal life and investment-type contracts, 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) Insurance licenses, net of amortization

The Company has classified as insurance licenses the cost in excess of
fair value of net assets acquired in a purchase transaction. Prior to January
1, 2002, the Company had been amortizing these insurance licenses on a
straight-line basis over 20 years. In June 2001, the Financial Accounting
Standards Board (FASB) issued Statement of Financial Accounting Standards
Number 142  Goodwill and Other Intangible Assets. Under FAS 142 the insurance
licenses are no longer amortized, but are subjected to an initial impairment
test on adoption of FAS 142 and an annual impairment test in subsequent years.
The Company adopted FAS 142 on January 1, 2002. In 2003, the Company
determined that an impairment charge was necessary and the entire amount was
written off. The amount carried at December 31, 2002 was $2,128,000.

(e)  Reserves for future policy benefits and interest sensitive contracts
liability

The development of reserves for policy benefits and for claims incurred
but not reported (IBNR) for the Companys products requires management to
make estimates and assumptions regarding mortality, lapse, persistency,
expenses 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 considers all
of the Companys reinsurance contracts to be long duration contracts.
Management monitors actual experience and, where circumstances warrant, will
revise its assumptions and the related reserve estimates.

The Companys liability for contracts providing reinsurance for life
insurance policies is recorded in the balance sheet as reserves for future
policy benefits. The reserve is estimated using a net level premium method
utilizing actuarial assumptions for mortality, persistency, interest and
expenses established when

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the contract is underwritten. These assumptions are based on anticipated
experience with a margin for adverse deviation. If the reserves for future
policy benefits plus the present value of expected future gross premiums are
insufficient to provide for expected future benefits and expenses, deferred
policy acquisition costs are written down and, if required, a premium
deficiency reserve is established, by a charge to income. Benefit liabilities
for traditional annuities that contain mortality risk are recorded at the
present value of expected future benefit payments. Reserves are also
established to cover death claims that may have been incurred and reported to
the ceding company, but not yet reported to the Company due to timing delays.

Premiums from universal life and investment-type contracts and benefit
liabilities for traditional annuities (during the accumulation period) are
reported in the balance sheet as interest sensitive contracts liability.
Universal life and investment-type contracts are recorded at their accumulated
policyholder values (without reduction for potential surrender or withdrawal
charges). Revenues from these contracts consist of income earned on the assets
and amounts assessed during the period against policyholders account balances
for mortality charges, policy administration charges and surrender charges.
Items that are charged to expense represent interest credited to policyholder
account and other benefits in excess of related policyholders account
balances, including minimum interest guarantee payments.

The Company reinsures certain minimum guarantees associated with variable
annuity contracts. The Companys accounting policy is designed to establish
reserves for expected claim payments based upon the view of expected losses
over the life of the underlying policies, based upon the original pricing
assumptions. The Companys reserving policy allows the Company to increase
reserves if claim amounts or claims volume exceed what was anticipated in
pricing.

(f) 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 is adjusted for amortization of premiums
and discounts. The carrying value of fixed income securities is adjusted for
declines in value that are considered other than temporary and any such
adjustment is considered a realized loss.

Realized gains and losses on investments are recognized in net income,
using the specific identification method. Changes in fair values of securities
classified as available for sale are reflected in accumulated other
comprehensive income.

(g) Translation of foreign currencies

The Companys functional currency is the United States dollar. Premiums
written and receivable in foreign currencies and liabilities for future
benefits payable in foreign currencies are recorded at exchange rates
prevailing at the time such assets and 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.

(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 potential dilutive common shares.
Options and warrants issued by the Company are considered potential dilutive
common shares and are included in the calculation using the treasury stock
method.

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(i) 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.

(j) Stock plans

In
December 2002, the FASB issued Statement Number 148 - Accounting for
Stock-Based Compensation  Transition and Disclosure, an amendment of FASB
Statement Number 123. This statement provides alternative methods of transition
for a voluntary change to the fair value based method of accounting for
stock-based employee compensation. On January 1, 2003, the Company voluntarily
adopted the fair value based method of accounting for stock-based employee
compensation under the prospective method described in FASB Statement Number
148. Under this method, the Company applies fair value accounting to all
grants of employee stock options subsequent to December 31, 2002. Previously,
the Company had applied the intrinsic value method when accounting for its
stock-based compensation and continues to apply the intrinsic value method to
stock-based compensation issued prior to January 1, 2003. FASB Statement
Number 148 also amends the disclosure requirements of FASB Statement Number 123
to require more prominent disclosures in both annual and interim financial
statements about the method of accounting for stock-based employee compensation
and the effect of the method used on reported results. The following table
provides the required disclosure for grants made prior to the Companys
adoption of the prospective method described in FASB Statement Number 148.

|                                                                                                                 |  |                         |              |      |  |      |              |   |  |   |             |  
|---------------------------------------------------------------------------------------------------------------- |  | ----------------------- | ------------ | ---- |  | ---- | ------------ | - |  | - | ----------- | -
|                                                                                                                 |  | Year Ended December 31,
|                                                                                                                 |  |                        
|                                                                                                                 |  | 2003                    |              | 2002 |  | 2001
|                                                                                                                 |  |                         |              |      |  |     
|Net (loss) - as reported                                                                                         |  | $                       | (132,155,584 | )    |  |      | (128,887,285 | ) |  | $ | (40,581,431 | )
|Pro forma effect on net
(loss) of applying fair
value accounting to pre
January 1, 2003 option
grants            |  |                         | (956,059     | )    |  |      | (3,448,484   | ) |  |   | (3,358,794  | )
|                                                                                                                 |  |                         |              |      |  |      |              |   |  |   |             |  
|Net (loss) - pro forma                                                                                           |  | $                       | (133,111,643 | )    |  | $    | (132,335,769 | ) |  | $ | (43,940,225 | )
|                                                                                                                 |  |                         |              |      |  |      |              |   |  |   |             |  
|(Loss) per share as reported:                                                                                    |  |                         |              |      |  |      |              |   |  |   |             |  
|Basic                                                                                                            |  | $                       | (5.11        | )    |  | $    | (5.01        | ) |  | $ | (1.59       | )
|Diluted                                                                                                          |  | $                       | (5.11        | )    |  | $    | (5.01        | ) |  | $ | (1.59       | )
|Pro forma effect on net
(loss) per share of applying
fair value accounting to pre
January 1, 2003 option
grants: |  |                         |              |      |  |      |              |   |  |   |             |  
|Basic                                                                                                            |  | $                       | (0.03        | )    |  | $    | (0.13        | ) |  | $ | (0.13       | )
|Diluted                                                                                                          |  | $                       | (0.03        | )    |  | $    | (0.13        | ) |  | $ | (0.13       | )
|Pro forma (loss) per share:                                                                                      |  |                         |              |      |  |      |              |   |  |   |             |  
|Basic                                                                                                            |  | $                       | (5.14        | )    |  | $    | (5.14        | ) |  | $ | (1.72       | )
|Diluted                                                                                                          |  | $                       | (5.14        | )    |  | $    | (5.14        | ) |  | $ | (1.72       | )

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The fair value of the options is estimated on the date of grant using the
Black-Scholes option-pricing model. The following table details the assumptions
and fair values for options issued in the past four years:

|              |  |          |      |            |  |                  |       |                  |  |  |      |   |  |   |       | 
|------------- |  | -------- | ---- | ---------- |  | ---------------- | ----- | ---------------- |  |  | ---- | - |  | - | ----- | 
|              |  | Dividend |      | Expected   |  | Weighted Average |       | Weighted Average
|Year of Grant |  | Yield    |      | Volatility |  | Risk Free Rate   |       | Fair Value      
|              |  |          |      |            |  |                  |       |                 
|2001          |  |          | 0.69 | %          |  |                  | 37.07 | %                |  |  | 5.05 | % |  | $ | 15.19 | 
|2002          |  |          | 1.22 | %          |  |                  | 62.19 | %                |  |  | 4.99 | % |  | $ | 10.62 | 
|2003          |  |          | 0.00 | %          |  |                  | 241.1 | %                |  |  | 3.68 | % |  | $ | 1.03  | 

(k) Funds withheld at interest and embedded derivatives

Funds withheld at interest represents a receivable balance equivalent to
the Companys proportionate share of its ceding companies statutory reserves
related to policies reinsured by the Company under annuity reinsurance
agreements written on a modified coinsurance or coinsurance funds withheld
basis. The premiums received by a ceding company on the policies underlying
these types of reinsurance agreements are used to purchase investment
securities that are managed by that ceding company or investment managers
appointed by it. Net investment income includes the Companys proportionate
share of the investment income and realized capital gains and losses on the
sale of investments purchased with those premiums, as well as distributions
from the embedded derivatives contained in certain of these agreements.

A portion of the Companys funds withheld at interest receivable asset
contains embedded derivatives, which require bifurcation and separate
accounting under FAS 133  Accounting for Derivative Instruments and Hedging
Activities, which the Company adopted as of January 1, 2001. The net fair value
of these embedded derivatives is classified as part of the Companys funds
withheld asset on its balance sheet. The change in the fair value of these
embedded derivatives is recorded in the Companys statement of operations as
Net change in fair value of embedded derivatives, which is a non-cash item. The
Company, with the assistance of outside advisors, has developed a cash flow
model to arrive at an estimate of the fair value of these embedded derivatives
that uses various assumptions regarding future cash flows under the affected
annuity reinsurance contracts. While the Company has made an estimate of the
fair value of these embedded derivatives using a model that it believes is
appropriate and based upon reasonable assumptions, the assumptions used are
subjective and may require adjustment in the future. In addition, as industry
standards for estimating the fair value of embedded derivatives develop, it is
possible that the Company may modify its methodology. The Company does not
bifurcate and separately account for the embedded derivatives contained in its
annuity reinsurance agreement with Transamerica and its guaranteed minimum
income benefit reinsurance agreement with CIGNA, because the Company acquired
those agreements prior to the transition date it elected under FAS 133, as
amended.

(l) Accounting pronouncements

The Company has reviewed the Standards and Interpretations recently issued
by the American Institute of Certified Public Accountants and the Financial Accounting Standards Board and has concluded that, with the
exception of Statement of Position No. 03-1, the adoption of those Standards
and Interpretations will not have a significant impact in the Companys
financial reporting.

In July 2003, the Accounting Standards Executive Committee of the AICPA
issued Statement of Position (SOP) 03-1, Accounting and Reporting by Insurance
Enterprises for Certain Non-Traditional Long-Duration Contracts and for
Separate Accounts. The SOP provides guidance on accounting and reporting by
insurance enterprises for certain nontraditional long-duration contracts and
for separate accounts. The SOP will change the manner in which life insurance
companies account for certain types of insurance and reinsurance contracts
including those that cover risks such as guaranteed minimum death benefits and
guaranteed minimum income benefits. Additionally, the SOP provides accounting
guidance for sales inducements paid to contract holders and provides guidance
for establishing liabilities for contracts with features that may result in
more than one potential account balance. The SOP is effective for financial
statements for fiscal years beginning after December 15, 2003. The SOP may not
be applied

- 75 -



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##### 



retroactively to prior years financial statements, and initial
application should be as of the beginning of an entitys fiscal year.

The Company has a combined GMDB/GMIB contract with CIGNA and an annuity
reinsurance agreement with Transamerica that will be affected by the adoption
of this new SOP. The SOP provides guidance for reserving for contracts with
guaranteed minimum death and income benefits. The methodology is based on
projection of a wide number of future scenarios regarding the present value of
premiums earned and claims incurred. Based on this future projection and
actual past experience of premiums and claims, a Benefit Ratio percentage is
determined. The reserve is then determined by applying the Benefit Ratio
percentage to actual premiums received less actual claims, both with interest.
Management does not expect the amount of reserves carried for its GMDB/GMIB
reinsurance agreement to change significantly as a result of the adoption of
the SOP. The SOP also provides guidance for reserving for annuity agreements
with more than one potential account balance. Such reserves should be based
upon the highest contractually determinable balance, without consideration of
surrender fees. Upon adoption of the SOP, there is a one-time transition
adjustment to the amount of carried deferred acquisition costs. Management is currently analyzing the impact of the adoption of the SOP on its
accounting for the Transamerica annuity reinsurance agreement.

(m) Presentation of prior year information

Prior year financial information is reclassified, when necessary, to be
consistent with current year presentation.

4. Investments



|(a) |  | The amortized cost and fair values of investments in fixed income
securities classified as available for sale at December 31, 2003 and 2002
are as follows:
|--- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------

|                               |  |           |             |            |  |            |           |       |  |   |          |   |  |   |             | 
|------------------------------ |  | --------- | ----------- | ---------- |  | ---------- | --------- | ----- |  | - | -------- | - |  | - | ----------- | 
|                               |  | Amortized |             | Unrealized |  | Unrealized |           | Fair 
|2003                           |  | Cost      |             | Gain       |  | Loss       |           | Value
|                               |  |           |             |            |  |            |           |      
|U.S. Government Securities     |  | $         | 26,430,266  |            |  | $          | 313,192   |       |  | $ | (99,970  | ) |  | $ | 26,643,488  | 
|Non U.S. Government Securities |  |           | 3,049,346   |            |  |            | 19,227    |       |  |   |         |   |  |   | 3,068,573   | 
|U.S. Corporate Securities      |  |           | 59,547,627  |            |  |            | 1,441,874 |       |  |   | (133,896 | ) |  |   | 60,855,605  | 
|Non U.S. Corporate Securities  |  |           | 5,794,559   |            |  |            | 75,029    |       |  |   | (35,039  | ) |  |   | 5,834,549   | 
|Mortgage Securities            |  |           | 20,772,401  |            |  |            | 637,829   |       |  |   |         |   |  |   | 21,410,230  | 
|                               |  |           |             |            |  |            |           |       |  |   |          |   |  |   |             | 
|                               |  | $         | 115,594,199 |            |  | $          | 2,487,151 |       |  | $ | (268,905 | ) |  | $ | 117,812,445 | 
|                               |  |           |             |            |  |            |           |       |  |   |          |   |  |   |             | 

|                               |  |           |             |            |  |            |           |       |  |   |         |   |  |   |             | 
|------------------------------ |  | --------- | ----------- | ---------- |  | ---------- | --------- | ----- |  | - | ------- | - |  | - | ----------- | 
|                               |  | Amortized |             | Unrealized |  | Unrealized |           | Fair 
|2002                           |  | Cost      |             | Gain       |  | Loss       |           | Value
|                               |  |           |             |            |  |            |           |      
|U.S. Government Securities     |  | $         | 41,502,510  |            |  | $          | 1,974,490 |       |  | $ |        |   |  | $ | 43,477,000  | 
|Non U.S. Government Securities |  |           | 429,159     |            |  |            | 6,460     |       |  |   |        |   |  |   | 435,619     | 
|U.S. Corporate Securities      |  |           | 67,638,819  |            |  |            | 2,911,111 |       |  |   |        |   |  |   | 70,549,930  | 
|Non U.S. Corporate Securities  |  |           | 6,722,057   |            |  |            | 723,748   |       |  |   |        |   |  |   | 7,445,805   | 
|Mortgage Securities            |  |           | 30,195,358  |            |  |            | 1,349,196 |       |  |   | (37,479 | ) |  |   | 31,507,075  | 
|                               |  |           |             |            |  |            |           |       |  |   |         |   |  |   |             | 
|                               |  | $         | 146,487,903 |            |  | $          | 6,965,005 |       |  | $ | (37,479 | ) |  | $ | 153,415,429 | 
|                               |  |           |             |            |  |            |           |       |  |   |         |   |  |   |             | 

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##### 



A deferred tax liability of $377,000 and $765,000 has been provided
against unrealized gains on fixed income securities as of December 31, 2003 and
December 31, 2002, respectively.



|(b) |  | The following table sets forth certain information regarding the
investment ratings of the Companys fixed income securities portfolio at
December 31, 2003 and 2002.
|--- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------

|            |  |                |             |      |  |                |       |   |  |   |             |  |  |  |       |  
|----------- |  | -------------- | ----------- | ---- |  | -------------- | ----- | - |  | - | ----------- |  |  |  | ----- | -
|            |  | 2003           |             | 2002
|            |  |                |             |     
|Ratings (1) |  | Amortized Cost |             | %    |  | Amortized Cost |       | %
|            |  |                |             |      |  |                |       |  
|AAA         |  | $              | 52,748,482  |      |  |                | 45.6  | % |  | $ | 74,598,587  |  |  |  | 50.9  | %
|AA          |  |                | 17,577,721  |      |  |                | 15.2  | % |  |   | 15,758,858  |  |  |  | 10.8  | %
|A           |  |                | 35,669,294  |      |  |                | 30.9  | % |  |   | 45,217,707  |  |  |  | 30.8  | %
|BAA         |  |                | 9,448,886   |      |  |                | 8.2   | % |  |   | 10,439,225  |  |  |  | 7.2   | %
|BA          |  |                | 149,816     |      |  |                | 0.1   | % |  |   |            |  |  |  | 0.0   | %
|Below BA    |  |                |            |      |  |                | 0.0   | % |  |   | 473,526     |  |  |  | 0.3   | %
|            |  |                |             |      |  |                |       |   |  |   |             |  |  |  |       |  
|            |  | $              | 115,594,199 |      |  |                | 100.0 | % |  | $ | 146,487,903 |  |  |  | 100.0 | %
|            |  |                |             |      |  |                |       |   |  |   |             |  |  |  |       |  



---

|(1) |  | Ratings as assigned by Moodys.
|--- |  | -------------------------------



|(c) |  | At December 31, 2003 and 2002, letters of credit totaling $54,000,000 and
$174,000,000, respectively, issued in the ordinary course of the Companys
business had been issued by its bankers in favor of certain ceding
insurance companies to provide security and meet regulatory requirements.
At December 31, 2003 and 2002, cash and investments of approximately
$56,000,000 and $115,000,000, respectively, were pledged as collateral for
letters of credit.
|--- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|    |  | At December 31, 2003 and 2002, cash and investments of $96,000,000 and
$125,000,000, respectively, were held in trust for the benefit of certain
ceding insurance companies to provide security and to meet regulatory
requirements. Substantially all remaining cash and investments held at
December 31, 2003 were held by the Companys U.S. operating subsidiary and
are required by the subsidiary to maintain its statutory capital and
surplus.              
|   
|(d) |  | The maturity distribution of fixed income securities held as of December
31, 2003 and 2002 is shown below. Actual maturity dates may differ from
contractual maturity dates because certain borrowers have the ability to
prepay their obligations without penalty.                                                                                                                                                                                                 

|                            |  |           |             |       |  |           |             |       |  |   |             |  |  |   |             | 
|--------------------------- |  | --------- | ----------- | ----- |  | --------- | ----------- | ----- |  | - | ----------- |  |  | - | ----------- | 
|                            |  | 2003      |             | 2002 
|                            |  |           |             |      
|                            |  | Amortized |             | Fair  |  | Amortized |             | Fair 
|                            |  | Cost      |             | Value |  | Cost      |             | Value
|                            |  |           |             |       |  |           |             |      
|Within one year             |  | $         | 6,027,504   |       |  | $         | 6,121,704   |       |  | $ | 5,741,968   |  |  | $ | 5,826,503   | 
|From one year to five years |  |           | 32,486,349  |       |  |           | 33,020,061  |       |  |   | 50,566,587  |  |  |   | 52,761,998  | 
|From six to ten years       |  |           | 46,165,045  |       |  |           | 46,939,720  |       |  |   | 29,062,007  |  |  |   | 30,721,086  | 
|More than ten years         |  |           | 10,142,900  |       |  |           | 10,320,730  |       |  |   | 30,921,983  |  |  |   | 32,598,767  | 
|Mortgage securities         |  |           | 20,772,401  |       |  |           | 21,410,230  |       |  |   | 30,195,358  |  |  |   | 31,507,075  | 
|                            |  |           |             |       |  |           |             |       |  |   |             |  |  |   |             | 
|                            |  | $         | 115,594,199 |       |  | $         | 117,812,445 |       |  | $ | 146,487,903 |  |  | $ | 153,415,429 | 
|                            |  |           |             |       |  |           |             |       |  |   |             |  |  |   |             | 

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##### 





|(e) |  | Investment income earned during the years ended December 31, 2003, 2002
and 2001 was as follows:
|--- |  | ------------------------------------------------------------------------------------------------

|                                                                                 |  |      |            |      |  |      |             |   |  |   |            |  
|-------------------------------------------------------------------------------- |  | ---- | ---------- | ---- |  | ---- | ----------- | - |  | - | ---------- | -
|                                                                                 |  | 2003 |            | 2002 |  | 2001
|                                                                                 |  |      |            |      |  |     
|Interest income                                                                  |  | $    | 7,748,231  |      |  | $    | 27,396,270  |   |  | $ | 21,434,452 |  
|Investment income earned on
funds withheld under modified
coinsurance agreements |  |      | 22,106,175 |      |  |      | 76,207,803  |   |  |   | 70,963,486 |  
|Amortization of premium/discount                                                 |  |      | (264,789   | )    |  |      | (560,172    | ) |  |   | (839,580   | )
|Investment expenses                                                              |  |      | (547,394   | )    |  |      | (904,916    | ) |  |   | (429,662   | )
|                                                                                 |  |      |            |      |  |      |             |   |  |   |            |  
|                                                                                 |  | $    | 29,042,223 |      |  | $    | 102,138,985 |   |  | $ | 91,128,696 |  
|                                                                                 |  |      |            |      |  |      |             |   |  |   |            |  



|(f) |  | During the years ended December 31, 2002, the Company recognized a charge
of $900,000 for securities that were impaired on an other than temporary
basis.
|--- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------

5. Stockholders Equity

Preferred Stock

The Company is authorized to issue 50,000,000 preferred shares of par
value $1.00 each. Currently, there are 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. The common shareholders have no pre-emptive, redemption, conversion
or sinking fund rights. Subject to certain voting restrictions, which limit the
voting power of United States persons to less than 10%, and non-United States
persons to less than 17%, 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 preferred shares. Certain restrictions exist with
respect to the transfer of shares, should such a transfer cause the number of
shares held by one United States person to be 10% or more, or a non-United
States person to be 17% 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 that initially entitled the holders to purchase up to
3,059,990 common shares of the Company. The initial exercise price of the Class
A Warrants was $15.00, which was equal to the price of the Companys common
shares in the initial public offering. Due to the effect of anti-dilution
adjustment provisions in the Class A Warrants, the number of shares issuable
upon exercise of the Class A Warrants has increased to 3,155,331 common shares
and the exercise price of the Class A Warrants has been adjusted to $14.55 as
the result of our issuance of warrants to Hartford Life, discussed below. The
Class A Warrants are all currently exercisable and will expire on January 15,
2008. No Class A Warrants have been exercised at December 31, 2003.

Class B Warrants

In connection with the direct sales of equity securities to certain
Strategic Investors in connection with the Companys initial public offering,
the Company issued Class B Warrants that initially enabled the holders to
purchase an aggregate of 397,500 common shares of the Company. The initial
exercise price of

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##### 



the Class B Warrants was $15.00 per share, which was equal to the price of
the common shares in the initial public offering. Due to the effect of
anti-dilution adjustment provisions in the Class B Warrants, the number of
shares issuable upon exercise of the Class B Warrants has increased to 409,885
common shares and the exercise price of the Class B Warrants has been adjusted
to $14.55 as the result of our issuance of warrants to Hartford Life, discussed
below. The Class B Warrants are all currently exercisable and expire on April
15, 2008. No Class B Warrants have been exercised at December 31, 2003.

Stock Warrants

On June 30, 2003, the Company issued warrants to purchase an aggregate
1,000,000 common shares of the Company at an exercise price of $1.25 per share
to Hartford Life, the ceding company under the Companys then largest
guaranteed minimum death benefit reinsurance agreement. The warrants were
issued in connection with the recapture of that agreement. The warrants are
currently exercisable and expire on June 30, 2013. At June 30, 2003, the fair
value of warrants, using a Black-Scholes pricing model, was estimated at
$1,250,000, which was included in the charge associated with the recapture. The
expense of issuing these warrants is reflected as a component of Claim and
policy benefits expense in the Companys Consolidated Statements of Operations
and as Stock warrants in the Companys Consolidated Balance Sheet.

6. (Loss) Per Share

The following table sets forth the computation of basic and diluted (loss)
per share:

|                                                                                         |  |                |              |      |  |      |              |   |  |   |             |  
|---------------------------------------------------------------------------------------- |  | -------------- | ------------ | ---- |  | ---- | ------------ | - |  | - | ----------- | -
|                                                                                         |  | 2003           |              | 2002 |  | 2001
|                                                                                         |  |                |              |      |  |     
|                                                                                         |  | (U.S. Dollars)
|Net (loss) before cumulative effect
of a change in accounting principle                  |  | $              | (132,155,584 | )    |  | $    | (128,887,285 | ) |  | $ | (36,915,696 | )
|Cumulative effect of a change in accounting principle                                    |  |                |             |      |  |      |             |   |  |   | (3,665,735  | )
|                                                                                         |  |                |              |      |  |      |              |   |  |   |             |  
|Net (loss)                                                                               |  | $              | (132,155,584 | )    |  | $    | (128,887,285 | ) |  | $ | (40,581,431 | )
|                                                                                         |  |                |              |      |  |      |              |   |  |   |             |  
|Basic:                                                                                   |  |                |              |      |  |      |              |   |  |   |             |  
|Weighted average number of common shares outstanding                                     |  |                | 25,880,202   |      |  |      | 25,738,724   |   |  |   | 25,602,664  |  
|Net (loss) per common share before cumulative
effect of a change in accounting principle |  | $              | (5.11        | )    |  | $    | (5.01        | ) |  | $ | (1.45       | )
|Cumulative effect of a change in accounting principle
per common share                   |  |                |             |      |  |      |             |   |  |   | (0.14       | )
|                                                                                         |  |                |              |      |  |      |              |   |  |   |             |  
|(Loss) per common share                                                                  |  | $              | (5.11        | )    |  | $    | (5.01        | ) |  | $ | (1.59       | )
|                                                                                         |  |                |              |      |  |      |              |   |  |   |             |  
|Diluted:                                                                                 |  |                |              |      |  |      |              |   |  |   |             |  
|Weighted average number of common shares outstanding                                     |  |                | 25,880,202   |      |  |      | 25,738,724   |   |  |   | 25,602,664  |  
|Plus: incremental shares from assumed exercise of
options and warrants                   |  |                |             |      |  |      |             |   |  |   |            |  
|                                                                                         |  |                |              |      |  |      |              |   |  |   |             |  
|Diluted weighted average number of common shares
outstanding                             |  |                | 25,880,202   |      |  |      | 25,738,724   |   |  |   | 25,602,664  |  
|                                                                                         |  |                |              |      |  |      |              |   |  |   |             |  
|Net (loss) per common share before cumulative
effect of a change in accounting principle |  | $              | (5.11        | )    |  | $    | (5.01        | ) |  | $ | (1.45       | )
|Cumulative effect of a change in accounting principle
per common share                   |  |                |             |      |  |      |             |   |  |   | (0.14       | )
|                                                                                         |  |                |              |      |  |      |              |   |  |   |             |  
|(Loss) per common share                                                                  |  | $              | (5.11        | )    |  | $    | (5.01        | ) |  | $ | (1.59       | )
|                                                                                         |  |                |              |      |  |      |              |   |  |   |             |  

As of December 31, 2003, 2002, and 2001 the Company had 955,869,
1,144,535, and 1,860,536 options outstanding, respectively. There were Class A
and Class B warrants outstanding representing the right to acquire 3,565,216
shares as of December 31, 2003, and 3,457,490 shares at both December 31, 2002
and 2001. Warrants issued to Hartford Life to acquire 1,000,000 shares were
outstanding at December 31, 2003. Inclusion of the incremental shares from
assumed exercise of options and warrants is considered anti-dilutive in 2003,
2002 and 2001. Consequently they are not included in diluted (loss) per share
in these years.

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##### 



7. Agreements with Related Parties

Shareholders

The Prudential Investment Corporation serves as the Companys investment
managers. 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 also had entered into several life
reinsurance agreements with the Prudential Insurance Company of America, all of
which were recaptured during 2003. These contracts had been negotiated under
normal commercial terms. One of the Companys former directors was an
executive officer of Prudential Financial, Inc. an affiliate of both The
Prudential Investment Corporation and Prudential Insurance Company of America.

On December 31, 2002, the Company entered into a transaction with XL Life
Ltd (XL Life), a subsidiary of XL Capital, pursuant to which the Company
transferred certain blocks of life reinsurance business to XL Life. Under the
agreement with XL Life, the Company novated five blocks of life reinsurance
business to XL Life, which in turn entered into a 50% quota share reinsurance
agreement with the Company with respect to four of those blocks of business. As
a result of the transaction, the Company incurred a loss of approximately $26.5
million, primarily as a result of a write down of deferred acquisition costs of
$38.7 million (which was partially offset by a net ceding commission to the
Company of $18.0 million), a write down of prepaid expenses of $2.4 million and
transaction costs of approximately $3.2 million. The agreement also provided
that XL Life would receive an additional payment of $5.0 million if, during the
18 months following the agreement, the Company received new capital funding of
at least $35.0 million and the Companys stock traded at a price at or above
$5.00 per share for a period of 20 out of 30 consecutive trading days.

On August 5, 2003, XL Life served the Company with notice of its intention
to recapture the 50% quota share reinsurance agreement with the Company. As a
result, the Company determined it would not be able to recover the deferred
acquisition costs carried for this agreement from future expected income, and
wrote down approximately $21.0 million of such deferred acquisition costs in
the three months ended June 30, 2003.

During 2003, the Company and XL Life had been in discussions with respect
to each partys rights and obligations under the novation and retrocession
agreements entered into at December 31, 2002, as well as a $10.0 million excess
of loss reinsurance policy and a catastrophe excess of loss cover that were
each purchased by the Company from XL Life in the first quarter of 2002 and two
annuity reinsurance agreements ceded to the Company by an affiliate of XL Life.
The $10.0 million excess of loss reinsurance policy was purchased to protect
against lifetime minimum interest guarantee payments under the
Companys annuity reinsurance agreement with Transamerica, and full recovery
under the policy had been anticipated in establishing the Companys deferred
acquisition cost asset. The catastrophe excess of loss cover expired by its
terms on December 31, 2002, but the parties had continued to discuss with XL
Life the remaining obligations asserted under the agreement. The two annuity
reinsurance agreements had been in effect since December 17, 1999, and
represented approximately $95.9 million (including a cumulative loss from
embedded derivatives of approximately $2.8 million) of the Companys Funds
withheld at interest and approximately $95.6 million of the Companys Interest
sensitive contract and other liabilities on July 1, 2003, the effective date of
recapture.

As a result of the Companys discussions with XL Life, the Company and XL
Life and its affiliate agreed to mutually discharge their respective rights and
obligations under all of the agreements described in the preceding paragraph in
a comprehensive settlement effective as of July 1, 2003. Under the terms of the
comprehensive settlement, the Company paid $6.0 million to XL Life and was
released from any and all obligations to XL Life and its affiliate under all of
the agreements among the parties. In addition, as part of the comprehensive
settlement, the Company is obligated to pay $2.0 million to XL Life if prior to
June 30, 2004 the Companys stock trades above $2.00 per share for a period of
20 out of any 30 consecutive trading days and the Company raises an aggregate
$35.0 million of equity or debt.

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##### 



Transactions with management

During 1998, certain of the Companys officers purchased 163,121 shares in
the Company, and the Company made loans to the officers to partially finance
such purchases. The loans accrued interest at 7% per annum and certain unpaid
loans became due and payable in April 2003. In connection with the
renegotiation or termination of certain officers employment agreements, the
Company has deemed the outstanding loans of those officers to have been repaid
in exchange for the officers agreeing to forego certain bonus, severance or
other payments that were or may have become payable to them. During the year
ended December 31, 2003, loans of $1,000,000 and accrued interest of $402,812
were deemed repaid in this manner.

At December 31, 2003 and 2002, loans outstanding from officers for such
stock purchases were $0 and $1,250,000, respectively. Accrued interest on the
loans was $0 and $376,493, respectively. Interest income of $43,998, $97,854,
and $100,018 has been recognized for the years ended December 31, 2003, 2002
and 2001, respectively, on these loans.

8. Compensation 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 (ISOs) and Non-Qualified Stock Options (NQSOs). The aggregate
number of common shares for which options may be granted under the Plan was
initially 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 diluted earnings per
share. Only eligible employees of the Company are entitled to ISOs, while
NQSOs may be granted to eligible employees, non-employee directors and
consultants. The Compensation Committee of the Board of Directors administers
the Plan.

The term of the options granted under the Plan will not be more than ten
years from the date of grant. Unless otherwise provided in the option agreement
related to a specific grant, options granted under the Plan will 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, is automatically granted an option to purchase 15,000 common shares
on the date he or she becomes an eligible non-employee director. These options
have an exercise price equal to the greater of par value per common share or
the fair market value of the optioned common shares on the date the options are
granted and are exercisable in three equal installments commencing with the
first anniversary of the grant date. In addition, subject to certain
conditions, each non-employee director is automatically granted an option to
purchase 2,500 common shares at each successive annual general meeting. These
options have an exercise price equal to the fair market value of the optioned
common shares on the date the options are granted and are immediately
exercisable if granted after April 8, 1999.

|                                 |  |           |           |                  |  |           |        |                  |  |  |           |   |  |   |        |  
|-------------------------------- |  | --------- | --------- | ---------------- |  | --------- | ------ | ---------------- |  |  | --------- | - |  | - | ------ | -
|                                 |  | 2003      |           | 2002            
|                                 |  |           |           |                 
|                                 |  | Number    |           | Weighted Average |  | Number    |        | Weighted Average
|                                 |  | of Shares |           | Exercise Price   |  | of Shares |        | Exercise Price  
|                                 |  |           |           |                  |  |           |        |                 
|Outstanding at beginning of year |  |           | 1,144,535 |                  |  | $         | 19.90  |                  |  |  | 1,860,536 |   |  | $ | 18.44  |  
|Granted                          |  |           | 340,000   |                  |  | $         | 1.03   |                  |  |  | 282,000   |   |  | $ | 16.49  |  
|Exercised                        |  |           |          |                  |  | $         |       |                  |  |  |          |   |  | $ |       |  
|Forfeitures                      |  |           | (528,666  | )                |  | $         | (20.67 | )                |  |  | (998,001  | ) |  | $ | (16.03 | )
|                                 |  |           |           |                  |  |           |        |                  |  |  |           |   |  |   |        |  
|Outstanding at end of year       |  |           | 955,869   |                  |  | $         | 13.03  |                  |  |  | 1,144,535 |   |  | $ | 19.90  |  
|                                 |  |           |           |                  |  |           |        |                  |  |  |           |   |  |   |        |  

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##### 



At December 31, 2003, options to acquire 529,869 common shares were
exercisable. The weighted average remaining contractual life of these
exercisable options was 7 years.

On January 1, 2003, the Company voluntarily adopted the fair value based
method of accounting for stock-based employee compensation under the
prospective method described in FASB Statement Number 148. Under this method,
the Company applies fair value accounting to all grants of employee stock
options subsequent to December 31, 2002. Accordingly, $351,700 has been
recognized as the fair value of the options granted during
the year ended December 31, 2003. Based on the vesting of the options granted
in the year, approximately $111,500 was expensed in 2003. Approximately
$240,000 is deferred and will be expensed over the remaining vesting period and
is reflected as unamortized stock-based compensation at December 31, 2003. The
fair value of stock options awarded to employees and new directors will be
amortized into income over the three-year vesting period. The fair value of
stock options awarded to all other directors will be expensed immediately as
their options are exercisable on the day of grant and vest upon their award.

In 2002, the Board of Directors adopted a Restricted Stock Plan under
which it may grant common shares to key employees. The aggregate number of
common shares that may be granted under the Restricted Stock Plan is 1,200,000.
The Compensation Committee of the Board of Directors administers the
Restricted Stock Plan. During 2002, the Company made two awards to employees.
Under the first award to employees, the Company issued 133,500 shares of
restricted stock that vest on the third anniversary of the grant date. Under
the second award, certain employees of the Company were irrevocably offered
shares of restricted stock, conditioned upon the execution of a retention
agreement with the Company. The Company issued an aggregate 267,500 shares to
those employees who chose to execute retention agreements and such shares vest
in three equal annual installments commencing on the first anniversary of the
grant date.

During the first quarter of 2003, the Company issued 200,000 shares of
restricted stock to the Companys President and Chief Executive Officer. These
shares vest in three equal annual installments commencing on the first
anniversary of the grant date. In addition, during the second quarter of 2003,
the Company issued an additional 375,000 shares of restricted stock in
connection with retention grants to employees. These shares also vest in three
equal annual installments commencing on the first anniversary of the grant
date. During 2003, 227,133 shares of restricted stock were cancelled as a
result of certain employees terminating their employment with the Company. The
fair value as determined at the date of grant of the restricted stock awards
that remain outstanding on December 31, 2003 was approximately $2,400,000 and
is reflected in the Companys balance sheet as common shares and additional
paid-in-capital. The fair value of the outstanding restricted stock is being
amortized on a straight-line basis over the three-year vesting
period. Based on the vesting of the restricted stock, approximately
$325,000 was expensed in 2003. The
unamortized balance of outstanding restricted stock is reflected in the balance
sheet as a component of unamortized stock-based compensation and was
approximately $1,269,000 at December 31, 2003.

9. Retrocession Agreements

The Company has entered into a retrocession agreement that generally
enables it to limit the amount of life reinsurance it retains to $1,000,000 per
single life. The contract is automatic and effective for risks assumed and in
force from January 1, 1997. At December 31, 2003 and 2002, the Company had
ceded approximately $380 million and $1.26 billion of in force insurance
coverage, respectively, to other reinsurers. Total amounts of $465,000 and
$500,000 were recoverable from reinsurers at December 31, 2003 and 2002,
respectively.

Prior to its acquisition by Annuity and Life Re America, Inc. on June 1,
2000, the in force insurance business of Capitol Bankers Life Insurance Company
was 100% reinsured with its former owner, a subsidiary of Swiss Re, who
continues to administer the business reinsured. The amounts related to the
reinsured business are included on the Companys balance sheet in assets as
Receivable for reinsurance ceded and in liabilities as Reserves for future
policy benefits. At December 31, 2003 and 2002, these amounts were $88.2
million and $93.4 million, respectively. Capital Bankers Life Insurance
Company was renamed Annuity and Life Reassurance America, Inc. in December
2000.

- 82 -



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##### 



Retrocession agreements do not relieve the Company from its obligations to
its cedents and failure of the Companys 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 parties to the retrocession
agreements described above have current credit rating of A+ or better, as
assigned by A.M. Best.

10. Contingencies

As of December 31, 2003, the Company did not have sufficient available
cash and investments to post as collateral to satisfy the collateral
requirements asserted by CIGNA, the ceding company under the Companys only

remaining guaranteed minimum death benefit and guaranteed minimum income
benefit agreement. As of December 31, 2002, CIGNA asserted that the Company was
required to post $59.0 million of collateral in addition to the $11.0 million
of collateral the Company had previously provided. As of December 31, 2003,
CIGNA was seeking $49.0 million of collateral in addition to the $11.0 million
of collateral the Company had previously provided. The Company does not agree
that the aggregate $60.0 million collateral requirement currently asserted by
CIGNA is required to be posted, and has not posted any additional collateral
for the agreement. As a result, CIGNA may institute arbitration or litigation
proceedings against the Company. If the Company does not prevail in any such
arbitration or litigation proceedings, it would have a material adverse effect
on the Companys financial condition and the Company may be required to
liquidate its operations.

On November 20, 2002, the State of Connecticut Insurance Department and
Annuity and Life Reassurance America entered into a letter agreement that
acknowledged that the Department was monitoring the financial condition of
Annuity and Life Reassurance America and such letter agreement required that
certain financial transactions that Annuity and Life Reassurance America enters
into, including disposal of assets, payment of dividends and settlement of
inter-company balances with Annuity and Life Reassurance, be pre-approved by
the Department. In addition, the Department had requested weekly reports from
senior management of Annuity and Life Reassurance America on the Companys
status and any changes in the status of Annuity and Life Reassurance America.
The letter agreement was in effect until March 1, 2004 and was not renewed by
the Department.

On and since December 4, 2002, certain of the Companys shareholders filed
purported shareholder class action lawsuits against the Company and certain of
its present and former officers and directors in the United States District
Court for the District of Connecticut seeking unspecified monetary damages. The
plaintiffs claim that the defendants violated certain provisions of the United
States securities laws by making various alleged material misstatements and
omissions in public filings and press releases. The plaintiffs filed a single
consolidated amended complaint in July 2003, adding as defendants XL Capital
Ltd and two additional directors. On October 1, 2003, the Company answered the
amended and consolidated complaint and denied liability on the claims the
plaintiffs have asserted. In February 2004, the court denied certain
individual defendants motions to dismiss the action. In March 2004, the court
denied motions to dismiss filed by certain other individual defendants and XL
Capital Ltd. The court has not yet ruled on one individual
defendants motion to dismiss. No assurance can be given that the Company will not be required
to pay monetary damages in connection with these lawsuits.

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

Transamerica has alleged that the Company, as of October 31, 2003, owed
$17.6 million under its annuity reinsurance agreement with Transamerica. On
February 3, 2004, the Company paid Transamerica $12.6 million representing the
net amount the Company believed was due under the reinsurance agreement

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as of October 31, 2003 after deducting $5.0 million for investment related
expenses that the Company believes was owed to it by Transamerica.
Transamerica is currently pursuing arbitration with the Company, asserting that
the $5.0 million offset is not justified and that the Company owes Transamerica
that amount and interest on the amounts that Transamerica previously alleged
were due.

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

There can be no assurance that the Company will be able to maintain its
operations and liquidity. If the Company is unable to reposition its investment portfolio to achieve a substantially higher yield within its
investment guidelines, successfully defend against the pending purported
shareholder class action suit, improve the performance of its reinsurance
agreement with Transamerica and restructure its reinsurance agreement with
CIGNA, the Company may not be able to meet its obligations in 2004. The Companys
failure to achieve any one of the foregoing items could have a material adverse
effect on its financial condition and results of operations.

11. Vulnerability Due to Concentrations

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

The contract is a modified coinsurance annuity reinsurance agreement
whereby the Company reinsures Transamerica. At December 31, 2003 and 2002,
approximately $604 million and $734 million, respectively, of the Companys
funds withheld at interest receivable and $602 million and $756 million,
respectively, of the Companys interest sensitive contracts liability related
to its reinsurance agreement with Transamerica. The reinsurance agreement is a
retrocessional agreement covering policies issued by IL Annuity and Insurance
Company. Transamericas agreement with IL Annuity is also structured on a
modified coinsurance basis, so IL Annuity maintains ownership and control of
the assets supporting the Companys obligations to Transamerica. At December
31, 2003, IL Annuity had financial strength or claims paying ratings of BB+
from Standard & Poors. At December 31, 2003, Transamerica had financial
strength or claims paying ratings of A+, AA, Aa3 and AA+ (with a negative
outlook) from A.M. Best, Standard & Poors, Moodys Ratings and Fitch Ratings,
respectively.

During 2003, the Company recorded $16,120,000 of payments made under the
contract for minimum interest guarantees to policyholders who surrendered their
policies. During 2002, the Company recorded $54,174,000 of payments and
charges related to the Transamerica reinsurance contract, made up of
$26,760,000 of payments made under the contract for minimum interest guarantees
to policyholders who surrendered their policies and a write-down of deferred
acquisition costs of $27,474,000. The 2002 charges were the result of a high
level of surrenders by policyholders coupled with poor investment performance
on the premiums paid by the holders of policies underlying the reinsurance
contract. In writing down the deferred acquisition costs to their estimated
recoverable amount, management has estimated the future levels of surrenders of
the underlying policies together with the estimated future level of investment
return on the invested premiums. While management has written down deferred
acquisition costs to what it believes to be an appropriate level based upon
reasonable assumptions about future investment performance and surrenders, the
write down is an estimate. Actual amounts of income earned and amounts payable
upon future surrenders may be significantly higher or lower than the amounts
currently estimated. If actual experience varies significantly from the
assumptions used to write down the deferred acquisition costs, additional write
downs may be needed in the future.

As a result of the recapture or termination of many of the Companys
reinsurance agreements, certain of the Companys remaining agreements, which
previously did not represent a significant percentage of the Companys
business, have become more prominent. For the year ended December 31, 2003,
the Company recorded losses of approximately $2.1 million, related to its life
reinsurance agreement with ERC Life. Premiums associated with this agreement
for the year ended December 31, 2003 were approximately $17.1 million. For the
year ended December 31, 2003, the Company recorded losses of approximately $2.2
million related to its life reinsurance agreement with National States Life.
Premiums associated with this agreement for the year ended December 31, 2003
were approximately $12.2 million. For the year ended

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December 31, 2003, the Company recorded a loss of $2.7 million related to
its remaining life reinsurance agreement with Fidelity & Guarantee Life.
Premiums associated with this agreement for the year ended December 31, 2003,
was approximately $13.3 million.

The Companys United States domiciled operating subsidiary, Annuity and
Life Reassurance America, was purchased from a subsidiary of SwissRe on June 1,
2000. Immediately prior to the acquisition, 100% of Annuity and Life
Reassurance Americas life and annuity policies were reinsured with Reassure
America Life Insurance Company (Reassure), a subsidiary of SwissRe, under an
indemnity co-insurance agreement. Following the acquisition, the policies
continue to be 100% reinsured with Reassure; however, Annuity and Life
Reassurance America remains the primary carrier. Reassure is required to
indemnify Annuity and Life Reassurance America for any losses associated with
these policies. Reserves ceded under its reinsurance agreement amounted to
approximately $88.2 million and $93.4 million at December 31, 2003 and December
31, 2002, respectively. Reassure currently is rated
A+g (superior) by AM Best.

12. 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 Income Securities

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

Cash and Cash Equivalents

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

Embedded Derivatives

At December 31, 2003, one of the Companys modified coinsurance annuity
reinsurance agreements has a feature that constitutes an embedded derivative
which requires bifurcation and separate accounting under FAS 133  Accounting
for Derivative Instruments and Hedging Activities. The valuation of this
embedded derivative requires cash flow modeling that uses various assumptions
regarding future cash flows under these agreements. The fair value of this
derivative is reported as a component of Funds withheld at interest. At
December 31, 2003, the fair value of this embedded derivative was a loss of
$(7,790,000). At December 31, 2002, the fair value of the Companys embedded
derivatives under its modified coinsurance and coinsurance funds withheld
annuity reinsurance agreements was a loss of approximately $(24,483,000).

Other Items

Fair value disclosures are not required for reinsurance balances
recoverable, deferred policy acquisition costs, or liabilities arising from
insurance and annuity contracts. As a result, the Company has not determined
such disclosures. Fair values of other assets and liabilities approximate their
carrying values due to their short-term nature. Included in other liabilities
is $2,570,000 at December 31, 2002 of unrealized loss, representing the fair
value of two interest rate swap agreements.

13. Segments

During the first quarter of 2002, the Company began to separately track
financial results of the life and annuity operations in segments. Each segment
is defined by a dominant risk characteristic inherent in all products in that
segment. The life segment consists of all products where the dominant risk
characteristic is

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mortality risk. The annuity segment comprises all products where the
dominant risk characteristic is investment risk, including those products which
provide minimum guarantees on variable annuity products. In addition, since
January 1, 2001, certain of the Companys modified coinsurance and coinsurance
funds withheld annuity reinsurance agreements have features that constitute
embedded derivatives that require bifurcation and separate accounting under FAS
133  Accounting for Derivative Instruments and Hedging Activities. The
cumulative effect of the application of FAS 133 through January 1, 2001 and the
change in the fair value of these embedded derivatives since that date are
included in the annuity segment.

Both the life and annuity segments have specific assets, liabilities,
stockholders equity, revenue, benefits and expenses that apply only to them.
The corporate segment contains all stockholders equity not otherwise deployed
to the life or annuity segment. In addition, the corporate segment includes all
capital gains and losses from sales of securities in our portfolio and
investment income on undeployed invested assets. Operating expenses are
allocated to the segments proportionately based upon the amount of
stockholders equity deployed to the segment, except for capital raising costs
that have been completely allocated to the corporate segment.

|                  |  |             |             |             |  |           |             |              |  |   |            |  |  |   |               |  
|----------------- |  | ----------- | ----------- | ----------- |  | --------- | ----------- | ------------ |  | - | ---------- |  |  | - | ------------- | -
|                  |  | Life        |             | Annuity     |  |           |             |              |  |   |            | 
|2003              |  | Reinsurance |             | Reinsurance |  | Corporate |             | Consolidated
|                  |  |             |             |             |  |           |             |             
|Revenues          |  | $           | 166,333,033 |             |  | $         | 52,122,419  |              |  | $ | 7,955,901  |  |  | $ | 226,411,353   |  
|Expenses          |  |             | 256,769,309 |             |  |           | 96,493,357  |              |  |   | 5,304,271  |  |  |   | 358,566,937   |  
|                  |  |             |             |             |  |           |             |              |  |   |            |  |  |   |               |  
|Net (Loss) Income |  | $           | (90,436,276 | )           |  | $         | (44,370,938 | )            |  | $ | 2,651,630  |  |  | $ | (132,155,584  | )
|                  |  |             |             |             |  |           |             |              |  |   |            |  |  |   |               |  
|Total Assets      |  | $           | 250,732,481 |             |  | $         | 695,317,546 |              |  | $ | 83,832,312 |  |  | $ | 1,029,882,339 |  
|                  |  |             |             |             |  |           |             |              |  |   |            |  |  |   |               |  

|                  |  |             |             |             |  |           |               |              |  |   |             |   |  |   |               |  
|----------------- |  | ----------- | ----------- | ----------- |  | --------- | ------------- | ------------ |  | - | ----------- | - |  | - | ------------- | -
|                  |  | Life        |             | Annuity     |  |           |               |              |  |   |             |  
|2002              |  | Reinsurance |             | Reinsurance |  | Corporate |               | Consolidated
|                  |  |             |             |             |  |           |               |             
|Revenues          |  | $           | 352,183,178 |             |  | $         | 78,427,733    |              |  | $ | 25,685,108  |   |  | $ | 456,296,019   |  
|Expenses          |  |             | 419,364,331 |             |  |           | 156,674,132   |              |  |   | 9,144,841   |   |  |   | 585,183,304   |  
|                  |  |             |             |             |  |           |               |              |  |   |             |   |  |   |               |  
|Net (Loss) Income |  | $           | (67,181,153 | )           |  | $         | (78,246,399   | )            |  | $ | 16,540,267  |   |  | $ | (128,887,285  | )
|                  |  |             |             |             |  |           |               |              |  |   |             |   |  |   |               |  
|Total Assets      |  | $           | 502,281,795 |             |  | $         | 1,553,638,311 |              |  | $ | (11,221,919 | ) |  | $ | 2,044,698,187 |  
|                  |  |             |             |             |  |           |               |              |  |   |             |   |  |   |               |  

|                                                                               |  |             |             |             |  |           |               |              |  |   |             |  |  |   |               |  
|------------------------------------------------------------------------------ |  | ----------- | ----------- | ----------- |  | --------- | ------------- | ------------ |  | - | ----------- |  |  | - | ------------- | -
|                                                                               |  | Life        |             | Annuity     |  |           |               |              |  |   |             | 
|2001                                                                           |  | Reinsurance |             | Reinsurance |  | Corporate |               | Consolidated
|                                                                               |  |             |             |             |  |           |               |             
|Revenues                                                                       |  | $           | 249,787,787 |             |  | $         | 103,170,165   |              |  | $ | 14,742,747  |  |  | $ | 367,700,699   |  
|Expenses                                                                       |  |             | 252,057,673 |             |  |           | 146,653,314   |              |  |   | 5,905,408   |  |  |   | 404,616,395   |  
|                                                                               |  |             |             |             |  |           |               |              |  |   |             |  |  |   |               |  
|Net (loss) income
before cumulative
effect of a change
in accounting
principle |  |             | (2,269,886  | )           |  |           | (43,483,149   | )            |  |   | 8,837,339   |  |  |   | (36,915,696   | )
|Cumulative effect
of a change in
accounting
principle                          |  |             |            |             |  |           | (3,665,735    | )            |  |   |            |  |  |   | (3,665,735    | )
|                                                                               |  |             |             |             |  |           |               |              |  |   |             |  |  |   |               |  
|Net (Loss) Income                                                              |  | $           | (2,269,886  | )           |  | $         | (47,148,884   | )            |  | $ | 8,837,339   |  |  | $ | (40,581,431   | )
|                                                                               |  |             |             |             |  |           |               |              |  |   |             |  |  |   |               |  
|Total Assets                                                                   |  | $           | 538,181,649 |             |  | $         | 1,602,020,485 |              |  | $ | 170,570,456 |  |  | $ | 2,310,772,590 |  
|                                                                               |  |             |             |             |  |           |               |              |  |   |             |  |  |   |               |  

14. Taxation

The effective tax rate provided for in the financial statements is
computed at a rate of zero. A substantial portion of the Companys operations
is Bermuda based and as a result income is exempt from taxation.

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Under current Bermuda law, there is no income or capital gains tax payable
by the Company or Annuity and Life Reassurance. The Company and Annuity and
Life Reassurance have received from the Bermuda Minister of Finance, under The
Exempted Undertakings Tax Protection Act 1966 of Bermuda, assurances to the
effect that in the event of there being enacted by Bermuda any legislation
imposing tax computed on profits or income, or computed on any capital asset,
gain or appreciation, or any tax in the nature of estate duty or inheritance
tax, then the imposition of any such tax shall not be applicable to them or to
any of their respective operations or to their shares, debentures or other
obligations until March 28, 2016. This is not to be construed so as to prevent
the application of any tax or duty to such persons as are ordinarily resident
in Bermuda or to prevent the application of any tax payable in accordance with
the provisions of The Land Tax Act 1967 of Bermuda or otherwise payable in
relation to any property leased to the Company or its Bermuda subsidiary.

Annuity and Life Re America and Annuity and Life Reassurance America, the
Companys United States based subsidiaries, are subject to all applicable
Federal and State taxes of the United States. U.S. income taxes applicable to
the Companys U.S. operations are not material to the consolidated financial
statements and, therefore, no separate item appears on the income statement or
balance sheet. At December 31, 2003 and 2002 the Company had recorded a
deferred tax liability of $377,000 and $765,000, respectively, related to U.S.
income taxes on unrealized gains on investments held by its U.S. operations. No
deferred tax asset or liability related to operating income has been
recognized. GAAP stand alone net operating results for the Companys U.S.
operations for the year ending 2003, 2002, and 2001 was a loss of
$(12,230,000), a loss of $(781,000), and a gain of $891,000, respectively. The
tax basis net operating loss carry forward at December 31, 2003 was
$12,559,000, which begins expiring in 2019. The Company does not expect that
its future taxable net income will be sufficient to offset its deferred tax
asset within a reasonable time period. Therefore, the Company has established
valuation allowances of $3,818,000 and $200,000 at December 31, 2003 and 2002,
respectively, against its deferred tax asset.

15. Statutory Requirements and Dividend Restrictions

The Company and Annuity and Life Reassurance are required to comply with
the provisions of the Companies Act that regulate the payment of dividends and
the making of distributions from contributed surplus. Neither the Company nor
Annuity and Life Reassurance may declare or pay a dividend, or make a
distribution out of contributed surplus, if there are reasonable grounds for
believing that: (i) the relevant company is, or would be after the payment,
unable to pay its liabilities as they become due; or (ii) the realizable value
of the relevant companys assets would thereby be less than the aggregate of
its liabilities and its issued share capital and share premium accounts. As of
and since December 31, 2002, the Company has not declared a dividend. The
Companys ability to pay dividends depends on the ability of its operating
subsidiaries to pay dividends to the Company, which may be subject to
regulatory constraints that affect their ability to pay dividends to the
Company.

As long-term insurer, Annuity and Life Reassurance must maintain long-term
business assets of a value of at least $250,000 greater than its long-term
business liabilities. Annuity and Life Reassurance is prohibited from declaring
or paying dividends unless the value of its long-term business assets exceed
the amount of its long-term business liabilities (as certified by an approved
actuary), by the amount of the dividend and by at least $250,000. Additionally,
the amounts of any such dividend must not exceed the aggregate of that excess
and other funds properly available for the payment of dividends, including
funds arising out of its business aside from its long-term business.

Annuity and Life Reassurance America, Inc is subject to statutory
regulations of the state of Connecticut of the United States that restrict the
payment of dividends. It may not pay dividends in any 12-month period in excess
of the greater of the statutory net gain from operations for the immediately
proceeding calendar year excluding pro rata distributions of any class of
Annuity and Life Reassurance Americas securities or 10% of Annuity and Life
Reassurance Americas statutory surplus as regards policyholders as of the
immediately preceding December 31 at the end of the preceding year, without
regulatory approval. At December 31, 2003 the statutory capital and surplus of
Annuity and Life Reassurance America was $13,892,000.

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On November 20, 2002, the State of Connecticut Insurance Department and
Annuity and Life Reassurance America entered into a letter agreement that
acknowledged that the Department was monitoring the financial condition of
Annuity and Life Reassurance America and such letter agreement required that
certain financial transactions that Annuity and Life Reassurance America enters
into, including disposal of assets, payment of dividends and settlement of
inter-company balances with Annuity and Life Reassurance, be pre-approved by
the Department. In addition, the Department had requested weekly reports from
senior management of Annuity and Life Reassurance America on our status and any
changes in the status of Annuity and Life Reassurance America. The letter
agreement was in effect until March 1, 2004 and was not renewed by the State of
Connecticut Insurance Department.

16. Unaudited Quarterly Financial Data

The unaudited quarterly financial data for the following years ended
December 31 are as follows:

|                                                                                                          |  |         |             |         |  |         |             |         |  |   |             |   |  |   |             |  
|--------------------------------------------------------------------------------------------------------- |  | ------- | ----------- | ------- |  | ------- | ----------- | ------- |  | - | ----------- | - |  | - | ----------- | -
|                                                                                                          |  | First   |             | Second  |  | Third   |             | Fourth 
|                                                                                                          |  | Quarter |             | Quarter |  | Quarter |             | Quarter
|                                                                                                          |  |         |             |         |  |         |             |        
|2003                                                                                                      |  |         |             |         |  |         |             |         |  |   |             |   |  |   |             |  
|Net premiums                                                                                              |  | $       | 61,365,914  |         |  | $       | 58,563,721  |         |  | $ | 28,657,264  |   |  | $ | 18,385,942  |  
|Investment income, net of related expenses                                                                |  |         | 8,158,689   |         |  |         | 5,734,738   |         |  |   | 16,250,225  |   |  |   | (1,101,429  | )
|Net realized investment gains (losses)                                                                    |  |         | 1,663,868   |         |  |         | 4,896,176   |         |  |   | (52,025     | ) |  |   | (101,432    | )
|Change in fair value of embedded derivatives                                                              |  |         | 13,754,859  |         |  |         | (1,717,537  | )       |  |   | 2,808,427   |   |  |   | 1,846,939   |  
|Claims and policy benefits                                                                                |  |         | 75,089,440  |         |  |         | 84,425,206  |         |  |   | 19,075,004  |   |  |   | 19,413,255  |  
|Interest credited to interest sensitive products                                                          |  |         | 4,871,759   |         |  |         | 4,217,542   |         |  |   | 7,642,151   |   |  |   | (2,750,729  | )
|Policy acquisition & other insurance expenses                                                             |  |         | 52,501,064  |         |  |         | 44,631,210  |         |  |   | 22,796,448  |   |  |   | 8,620,567   |  
|Net loss                                                                                                  |  |         | (52,474,816 | )       |  |         | (68,716,440 | )       |  |   | (3,786,905  | ) |  |   | (7,177,423  | )
|Net loss per common share (diluted)                                                                       |  | $       | (2.03       | )       |  | $       | (2.66       | )       |  | $ | (0.15       | ) |  | $ | (0.28       | )
|2002                                                                                                      |  |         |             |         |  |         |             |         |  |   |             |   |  |   |             |  
|Net premiums                                                                                              |  | $       | 78,006,891  |         |  | $       | 92,065,743  |         |  | $ | 84,934,401  |   |  | $ | 89,090,406  |  
|Investment income, net of related expenses                                                                |  |         | 24,589,790  |         |  |         | 26,366,669  |         |  |   | 31,127,396  |   |  |   | 20,055,130  |  
|Net realized investment (losses) gains                                                                    |  |         | (321,708    | )       |  |         | 1,837,672   |         |  |   | 9,297,351   |   |  |   | 8,935,951   |  
|Net change in fair value of embedded derivatives                                                          |  |         | 1,590,098   |         |  |         | (6,566,805  | )       |  |   | (13,277,822 | ) |  |   | (7,591,580  | )
|Claims and policy benefits                                                                                |  |         | 58,815,606  |         |  |         | 74,443,139  |         |  |   | 91,381,831  |   |  |   | 127,768,226 |  
|Interest credited to interest sensitive products                                                          |  |         | 17,922,346  |         |  |         | 20,948,167  |         |  |   | 18,345,349  |   |  |   | 14,154,754  |  
|Policy acquisition & other insurance expenses                                                             |  |         | 15,636,118  |         |  |         | 40,571,869  |         |  |   | 17,492,342  |   |  |   | 52,177,650  |  
|Net income (loss)                                                                                         |  |         | 10,433,630  |         |  |         | (20,293,998 | )       |  |   | (19,147,016 | ) |  |   | (99,879,901 | )
|Net income (loss) per common share (diluted)                                                              |  | $       | 0.39        |         |  | $       | (0.79       | )       |  | $ | (0.74       | ) |  | $ | (3.88       | )
|2001                                                                                                      |  |         |             |         |  |         |             |         |  |   |             |   |  |   |             |  
|Net premiums                                                                                              |  | $       | 53,513,153  |         |  | $       | 61,628,943  |         |  | $ | 66,813,664  |   |  | $ | 69,837,477  |  
|Investment income, net of related expenses                                                                |  |         | 23,089,810  |         |  |         | 19,605,194  |         |  |   | 24,239,602  |   |  |   | 24,194,090  |  
|Net realized investment gains (losses)                                                                    |  |         | 25,621      |         |  |         | 320,629     |         |  |   | 1,078,933   |   |  |   | (195,145    | )
|Net change in fair value of embedded derivatives                                                          |  |         | (148,927    | )       |  |         | 1,846,981   |         |  |   | (5,265,396  | ) |  |   | 8,596,369   |  
|Claims and policy benefits                                                                                |  |         | 41,624,668  |         |  |         | 45,201,447  |         |  |   | 74,873,807  |   |  |   | 54,325,088  |  
|Interest credited to interest sensitive products                                                          |  |         | 8,291,470   |         |  |         | 7,797,407   |         |  |   | 14,401,290  |   |  |   | 18,768,251  |  
|Policy acquisition and other insurance expenses                                                           |  |         | 25,025,150  |         |  |         | 26,889,334  |         |  |   | 43,306,421  |   |  |   | 32,559,644  |  
|Net income (loss) before cumulative effect
of a change in accounting principle                            |  |         | 2,006,770   |         |  |         | 5,469,204   |         |  |   | (42,680,474 | ) |  |   | (1,711,196  | )
|Net income (loss) per common share (diluted)
before cumulative effect of a change in
accounting principle |  | $       | 0.08        |         |  | $       | 0.19        |         |  | $ | (1.66       | ) |  | $ | (0.07       | )
|Cumulative effect of a change in accounting
principle                                                     |  |         | (3,665,735  | )       |  |         |            |         |  |   |            |   |  |   |            |  
|Net (loss) income                                                                                         |  |         | (1,658,965  | )       |  |         | 5,469,204   |         |  |   | (42,680,474 | ) |  |   | (1,711,196  | )
|Net (loss) income per common share (diluted)                                                              |  | $       | (0.07       | )       |  | $       | 0.19        |         |  | $ | (1.66       | ) |  | $ | (0.07       | )

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ANNUITY AND LIFE RE (HOLDINGS), LTD.

CONDENSED FINANCIAL INFORMATION OF REGISTRANT

SCHEDULE II

BALANCE SHEETS

(Parent Company in U.S. Dollars)

|                                                                                                                                                        |  |                                 |              |      |  |   |             |  
|------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------------------------- | ------------ | ---- |  | - | ----------- | -
|                                                                                                                                                        |  | For the Year Ended December 31,
|                                                                                                                                                        |  |                                
|                                                                                                                                                        |  | 2003                            |              | 2002
|                                                                                                                                                        |  |                                 |              |     
|Assets                                                                                                                                                  |  |                                 |              |      |  |   |             |  
|Investment in common stock of subsidiaries (1)                                                                                                          |  | $                               | 141,761,304  |      |  | $ | 271,343,469 |  
|Other assets                                                                                                                                            |  |                                 | 732,197      |      |  |   |            |  
|Cash and cash equivalents                                                                                                                               |  |                                 | 548,664      |      |  |   | 1,327,501   |  
|                                                                                                                                                        |  |                                 |              |      |  |   |             |  
|Total assets                                                                                                                                            |  | $                               | 143,042,165  |      |  | $ | 272,670,970 |  
|                                                                                                                                                        |  |                                 |              |      |  |   |             |  
|Liabilities                                                                                                                                             |  |                                 |              |      |  |   |             |  
|Accounts payable and accrued expenses                                                                                                                   |  | $                               | 7,869,586    |      |  | $ | 4,334,259   |  
|                                                                                                                                                        |  |                                 |              |      |  |   |             |  
|Total Liabilities                                                                                                                                       |  | $                               | 7,869,586    |      |  | $ | 4,334,259   |  
|                                                                                                                                                        |  |                                 |              |      |  |   |             |  
|Stockholders Equity                                                                                                                                    |  |                                 |              |      |  |   |             |  
|Preferred shares (par value $1.00; 50,000,000
shares authorized; no shares outstanding)                                                                 |  | $                               |             |      |  | $ |            |  
|Common shares (par value $1.00; 100,000,000
shares authorized; 26,454,195 and 26,106,328
shares outstanding at December 31, 2003 and
December 31, 2002) |  |                                 | 26,454,195   |      |  |   | 26,106,328  |  
|Additional paid-in capital                                                                                                                              |  |                                 | 334,418,029  |      |  |   | 335,334,932 |  
|Notes receivable from stock sales                                                                                                                       |  |                                 |             |      |  |   | (1,626,493  | )
|Unamortized stock based compensation                                                                                                                    |  |                                 | (1,509,022   | )    |  |   | (2,514,693  | )
|Stock warrants                                                                                                                                          |  |                                 | 1,250,000    |      |  |   |            |  
|Accumulated other comprehensive income                                                                                                                  |  |                                 | 1,840,849    |      |  |   | 6,162,525   |  
|(Deficit)                                                                                                                                               |  |                                 | (227,281,472 | )    |  |   | (95,125,888 | )
|                                                                                                                                                        |  |                                 |              |      |  |   |             |  
|Total Stockholders Equity                                                                                                                              |  | $                               | 135,172,579  |      |  | $ | 268,336,711 |  
|                                                                                                                                                        |  |                                 |              |      |  |   |             |  
|Total Liabilities and Stockholders Equity                                                                                                              |  | $                               | 143,042,165  |      |  | $ | 272,670,970 |  
|                                                                                                                                                        |  |                                 |              |      |  |   |             |  



|(1) |  | Eliminated on consolidation
|--- |  | ---------------------------

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##### 



ANNUITY AND LIFE RE (HOLDINGS), LTD.

CONDENSED FINANCIAL INFORMATION OF REGISTRANT

SCHEDULE II

STATEMENT OF OPERATIONS

(Parent Company in U.S. Dollars)

|                                                 |            |   |                                 |              |      |   |              |              |   |   |             |             |  
|------------------------------------------------ | ---------- | - | ------------------------------- | ------------ | ---- | - | ------------ | ------------ | - | - | ----------- | ----------- | -
|                                                 |            |   | For the Year Ended December 31,
|                                                 |            |   |                                
|                                                 |            |   | 2003                            |              | 2002 |   | 2001        
|                                                 |            |   |                                 |              |      |   |             
|Revenues                                         |            |   |                                 |              |      |   |              |              |   |   |             |            
|Interest income                                  |            | $ | 48,534                          |              |      | $ | 109,796      |              |   | $ | 225,103     |            
|                                                 |            |   |                                 |              |      |   |              |              |   |   |             |            
|Total Revenues                                   |            | $ | 48,534                          |              |      | $ | 109,796      |              |   | $ | 225,103     |            
|                                                 |            |   |                                 |              |      |   |              |              |   |   |             |            
|Expenses                                         |            |   |                                 |              |      |   |              |              |   |   |             |            
|Operating expenses                               |            | $ | 5,693,629                       |              |      | $ | 4,145,838    |              |   | $ | 1,280,215   |            
|                                                 |            |   |                                 |              |      |   |              |              |   |   |             |            
|Net (loss) before equity in (loss) of subsidiary |            |   | (5,645,095                      | )            |      |   | (4,036,042   | )            |   |   | (1,055,112  | )          
|Equity in (loss) of subsidiaries                 |            |   | (126,510,489                    | )            |      |   | (124,851,243 | )            |   |   | (39,526,319 | )          
|                                                 |            |   |                                 |              |      |   |              |              |   |   |             |            
|                                                 | Net (loss) |   | $                               | (132,155,584 | )    |   | $            | (128,887,285 | ) |   | $           | (40,581,431 | )
|                                                 |            |   |                                 |              |      |   |              |              |   |   |             |            

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##### 



ANNUITY AND LIFE RE (HOLDINGS), LTD.

CONDENSED FINANCIAL INFORMATION OF REGISTRANT

SCHEDULE II

STATEMENT OF CASH FLOWS

(Parent Company in U.S. Dollars)

|                                                                               |  |                                 |              |      |  |      |              |   |  |   |             |  
|------------------------------------------------------------------------------ |  | ------------------------------- | ------------ | ---- |  | ---- | ------------ | - |  | - | ----------- | -
|                                                                               |  | For the Year Ended December 31,
|                                                                               |  |                                
|                                                                               |  | 2003                            |              | 2002 |  | 2001
|                                                                               |  |                                 |              |      |  |     
|Operating Activities                                                           |  |                                 |              |      |  |      |              |   |  |   |             |  
|Net (loss)                                                                     |  | $                               | (132,155,584 | )    |  | $    | (128,887,285 | ) |  | $ | (40,581,431 | )
|Amortization of stock-based compensation                                       |  |                                 | 436,635      |      |  |      | 774,177      |   |  |   |            |  
|Adjustments to reconcile net (loss) to net cash (used)
provided by operations: |  |                                 |              |      |  |      |              |   |  |   |             |  
|Equity in loss of subsidiaries                                                 |  |                                 | 126,510,489  |      |  |      | 124,851,243  |   |  |   | 39,526,319  |  
|Other assets                                                                   |  |                                 | (732,197     | )    |  |      |             |   |  |   | 15,813      |  
|Accounts payable                                                               |  |                                 | 3,535,327    |      |  |      | 4,070,433    |   |  |   | 218,733     |  
|                                                                               |  |                                 |              |      |  |      |              |   |  |   |             |  
|Net cash (used) provided by operating activities                               |  | $                               | (2,405,330   | )    |  | $    | 808,568      |   |  | $ | (820,566    | )
|                                                                               |  |                                 |              |      |  |      |              |   |  |   |             |  
|Investing Activities                                                           |  |                                 |              |      |  |      |              |   |  |   |             |  
|Dividends received from subsidiary                                             |  | $                               |             |      |  | $    | 3,660,266    |   |  | $ | 5,110,000   |  
|Return of capital from subsidiary                                              |  |                                 |             |      |  |      |             |   |  |   | 2,000,000   |  
|Investment in subsidiary                                                       |  |                                 |             |      |  |      |             |   |  |   | (5,000,000  | )
|                                                                               |  |                                 |              |      |  |      |              |   |  |   |             |  
|Net cash provided by investing activities                                      |  | $                               |             |      |  | $    | 3,660,266    |   |  | $ | 2,110,000   |  
|                                                                               |  |                                 |              |      |  |      |              |   |  |   |             |  
|Financing Activities                                                           |  |                                 |              |      |  |      |              |   |  |   |             |  
|Net proceeds from sale of company stock                                        |  | $                               |             |      |  | $    |             |   |  | $ | 3,156,300   |  
|Repayment (issuance) of notes receivable, less accrued interest                |  |                                 | 1,626,493    |      |  |      | (309,234     | ) |  |   | 49,982      |  
|Dividends paid to shareholders                                                 |  |                                 |             |      |  |      | (5,173,846   | ) |  |   | (5,119,824  | )
|                                                                               |  |                                 |              |      |  |      |              |   |  |   |             |  
|Net cash provided (used) by financing activities                               |  | $                               | 1,626,493    |      |  | $    | (5,483,080   | ) |  | $ | (1,913,542  | )
|                                                                               |  |                                 |              |      |  |      |              |   |  |   |             |  
|(Decrease) in cash and cash equivalents                                        |  | $                               | (778,837     | )    |  | $    | (1,014,246   | ) |  | $ | (624,108    | )
|Cash and equivalents, beginning of period                                      |  |                                 | 1,327,501    |      |  |      | 2,341,747    |   |  |   | 2,965,855   |  
|                                                                               |  |                                 |              |      |  |      |              |   |  |   |             |  
|Cash and equivalents, end of period                                            |  | $                               | 548,664      |      |  | $    | 1,327,501    |   |  | $ | 2,341,747   |  
|                                                                               |  |                                 |              |      |  |      |              |   |  |   |             |  

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##### 



Item 9.Changes in and Disagreements With Accountants on Accounting and Financial Disclosure.

None.

Item 9A.Controls and Procedures.

As of the end of the period covered by this Form 10-K, the Companys
management, including its Chief Executive Officer and Chief Financial Officer,
conducted an evaluation of the effectiveness of the Companys disclosure
controls and procedures. Based on that evaluation, the Chief Executive Officer
and the Chief Financial Officer concluded that the Companys disclosure
controls and procedures were effective. There have been no changes in the
Companys internal controls over financial reporting during the period ended
December 31, 2003 that have materially affected, or are reasonably likely to
materially affect, the Companys internal controls over financial reporting.

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 Securities and Exchange
Commission (the Commission) pursuant to Regulation 14A within 120 days after
December 31, 2003.

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, 2003.

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, 2003.

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, 2003.

Item 14.Principal Accountant Fees and Services.

The information required by Item 14 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, 2003.

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##### 



PART IV

Item 15.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 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 62.



| | 2. |  | Financial Statement Schedule
| | -- |  | ----------------------------

The schedule listed in the Index to Financial Statements and Financial
Statement Schedule appearing on pages 89.



| | 3. |  | Exhibits
| | -- |  | --------

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

|      |  |                                                                                                                                                                                                                                     
|----- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|*2.1  |  | Master Agreement, dated as of December 31, 2002, by and among Annuity and Life
Reassurance Ltd. (the Operating Company), Viva Reassurance, Ltd. and XL Life
Ltd (Exhibit 2.1 to the Companys Form 8-K filed on January 16, 2003).
|      |  |                                                                                                                                                                                                                                     
|*2.2  |  | Novation Agreement, dated as of December 31, 2002, by and among the Operating
Company, XL Life Ltd and Continental Assurance Company (Exhibit 2.2 to the
Companys Form 8-K filed on January 16, 2003).                             
|      |  |                                                                                                                                                                                                                                     
|*2.3  |  | Novation Agreement, dated as of December 31, 2002, by and among the Operating
Company, XL Life Ltd and Valley Forge Life Insurance Company (Exhibit 2.3 to
the Companys Form 8-K filed on January 16, 2003).                       
|      |  |                                                                                                                                                                                                                                     
|*2.4  |  | Novation Agreement, dated as of December 31, 2002, by and among the Operating
Company, XL Life Ltd and Zurich Life Insurance Company of America (Exhibit 2.4
to the Companys Form 8-K filed on January 16, 2003).                  
|      |  |                                                                                                                                                                                                                                     
|*2.5  |  | Novation Agreement, dated as of December 31, 2002, by and among the Operating
Company, XL Life Ltd and Fidelity Life Association (Exhibit 2.5 to the
Companys Form 8-K filed on January 16, 2003).                                 
|      |  |                                                                                                                                                                                                                                     
|*2.6  |  | Novation Agreement, dated as of December 31, 2002, by and among the Operating
Company, XL Life Ltd and Federal Kemper Life Assurance Company (Exhibit 2.6 to
the Companys Form 8-K filed on January 16, 2003).                     
|      |  |                                                                                                                                                                                                                                     
|*2.7  |  | Novation Agreement, dated as of December 31, 2002, by and among the Operating
Company, XL Life Ltd and Protective Life Insurance Company (Exhibit 2.7 to the
Companys Form 8-K filed on January 16, 2003).                         
|      |  |                                                                                                                                                                                                                                     
|*2.8  |  | Novation Agreement, dated as of December 31, 2002, by and among the Operating
Company, XL Life Ltd and Phoenix Life and Annuity Company (Exhibit 2.8 to the
Companys Form 8-K filed on January 16, 2003).                          
|      |  |                                                                                                                                                                                                                                     
|*2.9  |  | Novation Agreement, dated as of December 31, 2002, by and among the Operating
Company, XL Life Ltd and Phoenix Life Insurance Company (Exhibit 2.9 to the
Companys Form 8-K filed on January 16, 2003).                            
|      |  |                                                                                                                                                                                                                                     
|*2.10 |  | Novation Agreement, dated as of December 31, 2002, by and among the Operating
Company, XL Life Ltd and Empire General Life Assurance Corporation (Exhibit
2.10 to the Companys Form 8-K filed on January 16, 2003).                
|      |  |                                                                                                                                                                                                                                     
|*2.11 |  | Novation Agreement, dated as of December 31, 2002, by and among the Operating                                                                                                                                                       

- 93 -



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##### 



|        |  |                                                                                                                                                                                                                         
|------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|        |  | Company, XL Life Ltd and PHL Variable Insurance Company (Exhibit 2.11 to the
Companys Form 8-K filed on January 16, 2003).                                                                                             
|        |  |                                                                                                                                                                                                                         
|*2.12   |  | Retrocessional Reinsurance Agreement, dated as of December 31, 2002, by and
between the Operating Company and XL Life Ltd (Exhibit 2.12 to the Companys
Form 8-K filed on January 16, 2003).                           
|        |  |                                                                                                                                                                                                                         
|*2.13   |  | Reinsurance Termination Agreement, dated as of December 31, 2002, by and
between the Operating Company and Viva Reassurance, Ltd. (Exhibit 2.13 to the
Companys Form 8-K filed on January 16, 2003).                   
|        |  |                                                                                                                                                                                                                         
|*2.14   |  | Termination Agreement, dated as of February 14, 2003, by and between the
Operating Company and The Ohio National Life Insurance Company (Exhibit 2.1 to
the Companys Form 8-K filed on March 3, 2003).                 
|        |  |                                                                                                                                                                                                                         
|*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 3.1 to the Companys Form 10-Q
filed on May 15, 2002).                                                                                                                    
|        |  |                                                                                                                                                                                                                         
|*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).                                                                                                                                                    
|        |  |                                                                                                                                                                                                                         
|*4.3    |  | Form of Warrant issued to Hartford Life and Annuity Insurance Company and
Hartford Life Insurance Company (Exhibit 4 to the Companys Form 10-Q filed on
August 14, 2003).                                              
|        |  |                                                                                                                                                                                                                         
|*10.1  |  | Amended and Restated Employment Agreement, dated as of July 28, 2003, by and
between the Company, the Operating Company and John F. Burke (Exhibit 10.1 to
the Companys Form 10-Q filed on August 14, 2003).           
|        |  |                                                                                                                                                                                                                         
|*10.2  |  | Employment Agreement, dated as of June 10, 2003, among the Company, the
Operating Company and Robert Reale (Exhibit 10.2 to the Companys Form 10-Q
filed on August 14, 2003).                                          
|        |  |                                                                                                                                                                                                                         
|*10.3  |  | Amendment No. 1, dated as of February 1, 1998, to Employment Agreement, dated
as of January 8, 1998, among Robert J. Reale, the Company and the Operating
Company (Exhibit 10.9 to the Registration Statement).         
|        |  |                                                                                                                                                                                                                         
|*10.4  |  | Employment Agreement, dated as of October 24, 2000, among Patricia E. McWeeney,
the Company and the Operating Company (Exhibit 10.1 to the Companys Form 10-Q
filed on November 14, 2001).                             
|        |  |                                                                                                                                                                                                                         
|*10.5  |  | Employment Agreement, dated as of January 2, 2002, among the Company, the
Operating Company and William H. Mawdsley, III (Exhibit 10.1 to the Companys
Form 10-Q filed on May 15, 2002).                               
|        |  |                                                                                                                                                                                                                         
|*10.6  |  | Employment Agreement, dated as of July 1, 1999, among Bryan Featherstone,
Annuity and Life Re America, Inc. and the Company (Exhibit 10.18 to the
Companys Form 10-K filed on March 29, 2000).                         
|        |  |                                                                                                                                                                                                                         
|*10.7  |  | Letter Agreement, dated September 9, 2002, by and between the Company and
Frederick S. Hammer (Exhibit 10.1 to the Companys Form 10-Q filed on November
27, 2002).                                                     
|        |  |                                                                                                                                                                                                                         
|*10.8  |  | Letter Agreement, dated September 9, 2002, by and between the Company and
Robert M. Lichten (Exhibit 10.2 to the Companys Form 10-Q filed on November
27, 2002).                                                       
|        |  |                                                                                                                                                                                                                         
|*10.9  |  | Retention Agreement, dated as of September 4, 2002 (as revised December 19,
2002), between the Company and John F. Burke. (Exhibit 10.11 to the Companys
Form 10-K filed on April 16, 2003).                           
|        |  |                                                                                                                                                                                                                         
|*10.10 |  | Retention Agreement, dated as of September 4, 2002 (as revised December 19,
2002), between the Company and Robert Reale. (Exhibit 10.12 to the Companys
Form 10-K filed on April 16, 2003).                            
|        |  |                                                                                                                                                                                                                         
|*10.11 |  | Retention Agreement, dated as of September 4, 2002 (as revised December 19,
2002), between the Company and Gary Scofield. (Exhibit 10.13 to the Companys
Form 10-K filed on April 16, 2003).                           

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|        |  |                                                                                                                                                                                                      
|------- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|*10.12 |  | Retention Agreement, dated as of September 4, 2002 (as revised December 19,
2002), between the Company and Robert Mills. (Exhibit 10.14 to the Companys
Form 10-K filed on April 16, 2003).         
|        |  |                                                                                                                                                                                                      
|*10.13 |  | Retention Agreement, dated as of September 4, 2002 (as revised December 19,
2002), between the Company and Rodney Cordle. (Exhibit 10.15 to the Companys
Form 10-K filed on April 16, 2003).        
|        |  |                                                                                                                                                                                                      
|*10.14 |  | Retention Agreement, dated as of September 4, 2002 (as revised December 19,
2002), between the Company and Richard Tucker. (Exhibit 10.16 to the Companys
Form 10-K filed on April 16, 2003).       
|        |  |                                                                                                                                                                                                      
|*10.15 |  | Retention Agreement, dated as of September 4, 2002 (as revised December 19,
2002), between the Company and Bryan Featherstone. (Exhibit 10.17 to the
Companys Form 10-K filed on April 16, 2003).   
|        |  |                                                                                                                                                                                                      
|*10.16 |  | Retention Agreement, dated as of September 4, 2002 (as revised December 19,
2002), between the Company and William Mawdsley. (Exhibit 10.18 to the
Companys Form 10-K filed on April 16, 2003).     
|        |  |                                                                                                                                                                                                      
|*10.17 |  | Retention Agreement, dated as of September 4, 2002 (as revised December 19,
2002), between the Company and Patricia McWeeney. (Exhibit 10.19 to the
Companys Form 10-K filed on April 16, 2003).    
|        |  |                                                                                                                                                                                                      
|*10.18 |  | Retention Agreement, dated as of September 4, 2002 (as revised December 19,
2002), between the Company and John W. Lockwood. (Exhibit 10.20 to the
Companys Form 10-K filed on April 16, 2003).     
|        |  |                                                                                                                                                                                                      
|*10.19 |  | Retention Agreement, dated as of September 4, 2002 (as revised December 19,
2002), between the Company and Brian G. Holland. (Exhibit 10.21 to the
Companys Form 10-K filed on April 16, 2003).     
|        |  |                                                                                                                                                                                                      
|*10.20 |  | Retention Agreement, dated as of September 4, 2002 (as revised December 19,
2002), between the Company and Michael H. Choate. (Exhibit 10.22 to the
Companys Form 10-K filed on April 16, 2003).    
|        |  |                                                                                                                                                                                                      
|*10.21 |  | Retention Agreement, dated as of September 4, 2002 (as revised December 19,
2002), between the Company and David A. Van Der Beek. (Exhibit 10.23 to the
Companys Form 10-K filed on April 16, 2003).
|        |  |                                                                                                                                                                                                      
|*10.22 |  | Retention Agreement, dated as of September 4, 2002 (as revised December 19,
2002), between the Company and Ava Zils. (Exhibit 10.24 to the Companys Form
10-K filed on April 16, 2003).             
|        |  |                                                                                                                                                                                                      
|*10.23 |  | Retention Agreement, dated as of September 4, 2002 (as revised December 19,
2002), between the Company and Paul Widhalm. (Exhibit 10.25 to the Companys
Form 10-K filed on April 16, 2003).         
|        |  |                                                                                                                                                                                                      
|*10.24 |  | Retention Agreement, dated as of September 4, 2002 (as revised December 19,
2002), between the Company and Carolynne Furhtz. (Exhibit 10.26 to the
Companys Form 10-K filed on April 16, 2003).     
|        |  |                                                                                                                                                                                                      
|*10.25 |  | Retention Agreement, dated as of September 4, 2002 (as revised December 19,
2002), between the Company and Cindy Madeiros. (Exhibit 10.27 to the Companys
Form 10-K filed on April 16, 2003).       
|        |  |                                                                                                                                                                                                      
|*10.26 |  | Retention Agreement, dated as of September 4, 2002 (as revised December 19,
2002), between the Company and Ronnie Lewis. (Exhibit 10.28 to the Companys
Form 10-K filed on April 16, 2003).         
|        |  |                                                                                                                                                                                                      
|*10.27 |  | Retention Agreement, dated as of September 4, 2002 (as revised December 19,
2002), between the Company and Florence Durousseau. (Exhibit 10.29 to the
Companys Form 10-K filed on April 16, 2003).  
|        |  |                                                                                                                                                                                                      
|*10.28 |  | Retention Agreement, dated as of September 4, 2002 (as revised December 19,
2002), between the Company and Todd Callaway. (Exhibit 10.30 to the Companys
Form 10-K filed on April 16, 2003).        
|        |  |                                                                                                                                                                                                      
|*10.29 |  | Retention Agreement, dated as of September 4, 2002 (as revised December 19,
2002), between the Company and Linda Sabotka. (Exhibit 10.31 to the Companys
Form 10-K filed on April 16, 2003).        

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|        |  |                                                                                                                                                                                                                                                                                                                                                                
|------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|*10.30 |  | Retention Agreement, dated as of September 4, 2002 (as revised December 19,
2002), between the Company and Michelle Gambardella. (Exhibit 10.32 to the
Companys Form 10-K filed on April 16, 2003).                                                                                                                                                           
|        |  |                                                                                                                                                                                                                                                                                                                                                                
|*10.31 |  | Retention Agreement, dated as of September 4, 2002 (as revised December 19,
2002), between the Company and Mary Noake. (Exhibit 10.33 to the Companys Form
10-K filed on April 16, 2003).                                                                                                                                                                     
|        |  |                                                                                                                                                                                                                                                                                                                                                                
|*10.32 |  | Retention Agreement, dated as of September 4, 2002 (as revised December 19,
2002), between the Company and Sylvia Oliveira. (Exhibit 10.34 to the Companys
Form 10-K filed on April 16, 2003).                                                                                                                                                                
|        |  |                                                                                                                                                                                                                                                                                                                                                                
|*10.33 |  | Initial Stock Option Plan, as amended and restated effective April 29, 1999
(Exhibit 4 to the Companys Form 10-Q filed on May 10, 1999).                                                                                                                                                                                                                      
|        |  |                                                                                                                                                                                                                                                                                                                                                                
|*10.34 |  | Annuity and Life Re (Holdings), Ltd. Restricted Stock Plan (Exhibit 10.2 to the
Companys Form 10-Q filed on May 15, 2002).                                                                                                                                                                                                                                    
|        |  |                                                                                                                                                                                                                                                                                                                                                                
|*10.35 |  | Annuity and Life Re (Holdings), Ltd. Directors Deferred Compensation Plan
(Exhibit 10.3 to the Companys Form 10-Q filed on May 15, 2002).                                                                                                                                                                                                                     
|        |  |                                                                                                                                                                                                                                                                                                                                                                
|*10.36  |  | Form of Securities Purchase 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 10.12 to the Registration Statement).
|        |  |                                                                                                                                                                                                                                                                                                                                                                
|*10.37  |  | 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).
|        |  |                                                                                                                                                                                                                                                                                                                                                                
|*10.38  |  | 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).                                                                                                                                                                                          
|        |  |                                                                                                                                                                                                                                                                                                                                                                
|*10.39  |  | Letter Agreement, dated as of May 1, 2000, among Risk Capital Reinsurance
Company, the Company and XL Capital Ltd (Exhibit 10.13 to the Companys Form
10-K filed on March 15, 2001).                                                                                                                                                                          
|        |  |                                                                                                                                                                                                                                                                                                                                                                
|*10.40  |  | 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).                                                                                                                   
|        |  |                                                                                                                                                                                                                                                                                                                                                                
|*10.41  |  | Letter of Intent with XL Life Ltd, dated February 28, 2002, providing
catastrophe excess of loss cover (Exhibit 10.4 to the Companys Form 10-Q filed
on May 15, 2002).                                                                                                                                                                                        
|        |  |                                                                                                                                                                                                                                                                                                                                                                
|*10.42  |  | Letter of Intent with XL Life Ltd, dated as of February 28, 2002, providing
$10,000,000 of excess of loss protection for Transamerica Occidental Life LMIG
exposure (Exhibit 10.20 to the Companys Form 10-K filed on March 28, 2002).                                                                                                                        
|        |  |                                                                                                                                                                                                                                                                                                                                                                
|**10.43 |  | Retrocession Agreement, dated as of March 27, 2001, between the Company and XL
Re Ltd. (Exhibit 10.45 to the Companys Form 10-K filed on April 16, 2003).                                                                                                                                                                                                     
|        |  |                                                                                                                                                                                                                                                                                                                                                                
|**10.44 |  | Retrocession Agreement, dated as of December 13, 2000, between the Company and
XL Mid Ocean Reinsurance Ltd. (Exhibit 10.46 to the Companys Form 10-K filed
on April 16, 2003).                                                                                                                                                                               
|        |  |                                                                                                                                                                                                                                                                                                                                                                
|*10.45  |  | Letter of Intent with XL Mid Ocean Reinsurance Ltd, dated as of April 13, 2000.
(Exhibit 10.47 to the Companys Form 10-K filed on April 16, 2003).                                                                                                                                                                                                            
|        |  |                                                                                                                                                                                                                                                                                                                                                                
|*10.46  |  | Agreement, dated as of December 23, 1997, between Inter-Atlantic Securities
Corp. and the Company (Exhibit 10.4 to the Registration Statement).                                                                                                                                                                                                                
|        |  |                                                                                                                                                                                                                                                                                                                                                                
|*10.47  |  | 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).                                                                                                                                                               
|        |  |                                                                                                                                                                                                                                                                                                                                                                
|*10.48  |  | Recapture Agreement and General Release of Guaranteed Minimum Death Benefit
Reinsurance Agreements, dated as of June 30, 2003, among Hartford Life and
Annuity Insurance Company, Hartford Life Insurance Company and the Operating
Company                                                                                                                    

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---



##### 



|       |  |                                                                                                                                                                                                                                                                     
|------ |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|       |  | (Exhibit 10.3 to the Companys Form 10-Q filed on August 14, 2003).                                                                                                                                                                                                 
|       |  |                                                                                                                                                                                                                                                                     
|*10.49 |  | Settlement and Commutation Agreement, dated as of November 4, 2003, by and
among XL Life Ltd, XL Re Ltd (formerly known as XL MidOcean Reinsurance Ltd),
the Operating Company and the Company (Exhibit 10.3 to the Companys Form 10-Q
filed on November 14, 2003).
|       |  |                                                                                                                                                                                                                                                                     
|*21.1  |  | Subsidiaries of the Company (Exhibit 21.1 to the Companys Form 10-K filed on
March 15, 2001).                                                                                                                                                                      
|       |  |                                                                                                                                                                                                                                                                     
|23.1   |  | Consent of KPMG (Independent Accountants).                                                                                                                                                                                                                          
|       |  |                                                                                                                                                                                                                                                                     
|31.1   |  | Rule 13a-14(a)/15d-14(a) Certification of the Companys Chief Executive Officer.                                                                                                                                                                                    
|       |  |                                                                                                                                                                                                                                                                     
|31.2   |  | Rule 13a-14(a)/15d-14(a) Certification of the Companys Chief Financial Officer.                                                                                                                                                                                    
|       |  |                                                                                                                                                                                                                                                                     
|32.1   |  | Section 1350 Certification of the Companys Chief Executive Officer.                                                                                                                                                                                                
|       |  |                                                                                                                                                                                                                                                                     
|32.2   |  | Section 1350 Certification of the Companys Chief Financial Officer.                                                                                                                                                                                                



---



|*  |  | Previously filed with the Commission and incorporated herein by reference.                                                                                                                                                   
|-- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  
|** |  | Previously filed with the Commission and incorporated herein by reference. Material in this document was omitted pursuant
to a confidential treatment request. The omitted material was filed separately with the Commission.
|  
|  |  | Management contract or compensatory plan or arrangement required to be filed as an exhibit to this Form 10-K.                                                                                                                

(b)  Reports on Form 8-K  Current Report dated November 13, 2003 was filed with
the Commission on November 14, 2003, reporting Results of Operations and
Financial Condition under Item 12.

- 97 -



---



##### 



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.
|                     |  |                                      |  |                        
|Date: March 15, 2004 |  | By:                                  |  | /s/ John F. Burke      
|                     |  |                                      | 
|                     |  | Name:                                |  | John F. Burke          
|                     |  | Title:                               |  | Chief Executive Officer

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

|                                                                                               |  |               
|---------------------------------------------------------------------------------------------- |  | --------------
|Signature                                                                                      |  | Date          
|/s/ John F. BurkeJohn F. Burke, Chief Executive Officer
and Director                           |  | March 15, 2004
|                                                                                              
|/s/ John W. LockwoodJohn W. Lockwood, Chief Financial Officer and
Principal Accounting Officer |  | March 15, 2004
|                                                                                              
|Frederick S. Hammer, Non-Executive
Chairman and Director                                       |  |               
|                                                                                              
|/s/ Robert M. LichtenRobert M. Lichten, Non-Executive Deputy
Chairman and Director             |  | March 15, 2004
|                                                                                              
|/s/ Martin A. BerkowitzMartin A. Berkowitz, Director                                           |  | March 15, 2004
|                                                                                              
|/s/ Albert R. DowdenAlbert R. Dowden, Director                                                 |  | March 15, 2004
|                                                                                              
|Michael P. Esposito, Jr., Director                                                             |  |               
|                                                                                              
|/s/ Lee M. Gammill, Jr.Lee M. Gammill, Jr., Director                                           |  | March 15, 2004

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---



##### 



|                                                     |  |               
|---------------------------------------------------- |  | --------------
|Signature                                            |  | Date          
|                                                    
|/s/ Robert P. JohnsonRobert P. Johnson, Director     |  | March 15, 2004
|                                                    
|/s/ Henry C.V. KeelingHenry C.V. Keeling, Director   |  | March 15, 2004
|                                                    
|/s/ Jerry S. RosenbloomJerry S. Rosenbloom, Director |  | March 15, 2004
|                                                    
|Jeffrey D. Watkins, Director                         |  |               
|                                                    
|/s/ Jon W. Yoskin, IIJon W. Yoskin, II, Director     |  | March 15, 2004

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