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SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549




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Form 10-K/A-1






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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,
    2002                                             
|          
|or        
|          
|o          |  | TRANSITION REPORT PURSUANT TO SECTION 13
    OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|          
|           |  | For the transition period
    from           to                                             




Commission file number 1-16561






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ANNUITY AND LIFE RE (HOLDINGS), LTD.

(Exact Name of Registrant as Specified in Its
Charter)


|                                                                                                       |  |                                         
|------------------------------------------------------------------------------------------------------ |  | ----------------------------------------
|BERMUDA                                                                                                |  | NOT APPLICABLE                          
|(State or Other Jurisdiction of
    Incorporation or Organization)                                     |  | (I.R.S. Employer
    Identification No.)
|                                                                                                      
|CUMBERLAND HOUSE, 1 VICTORIA STREET,
    HAMILTON, BERMUDA(Address of Principal Executive
    Offices) |  | HM 11(Zip Code)                         

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 o

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.     Yes o          No x

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

As of June 28, 2002, the aggregate market
value of Common Shares, $1.00 par value, held by non-affiliates
was $452,453,802.

As of March 12, 2003, 26,106,328 Common
Shares, $1.00 par value, were outstanding.

DOCUMENTS INCORPORATED BY REFERENCE.




Certain information required by Items 10, 11, 12
and 13 was incorporated by reference into Part III of the
registrants Form 10-K from the registrants
proxy statement for its 2003 Annual Meeting of Shareholders,
which was filed with the Securities and Exchange Commission
within 120 days of the close of the registrants
fiscal year ended December 31, 2002.






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TABLE OF CONTENTS



|                                                  |                                                                                                |  |  |  |  |  |  | 
|------------------------------------------------- | ---------------------------------------------------------------------------------------------- |  |  |  |  |  |  | 
|TABLE OF CONTENTS                                
|PART I                                           
|                                                  | Item 1. Business.                                                                             
|                                                  | Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operations.
|PART IV                                          
|                                                  | Item 15. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.                    
|SIGNATURES                                       
|CERTIFICATION                                    
|SECTION 1350 CERTIFICATION OF COMPANY'S CEO & CFO



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TABLE OF CONTENTS




|                 |  |                                                                                           |   |      |    | 
|---------------- |  | ----------------------------------------------------------------------------------------- | - | ---- | -- | 
|                 |  |                                                                                           |   | Page
|                 |  |                                                                                           |   |     
|Explanatory Note |  |                                                                                           | 1 |     
|PART I          
|Item 1.          |  | Business                                                                                  |   |      | 2  | 
|PART II         
|Item 7.          |  | Managements Discussion and Analysis of
    Financial Condition and Results of Operations |   |      | 23 | 
|PART IV         
|Item 15.         |  | Exhibits, Financial Statement Schedules, and
    Reports on Form 8-K                      |   |      | 56 | 






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Explanatory Note







This Amendment No. 1 to our Annual Report on
Form 10-K for the fiscal year ended December 31, 2002
is being filed to supplement certain information provided in the
original Form 10-K in response to comments received from
the Securities and Exchange Commission. In particular, we have
revised Item 1. Business  Transamerica
Contract to include a section headed Minimum
Interest Guarantees that repeats information originally
disclosed in our amended Form 10-K for the fiscal year
ended December 31, 2001, which was filed with the
Securities and Exchange Commission on March 21, 2003. We
have also amended the discussion of our policy for the
recognition of revenue and expenses set forth in
Item 7. Managements Discussion and Analysis of
Financial Condition and Results of Operations 
Critical Accounting Policies to include a sentence
clarifying our method of accounting for minimum interest
guarantee payments.







This amendment does not update information that
was presented in our original Annual Report on Form 10-K to
reflect developments that have occurred since we filed the
original Form 10-K. Additional information about our
company can be found in the other filings we have made with the
Securities and Exchange Commission.




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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 year ended December 31, 2002. In addition to reporting
a significant operating loss for the year, we did not have
sufficient available cash and investments at December 31,
2002 to post collateral to satisfy all of our obligations under
certain of our reinsurance treaties. Since that date, certain of
our cedents have asserted that we must satisfy additional
substantial collateral requirements, bringing the total asserted
collateral requirements of our cedents to approximately
$140 million in excess of amounts we currently have posted.
We are currently analyzing these asserted collateral
requirements and have not concluded that such amounts are in
fact required to be posted as collateral under the relevant
reinsurance contracts. In addition, we are also attempting to
address a request from a letter of credit provider to
collateralize or return approximately $45 million of
outstanding letters of credit issued on our behalf. In an effort
to meet or reduce our collateral requirements and improve our
liquidity, we have novated, terminated or negotiated the
recapture of several of our annuity and life reinsurance
contracts, including our annuity reinsurance contract with The
Ohio National Life Insurance Company, which was our second
largest annuity reinsurance contract, and certain of our more
profitable life reinsurance contracts.

While we plan to continue to receive premiums and
pay claims under our remaining reinsurance treaties, we have
ceased to write new reinsurance agreements and have notified our
existing clients that we will not be accepting any new business
under existing treaties on their current terms. We do not
anticipate resuming to write new reinsurance agreements in the
foreseeable future. Our plans for the future involve attempting
to meet or reduce the additional collateral requirements of our
ceding companies by continuing to negotiate the recapture,
retrocession, novation or sale of certain of our reinsurance
agreements, but there can be no assurance that we will be able
to negotiate favorable terms for such transactions. We have also
instituted substantial premium rate increases on all of our
non-guaranteed premium yearly renewable term contracts that
remain in force. There can be no assurance that our plans will
be sufficient to improve our operations or liquidity. If we are
not successful in implementing our plans, or if those plans are
insufficient, we will not be able to satisfy our obligations in
2003 and will likely be required to liquidate our business if we
cannot successfully pursue any other strategic alternative. For
a more detailed discussion of certain factors that could
materially and adversely affect our financial condition and
results of operations, including, among other things, the
possible delisting of our common shares from the New York Stock
Exchange, please see Item 7. Managements Discussion
and Analysis of Financial Condition and Results of
Operations  Forward-Looking Statements.

In light of the foregoing, the discussion of our
results of operations for the year ended December 31, 2002
presented in this report is not likely to be indicative of our
future operating results.

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

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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
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. Our current ratings are below the specified ratings
in such treaties, and we have had certain treaties recaptured as
a result of the ratings downgrades we have experienced. We are
also seeking to negotiate the recapture of certain treaties, as
we did in 2002, 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. These recaptures have had an adverse
impact on our reported earnings, and additional recaptures will
likely further reduce our earnings in future periods.

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 can cause us to pay greater death benefits, adversely
affecting the profitability of our reinsurance contracts. 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

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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. Certain of the annuity policies we reinsure are
in the payout phase, and are therefore subject to the risk that
policyholders will survive for longer periods than we assumed
when pricing the reinsurance contract. If policyholders live
longer than we assumed, we may be required to pay greater than
expected annuity payout benefits in future periods.


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
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, 2002, our cedents had
approximately $1.4 billion in assets that were held and
managed by or for them under our modified coinsurance and
coinsurance funds withheld arrangements. Of those assets,
approximately $366 million is related to our annuity
reinsurance agreement with Ohio National, which was terminated
in the first quarter of 2003. 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 contracts. 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. Those assets are
primarily invested in fixed income securities and, with respect
to our annuity reinsurance contract with Transamerica Occidental
Life Insurance Company, in convertible bonds. The fixed income
securities in which the assets are invested are subject to risks
similar to those described above with respect to our own
investments. 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.

We are also subject to investment risk based on
the difference between the interest rates 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,

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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 contracts or
reinsurance contracts 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 has been the case
over the last several years, 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 a guaranteed
minimum income benefit that entitle a policyholder to purchase a
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. At December 31, 2002, we were
party to two interest rate swap agreements with an aggregate
notional value of $67 million. These swap agreements were
terminated on January 13, 2003. In general, however, we
have not hedged our investment risk, but we may do so in the
future.

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, as was the case in 2001 and
2002 with our annuity reinsurance contract with Transamerica, we
may conclude that the contract will be unprofitable over its
expected lifetime, and we would be required to further write
down our deferred acquisition costs. 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 contract, 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.
We have been required to make significant minimum interest
guarantee payments under this contract, as discussed below.
During periods in which the financial markets are falling,
increases in partial surrenders under certain reinsurance
policies do not reduce the guaranteed minimum death benefits we
are obligated to pay by the same proportion by which the
premiums supporting the guaranteed minimum death benefit
obligations are reduced. The risk of partial surrenders
impacting our guaranteed minimum death benefit obligations may
have an effect on the profitability of our largest contract
reinsuring such benefits.

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

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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.

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,
|                                                     |                     |                        
|                                                     |                     | 2002(1)                 |               | 2001       |             | 2000
|                                                     |                     |                         |               |            |             |     
|Policy Revenues                                      |                     |                         |               |            |             |      |               |            |             |   |               |           
|                                                     | Life Reinsurance    |                         |               |            |             |      |               |            |             |   |               |            |            
|                                                     |                     | First Year              |               | $          | 117,801,608 |      |               | $          | 94,746,734  |   |               | $          | 55,047,163  | 
|                                                     |                     | Renewal                 |               |            | 215,379,401 |      |               |            | 141,607,931 |   |               |            | 96,151,918  | 
|                                                     | Annuity Reinsurance |                         |               | 10,916,432 |             |      |               | 15,438,572 |             |   |               | 17,204,941 |            
|                                                     |                     |                         |               |            |             |      |               |            |             |   |               |           
|                                                     |                     | Total                   |               | $          | 344,097,441 |      |               | $          | 251,793,237 |   |               | $          | 168,404,022 | 
|                                                     |                     |                         |               |            |             |      |               |            |             |   |               |           
|Insurance in force at end of year
    (in thousands) |                     | $                       | 117,511,000   |            |             | $    | 117,400,000   |            |             | $ | 77,019,000    |           
|                                                     |                     |                         |               |            |             |      |               |            |             |   |               |           
|Annuity Reinsurance Deposits                         |                     | $                       | 1,443,143,080 |            |             | $    | 1,519,596,075 |            |             | $ | 1,597,928,818 |           
|                                                     |                     |                         |               |            |             |      |               |            |             |   |               |           



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|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | The information presented for the year ended
    December 31, 2002 does not reflect the effects of the
    termination, novation and recapture of several of our
    reinsurance agreements, except that Insurance in force does
    reflect the effect of a transaction with XL Life Ltd, a
    subsidiary of XL Capital Ltd, a related party, that was
    completed on December 31, 2002. See Item 7.
    Managements Discussion and Analysis of Financial Condition
    and Results of Operations  Pro Forma Effects of
    Recent Transactions for a discussion of the effects of these
    transactions.

In 2002, we began to 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 either involve the tax-deferred
accumulation of interest on a single premium paid by the
policyholder (accumulation phase policies) or are annuities that
pay fixed amounts periodically to policyholders over a fixed
period of time or their lives (payout phase policies).
Accumulation phase policies are subject primarily to investment
risk and persistency (lapse) risk, while

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payout phase policies are primarily subject to
investment risk and mortality (longevity) risk. Most of the
fixed annuities we reinsure are accumulation phase policies.


All of 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 contract
with Ohio National, which was terminated in the first quarter of
2003.

Under our Transamerica annuity reinsurance
contract, the minimum interest guarantee provisions take effect
when the policyholder dies, his or her policy annuitizes or his
or her policy is surrendered. Our aggregate 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, enhanced earnings 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. The majority of the policies underlying
the guaranteed minimum death benefit contracts 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

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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. Some policies offer an enhanced version of the
guaranteed minimum death benefit, under which the
policyholders beneficiary receives the greater of the
actual cash value, the ratcheted value or the roll-up value. Our
agreements reinsuring such policies may be particularly
disadvantageous to us in light of the recent extended decline in
the equity financial markets. 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 two large contracts reinsuring guaranteed
minimum death benefits. As of December 31, 2002, the
guaranteed minimum death benefit amount at risk (i.e., the
amount by which guaranteed death benefits exceed related account
values) under our largest such contract was approximately
$1.07 billion. Also as of December 31, 2002, the
guaranteed minimum death benefit amount at risk under the other
such contract was approximately $160 million. These amounts
are an aggregate measure of our exposure to guaranteed minimum
death benefits assuming all the policyholders died on
December 31, 2002. Our expected liability for future
guaranteed minimum death benefit payments, based on our
mortality assumptions, is substantially less. Because the
premium paid to the ceding company under our largest such
reinsurance agreement, and to us under that reinsurance
agreement, 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. Under our largest such reinsurance agreement, we are
subject to additional risks beyond those described above when
the underlying policies are partially surrendered. Unlike the
policies underlying the other such reinsurance contract, the
policies underlying our largest such agreement provide that the
guaranteed minimum death benefit is not proportionally reduced
when a policyholder withdraws some, but not all, of the policy
value (a partial surrender), but rather is reduced on a dollar
for dollar basis. As a result, partial surrenders of those
underlying policies reduce the account value from which we
derive our revenues without reducing our exposure to the death
benefit in excess of the account value. We are, in effect, paid
less for the same amount of risk. However, under that same
reinsurance agreement, the maximum amount of guaranteed minimum
death benefit payments we would have to make in a calendar year
would be limited to no more than 2% of the average aggregate
account values of all of the underlying policyholders in that
calendar year. Any partial surrenders of the underlying policies
will reduce the aggregate account values and may lower the
amount of payments we could be required to make. The account
values would, however, have to decline substantially for the 2%
cap to have any meaningful effect on the amount of our current
exposure.

The following table summarizes key attributes of
our exposure under our contracts reinsuring guaranteed minimum
death benefits as of December 31, 2002:

|                                        |  |                       |     |         |  |            |       |         |  |       |     |   |  |   |     |   |  |   |       | 
|--------------------------------------- |  | --------------------- | --- | ------- |  | ---------- | ----- | ------- |  | ----- | --- | - |  | - | --- | - |  | - | ----- | 
|                                        |  |                       |     |        
|                                        |  | Type of Contract      |     |        
|                                        |  |                       |     |        
|                                        |  | Return of             |     |         |  | Ratchet or |       |        
|                                        |  | Premium               |     | Ratchet |  | Roll-Up    |       | Roll-Up |  | Total
|                                        |  |                       |     |         |  |            |       |         |  |      
|                                        |  |                      
|                                        |  | (Dollars in millions)
|Policyholder account value              |  | $                     | 1   |         |  | $          | 2,901 |         |  | $     | 171 |   |  | $ | 344 |   |  | $ | 3,417 | 
|Net amount at risk                      |  |                       | 0   |         |  |            | 967   |         |  |       | 115 |   |  |   | 148 |   |  |   | 1,231 | 
|Average age of policyholders            |  |                       | 86  |         |  |            | 64    |         |  |       | 64  |   |  |   | 64  |   |  |   | 64    | 
|Range of minimum guarantee return rates |  |                       | n/a |         |  |            | n/a   |         |  |       | 3-6 | % |  |   | 5   | % |  |   | n/a   | 

Policies with the enhanced earnings benefit
provide that if a policyholder dies prior to the maturity date
of his or her policy, the issuer of the policy will pay the
policyholders beneficiary the death benefit otherwise
payable under the policy plus an additional amount generally
equal to 25% to 40% of the actual increase in the

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policyholders account value, with a cap of
200% of premiums paid into the policy. The enhanced earnings
benefit is designed to increase the total payments to the
policyholders beneficiary with an amount to help offset
income taxes on the increase in the account value. Our net
amount at risk under our reinsurance contracts reinsuring this
benefit at December 31, 2002 was insignificant.


We have one contract reinsuring guaranteed
minimum income benefits. Policies providing a guaranteed minimum
income benefit entitle 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
estimate accurately the effect the unfavorable annuity purchase
rates will have on policyholders desire to utilize this
benefit under various market conditions. The earliest date on
which policyholders can elect to annuitize is in 2004.

The following table summarizes key attributes of
our exposure under our contracts reinsuring guaranteed minimum
income benefits as of December 31, 2002:

|                                            |  |   |      |  
|------------------------------------------- |  | - | ---- | -
|Policyholder account value (in millions)    |  | $ | 681  |  
|Average age of policyholders                |  |   | 61   |  
|Range of minimum guarantee return rates     |  |   | 3-6  | %
|Average years remaining until annuitization |  |   | 4.22 |  

Underwriting

We currently are not writing new reinsurance
treaties or accepting any additional business under existing
treaties on their current terms. Our reinsurance policies,
including those that remain in force, 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 type of risks to be
covered, actuarial evaluations, historical performance data for
the cedent and the industry as a whole, the cedents
retention, the product to be reinsured, pricing assumptions,
underwriting standards, reputation and financial strength of the
cedent, the likelihood of establishing a long term relationship
with the cedent and the market share of the cedent. Pricing of
our reinsurance products 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.

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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 formerly ceded to us
subject to certain conditions. Recapture features were
considered when we underwrote the reinsurance agreements.

Transamerica Contract






| |                  
| | -----------------
| | Historical Impact




Our largest annuity reinsurance contract, which
was effective as of September 30, 1998, is with
Transamerica Occidental Life Insurance Company. The contract is
a retrocessional reinsurance arrangement covering VisionMark
fixed annuity products issued by IL Annuity and Insurance
Company. Since the middle of 1999 through 2002, 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 are based on a total
return strategy and allow the policyholder 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. 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,
2000, 2001, and 2002, we paid approximately $2,800,000,
$13,500,000, and $26,700,000, respectively, under our annuity
reinsurance contract with Transamerica to cover our
proportionate share of the shortfall that arose because the net
investment returns on the assets related to these policies
substantially underperformed the minimum interest guarantees for
surrendered policies.

The following table sets forth certain financial
information relating to our annuity reinsurance contract with
Transamerica from its inception in 1998 through
December 31, 2002.

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

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

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included on our balance sheet at the end of each
of the periods indicated. This is our proportionate 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, as we did with the Transamerica contract in 2001 and
again in 2002. The effects of such adjustments are typically
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 36% of our total assets at December 31, 2002. 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 43% of our total liabilities at
December 31, 2002. The deferred acquisition costs
associated with the contract have declined from over 97% of our
total Deferred policy acquisition costs at December 31,
1998 and 1999 to 27% of our total Deferred acquisition costs at
December 31, 2002, primarily because of the extensive write
downs recorded. 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 income in future periods. However, those write downs
were based on a series of complex assumptions principally
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 full surrenders, partial
withdrawals, annuitizations and policyholder deaths. We believe
these estimates to be reasonable, but 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 analysis of the
monthly settlement reports and discussions held with
Transamerica about those reports. Until




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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. For
example, our operating results for the quarter and year ended
December 31, 2002 were significantly impacted by an
unexpected increase in reported claim volume and average claim
size during the fourth quarter.

Policy benefit liabilities for annuities are
reflected on our balance sheet as Interest sensitive
contracts liability and are reported at the accumulated
policyholder balance of these contracts.

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. A fixed income
security rated A by Standard & Poors is
considered to be somewhat 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. As of July 31, 2002, our
investment guidelines were amended to prohibit us from investing
in fixed income securities that are rated below investment grade
at the time of purchase. Previously, we could invest up to 10%
of our invested assets in such securities. We do not invest in
any fixed income securities in emerging markets or securities
that are not rated by a major rating agency.

Our investment securities are managed by two
professional investment advisors, Alliance Capital Management
Corporation and Prudential Investment Corporation, each of which
manages a segment of the portfolio. Our agreement with Alliance
may be terminated by either party with 30 days notice and
our agreement with Prudential may be terminated by either party
with 45 days notice. The performance of

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Alliance and Prudential and the fees associated
with the arrangements are periodically reviewed by our Board of
Directors.


At December 31, 2002, our invested assets,
including cash and cash equivalents, had an aggregate
fair value of $306,346,337, including unrealized gains of
$6,162,525. At December 31, 2002, 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 3.8 years. The effective yield
rate earned on our invested assets was approximately 5.28% for
the year ended December 31, 2002. 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, 2002.

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 interest rate changes on our balance sheet. In general,
however, we have not hedged our investment risk, but we may do
so in the future. 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 or coinsurance funds withheld arrangements, as
discussed below under Funds Withheld at Interest.

Funds Withheld at Interest

Our annuity reinsurance agreements generally
cover individual single premium deferred annuity policies and
are structured as modified coinsurance or coinsurance funds
withheld arrangements. In these types of arrangements, 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 or coinsurance funds withheld arrangement with us, a
portion of the ceding companys liability to the
policyholders is ceded to us. Our remaining modified coinsurance
and coinsurance funds withheld arrangements are generally on a
quota share basis, so the portion that is ceded to us is a fixed
percentage of the liabilities arising from the underlying
policies. Our share of the ceding companys liability is
included on our balance sheet as Interest sensitive
contracts liabilities. However, unlike other reinsurance
arrangements in which we receive cash or investments as
consideration for assuming a portion of the ceding
companys liability, under these types of arrangements, we
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, 2002, we had annuity
reinsurance contracts with six ceding companies. At
December 31, 2002, our Funds withheld at interest
receivable related to these contracts had a carrying value of
approximately $1.4 billion. Our contracts with Transamerica
and Ohio National accounted for approximately 77% of our Funds
withheld at interest receivable as of that date. At
December 31, 2002, the assets held and managed by our
ceding companies were invested in convertible bonds and fixed
income securities having a

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weighted average credit quality of A
and a weighted average duration of 5.3 years. In addition,
at December 31, 2002 approximately 4.2% 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 5.25% for the year ended
December 31, 2002. The average yield rates earned on the
invested premiums funding our annuity obligations to
Transamerica and Ohio National were approximately 4.61% and
6.36%, respectively, for the year ended December 31, 2002.
As noted elsewhere in this report, on February 14, 2003, we
terminated our annuity reinsurance contract with Ohio National.


For purposes of calculating the average yield
rate earned on assets held and managed by our ceding companies,
including Transamerica and Ohio National, we include net
realized capital gains and losses as reported to us by our
ceding companies. The performance of these assets depends to a
great extent on the ability of the ceding company and its
investment managers to make appropriate investments and match
asset and liability duration exposure. If these assets do not
achieve investment returns at rates 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, 2002, approximately $734 million of our
Funds withheld at interest receivable and $756 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, 2002, IL Annuity has financial strength or
claims paying ratings of A from both A.M. Best and
Standard & Poors. As of December 31, 2002,
Transamerica has financial strength or claims paying ratings of
A+, AA+, Aa3 and
AA+ from A.M. Best, Standard & Poors,
Moodys Ratings and Fitch Ratings, respectively. At
December 31, 2002, approximately $366 million of our
Funds withheld at interest receivable (net of the fair value of
the embedded derivatives associated with this contract, which
was an unrealized loss of $10 million) and
$376 million of our Interest sensitive contracts liability
related to our reinsurance contract with Ohio National. As of
December 31, 2002, Ohio National has financial strength or
claims paying ratings of A+, AA, and
A1 from A.M. Best, Standard & Poors, and
Moodys 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 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 the
reinsurance agreements or the underlying insurance policies.
Therefore, the 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.

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However, information regarding the types, ratings
and maturities of the securities that fund our annuity
obligations to Transamerica and Ohio National is presented under
Item 7. Managements Discussion and Analysis of
Financial Condition and Results of Operations 
Financial Condition  Transamerica and 
Ohio National, respectively, 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 those
contracts.


Embedded Derivatives

We have concluded that there are embedded
derivatives within the Funds withheld at interest receivable
related to certain of our annuity reinsurance contracts written
on a modified coinsurance or coinsurance funds withheld basis
that require bifurcation and separate accounting under Statement
of Financial Accounting Standards No. 133 
Accounting for Derivative Instruments and Hedging Activities.
These embedded derivatives are similar to a total return swap
arrangement on the underlying assets held by our ceding
companies. The fair value of these embedded derivatives is
classified as part of our Funds withheld asset on our balance
sheet. We have developed a cash flow model with the assistance
of outside advisors to arrive at an estimate of the fair value
of this total return swap that uses various assumptions
regarding future cash flows under the affected annuity
reinsurance contracts. The change in fair value of these
embedded derivatives is recorded in our statement of operations
as Net change in fair value of embedded derivatives, which is a
non-cash item. The change in fair value of these embedded
derivatives also impacts the emergence of expected gross profits
for purposes of amortizing deferred acquisition costs associated
with these contracts. The application of this accounting policy
has increased the volatility of our reported earnings. While we
have made an estimate of the fair value of these embedded
derivatives using a model that we believe to be appropriate and
based upon reasonable assumptions, the assumptions used are
subjective and may require adjustment in the future. In
addition, as industry standards for estimating the fair value of
embedded derivatives develop, it is possible that we may modify
our methodology. Changes in our assumptions and industry
standards could have a significant impact on the fair value of
the embedded derivatives and our reported earnings. We do not
bifurcate and separately account for the embedded derivatives
contained in certain of our contracts, including our
Transamerica annuity reinsurance agreement and our guaranteed
minimum income benefit reinsurance agreement, because we
acquired those agreements prior to the transition date elected
by us under FAS 133, as amended by FAS 137. Because of
the nature of the assets underlying our Transamerica contract,
which were roughly 65% convertible bonds at December 31,
2002, the bifurcation and separate accounting for the embedded
derivatives contained in that contract would 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, it
also would add volatility to our reported results.

Competition

The reinsurance industry is highly competitive.
Although we are currently not writing new reinsurance treaties
or accepting any additional business under existing treaties on
their current terms, 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

As of March 31, 2003, A.M. Best has assigned
a financial strength rating of B- to Annuity and
Life Reassurance and Annuity and Life Reassurance America. A.M.
Best has announced that these ratings are under review with
negative implications. Annuity and Life Reassurance and Annuity
and Life Reassurance America have also received a
BB- rating from Standard & Poors, which
has placed both companies on

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CreditWatch with negative implications. Annuity
and Life Reassurance has been rated C by Fitch
Ratings, which also has a negative ratings outlook. These
ratings represent significant downgrades from historical levels
and have contributed to our inability to write new business and
have adversely affected our ability to retain existing business,
as certain of our cedents have chosen to recapture their
reinsurance agreements as a result of these downgrades. If other
cedents that currently have the right to recapture their
agreements with us do so, it could adversely affect our
financial condition and results of operations. In particular, we
entered into a 50% quota share reinsurance treaty with a
subsidiary of XL Capital Ltd in December 2002, under which XL
has the right to recapture given our current ratings. 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 our financial
ratings do not improve.


Employees

As of December 31, 2002, we had fourteen
employees located in Bermuda and ten employees located in the
United States.

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. 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 pursuant to
Section 13(a) or 15(d) of the Securities Exchange Act of
1934, as amended, are not always made available on our Internet
website, because such reports are available either via the
SECs Internet website at www.sec.gov or through us upon
request. We will voluntarily provide electronic or paper copies
of our filings free of charge (other than exhibits) 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). The general public also
may read and copy any materials we file with the SEC at the
SECs Public Reference Room at 450 Fifth Street, NW,
Washington, DC 20549 and may obtain information on the
operation of the Public Reference Room by calling the SEC at
1-800-SEC-0330.

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.

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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
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 Registrar of Companies 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, two directors of the insurer, and our
independent auditor. 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

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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
Chief Financial Officer, 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 liquidity or
other ratio.

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 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. As noted
elsewhere in this report, 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. If we cannot
achieve a $1.00 average share price for 30 consecutive
trading days within six months of the receipt of this
notification, the NYSE will commence suspension and delisting
procedures with respect to our common shares. If our common
shares are no longer listed on the NYSE and we cannot have our
shares listed on another appointed stock exchange, we would need
to apply for an amendment to the permission of the Authority to
allow for the trading of our common shares after they are
delisted. While we believe that we would be able to obtain such
permission so long as we are regulated by the SEC, we cannot
assure you that we will be able to secure such permission or
that we can predict that conditions the Authority may impose in
granting such permission. If we cannot secure such permission,
our common shares could no longer be transferred between, or
issued to, persons regarded as non-resident in Bermuda for
exchange control purposes without specific prior approval under
the Exchange Control Act 1972.

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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.

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

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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 it has not
been disapproved by the Connecticut Insurance Commissioner. 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.

On November 20, 2002, the State of
Connecticut Insurance Department and Annuity and Life
Reassurance America entered into a letter agreement that
acknowledges that the Connecticut Insurance Department is
monitoring the financial condition of Annuity and Life
Reassurance America and such letter agreement requires 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 Connecticut
Insurance Department. In addition, the Connecticut Insurance
Department has 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 continues to be effective until
March 1, 2004.

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

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, 2002,
most of our cash and investments were posted as collateral to

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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 collateral to satisfy all of our obligations under
certain of our reinsurance treaties. Since that date, certain of
our cedents have asserted that we must satisfy additional
substantial collateral requirements, bringing the total asserted
collateral requirements of our cedents to approximately
$140 million in excess of amounts that we currently have
posted. We are currently analyzing these asserted collateral
requirements and have not concluded that such amounts are in
fact required to be posted as collateral under the relevant
reinsurance contracts. If these asserted collateral requirements
are valid, we do not believe we will have sufficient available
cash and investments to satisfy them and will need to attempt to
negotiate other means of meeting or reducing these requirements
with our cedents. If these negotiations are unsuccessful, our
cedents could initiate arbitration proceedings against us for
the satisfaction of our obligations to them. If we are unable to
satisfy those obligations, our cedents could be deemed creditors
of ours, in which case, they could institute proceedings seeking
our liquidation.





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PART II









|        |                                                                                           
|------- | ------------------------------------------------------------------------------------------
|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 the cedents under certain of
    our reinsurance treaties. In addition, a provider of letters of
    credit issued on our behalf has demanded the return or
    collateralization of those letters of credit. While we believe
    our plan to reduce or satisfy these obligations by negotiating
    the termination, recapture or novation of additional reinsurance
    agreements or by raising additional capital are preferable to
    other alternatives, we presently have no commitments for the
    termination or sale of any of our remaining reinsurance
    contracts and have been unable to raise capital since beginning
    such efforts in early 2002. There can be no assurance that our
    plans will be sufficient to improve our operations or liquidity.
    If we are not successful in implementing our plans, or if those
    plans are insufficient, we will not be able to satisfy our
    obligations in 2003 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 two statutory demands under Bermuda law and have satisfied
    or otherwise eliminated our obligations to the parties making
    those demands. 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.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|
| |  | In an effort to meet or reduce the collateral
    requirements of our ceding companies, we have negotiated the
    termination, recapture or novation of several of our annuity and
    life reinsurance contracts, including certain of our
    historically profitable contracts. We also have ceased to write
    new reinsurance agreements and have notified our existing
    clients that we will not be accepting any new business under
    existing treaties on their current terms. Further, we do not
    anticipate resuming to write new reinsurance agreements in the
    foreseeable future. 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                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                

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| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |   | 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 certain of these
    remaining contracts in the past, including our annuity
    reinsurance contract with Transamerica and our largest
    guaranteed minimum death benefit contract. Unless our remaining
    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.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|
| |  | The financial strength ratings of both our
    operating subsidiaries have been downgraded to a level that
    effectively precludes them from writing new business. We cannot
    assure you that we will be able to increase those financial
    strength ratings or 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 and 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, several of our ceding companies
    have asserted that we are in breach of our reinsurance
    agreements, and we may need to enter into arbitration or
    litigation to resolve these matters. 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. If we cannot achieve a
    $1.00 average share price for 30 consecutive trading days
    within six months of the receipt of this notification, the NYSE
    will commence suspension and delisting procedures with respect
    to our common shares. In addition, the NYSE informed us that it
    is considering whether we continue to meet certain of its
    qualitative continued listing standards due to concerns over our
    financial condition. We can provide no assurance that we will be
    able to maintain the listing of our common shares on the NYSE.
    If delisted, the liquidity of our common shares likely would
    decrease to a point where our shareholders may experience
    difficulties selling, and may be unable to sell, any of our
    common shares. We cannot assure you that, if delisted, our
    common shares will qualify for trading in an over-the-counter
    bulletin board system, the pink sheets or any similar trading
    system, or that if they do qualify, a trading market in our
    common shares will develop. In addition, if our common shares
    are no longer listed on an appointed stock exchange, we would
    need to apply for an amendment to the previously granted consent
    of the Bermuda Monetary Authority to permit for the trading of
    our common shares after they are delisted. While we believe that
    we would be able to obtain such permission so long as we are
    regulated by the SEC, we cannot assure you that we will be able
    to secure such permission or that we can predict what conditions
    the Authority may impose in granting such permission. If we
    cannot secure such permission, any transfers of our common
    shares between persons regarded as non-resident in Bermuda for
    exchange control purposes would require specific prior approval
    under Bermuda law. Please see Item 1. Business 
    Regulation for more information.
|
| |  | 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 certain 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. For example, we have had to
    increase our reserves in the recent past regarding several of
    our largest contracts, including our largest guaranteed minimum
    death benefit contract. We also had to record substantial write
    downs of deferred acquisition costs related to our                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  

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| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |   | annuity reinsurance contract with Transamerica in
    2002, after having written down such costs in 2001 to what we
    then believed to be an appropriate level.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|
| |  | 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 and 2002, we had
    substantial unexpected adverse mortality experience under
    certain 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 profitability 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
    $1.0 billion of the assets supporting the policies we
    reinsure were held and managed by our ceding companies or their
    investment managers under our 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 our
    largest guaranteed minimum death benefit contract. 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, certain of our
    annuity reinsurance contracts are deemed to host embedded
    derivatives that must be bifurcated and accounted for
    separately. Changes in the fair value of the embedded
    derivatives are primarily driven by credit risk related changes
    in the market value of assets underlying these contracts,
    changes in expected future cash flows and changes in interest
    rates. These changes in fair value are reported as a component
    of net income, thereby increasing the volatility of our reported
    net income. If prevailing market conditions or other factors
    adversely impact the value of the embedded derivative components
    of our annuity reinsurance contracts, it could have a
    substantial effect on our results of operations.                                                                                                                                                                                                               

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| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Most 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. Currently, our financial strength ratings are at
    the level where 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.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|
| |  | While we believe that the Securities and Exchange
    Commission has completed its review of certain of our prior
    public filings, we can provide no assurance as to whether it
    will require us to make any further changes to the financial,
    pro forma or other information and data included in this report
    or in other periodic reports we have filed with the SEC.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|
| |  | The American Institute of Certified Public
    Accountants has issued a proposed Statement of Position that, if
    adopted, could require us to establish additional reserves for
    our reinsurance contracts covering guaranteed minimum benefits
    related to variable annuity contracts, which could result in
    losses. We anticipate that this new standard, if adopted, will
    increase the volatility of our reserves, which will affect our
    reported results of operations.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|
| |  | 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
    and 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.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|
| |  | 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. On
    November 20, 2002, the State of Connecticut Insurance
    Department and our United States operating subsidiary entered
    into a letter agreement that acknowledges that the Connecticut
    Insurance Department is monitoring the financial condition of
    the U.S. operating subsidiary and such letter agreement requires
    that certain financial transactions entered into by the
    subsidiary, including disposal of assets, payment of dividends
    and settlement of inter-company balances with our Bermuda
    operating subsidiary, be pre-approved by the Connecticut
    Insurance Department. In addition, the Connecticut Insurance
    Department has requested weekly reports from senior management
    of our United States operating subsidiary on our status and any
    changes in the status of Annuity and Life Reassurance America.
    The letter agreement continues to be effective until
    March 1, 2004. 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 pay our expenses.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|
| |  | 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. If we were considered to
    be 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 effectively connected with their United States
    business plus an additional 30% branch profits tax
    on such income remaining after the regular tax. Such taxes would
    have an adverse affect on our business.

General

Our company encountered significant difficulties
during the year ended December 31, 2002. In addition to
reporting a significant operating loss for the year, we did not
have sufficient available cash and investments at
December 31, 2002 to post collateral to satisfy all of our
obligations under certain of our reinsurance treaties. Since
that date, certain of our cedents have asserted that we must
satisfy additional substantial collateral requirements, bringing
the total asserted collateral requirements to approximately
$140 million in excess of amounts we currently have posted.
We are currently analyzing these asserted collateral
requirements and have not concluded that such amounts are in
fact required to be posted as collateral under the relevant
reinsurance contracts. In addition, we are also attempting to
address a request from a letter of credit provider to
collateralize or return approximately $45 million of
outstanding letters of credit issued on our behalf. In an effort
to meet or reduce our collateral requirements and improve our
liquidity, we have novated, terminated or negotiated the
recapture of several of our annuity and life reinsurance
contracts, including our annuity reinsurance contract with Ohio
National, which was our second largest annuity reinsurance
contract, and certain of our more profitable life reinsurance
contracts.

While we plan to continue to receive premiums and
pay claims under our remaining reinsurance treaties, we have
ceased to write new reinsurance agreements and have notified our
existing clients that we will not be accepting any new business
under existing treaties on their current terms. We do not
anticipate resuming to write new reinsurance agreements in the
foreseeable future. Our plans for the future involve attempting
to meet or reduce the additional collateral requirements of our
ceding companies by continuing to negotiate the recapture,
retrocession, novation or sale of certain of our reinsurance
agreements, but there can be no assurance that we will be able
to negotiate favorable terms for such transaction. We have also
instituted substantial premium rate increases on all of our
non-guaranteed premium yearly renewable term contracts that
remain in force. There can be no assurance that our plans will
be sufficient to improve our operations or liquidity. If we are
not successful in implementing our plans, or if those plans are
insufficient, we will not be able to satisfy our obligations in
2003 and will likely be required to liquidate our business if we
cannot successfully pursue any other strategic alternative.

In light of the foregoing, the discussion of our
results of operations for the year ended December 31, 2002
presented in this report is not likely to be indicative of our
future operating results. Pro forma financial information giving
effect to certain novations, terminations and recaptures is
presented in the section headed  Pro Forma Effects
of Recent Transactions.

Our primary life products continues 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 2002. At
December 31, 2002 and 2001, the total face amount of our
life insurance in force amounted to approximately
$117.5 billion and $117.4 billion, respectively. At
March 31, 2003, we estimate our life reinsurance in force to

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be approximately $72 billion, reflecting the
novations, terminations and recaptures of certain of our
reinsurance agreements that had occurred since December 31,
2002. At December 31, 2002 and 2001, we had retroceded
approximately $1.26 billion and $493 million of our
obligations under our life reinsurance contracts to other
reinsurers, respectively, or 1.07% and 0.42% of our life
insurance in force, respectively.


Our primary annuity products are reinsurance of
general account fixed deferred annuities, general account payout
annuity obligations 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 2002 and 2001. At
December 31, 2002 and 2001, our liability for annuity
reinsurance contracts amounted to approximately
$1.4 billion and $1.5 billion, respectively. At
March 31, 2003, our liability for annuity reinsurance
contracts amounted to approximately $1.0 billion,
reflecting terminations and recaptures that have occurred since
December 31, 2002, including the termination of our annuity
reinsurance contract with Ohio National in February 2003.

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 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 are
attempting to improve our liquidity by novating and recapturing
certain of our reinsurance agreements. If we cannot novate or
recapture these reinsurance agreements on favorable terms, we
will incur additional deferred acquisition cost write downs.

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 cedents, actual results could differ (and, in the past, have
differed)

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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 are embedded derivatives within the Funds withheld at
interest receivable related to certain of our annuity
reinsurance contracts written on a modified coinsurance or
coinsurance funds withheld basis that require bifurcation and
separate accounting under Statement of Financial Accounting
Standards No. 133  Accounting for Derivative
Instruments and Hedging Activities. These embedded derivatives
are similar to a total return swap arrangement on the underlying
assets held by our ceding companies. The net fair value of these
embedded derivatives is classified as part of our Funds withheld
asset on our balance sheet. We have developed a cash flow model
with the assistance of outside advisors to arrive at an estimate
of the fair value of this total return swap that uses various
assumptions regarding future cash flows under the affected
annuity reinsurance contracts. The 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 rates. The change in fair value of these embedded
derivatives is recorded in our statement of operations as Net
change in fair value of embedded derivatives, which is a
non-cash item. The change in fair value of these embedded
derivatives also impacts the emergence of expected gross profits
for purposes of amortizing deferred acquisition costs associated
with these contracts. The application of this accounting policy
has increased the volatility of our reported earnings. While we
have made an estimate of the fair value of these embedded
derivatives using a model that we believe to be appropriate and
based upon reasonable assumptions, the assumptions used are
subjective and may require adjustment in the future. In
addition, as industry standards for estimating the fair value of
embedded derivatives develop, it is possible that we may modify
our methodology. Changes in our assumptions and industry
standards could have a significant impact on the fair value of
the embedded derivatives and our reported earnings. We do not
bifurcate and separately account for the embedded derivatives
contained in certain of our contracts, including our
Transamerica annuity reinsurance agreement and our guaranteed
minimum income benefit reinsurance agreement, because we
acquired those agreements prior to the transition date elected
by us under FAS 133, as amended by FAS 137. Because of the
nature of the assets underlying our Transamerica contract, which
were roughly 65% convertible bonds at December 31, 2002,
the bifurcation and separate accounting for the embedded
derivatives contained in that contract would add significant
volatility to our reported results. If we bifurcated and
separately accounted for the embedded derivative contained in
our guaranteed minimum income benefit reinsurance agreement, it
also would 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. For those policies with premium paying
periods that are significantly shorter than the total period
over which benefits are expected to be provided, profits are
deferred and recognized as 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 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. Such minimum interest guarantee payments are
not included in the policyholder account balances reported to
us. They are payable upon the surrender of the underlying
policies and are recognized as an expense at that time. We make
estimates at the end of each reporting period regarding premiums
and benefits for cedents 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 Contract
Liabilities.The development of
reserves for policy benefits and for claims incurred but not
reported for our life reinsurance contracts requires us to make
estimates and assumptions regarding mortality, lapse,

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persistency, expense and investment experience.
Such estimates are primarily based on historical experience and
information provided by ceding companies. As occurred in the
fourth quarter of 2002, actual results could differ 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 contracts. These include guaranteed
minimum death benefits, guaranteed minimum income benefits, and
enhanced earnings benefits. Our accounting policy is designed to
establish reserves for expected claim payments based upon the
long-term 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.

At December 31, 2002, we had reserves for
minimum guarantees associated with variable annuity contracts of
$18,500,000. The American Institute of Certified Public
Accountants has issued a proposed Statement of Position that
could set new standards for accounting for Certain
Nontraditional Long-Duration Contracts and for Separate
Accounts. We anticipate that this new standard will, if adopted
as currently written, increase the volatility of our reserves,
which will affect our reported results of operations. Had we
followed this proposed standard, at December 31, 2001, and
March 31, and June 30, 2002, we estimate that no such
reserves would have been required, while at September 30,
and December 31, 2002, we estimate that approximately
$22 million and $23 million, respectively, of such
reserves would have been required. 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, 2002 Compared to
    Year Ended December 31, 2001

Net (Loss) Income.For the year ended December 31, 2002, we had a consolidated
net loss of $128,887,285 or a net loss of $5.01 per primary and
fully diluted common share, as compared to a net loss of
$40,581,431 or a net loss of $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 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

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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 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 recent
periods and continuing deterioration of the financial markets.
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 and twelve
month periods ended December 31, 2002, respectively.

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 net income. 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. As we
continue to novate, terminate and negotiate the recapture of
other reinsurance contracts, we expect our insurance in force
and Net premium revenue to decline. Please see
 Pro Forma Effects of Recent Transactions
for further discussion of the pro forma effects of the
novations, terminations and recaptures that occurred in 2002 and
early 2003. In addition, we have stopped writing new reinsurance
agreements and have notified our existing clients that we

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will not be accepting any new business under
existing treaties on their current terms, which we expect will
also adversely impact our net premium revenue going forward.


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 the year 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 rate earned
on our Funds withheld at interest, we include net realized
capital gains and losses as reported to us by our ceding
companies. We expect our net investment income to decline in
2003 as a result of the termination of the Ohio National
contract and the return of the cash deposits we had received
under the reinsurance agreement that was designed to fund the
collateral requirements of our cedents.

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 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

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than expected reporting lag and a higher average
death benefit. We are continuing to monitor and analyze our
experience under these life reinsurance contracts. At present,
we believe that the increase in the number of reported claims is
partly the result of our cedents concerns about our
financial condition, while we believe that the increased average
size of claims reflects, in part, an increase in the percentage
of claims relating to new business contracts, many of which
provide for higher face amounts of coverage on a growing
policyholder base. We also continue to monitor and evaluate our
experience under these contracts against the assumptions
regarding mortality risk we made when pricing them. If claim
volume and average claim size remain at the levels observed
during the fourth quarter of 2002, or increase from those
levels, our operating results would be materially and adversely
affected. The novation, termination and recapture of our
reinsurance agreements will reduce claims and policy benefits at
an aggregate level in future periods, and it may affect the
level of claims and policy benefits as a percentage of premiums.
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 recent quarters
and the continuing deterioration of the financial markets.


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 $26,700,000 in minimum interest
guarantee payments, as compared to approximately $13,500,000 of
payments in 2001. These minimum interest guarantee payments
result 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 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. As
we continue to seek to novate, terminate or negotiate the
recapture of certain of our reinsurance agreements, we may incur
additional write downs of deferred acquisition costs.

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 have been recorded on
our consolidated balance sheet as a deposit liability.
Collateral costs were $12,948,000 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

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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.


Other 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 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.



| |                                                                          
| | -------------------------------------------------------------------------
| | Year Ended December 31, 2001 Compared to
    Year Ended December 31, 2000

Net (Loss) Income.For the year ended December 31,
2001, we had a consolidated net loss of $40,581,431 or a net
loss of $1.59 per primary and fully diluted common share,
compared to net income of $39,101,736 or $1.53 per primary
common share and $1.42 per fully diluted common share, for the
year ended December 31, 2000. As more fully discussed
below, our results for 2001 were adversely affected by poor
performance on our annuity reinsurance contract with
Transamerica, adverse mortality experience on two major life
reinsurance contracts, and the September 11th tragedy.

Our net income has historically been
significantly affected by our annuity reinsurance contract with
Transamerica, which is our largest annuity reinsurance contract
and represented approximately $962 million, or
approximately 65%, of our Funds withheld at interest receivable
as of December 31, 2001. During 2001, with respect to the
Transamerica contract, we recorded approximately $13,500,000 of
minimum interest guarantee payments made to policyholders and
write downs of deferred acquisition costs of approximately
$46,115,000. The $13,500,000 expense for minimum interest
guarantees for the year ended December 31, 2001 is
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 a related $19,500,000
charge for expected future minimum interest guarantee payments
in the fourth quarter because that was the quarter in which we
first received data that enabled us to estimate these payments
accurately. We subsequently 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. This change caused
the amortization of deferred acquisition costs to decrease by
$1,915,000 in 2000, resulting in a net income decline of
$885,000 in that year. While we wrote down deferred acquisition
costs in 2001 to what we believe to be an appropriate level
based upon reasonable assumptions about future investment
performance and surrenders, the write downs were estimates. As
discussed above, we were required to take additional substantial
write downs in 2002 because our actual experience varied
significantly from the assumptions used to write down the
deferred acquisition costs in 2001.

During the year 2001, we experienced $16,000,000
of adverse mortality experience on two life reinsurance
contracts. While we anticipate that mortality experience on our
life reinsurance business will be relatively constant over
longer periods of time (our contracts can span 10 to
40 years), there can be fluctuations in the amount of
reported deaths in any given quarter or year. With respect to
one of these contracts, we have historically experienced a
higher level of claims than expected when the policy was
written. With respect to the other contract, the ceding company
reported claims exceeding premium by $8,000,000 during 2001.
Many of the claims related to deaths that occurred prior to
2001, but consistent with industry practice and our accounting
policies, we recorded these claims in the third quarter of 2001
as they were reported to us. As discussed elsewhere in this
report, we sought relief from our ceding reinsurers with respect
to these two life

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reinsurance contracts. In April and May 2002, we
served written notice of arbitration in connection with these
agreements. During the third quarter of 2002, we settled our
arbitration with Lincoln National, which recaptured the contract
that had been the subject of the arbitration. The other
arbitration is continuing. If we are unable to rescind,
recapture, reprice, or otherwise restructure the agreement that
is the subject of the ongoing arbitration, we may incur
additional losses on this contract in future periods. In
February 2003, we served the ceding company under the contract
with notice of a premium rate increase, which has also become a
subject of this arbitration.


Our net loss for the year ended December 31,
2001 was also affected by the World Trade Center tragedy. We
recorded an expense of $12,000,000 in the third quarter of 2001
based on our estimates of claims we expected to receive as a
result of that event. We ultimately paid approximately
$10,000,000 in actual death benefits.

Under FAS 133, we are required to carry the fair
value of the embedded derivatives contained in certain of our
annuity reinsurance contracts on our balance sheet, and
unrealized changes in the fair value of those embedded
derivatives are reflected in our net income. The change in fair
value of the embedded derivatives is influenced by changes in
credit risk changes in expected future cash flows under the
annuity reinsurance contracts and interest rate changes. The
change in fair value also impacts the emergence of expected
gross profits under the contracts for purposes of amortizing
deferred acquisition costs. The cumulative effect of the change
in accounting principle as of January 1, 2001 was a loss of
$3,665,735, or a loss of $0.14 per basic and fully diluted
common share, which is reflected in our net income for the year
ended December 31, 2001.

Net Premiums.Net
premium revenue for the year ended December 31, 2001 was
$251,793,237, an increase of 50% over net premium revenue of
$168,404,022 for the year ended December 31, 2000. The
majority of premium revenue was derived from traditional
ordinary life reinsurance. The growth reflects the level of new
business written in 2001 and the increase in the face amount of
insurance in force. At December 31, 2001, the total face
amount of life insurance in force increased 52% to approximately
$117.4 billion, as compared with approximately
$77.0 billion at December 31, 2000. New business
writings and premium revenue levels are significantly influenced
by the seasonal nature of the life reinsurance marketplace and
by large transactions and therefore can fluctuate from period to
period.

Net Investment Income.Total net investment income for the
year ended December 31, 2001 was $91,128,696, a decrease of
33% from net investment income of $136,648,327 for the year
ended December 31, 2000. The decline was primarily due to
the reduction in net investment income from our annuity
reinsurance contract with Transamerica. As a result, income
earned on Funds withheld for the year ended December 31,
2001 was $70,963,000, as compared with $116,522,000 for the year
ended December 31, 2000, reflecting a general decline in
interest rates and poor investment performance on the assets
supporting the Transamerica contract. The average yield rate
earned on Funds withheld was 4.59% for the year ended
December 31, 2001, as compared with 7.61% for the year
ended December 31, 2000. For purposes of calculating the
average yield rate earned on Funds withheld we included net
realized capital gains and losses as reported to us by our
ceding companies. Also contributing to the decline in net
investment income in 2001 was a decline in the average yield
rate earned on our invested assets, which excludes Funds
withheld. The average yield rate earned on our invested assets
was approximately 5.74% for the year ended December 31,
2001 compared with 6.85% for the year ended December 31,
2000, reflecting an overall decline in interest rates.

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. During the year 2001, we
benefited from the repositioning of one of our ceding
companies portfolios in the fourth quarter. The result was
an unrealized gain on our embedded derivative of $5,029,027 for
2001. We implemented FAS 133 effective January 1, 2001, so
we did not record any embedded derivative gains or losses in
2000.

Net Realized Investment Gains (Losses).Net realized investment gains were
approximately $1,230,038 for the year ended December 31,
2001, as compared with realized losses of $4,817,121 for the
year ended December 31, 2000. These gains and losses
resulted from normal active management of our investment

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portfolio intended to improve performance and
increase operating income in 2001. 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 annuity benefits. Claims and policy benefits for
the year ended December 31, 2001 were $216,025,010 or 86%
of net premium, as compared with $132,810,192 or 79% of net
premium for the year ended December 31, 2000. Aggregate
mortality experience has been negatively impacted by $16,000,000
of adverse mortality experience on two of our in force life
reinsurance contracts underwritten in 1998 and a $12,000,000
charge for the World Trade Center tragedy. As discussed
elsewhere in this report we sought relief from our ceding
reinsurers with respect to these two life reinsurance contracts.
In April and May 2002, we served written notice of arbitration
in connection with these agreements. During the third quarter of
2002, we settled our arbitration with Lincoln National, which
recaptured the contract that had been the subject of the
arbitration. The other arbitration is continuing. If we are
unable to rescind, recapture, reprice, or otherwise restructure
the agreement that is the subject of the ongoing arbitration, we
may incur additional losses on this contract in future periods.
In February 2003, we served the ceding company under the
contract with notice of a premium rate increase, which has also
become a subject of this arbitration.

The mortality experience of our life reinsurance
business, excluding these two life reinsurance contracts, was
otherwise within pricing parameters during 2001. Although we
expect mortality to be fairly constant over long periods of
time, it will fluctuate from period to period. Reserves for
future policy benefits are in part determined by claims reported
from ceding companies, our aggregate experience and overall
mortality trends.

Interest Credited to Interest Sensitive
Products.Interest credited to
interest sensitive products was approximately $49,258,418 for
the year ended December 31, 2001, as compared with
approximately $65,842,303 for the year ended December 31,
2000. The 2001 expense includes approximately $13,500,000 in
minimum interest guarantee payments resulting from poor
investment performance of invested premiums managed by the
primary insurance company under our annuity reinsurance contract
with Transamerica and excessive surrender rates on policies
underlying that contract, as compared with approximately
$2,800,000 in minimum interest guarantee payments made in the
year ended December 31, 2000. After adjusting for these
payments, interest credited for the year 2001 was $35,758,000, a
reduction of $27,284,000 from the year 2000 reflecting the
general decline in interest rates credited to policyholders and
a lower amount of in force business due to the high surrender
rate we have experienced on our contract with Transamerica,
partially offset by growth in our Ohio National contract in
2001. The $13,500,000 estimated expense for minimum interest
guarantees for the year ended December 31, 2001 is
comprised of payments of $1,600,000, $3,300,000, $4,400,000, and
$4,200,000 for 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 in the fourth quarter because that was the
quarter in which we first received data that enabled us to
estimate these payments accurately. 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.

Policy Acquisition Costs and Other Insurance
Expenses.Policy acquisition costs and
other insurance expenses, consisting primarily of allowances and
amortization or write down of deferred policy acquisition costs,
were approximately $126,580,549 for the year ended
December 31, 2001, as compared with $58,985,523 for the
year ended December 31, 2000. For 2001, this expense
includes $46,115,000 in aggregate charges to write down deferred
acquisition costs and, as a result of the application of
FAS 133, an acceleration of amortization of $1,320,000 of
deferred acquisition costs. The write downs of deferred
acquisition costs relate to our annuity reinsurance contract
with Transamerica and are the 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 minimum interest guarantee payments. After
adjusting for the write downs and the impact of FAS 133 on
our deferred acquisition costs, policy acquisition costs and
other insurance costs were $80,346,000, as compared with
$58,986,000 for the year ended December 31, 2000.
Generally, policy acquisition costs and other insurance expenses
fluctuate with business volume and changes in product mix. The
increase in these costs, as adjusted, reflects the growth and
development of our life reinsurance business in 2001.

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Other Operating Expenses.Operating expenses were approximately
$11,552,418 or 3.1% of total revenue (excluding the net change
in fair value of embedded derivatives) for the year ended
December 31, 2001, as compared with $10,411,344 or 3.4% of
total revenue for the year ended December 31, 2000. The
decrease in the ratio of operating expenses to total revenue is
due to our premium growth in 2001.

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 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 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.

As discussed elsewhere in this report, our
company has faced significant challenges during the year ended
December 31, 2002. While we plan to continue to receive
premiums and pay claims under our remaining reinsurance
treaties, we have ceased to write new reinsurance agreements and
have notified our existing clients that we will not be accepting
any new business under existing treaties on their current terms.
We do not anticipate resuming to write new reinsurance
agreements in the foreseeable future. As a result, the following
discussion of our segment results of operations for the year
ended December 31, 2002 is not likely to be indicative of
our future operating results.

Life Segment.Our
life segment is our largest segment as measured by revenues. Our
net segment loss for the three and twelve months ended
December 31, 2002 was $71,034,773 and $67,181,153,
respectively. Our net segment loss for the three and twelve
months ended December 31, 2002 was significantly affected
by adverse mortality experience driven by an unexpected increase
in the number of reported claims during the latter half 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
$39,351,000 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 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 $6,017,000 in connection with the
termination or recapture of other life reinsurance contracts

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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.


Segment loss for the year ended December 31,
2002 was also adversely impacted by approximately $2,570,000 in
losses on interest rate swap agreements we entered into in the
third quarter of 2002 that did not qualify for hedge accounting.
These swap agreements were terminated in January 2003.

Segment revenues grew 41% to $352,183,178 for the
year ended December 31, 2002, as compared with $249,787,787
for the year ended December 31, 2001. Our revenue growth
was primarily related to a 38% growth in life premium to
approximately $333,181,000 for the year ended December 31,
2002, as compared to approximately $241,778,000 for the
comparable prior period. For the year ended December 31,
2001, segment revenue included investment income earned on funds
deposited with us by a reinsurer that was used to fund
collateral requirements of our clients. The reinsurance
agreement pursuant to which the reinsurer provided funds to us
was terminated in December 2002 in connection with the
novation of certain of our life reinsurance contracts to
XL Life.

Segment policy benefits and expenses for the year
ended December 31, 2002 grew 66% to $419,364,331 from
$252,057,673 for the year ended December 31, 2001. This
increase is predominantly the result of greater frequency and
severity of death claims and costs associated with the novation
and retrocession of certain reinsurance agreements with
XL Life. 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, segment policy benefits and expenses were $162,898,564 or
177% of revenue, as compared to $63,776,839, or 91% of revenue
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
total 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.

Segment benefits and expenses for the years ended
December 31, 2002 and 2001 include collateral costs of
approximately $12,948,000 and $1,200,000 associated with a
reinsurance agreement that provided us with cash deposits we
used to fund collateral requirements of our clients. This
agreement was terminated at the end of 2002.

Annuity Segment.Our
annuity segment contains the majority of our assets. The annuity
segment loss for the three and twelve months ended
December 31, 2002 was $33,191,784 and $78,246,399,
respectively. Annuity segment loss for the three and
twelve months ended December 31, 2001 was $9,149,155
and $47,148,884, respectively. The losses for 2002 were the
result of the unrealized change in the value of embedded
derivatives, write downs of deferred acquisition costs
associated with our Transamerica annuity reinsurance contract
and minimum guarantee reserve increases.

Under FAS 133 we are required to bifurcate
and separately account for embedded derivatives contained in
certain of our annuity reinsurance agreements. During 2002, we
experienced a net loss from embedded derivatives 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), 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 the 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.

Our segment net loss 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

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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 reserves for expected claim
payments associated with variable annuity reinsurance products
by $7,776,000 and $10,740,000 for 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 reserve
increase is the result of increasing claim activity in recent
periods and continuing deterioration of the financial markets.
This increase in claims activity also resulted in claims in
excess of premiums earned of $3,620,153 and $5,791,853 on our
contracts reinsuring such guarantees during the three and twelve
month periods ended December 31, 2002, respectively.

Segment revenue for the year ended
December 31, 2002 declined 24% to $78,427,733 from
$103,170,165 for the year ended December 31, 2001. This
decline is primarily related to the previously mentioned
increases in embedded derivative losses.

Policy benefits and expenses for the annuity
segment increased 7% to approximately $156,674,000 for the year
ended December 31, 2002, compared to $146,653,000 for the
year ended December 31, 2001. The primary components of
these expenses are interest credited to policyholders, payments
for minimum interest guarantees, payments and reserve increases
for minimum guarantees associated with variable annuity
contracts and write downs and amortization of deferred
acquisition costs. As discussed above, we wrote down
approximately $27,474,000 of deferred acquisition costs
associated with our Transamerica 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.

Corporate Segment.The corporate segment includes all
capital gains and losses from our own portfolio, investment
income on undeployed invested assets, and a proportionate share
of operating expenses based upon how stockholders equity
is deployed to the life and annuity segments. As a result, the
corporate segment, while small relative to our total Company,
will likely have volatile results. For the year ended
December 31, 2002 segment income grew to $16,540,267 from
$8,837,339 for the year ended December 31, 2001.

The growth in corporate segment income was the
result of net realized investment gains of approximately
$19,749,000 for the year ended December 31, 2002, as
compared to approximately $1,230,000 for the comparable prior
period, offset by unusual expenses of approximately $5,200,000
related to capital raising costs, fees paid to recruitment firms
in connection with our search for a new Chief Executive Officer,
and legal, accounting and consulting fees incurred in the
connection with the restatement of our financial statements for
the years ended December 31, 2001 and 2000 and certain
quarterly financial statements for 2002.

Financial Condition



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

Our invested assets, including cash and cash
equivalents, had an aggregate fair value of approximately
$306,346,000 at December 31, 2002, as compared with
approximately $423,780,000 at December 31, 2001. Virtually
all of our available cash and investments are posted as
collateral to secure our obligations under reinsurance
agreements and letter of credit facilities or is required to
maintain the statutory capital and surplus requirements of our
U.S. operating subsidiary. The decline in invested assets
during 2002 was due primarily to the termination of a
reinsurance agreement that had been used to fund our collateral
requirements in the past and the return of $147,000,000 in cash
deposits that had been provided to us by the reinsurer under
that agreement, partially offset by net investment income and
realized gains during the period. At December 31,

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2002, unrealized gains totaled approximately
$6,163,000, as compared to approximately $6,418,000 at
December 31, 2001. At December 31, 2002 and 2001, the
weighted average duration of the fixed income securities
included in our invested assets was 3.8 and 3.7 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. A fixed income
security rated A by Standard & Poors is
considered to be somewhat 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. As of July 31, 2002, our investment guidelines were
amended to prohibit us from investing in fixed income securities
that are rated below investment grade at the time of purchase.
We do not invest in any fixed income securities in emerging
markets or securities that are not rated by a major rating
agency.

Our investment securities are managed by two
professional investment advisors, Alliance Capital Management
Corporation and Prudential Investment Corporation, each of which
manages a segment of the portfolio. Our agreement with Alliance
may be terminated by either party on 30 days notice and our
agreement with Prudential may be terminated by either party with
45 days notice. Our Board of Directors periodically reviews
the performance of Alliance and Prudential and the fees
associated with the arrangements.

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 2002. 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, 2002 and 2001, 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 prohibit the purchase
of below investment grade securities as these investments are
subject to a higher degree of credit risk than investment grade
securities. We monitor the creditworthiness of the portfolio as
a whole, and when the fair market value of a security declines
for reasons other than changes in interest rates or other
perceived temporary conditions, the security is written down to
its fair value. At December 31, 2002, there was one
impaired security in our portfolio, which was written down by
$900,000 to its fair value. At December 31, 2001, there
were two impaired securities in our portfolio, which were
written down by $600,000.

At December 31, 2002, mortgage backed
securities represented approximately 10% of our invested assets,
including cash and cash equivalents, as compared with 11% at
December 31, 2001. Investors in these securities are
compensated primarily for reinvestment risk rather than credit
quality risk. Investments in mortgage-backed securities include
collateralized mortgage obligations (CMOs) and
mortgage backed pass-through securities. Mortgage backed
securities generally are collateralized by mortgages issued by
the Government National Mortgage Association (GNMA),
the Federal National Mortgage Association (FNMA) and
the Federal Home Loan Mortgage Corporation (FHLMC).
Of these, only GNMA mortgages are backed by the full faith and
credit of the U.S. government. Credit risk generally is not
a consideration when investing in agency mortgage backed
securities. Our mortgage backed securities portfolio had a
weighted average investment quality rating of AAA at
both December 31, 2002 and 2001.

At December 31, 2002, approximately 7% of
our mortgage backed investment portfolio consisted of securities
with planned repayment schedules, as compared with 2% at
December 31, 2001. These investments

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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 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 interest rate changes on our balance sheet. In general,
however, we have not hedged our investment risk, but we may do
so in the future. 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 or coinsurance funds withheld arrangements, as
discussed below under Funds Withheld at Interest.

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

Investment Results

|                                                               |  |                                  |         |      |  |      |         |   |  |   |         |  
|-------------------------------------------------------------- |  | -------------------------------- | ------- | ---- |  | ---- | ------- | - |  | - | ------- | -
|                                                               |  |                                 
|                                                               |  | Twelve Months Ended December 31,
|                                                               |  |                                 
|                                                               |  | 2002                             |         | 2001 |  | 2000
|                                                               |  |                                  |         |      |  |     
|                                                               |  |                                 
|                                                               |  | (Dollars in thousands)          
|Total investment assets, including cash and
    equivalents(1) |  | $                                | 306,346 |      |  | $    | 423,780 |   |  | $ | 321,819 |  
|Investment income, net of related expenses                     |  | $                                | 25,931  |      |  | $    | 20,165  |   |  | $ | 20,126  |  
|Effective yield rate(2)                                        |  |                                  | 5.28    | %    |  |      | 5.74    | % |  |   | 6.85    | %
|Realized investment gains (losses)                             |  | $                                | 19,749  |      |  | $    | 1,230   |   |  | $ | (4,817  | )



---



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



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

Our annuity reinsurance agreements generally
cover individual single premium deferred annuity policies and
are structured as modified coinsurance or coinsurance funds
withheld arrangements. In these types of arrangements, 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 or coinsurance funds withheld arrangement with us, a
portion of the ceding companys liability to the
policyholders or, in the case of a retrocessional arrangement,
the primary insurer, is ceded to us. Our remaining modified
coinsurance and coinsurance funds withheld arrangements are
generally on a quota share basis, so the portion that is ceded
to us is a fixed percentage of the liabilities arising from the
underlying policies. Our share of the ceding companys
liability is included on our balance sheet as Interest
sensitive contracts liabilities. However, unlike other
reinsurance arrangements in which we receive cash or investments

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


At December 31, 2002, we had annuity
reinsurance contracts with six ceding companies. At
December 31, 2002, our Funds withheld at interest
receivable related to these contracts had a carrying value of
approximately $1.4 billion. Our contracts with Transamerica
and Ohio National accounted for approximately 77% of our Funds
withheld at interest receivable as of that date. At
December 31, 2002, 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 5.3 years.
In addition, at December 31, 2002 approximately 4.2% of
such assets were invested in below investment grade securities,
as compared to 4.0% of such assets at December 31, 2001.
The average yield rate earned on the assets held and managed by
our ceding companies was approximately 5.25% for the year ended
December 31, 2002. The average yield rates earned on the
invested premiums funding our annuity obligations to
Transamerica and Ohio National were approximately 4.61% and
6.36%, respectively, for the year ended December 31, 2002.
As noted elsewhere in this report, on February 14, 2003, we
terminated our annuity reinsurance contract with Ohio National.

For purposes of calculating the average yield
rate earned on assets held and managed by our ceding companies,
including Transamerica and Ohio National, we include net
realized capital gains and losses as reported to us by our
ceding companies. The performance of these assets depends to a
great extent on the ability of the ceding company and its
investment managers to make appropriate investments and match
asset and liability duration exposure. If these assets do not
achieve investment returns at rates 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, 2002, approximately $734 million of our
Funds withheld at interest receivable and $756 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 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 our obligations to Transamerica. As of
December 31, 2002, IL Annuity has financial strength or
claims paying ratings of A from both A.M. Best and
Standard & Poors. As of December 31, 2002,
Transamerica has financial strength or claims paying ratings of
A+, AA+, Aa3 and
AA+ from A.M. Best, Standard & Poors,
Moodys Ratings and Fitch Ratings, respectively. At
December 31, 2002, approximately $366 million of our
Funds withheld at interest receivable (net of the fair value of
embedded derivatives associated with this contract, which was an
unrealized loss of $10 million) and $376 million of
our Interest sensitive contracts liability related to our
reinsurance contract with Ohio National. As of December 31,
2002, Ohio National has financial strength or claims paying
ratings of A+, AA, and A1
from A.M. Best, Standard & Poors, and
Moodys 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

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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 the reinsurance agreements or the underlying insurance
policies. Therefore, the 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 and Ohio National 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 those contracts.


Transamerica

Our annuity reinsurance contract with
Transamerica is our largest annuity reinsurance contract and, as
of December 31, 2002, approximately $734 million, or
51%, of our Funds withheld at interest receivable, approximately
$756 million, or 52%, of our Interest sensitive contracts
liability, and approximately $50 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
represent a significant portion of our total assets and
liabilities in future periods. We do not expect the Transamerica
contract to generate significant income in future periods.
However, those write downs were based on a series of complex
assumptions principally related to the investment performance of
the assets supporting our liabilities under the contract, as
well as future policyholder lapse rates for the underlying
policies. These assumed lapse rates include assumptions
regarding full surrenders, partial withdrawals, annuitizations
and policyholder deaths. We believe the estimates are
reasonable, but we cannot assure you that they will prove to be
accurate. If such assumptions turn out to be inaccurate, the
Transamerica contract may have a significant 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 4.2 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 65% 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. During 2002 and 2001, we paid
approximately $26,700,000 and $13,500,000, respectively, under
this annuity reinsurance contract 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.

The Transamerica contract differs significantly
from the other annuity contracts 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 grade bonds, and

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(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,
2002, approximately 65% of the premiums held and managed by IL
Annuity were invested in convertible bonds, with the remaining
35% 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.

According to data provided to us by Transamerica,
at December 31, 2002 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                                           |                                                             | $             | 517,077,216 |              |  | $            | 481,801,794 |             |  |  | 65.2% |       
|Investment grade U.S. corporate bonds                                        |                                                             |               | 124,432,765 |              |  |              | 131,359,515 |             |  |  | 17.8% |       
|Below investment grade U.S. corporate bonds,
    including convertible bonds |                                                             |               | 38,048,993  |              |  |              | 37,064,984  |             |  |  | 5.0%  |       
|Mortgage securities                                                          |                                                             |               | 39,715,933  |              |  |              | 41,258,835  |             |  |  | 5.5%  |       
|Short term securities                                                        |                                                             |               | 46,671,358  |              |  |              | 47,866,358  |             |  |  | 6.5%  |       
|                                                                             |                                                             |               |             |              |  |              |             |             |  |  |       |       
|                                                                             | Total invested assets                                       |               | $           | 765,946,265  |  |              | $           | 739,351,486 |  |  |       | 100.0% | 
|                                                                             |                                                             |               |             |              |  |              |             |             |  |  |       |       
|Accrued investment income                                                    |                                                             |               |             |              |  |              | 5,845,215   |             |  |  |       |       
|                                                                             |                                                             |               |             |              |  |              |             |             |  |  |       |       
|                                                                             | Total market value, including accrued investment
    income |               |             |              |  |              | $           | 745,196,701 |  |  |       |        | 
|                                                                             |                                                             |               |             |              |  |              |             |             |  |  |       |       



---



|    |                                                                                                                                                                       
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Book values are those reported to us by the
    cedent for the underlying investments and do not represent the
    value of our Funds withheld at interest receivable.

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According to data provided to us by Transamerica,
at December 31, 2002 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                       |                                                             | $             | 98,661,184  |              |  | $            | 101,199,131 |             |  |  | 13.7% |       
|AA                        |                                                             |               | 36,386,695  |              |  |              | 36,467,972  |             |  |  | 4.9%  |       
|A                         |                                                             |               | 239,436,889 |              |  |              | 234,612,122 |             |  |  | 31.7% |       
|BBB                       |                                                             |               | 345,063,651 |              |  |              | 322,765,717 |             |  |  | 43.7% |       
|BB and below              |                                                             |               | 46,397,846  |              |  |              | 44,306,544  |             |  |  | 6.0%  |       
|                          |                                                             |               |             |              |  |              |             |             |  |  |       |       
|                          | Total invested assets                                       |               | $           | 765,946,265  |  |              | $           | 739,351,486 |  |  |       | 100.0% | 
|                          |                                                             |               |             |              |  |              |             |             |  |  |       |       
|Accrued investment income |                                                             |               |             |              |  | $            | 5,845,215   |             |  |  |       |       
|                          |                                                             |               |             |              |  |              |             |             |  |  |       |       
|                          | Total market value, including accrued investment
    income |               |             |              |  |              | $           | 745,196,701 |  |  |       |        | 
|                          |                                                             |               |             |              |  |              |             |             |  |  |       |       



---



|    |                                                                                                                                                                               
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(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 those reported to us by the
    cedent for the underlying investments and do not represent the
    value of our Funds withheld at interest receivable.        

According to data provided to us by Transamerica,
at December 31, 2002 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        |                 | $             | 18,492,946  |              |  | $          | 18,527,224  |             |  |  | 2.4%  |       
|From one to five years |                 |               | 171,933,519 |              |  |            | 173,451,546 |             |  |  | 22.4% |       
|From six to ten years  |                 |               | 197,126,036 |              |  |            | 194,740,784 |             |  |  | 25.7% |       
|More than ten years    |                 |               | 378,393,764 |              |  |            | 352,631,932 |             |  |  | 49.5% |       
|                       |                 |               |             |              |  |            |             |             |  |  |       |       
|                       | Total all years |               | $           | 765,946,265  |  |            | $           | 739,351,486 |  |  |       | 100.0% | 
|                       |                 |               |             |              |  |            |             |             |  |  |       |       



---



|    |                                                                                                                                                                       
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Book values are those reported to us by the
    cedent for the underlying investments and do not represent the
    value of our Funds withheld at interest receivable.

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 represents 67% of
the assets under management as of December 31, 2002. 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,
although some investments in short-term money market instruments
and U.S. government obligations are permitted as deemed
appropriate. No more than 2% of the assets invested pursuant to
the strategy may be invested in preferred or non-investment
grade convertible securities. There are no limitations on
concentration per security or industry, although the investment
guidelines for the strategy specify that investments be made
primarily in convertible bonds having an issue size exceeding
$100 million.

The Investment Grade Bond Strategy represents 17%
of the assets under management as of December 31, 2002.
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 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 twice the market weight
of that sector.

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The High Yield Bond Strategy represents 6% of the
assets under management as of December 31, 2002. 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 5% of the assets invested pursuant to
the strategy may be invested in any single security, and no more
than 15% of the assets invested pursuant to the strategy may be
invested in any one 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 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.

The Guaranteed One Year Strategy represents 10%
of the assets under management as of December 31, 2002.
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.

Ohio National

Our second largest annuity reinsurance contract
at December 31, 2002 was with Ohio National. This contract
reinsured single premium deferred annuity policies that
guarantee a crediting rate to policyholders for six years. As of
December 31, 2002, approximately $366 million of our
Funds withheld at interest receivable (net of the fair value of
embedded derivatives associated with this contract, which was an
unrealized loss of $10 million), or 26% of our Funds
withheld at interest receivable, approximately
$376 million, or 26%, of our Interest sensitive contracts
liability and approximately $18 million of the deferred
acquisition costs on our balance sheet related to this contract.
The assets funding the policyholder obligations were subject to
investment risks similar to those described above with respect
to our own investments and had an average credit quality of
A- and an average duration of approximately
5.82 years.

On February 14, 2003, we entered into a
termination agreement with Ohio National terminating our annuity
reinsurance agreement. Pursuant to the termination agreement,
the parties agreed to release and discharge one another from any
and all claims, demands, causes of action and/or damages
relating to the reinsurance agreement effective January 31,
2003. In consideration, Ohio National agreed to pay us
$5,000,000, as adjusted for certain amounts payable to Ohio
National under the reinsurance agreement as of January 31,
2003, resulting in a net payment to us of approximately
$2,799,000. See Item 7. Managements Discussion and
Analysis of Financial Condition and Results of
Operations  Pro Forma Effects of Recent
Transactions for a discussion of the effects of this
transactions.

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According to data provided to us by Ohio
National, at December 31, 2002 the assets managed by Ohio
National were comprised of the following:

|                           |                                                             |               |             |              |  |              |             |             |  |  |       |        | 
|-------------------------- | ----------------------------------------------------------- | ------------- | ----------- | ------------ |  | ------------ | ----------- | ----------- |  |  | ----- | ------ | 
|                           |                                                             |               |             |              |  | % of Total  
|Type of Security           |                                                             | Book Value(1) |             | Market Value |  | Market Value
|                           |                                                             |               |             |              |  |             
|Corporate bonds            |                                                             | $             | 241,465,591 |              |  | $            | 259,023,784 |             |  |  | 67.1% |       
|Asset backed securities    |                                                             |               | 83,509,255  |              |  |              | 79,905,342  |             |  |  | 20.7% |       
|Mortgage backed securities |                                                             |               | 42,994,874  |              |  |              | 46,089,169  |             |  |  | 11.9% |       
|Government securities      |                                                             |               | 1,184,420   |              |  |              | 1,184,420   |             |  |  | 0.3%  |       
|                           |                                                             |               |             |              |  |              |             |             |  |  |       |       
|                           | Total invested assets                                       |               | $           | 369,154,140  |  |              | $           | 386,202,715 |  |  |       | 100.0% | 
|                           |                                                             |               |             |              |  |              |             |             |  |  |       |       
|Accrued investment income  |                                                             |               |             |              |  |              | 4,931,983   |             |  |  |       |       
|                           |                                                             |               |             |              |  |              |             |             |  |  |       |       
|                           | Total market value, including accrued investment
    income |               |             |              |  |              | $           | 391,134,698 |  |  |       |        | 
|                           |                                                             |               |             |              |  |              |             |             |  |  |       |       



---



|    |                                                                                                                                                                       
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Book values are those reported to us by the
    cedent for the underlying investments and do not represent the
    value of our Funds withheld at interest receivable.

According to data provided to us by Ohio
National, at December 31, 2002 the credit ratings of the
assets (excluding accrued investment income) held and managed by
Ohio National were approximately as follows:

|                          |                                                             |               |             |              |  |              |             |             |  |  |       |        | 
|------------------------- | ----------------------------------------------------------- | ------------- | ----------- | ------------ |  | ------------ | ----------- | ----------- |  |  | ----- | ------ | 
|                          |                                                             |               |             |              |  | % of Total  
|Ratings(1)                |                                                             | Book Value(2) |             | Market Value |  | Market Value
|                          |                                                             |               |             |              |  |             
|AAA                       |                                                             | $             | 51,048,437  |              |  | $            | 53,041,094  |             |  |  | 13.7% |       
|AA                        |                                                             |               | 26,704,520  |              |  |              | 25,505,711  |             |  |  | 6.6%  |       
|A                         |                                                             |               | 122,381,880 |              |  |              | 129,857,391 |             |  |  | 33.6% |       
|BBB                       |                                                             |               | 158,441,765 |              |  |              | 168,151,682 |             |  |  | 43.5% |       
|BB and Below              |                                                             |               | 10,577,538  |              |  |              | 9,646,837   |             |  |  | 2.6%  |       
|                          |                                                             |               |             |              |  |              |             |             |  |  |       |       
|                          | Total invested assets                                       |               | $           | 369,154,140  |  |              | $           | 386,202,715 |  |  |       | 100.0% | 
|                          |                                                             |               |             |              |  |              |             |             |  |  |       |       
|Accrued investment income |                                                             |               |             |              |  |              | 4,931,983   |             |  |  |       |       
|                          |                                                             |               |             |              |  |              |             |             |  |  |       |       
|                          | Total market value, including accrued investment
    income |               |             |              |  |              | $           | 391,134,698 |  |  |       |        | 
|                          |                                                             |               |             |              |  |              |             |             |  |  |       |       



---



|    |                                                                                                                                                                               
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(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 those reported to us by the
    cedent for the underlying investments and do not represent the
    value of our Funds withheld at interest receivable.        

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

|                       |                 |               |             |              |  |            |             |             |  |  |       |        | 
|---------------------- | --------------- | ------------- | ----------- | ------------ |  | ---------- | ----------- | ----------- |  |  | ----- | ------ | 
|                       |                 |               |             |              |  | % of Total
|Maturity               |                 | Book Value(1) |             | Market Value |  | Book Value
|                       |                 |               |             |              |  |           
|Within one year        |                 | $             | 1,184,420   |              |  | $          | 1,184,420   |             |  |  | 0.3%  |       
|From one to five years |                 |               | 10,060,149  |              |  |            | 10,144,018  |             |  |  | 2.7%  |       
|From six to ten years  |                 |               | 164,165,922 |              |  |            | 175,068,166 |             |  |  | 44.5% |       
|More than ten years    |                 |               | 193,743,649 |              |  |            | 199,806,111 |             |  |  | 52.5% |       
|                       |                 |               |             |              |  |            |             |             |  |  |       |       
|                       | Total all years |               | $           | 369,154,140  |  |            | $           | 386,202,715 |  |  |       | 100.0% | 
|                       |                 |               |             |              |  |            |             |             |  |  |       |       



---



|    |                                                                                                                                                                       
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Book values are those reported to us by the
    cedent for the underlying investments and do not represent the
    value of our Funds withheld at interest receivable.

47



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##### Table of Contents



The investment objectives for Ohio National are
set forth in our annuity reinsurance agreement, which was
terminated on February 14, 2003. The primary objective is
to maximize after tax income without exposing surplus to
excessive liability in order to earn the required spread over
the credited rates of the annuity products offered by Ohio
National. The investment guidelines call for 40% to 80% of the
assets to be invested in corporate bonds, and such guidelines
also permit investments in limited amounts of U.S. government
securities, asset backed securities, residential and commercial
mortgage backed securities, U.S. dollar denominated
Canadian and other foreign securities. The weighted average
credit quality of the securities in which the assets are
invested is to be A- or better, with each security
purchased having been assigned a minimum designation of at least
NAIC 3. No more than 5% of the portfolio assets may have
been assigned a minimum designation of NAIC 3, and no more
than 40% of the portfolio assets may have been assigned a
minimum designation of NAIC 2. Further, securities
designated NAIC 2 and NAIC 3 may not, in the
aggregate, exceed 40% of the portfolio assets. No more than 5%
of the portfolio assets may be cash or short-term investments,
and no common stock may be held in the portfolio. Investments in
any one sector may not account for more than 20% of the
portfolio assets, except for industrial sector investments,
which can account for up to 25% of the portfolio.

Other Annuity Reinsurance Contracts

At December 31, 2002, we had four other
annuity reinsurance contracts that guaranteed crediting rates
that varied in amount and duration. At December 31, 2002,
the assets funding the policyholder obligations under these
contracts had an average credit quality of A and an
average duration of approximately 7.04 years.

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

|                                    |                                                             |               |            |              |  |              |             |             |  |  |       |        | 
|----------------------------------- | ----------------------------------------------------------- | ------------- | ---------- | ------------ |  | ------------ | ----------- | ----------- |  |  | ----- | ------ | 
|                                    |                                                             |               |            |              |  | % of Total  
|Type of Security                    |                                                             | Book Value(1) |            | Market Value |  | Market Value
|                                    |                                                             |               |            |              |  |             
|Canadian provincial bonds           |                                                             | $             | 97,881,002 |              |  | $            | 102,931,909 |             |  |  | 30.2% |       
|Investment grade US corporate bonds |                                                             |               | 89,548,989 |              |  |              | 94,972,590  |             |  |  | 27.9% |       
|Investment grade UK corporate bonds |                                                             |               | 77,390,681 |              |  |              | 77,449,931  |             |  |  | 22.7% |       
|Mortgage backed securities          |                                                             |               | 12,515,408 |              |  |              | 13,598,452  |             |  |  | 4.0%  |       
|Government bonds                    |                                                             |               | 19,062,673 |              |  |              | 19,062,673  |             |  |  | 5.5%  |       
|Canadian corporate bonds            |                                                             |               | 25,734,110 |              |  |              | 26,037,884  |             |  |  | 7.6%  |       
|Below Investment grade bonds        |                                                             |               | 10,495,850 |              |  |              | 6,928,850   |             |  |  | 2.1%  |       
|                                    |                                                             |               |            |              |  |              |             |             |  |  |       |       
|                                    | Total invested assets                                       |               | $          | 332,628,713  |  |              | $           | 340,982,289 |  |  |       | 100.0% | 
|                                    |                                                             |               |            |              |  |              |             |             |  |  |       |       
|Accrued investment income           |                                                             |               |            |              |  |              | 6,202,558   |             |  |  |       |       
|                                    |                                                             |               |            |              |  |              |             |             |  |  |       |       
|                                    | Total market value, including accrued investment
    income |               |            |              |  |              | $           | 347,184,847 |  |  |       |        | 
|                                    |                                                             |               |            |              |  |              |             |             |  |  |       |       



---



|    |                                                                                                                                                                       
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Book values are those reported to us by the
    cedent for the underlying investments and do not represent the
    value of our Funds withheld at interest receivable.

48



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##### Table of Contents



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

|                          |                                                             |               |             |              |  |              |             |             |  |  |       |        | 
|------------------------- | ----------------------------------------------------------- | ------------- | ----------- | ------------ |  | ------------ | ----------- | ----------- |  |  | ----- | ------ | 
|                          |                                                             |               |             |              |  | % of Total  
|Ratings(1)                |                                                             | Book Value(2) |             | Market Value |  | Market Value
|                          |                                                             |               |             |              |  |             
|AAA                       |                                                             | $             | 56,841,845  |              |  | $            | 57,334,991  |             |  |  | 16.8% |       
|AA                        |                                                             |               | 32,825,381  |              |  |              | 33,533,556  |             |  |  | 9.8%  |       
|A                         |                                                             |               | 174,486,252 |              |  |              | 182,852,331 |             |  |  | 53.6% |       
|BBB                       |                                                             |               | 57,283,384  |              |  |              | 60,216,873  |             |  |  | 17.7% |       
|BB and below              |                                                             |               | 11,191,851  |              |  |              | 7,044,538   |             |  |  | 2.1%  |       
|                          |                                                             |               |             |              |  |              |             |             |  |  |       |       
|                          | Total invested assets                                       |               | $           | 332,628,713  |  |              | $           | 340,982,289 |  |  |       | 100.0% | 
|                          |                                                             |               |             |              |  |              |             |             |  |  |       |       
|Accrued investment income |                                                             |               |             |              |  |              | 6,202,558   |             |  |  |       |       
|                          |                                                             |               |             |              |  |              |             |             |  |  |       |       
|                          | Total market value, including accrued investment
    income |               |             |              |  |              | $           | 347,184,847 |  |  |       |        | 
|                          |                                                             |               |             |              |  |              |             |             |  |  |       |       



---



|    |                                                                                                                                                                               
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(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 those reported to us by the
    cedent for the underlying investments and do not represent the
    value of our Funds withheld at interest receivable.        

According to information provided by the ceding
companies under these four annuity reinsurance contracts, at
December 31, 2002 the maturity distribution of the assets
held and managed by those ceding companies was approximately as
follows:

|                       |                 |               |             |              |  |            |             |             |  |  |       |        | 
|---------------------- | --------------- | ------------- | ----------- | ------------ |  | ---------- | ----------- | ----------- |  |  | ----- | ------ | 
|                       |                 |               |             |              |  | % of Total
|Maturity               |                 | Book Value(1) |             | Market Value |  | Book Value
|                       |                 |               |             |              |  |           
|Within one year        |                 | $             | 15,849,242  |              |  | $          | 15,869,290  |             |  |  | 4.8%  |       
|From one to five years |                 |               | 72,223,985  |              |  |            | 74,646,294  |             |  |  | 21.7% |       
|From six to ten years  |                 |               | 77,756,390  |              |  |            | 78,312,072  |             |  |  | 23.4% |       
|More than ten years    |                 |               | 166,799,096 |              |  |            | 172,154,633 |             |  |  | 50.1% |       
|                       |                 |               |             |              |  |            |             |             |  |  |       |       
|                       | Total all years |               | $           | 332,628,713  |  |            | $           | 340,982,289 |  |  |       | 100.0% | 
|                       |                 |               |             |              |  |            |             |             |  |  |       |       



---



|    |                                                                                                                                                                       
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Book values are those reported to us by the
    cedent for the underlying investments and do not represent the
    value of our Funds withheld at interest receivable.

Liquidity and Capital Resources

Our liquidity and capital resources are a measure
of our overall financial strength and our ability to generate
cash flows from our operations to meet operating and growth
needs. Our principal sources of funds are premiums received, net
investment income, proceeds from investments called, redeemed or
sold, 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. 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, 2002 and 2001, letters of credit totaling
$174,000,000 and $197,000,000, respectively, issued in the
ordinary course of our business had been issued by our bankers
in favor of certain ceding insurance companies (including our
U.S. operating subsidiary) to provide security and meet
regulatory requirements. At December 31, 2002 and 2001,
cash and investments of approximately $115,000,000 and
$112,000,000, respectively, were pledged as collateral for
letters of credit. At December 31, 2002 and 2001, cash
investments of $125,000,000 and $272,000,000, respectively, were
held in trust for the benefit of certain of our ceding insurance
companies to provide security and to meet regulatory
requirements.

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We have two reinsurance operating subsidiaries,
the largest of which is based in and operates out of Bermuda.
Our other reinsurance operating subsidiary is based in and
operates out of the United States. Our Bermuda operating
subsidiary reinsures a large portion of the reinsurance business
written by our U.S. operating subsidiary. The primary
purpose of this reinsurance is to provide reinsurance capacity
to our U.S. operating subsidiary so that it can compete in
its market place. Our Bermuda operating subsidiary also has made
capital infusions into our U.S. operating subsidiary to
allow the U.S. company to maintain targeted statutory
surplus levels and to provide cash and securities as collateral
for the reinsurance cessions our U.S. operating subsidiary
makes to our Bermuda operating subsidiary. At December 31,
2002, approximately $68,000,000 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 to fund
liquidity or collateral needs.

As discussed below, in 2001 we entered into a
reinsurance agreement with a reinsurer to cede excess U.S.
statutory reserves to the reinsurer. Under that reinsurance
agreement, we were required to make cash deposits of $40,750,000
with that reinsurer. In 2001, we classified those deposits as a
component of operating cash flows in our Consolidated Statements
of Cash Flows. For the year 2002, we are classifying the return
of those deposits in connection with the termination of the
reinsurance agreement as a component of financing cash flows,
and have reclassified the $40,750,000 of deposits in 2001 as a
component of financing cash flows in our Consolidated Statements
of Cash Flows to maintain comparability between the two years.
After giving effect to this reclassification, net cash used by
operations was $33,187,656 for the year ended December 31,
2002, as compared with net cash provided by operating activities
of $60,223 for the year ended December 31, 2001. Our
negative operating cash flow for the year 2002 was primarily the
result of the XL Life transaction at December 31, 2002
in which we novated five blocks of reinsurance agreements to
XL Life. In connection with these novations, we paid cash
to XL Life to fund the GAAP liabilities they assumed and
closing costs associated with the transaction, offset in part by
a net ceding commission paid to us. The 50% quota share
retrocession business back to us on four of the five blocks of
novated agreements was done on a modified coinsurance basis,
and, as a result, no cash was paid to us for the GAAP reserves
we reassumed. Our positive cash flows from investing activities
are the result of significant sales of securities we made. The
proceeds of those sales were used to return cash deposits to a
reinsurer, which caused our negative cash flows from Financing
activities. For 2001, virtually all cash flow was used to fund
trust accounts or secure letters of credit.

As of December 31, 2002, after giving effect
to the novation of certain of our life reinsurance contracts to
XL Life, we did not have sufficient available cash or
investments to post collateral to satisfy all of our obligations
under certain of our reinsurance treaties. This shortfall was
primarily attributable to collateral requirements asserted by
the cedent under our largest guaranteed minimum death benefit
contract. Since that date, our cedents have asserted that we
must satisfy additional substantial collateral requirements,
bringing the total asserted collateral requirements to
approximately $140,000,000 in excess of amounts we currently
have posted. We are currently analyzing these asserted
collateral requirements and have not concluded that such amounts
are in fact required to be posted as collateral under the
relevant reinsurance contracts. In an effort to meet or reduce
our collateral requirements and improve our liquidity, we have
novated, terminated or negotiated the recapture of several of
our annuity and life reinsurance contracts, including our second
largest annuity reinsurance contract and certain of our more
profitable life contracts. Pro forma financial information
giving effect to certain of these transactions is presented
below under the heading  Pro Forma Effects of
Recent Transactions.

We currently have approximately $45,000,000 of
outstanding letters of credit issued on our behalf by Citibank.
In October 2002, Citibank agreed to extend our unsecured letter
of credit facility into 2003 in exchange for our agreement to
secure or eliminate the letter of credit facility by
June 30, 2003. If we are unable to secure or eliminate the
letter of credit facility by that date, Citibank will not renew
the outstanding letters of credit at December 31, 2003, at
which time our customers may draw on such letters of credit, and
we will be obligated to repay Citibank for any amounts paid to
our customers up to $45,000,000.

At December 31, 2002, we had a $15,000,000
letter of credit outstanding under a letter of credit facility
with Manufacturers Life Insurance Company that had been
posted as security to allow our U.S. operating subsidiary
to take credit on its statutory financial statements for
reinsurance ceded to our Bermuda operating

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##### Table of Contents



company. On February 6, 2003, we were served
with a statutory demand under Bermuda law from Manulife related
to our alleged failure to return or collateralize the letter of
credit Manulife issued on our behalf. On February 25, 2003,
we filed an application with the Bermuda Supreme Court seeking
an injunction to prevent Manulife from filing proceedings to
wind up our business on the basis that Manulife is not a
creditor of ours and therefore did not have standing to make the
statutory demand. On March 21, 2003, the court held in our
favor and issued an injunction preventing Manulife from
commencing winding up proceedings based upon that demand. Since
that date, as the result of recaptures of certain reinsurance
agreements by cedents of our U.S. operating subsidiary, the
need for Manulifes letter of credit facility has been
eliminated, and the letter of credit has been terminated.


During 2001, we had entered into a reinsurance
agreement with a reinsurer to cede excess U.S. statutory
reserves (the amount by which our cedents
U.S. statutory reserves exceed our U.S. GAAP reserves
for certain life insurance contracts subject to certain state
statutory regulations known as Triple-X) to the reinsurer. Under
the agreement, the reinsurer was obligated to make cash deposits
with us that were used to fund the collateral requirements
associated with these excess U.S. statutory reserves. Prior
to December 31, 2002, we had received deposits of
$147,000,000 from the reinsurer. This reinsurance agreement did
not qualify for reinsurance accounting under U.S. GAAP. As
a result, funds received under this contract were recorded as a
deposit liability. We were also required to deposit funds with
the reinsurer in connection with the reinsurance agreement,
which funds had accumulated to approximately $42,400,000 at
December 31, 2002. These funds were included in Deposits
and other reinsurance receivables on our balance sheet. We
received the benefit of investment income from the investment of
the funds received and our deposit with the reinsurer, and we
paid the reinsurer certain fees associated with the contract.
For the year 2002, these fees were $8,157,000 and were included
in Collateral expenses on our income statement. In connection
with the novation of certain of our reinsurance contracts to
XL Life, we terminated this reinsurance agreement and
repaid to the reinsurer the entire $147,000,000 balance owed by
us under the agreement at December 31, 2002. In addition,
the reinsurer returned to us the $42,400,0000 we had deposited
with it in connection with the termination of the reinsurance
agreement.

At December 31, 2002, our total
capitalization, which consisted entirely of equity, was
approximately $268,337,000. On March 1, 2002, we filed a
shelf registration statement on Form S-3 to register under
the Securities Act of 1933 $200,000,000 of senior debt to be
sold in one or more transactions on a delayed basis. We
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.

On November 20, 2002, the State of
Connecticut Insurance Department and Annuity and Life
Reassurance America entered into a letter agreement that
acknowledges that the Connecticut Insurance Department is
monitoring the financial condition of our United States
operating subsidiary and such letter agreement requires that
certain financial transactions entered into by the subsidiary,
including disposal of assets, payment of dividends and
settlement of inter-company balances with our Bermuda operating
subsidiary, be pre-approved by the Connecticut Insurance
Department. In addition, the Connecticut Insurance Department
has 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 continues to be effective until March 1, 2004.

We have no material commitments for capital
expenditures as of December 31, 2002, but as noted above,
we have significant obligations that we will not be able to
satisfy unless we are able to negotiate the termination,
recapture or novation of certain reinsurance agreements on
favorable terms, or raise additional capital. Since beginning
our efforts in September 2002, we also have been unable to raise
capital, and there can be no assurances that our efforts to
raise capital or pursue other strategic alternatives will be
successful.

While we plan to continue to receive premiums and
pay claims under our remaining reinsurance treaties, we have
ceased to write new reinsurance agreements and have notified our
existing clients that we will not be accepting any new business
under existing treaties on their current terms. We do not
anticipate resuming to write new reinsurance agreements in the
foreseeable future. Our plans for the future involve attempting
to meet or reduce the additional collateral requirements of our
ceding companies by continuing to negotiate the

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##### Table of Contents



recapture, retrocession, novation or sale of
certain of our reinsurance agreements, although there can be no
assurance that we will be able to negotiate favorable terms for
such transactions. We have also instituted substantial premium
rate increases on all of our non-guaranteed premium yearly
renewable term contracts that remain in force. There can be no
assurance that our plans will be sufficient to improve our
operations or liquidity. If we are not successful in
implementing our plans, or if those plans are insufficient, we
will not be able to satisfy our obligations in 2003 and will
likely be required to liquidate our business if we cannot
successfully pursue any other strategic alternative. The report
of our independent auditors included in this report contains a
paragraph expressing substantial doubt regarding our ability to
continue as a going concern.


In our efforts to meet our future collateral and
liquidity needs, we will be required to rationalize our
infrastructure costs while retaining employees with the skills
and knowledge that we need to implement our plan. In this
regard, we may elect to settle our claims for repayment of
amounts owed to us by certain of our officers who have indicated
they may oppose collection of (or be unable to repay) these
amounts. Such settlements may be for less than the amounts owed
us, if it appears more efficient to do so.

Quarterly dividends of $0.05 per common share
were declared and paid in each quarter of 2002 and 2001. 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 December 31,
2002, we could not reasonably determine that we met these
grounds. Accordingly, on February 19, 2003, we announced
that we would not declare or pay a dividend on our common shares
during the first quarter of 2003. 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 16 to our consolidated financial statements included
elsewhere in this report. We do not expect to declare or pay
dividends in the near future. Currently, there is no Bermuda
withholding tax on dividends paid by us to shareholders.

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.

Pro Forma Effects of Recent
Transactions

In an effort to meet the collateral needs of as
many of our cedents as possible, we have entered into two
significant transactions and several smaller transactions, which
in the aggregate have had, and will have, a substantial impact
on our business. To highlight the effects of these transactions
on our business, we have prepared a Pro Forma Consolidated
Balance Sheet as of December 31, 2002 and a Pro Forma
Consolidated Statement of Operations for the year ended
December 31, 2002. The Pro Forma Consolidated Balance Sheet
as of December 31, 2002 is intended to demonstrate how our
Consolidated Balance Sheet as of December 31, 2002, as
reported in our consolidated financial statements contained in
this report, would look in light of novations, recaptures and
terminations of certain of our reinsurance agreements that have
occurred between January 1, 2003 and March 31, 2003.
The Pro Forma Consolidated Statement of Operations for the year
ended December 31, 2002 is intended to illustrate how our
Consolidated Statements of Operations, which is included in our
consolidated financial statements contained in this report,
would look if the novations, recaptures, and terminations that
occurred during 2002 and through March 31, 2003 had
occurred prior to January 1, 2002.

52



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The transactions that are the subject of the
following pro forma financial statements are as follows:



| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| | -- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 1. | On December 31, 2002, we entered into a
    transaction with XL Life Ltd, a subsidiary of
    XL Capital Ltd 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
    year-end collateral requirements under our reinsurance
    agreements and to repay deposits received under a reinsurance
    agreement to which we were a party. 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. The effects of this
    transaction, including $26,382,000 of charges, are not presented
    as having a pro forma impact in the pro forma balance sheet
    because they are already reflected in our Consolidated Balance
    Sheet as of December 31, 2002, which is included in our
    consolidated financial statements contained in this report.



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | The XL Life transaction is presented as having a
    pro forma impact in the pro forma statement of operations.
    Specifically, the pro forma statement of operations assumes that
    the block of business transferred to XL Life that is not
    covered by the 50% quota share were never written by us.
    Further, the pro forma statements of operations assumes that the
    four blocks of business that are covered by the 50% quota share
    reinsurance policy were originally written by us on that basis
    and that XL Life will not exercise its right to recapture those
    four blocks of business given that our current financial
    strength ratings are below the levels required by that
    reinsurance agreement. Additionally, the pro forma statement of
    operations excludes charges and expenses of approximately
    $26,382,000 associated with the XL Life transaction. These
    charges and expenses are primarily the result of a write down of
    deferred acquisition costs of approximately $38,700,000 (which
    was partially offset by a net ceding commission paid to us by
    XL Life of approximately $18,000,000), a write off of
    prepaid expenses related to the reinsurance agreement of
    approximately $2,400,000 and transaction costs of approximately
    $3,200,000. In addition, the pro forma statement of operations
    assumes we never entered into the reinsurance agreement that
    provided us with cash deposits we used to fund the collateral
    requirements of our cedents, which was terminated on
    December 31, 2002 in connection with the XL Life
    transaction.



| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| | -- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 2. | In February 14, 2003, we entered into a
    termination agreement with The Ohio National Life Insurance
    Company terminating our annuity reinsurance agreement. Pursuant
    to the terms of the termination agreement, the parties agreed to
    release and discharge one another from any and all claims,
    demands, causes of action and/or damages relating to the
    reinsurance agreement effective January 31, 2003. In
    consideration, Ohio National agreed to pay us $5,000,000, as
    adjusted for certain amounts payable to Ohio National under the
    reinsurance agreement as of January 31, 2003, resulting in
    a net payment to us of approximately $2,799,000. The pro forma
    balance sheet shows the pro forma effects of the termination of
    this agreement as if it had occurred on the same terms and
    conditions as of December 31, 2002 and the pro forma
    statement of operations assumes that we had terminated the
    reinsurance agreement with Ohio National prior to
    January 1, 2002.
|
| | 3. | In addition to the transactions described above,
    we also negotiated the termination or recapture of other
    reinsurance contracts during 2002 and through March 31,
    2003, resulting in the write down of deferred acquisition costs
    and cash payments made to cedents, net of reserve releases
    associated with those terminations or recaptures. The pro forma
    balance sheet shows the pro forma effects of those terminations
    and recaptures as if each had occurred on the same terms and
    conditions as of December 31, 2002, and the pro forma
    statement of operations assumes that we had terminated or
    negotiated the recapture of each of those agreements prior to
    January 1, 2002.                                                                                                                                                                                                                                                                                                              

The following pro forma figures should not be
considered indicative of our expected results of operations and
financial condition in 2003. For a discussion of certain factors
that could materially and adversely affect our operations and/or
cause our actual results of operations to differ from those
expressed, please see  Forward-Looking
Statements.

53



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##### Table of Contents



Annuity and Life Re (Holdings), Ltd.

Pro Forma Consolidated Balance Sheet as of
December 31, 2002


(Unaudited and in U.S. Dollars)


|                                                                                                                                                                |                                     |          |               |               |  |                  |              |              |   |   |             |             |   |   |               |               | 
|--------------------------------------------------------------------------------------------------------------------------------------------------------------- | ----------------------------------- | -------- | ------------- | ------------- |  | ---------------- | ------------ | ------------ | - | - | ----------- | ----------- | - | - | ------------- | ------------- | 
|                                                                                                                                                                |                                     |          |               |               |  | Other            |              |             
|                                                                                                                                                                |                                     |          |               | Ohio National |  | Terminations and |              |             
|                                                                                                                                                                |                                     | Reported |               | Termination   |  | Recaptures       |              | Pro Forma   
|                                                                                                                                                                |                                     |          |               |               |  |                  |              |             
|Assets                                                                                                                                                          |                                     |          |               |               |  |                  |              |              |   |   |             |             |   |   |               |              
|Cash and cash equivalents                                                                                                                                       |                                     | $        | 152,930,908   |               |  | $                | 2,798,891    | (A)          |   | $ | (23,137,742 | )(G)        |   | $ | 132,592,057   |              
|Fixed maturity investments at fair value                                                                                                                        |                                     |          | 153,415,429   |               |  |                  |             |              |   |   |            |             |   |   | 153,415,429   |              
|Funds withheld at interest                                                                                                                                      |                                     |          | 1,427,093,380 |               |  |                  | (360,765,777 | )(B)         |   |   | (24,591,901 | )(H)        |   |   | 1,041,735,702 |              
|Accrued investment income                                                                                                                                       |                                     |          | 2,141,338     |               |  |                  |             |              |   |   |            |             |   |   | 2,141,338     |              
|Receivable for reinsurance ceded                                                                                                                                |                                     |          | 93,669,173    |               |  |                  |             |              |   |   |            |             |   |   | 93,669,173    |              
|Deposits and other reinsurance receivables                                                                                                                      |                                     |          | 25,025,453    |               |  |                  |             |              |   |   | (84,316     | )(I)        |   |   | 24,941,137    |              
|Deferred policy acquisition costs                                                                                                                               |                                     |          | 187,913,648   |               |  |                  | (20,335,753  | )(C)         |   |   | (23,040,360 | )(J)        |   |   | 144,537,534   |              
|Other assets                                                                                                                                                    |                                     |          | 2,508,858     |               |  |                  |             |              |   |   |            |             |   |   | 2,508,858     |              
|                                                                                                                                                                |                                     |          |               |               |  |                  |              |              |   |   |             |             |   |   |               |              
|                                                                                                                                                                | Total Assets                        |          | $             | 2,044,698,187 |  |                  | $            | (378,302,639 | ) |   | $           | (70,854,319 | ) |   | $             | 1,595,541,229 | 
|                                                                                                                                                                |                                     |          |               |               |  |                  |              |              |   |   |             |             |   |   |               |              
|Liabilities                                                                                                                                                     |                                     |          |               |               |  |                  |              |              |   |   |             |             |   |   |               |              
|Reserves for future policy benefits                                                                                                                             |                                     | $        | 269,619,809   |               |  | $                |             |              |   | $ | (18,431,399 | )(K)        |   | $ | 251,188,410   |              
|Interest sensitive contracts liability                                                                                                                          |                                     |          | 1,443,143,080 |               |  |                  | (376,258,764 | )(D)         |   |   | (24,127,042 | )(L)        |   |   | 1,042,757,274 |              
|Other reinsurance liabilities                                                                                                                                   |                                     |          | 51,139,164    |               |  |                  | (2,896,108   | )(E)         |   |   |            |             |   |   | 48,243,056    |              
|Accounts payable and accrued expenses                                                                                                                           |                                     |          | 12,459,423    |               |  |                  |             |              |   |   | 31,331      | (M)         |   |   | 12,490,754    |              
|                                                                                                                                                                |                                     |          |               |               |  |                  |              |              |   |   |             |             |   |   |               |              
|                                                                                                                                                                | Total Liabilities                   |          | $             | 1,776,361,476 |  |                  | $            | (379,154,872 | ) |   | $           | (42,527,110 | ) |   | $             | 1,354,679,494 | 
|                                                                                                                                                                |                                     |          |               |               |  |                  |              |              |   |   |             |             |   |   |               |              
|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; 26,106,328 and 25,705,328 shares outstanding
    at December 31, 2002 and December 31, 2001) |                                     |          | 26,106,328    |               |  |                  |             |              |   |   |            |             |   |   | 26,106,328    |              
|Additional paid-in capital                                                                                                                                      |                                     |          | 335,334,932   |               |  |                  |             |              |   |   |            |             |   |   | 335,334,932   |              
|Notes receivable from stock sales                                                                                                                               |                                     |          | (1,626,493    | )             |  |                  |             |              |   |   |            |             |   |   | (1,626,493    | )            
|Restricted stock (401,000 shares at
    December 31, 2002)                                                                                                      |                                     |          | (2,514,693    | )             |  |                  |             |              |   |   |            |             |   |   | (2,514,693    | )            
|Accumulated other comprehensive income                                                                                                                          |                                     |          | 6,162,525     |               |  |                  |             |              |   |   |            |             |   |   | 6,162,525     |              
|(Deficit) Retained earnings                                                                                                                                     |                                     |          | (95,125,888   | )             |  |                  | 852,233      | (F)          |   |   | (28,327,209 | )(N)        |   |   | (122,600,864  | )            
|                                                                                                                                                                |                                     |          |               |               |  |                  |              |              |   |   |             |             |   |   |               |              
|                                                                                                                                                                | Total Stockholders Equity          |          | $             | 268,336,711   |  |                  | $            | 852,233      |   |   | $           | (28,327,209 | ) |   | $             | 240,861,735   | 
|                                                                                                                                                                |                                     |          |               |               |  |                  |              |              |   |   |             |             |   |   |               |              
|                                                                                                                                                                | Total Liabilities and Stockholders |          |               |               |  |                  |              |              |   |   |             |             |   |   |               |               | 
|                                                                                                                                                                | Equity                              |          | $             | 2,044,698,187 |  |                  | $            | (378,302,639 | ) |   | $           | (70,854,319 | ) |   | $             | 1,595,541,229 | 
|                                                                                                                                                                |                                     |          |               |               |  |                  |              |              |   |   |             |             |   |   |               |              



---



|    |                                                                                                                                                           
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------
|(A) | To reflect cash received from Ohio National.                                                                                                              
|(B) | To record the transfer of Funds withheld at
    interest receivable to Ohio National (net of the unrealized loss
    in embedded derivatives).            
|(C) | To record the write off of deferred acquisition
    costs associated with the Ohio National agreement.                                                    
|(D) | To record the transfer of the Companys
    Interest sensitive contracts liability to Ohio National.                                                      
|(E) | To record the settlement of liabilities due to
    Ohio National as part of the recapture consideration for
    December 2002 and January 2003.           
|(F) | Pro forma impact on net income of the recapture
    of the Ohio National agreement.                                                                       
|(G) | To record cash payments for unearned premiums
    upon the termination and recapture of reinsurance agreements.                                           
|(H) | To record the transfer of Funds withheld at
    interest receivable to a cedent that terminated its annuity
    reinsurance agreement.                    
|(I) | To record the release of receivables held upon
    the termination and recapture of reinsurance agreements.                                               
|(J) | To record the write down of deferred acquisition
    costs associated with the termination and recapture of
    reinsurance agreements.                   
|(K) | To record the release of policyholder benefit
    reserves associated with the termination and recapture of
    reinsurance agreements.                   
|(L) | To record the transfer of the Companys
    Interest sensitive contracts liability back to a cedent that
    terminated its annuity reinsurance agreement.
|(M) | To record miscellaneous expenses associated with
    the termination and recapture of reinsurance agreements.                                             

|    |                                                                                                      
|--- | -----------------------------------------------------------------------------------------------------
|(N) | To recognize the impact on net income of the
    termination and recapture of reinsurance agreements.

54



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##### Table of Contents



Annuity and Life Re (Holdings), Ltd.

Pro Forma Consolidated Statement of Operations
for the Year Ended December 31, 2002


(Unaudited and in U.S. Dollars)


|                                                          |  |          |              |               |  |             |             |                  |  |           |              |      |  |   |             |      |  |   |             |  
|--------------------------------------------------------- |  | -------- | ------------ | ------------- |  | ----------- | ----------- | ---------------- |  | --------- | ------------ | ---- |  | - | ----------- | ---- |  | - | ----------- | -
|                                                          |  |          |              |               |  |             |             | Other            |  |          
|                                                          |  |          |              | Ohio National |  | XL Life     |             | Terminations and |  |          
|                                                          |  | Reported |              | Termination   |  | Transaction |             | Recaptures       |  | Pro Forma
|                                                          |  |          |              |               |  |             |             |                  |  |          
|Revenues                                                  |  |          |              |               |  |             |             |                  |  |           |              |      |  |   |             |      |  |   |             |  
|Net premiums                                              |  | $        | 344,097,441  |               |  | $           |            |                  |  | $         | (59,624,222  | )(E) |  | $ | (60,528,463 | )(K) |  | $ | 223,944,756 |  
|Investment income, net of related expenses                |  |          | 102,138,985  |               |  |             | (17,249,434 | )(A)             |  |           | (7,366,557   | )(F) |  |   | (1,580,000  | )(L) |  |   | 75,942,994  |  
|Net realized investment gains                             |  |          | 19,749,266   |               |  |             |            |                  |  |           | (9,388,993   | )(G) |  |   |            |      |  |   | 10,360,273  |  
|Net change in fair value of embedded derivatives          |  |          | (25,846,110  | )             |  |             | 15,651,998  | (B)              |  |           |             |      |  |   |            |      |  |   | (10,194,112 | )
|Surrender fees and other revenues                         |  |          | 16,156,437   |               |  |             |            |                  |  |           |             |      |  |   |            |      |  |   | 16,156,437  |  
|                                                          |  |          |              |               |  |             |             |                  |  |           |              |      |  |   |             |      |  |   |             |  
|Total Revenues                                            |  |          | 456,296,019  |               |  |             | (1,597,436  | )                |  |           | (76,379,772  | )    |  |   | (62,108,463 | )    |  |   | 316,210,348 |  
|                                                          |  |          |              |               |  |             |             |                  |  |           |              |      |  |   |             |      |  |   |             |  
|Benefits and Expenses                                     |  |          |              |               |  |             |             |                  |  |           |              |      |  |   |             |      |  |   |             |  
|Claim and policy benefits                                 |  | $        | 352,408,801  |               |  | $           |            |                  |  | $         | (56,059,211  | )(H) |  | $ | (74,138,990 | )(M) |  | $ | 222,210,600 |  
|Interest credited to interest sensitive products          |  |          | 71,370,616   |               |  |             | (15,238,476 | )(C)             |  |           |             |      |  |   | (1,208,508  | )(N) |  |   | 54,923,632  |  
|Policy acquisition costs and other insurance
    expenses |  |          | 125,877,980  |               |  |             | 2,122,353   | (D)              |  |           | (33,021,486  | )(I) |  |   | (7,935,463  | )(O) |  |   | 87,043,384  |  
|Collateral costs                                          |  |          | 12,948,115   |               |  |             |            |                  |  |           | (12,948,115  | )(J) |  |   |            |      |  |   |            |  
|Operating expenses                                        |  |          | 22,577,792   |               |  |             |            |                  |  |           |             |      |  |   |            |      |  |   | 22,577,792  |  
|                                                          |  |          |              |               |  |             |             |                  |  |           |              |      |  |   |             |      |  |   |             |  
|Total Benefits and Expenses                               |  |          | 585,183,304  |               |  |             | (13,116,123 | )                |  |           | (102,028,812 | )    |  |   | (83,282,961 | )    |  |   | 386,755,408 |  
|                                                          |  |          |              |               |  |             |             |                  |  |           |              |      |  |   |             |      |  |   |             |  
|Net (Loss)                                                |  | $        | (128,887,285 | )             |  | $           | 11,518,687  |                  |  | $         | 25,649,040   |      |  | $ | 21,174,498  |      |  | $ | (70,545,060 | )
|                                                          |  |          |              |               |  |             |             |                  |  |           |              |      |  |   |             |      |  |   |             |  
|Net (loss) per common share:                              |  |          |              |               |  |             |             |                  |  |           |              |      |  |   |             |      |  |   |             |  
|Basic                                                     |  | $        | (5.01        | )             |  | $           | 0.45        |                  |  | $         | 1.00         |      |  | $ | 0.82        |      |  | $ | (2.74       | )
|Diluted                                                   |  | $        | (5.01        | )             |  | $           | 0.45        |                  |  | $         | 1.00         |      |  | $ | 0.82        |      |  | $ | (2.74       | )



---



|    |                                                                                                                                                                                                                                                                                                                                                                        
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(A) | To reflect reduced Net investment income as if
    the Ohio National agreement did not exist in 2002.                                                                                                                                                                                                                                                                  
|(B) | To reflect the Net change in the fair value of
    embedded derivatives as if the Ohio National agreement did not
    exist in 2002.                                                                                                                                                                                                                                   
|(C) | To reflect the reduction in Interest credited to
    interest sensitive contracts as if the Ohio National agreement
    did not exist in 2002.                                                                                                                                                                                                                         
|(D) | To reflect the increase in Policy acquisition
    costs and other insurance expenses as if the Ohio National
    agreement did not exist in 2002.                                                                                                                                                                                                                      
|(E) | To reflect the reduction in Premiums that would
    have occurred had we only underwritten the 50% quota share
    assumed from XL Life on four of the five blocks of life
    reinsurance novated to XL Life.                                                                                                                                                         
|(F) | To remove Net investment income on the invested
    assets purchased with the cash deposits received from the
    reinsurer under the reinsurance agreement we used to fund
    certain of our collateral requirements.                                                                                                                                                
|(G) | To remove Net realized capital gains on the
    disposition of invested assets purchased with the cash deposits
    received from the reinsurer under the reinsurance agreement we
    used to fund certain of our collateral requirements.                                                                                                                            
|(H) | To remove Claims and policy benefits associated
    with the five blocks of life reinsurance novated to XL Life, net
    of the 50% quota share assumed from XL Life on four of those
    blocks.                                                                                                                                                                      
|(I) | To remove Policy acquisition costs and other
    insurance expenses associated with the five blocks of life
    reinsurance novated to XL Life, net of the 50% quota share
    assumed from XL Life on four of those blocks.                                                                                                                                           
|(J) | To remove collateral costs incurred during 2002
    related to the reinsurance agreement that was terminated in
    connection with the novations to XL Life at
    December 31, 2002 that we used to fund certain of our
    collateral requirements and closing costs associated with
    terminating that collateral reinsurance agreement at
    December 31, 2002.
|(K) | To remove Premiums associated with the recaptures
    of reinsurance agreements during 2002 and through March 31,
    2003.                                                                                                                                                                                                                                            
|(L) | To reflect reduced Net investment income as if an
    annuity reinsurance agreement recaptured by one of our cedents
    did not exist in 2002.                                                                                                                                                                                                                        
|(M) | To remove Claims and policy benefits associated
    with recaptures of reinsurance agreements during 2002 and
    through March 31, 2003.                                                                                                                                                                                                                              
|(N) | To remove Interest credited to interest sensitive
    products associated with the recapture of an annuity reinsurance
    agreement during 2002 and through March 31, 2003.                                                                                                                                                                                           
|(O) | To remove Policy acquisition and other insurance
    expenses associated with the recapture of an annuity reinsurance
    agreement during 2002 and through March 31, 2003.                                                                                                                                                                                            

55



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##### Table of Contents






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 audited consolidated financial statements of
Annuity and Life Re (Holdings), Ltd. and the related
auditors report listed in the Index to Financial
Statements and Financial Statement Schedule appearing on
page 61.



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

The schedule listed in the Index to Financial
Statements and Financial Statement Schedule appearing on
pages 90-92.



| |              
| | -------------
| | 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., 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 Annuity and Life Reassurance, Ltd., 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 Annuity and Life Reassurance, Ltd., 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 Annuity and Life Reassurance, Ltd., 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 Annuity and Life Reassurance, Ltd., 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 Annuity and Life Reassurance, Ltd., 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 Annuity and Life Reassurance, Ltd., 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 Annuity and Life Reassurance, Ltd., 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 Annuity and Life Reassurance, Ltd., 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 Annuity and Life Reassurance, Ltd., 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 Annuity and Life Reassurance, Ltd., XL Life
    Ltd and PHL Variable Insurance Company (Exhibit 2.11 to the
    Companys Form 8-K filed on January 16, 2003).               

56



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##### Table of Contents






|        |  |                                                                                                                                                                                                                                         
|------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|*2.12   |  | Retrocessional Reinsurance Agreement, dated as of
    December 31, 2002, by and between Annuity and Life
    Reassurance, Ltd. 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 Annuity and Life
    Reassurance, Ltd. 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 Annuity and Life
    Reassurance, Ltd. 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).                                                                                                                                                                
|*10.1  |  | Employment Agreement, dated as of
    December 5, 1997, among Lawrence S. Doyle, the Company and
    Annuity and Life Reassurance, Ltd. (the Operating
    Company) (Exhibit 10.1 to the Registration Statement).                     
|*10.2  |  | Amendment No. 1, dated as of
    February 27, 1998, to Employment Agreement, dated as of
    December 5, 1997, among Lawrence S. Doyle, the Company and
    the Operating Company (Exhibit 10.8 to the Registration
    Statement).     
|*10.3  |  | Employment Agreement, dated as of
    September 17, 2001, among John F. Burke, the Company and
    the Operating Company (Exhibit 10.2 to the Companys
    Form 10-Q filed on November 14, 2001).                                      
|*10.4  |  | Employment Agreement, dated as of January 8,
    1998, among Robert J. Reale, the Company and the Operating
    Company (Exhibit 10.6 to the Registration Statement).                                                                   
|*10.5  |  | 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).         
|*10.6  |  | 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).                                 
|*10.7  |  | 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).                                   
|*10.8  |  | 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).                             
|*10.9  |  | 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).                                                         
|*10.10 |  | 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).                                                           
|*10.11 |  | 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).                               
|*10.12 |  | 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).                                
|*10.13 |  | 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).                               




57



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




58



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##### Table of Contents






|        |  |                                                                                                                                                                                                                                                                                                                                                                                    
|------- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|*10.32 |  | 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).                                                                                                                                                                   
|*10.33 |  | 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).                                                                                                                                                                             
|*10.34 |  | 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).                                                                                                                                                                        
|*10.35 |  | 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).                                                                                                                                                                                                                                  
|*10.36 |  | Annuity and Life Re (Holdings), Ltd. Restricted
    Stock Plan (Exhibit 10.2 to the Companys
    Form 10-Q filed on May 15, 2002).                                                                                                                                                                                                                                                
|*10.37 |  | 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).                                                                                                                                                                                                                                 
|*10.38  |  | 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).
|*10.39  |  | 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).
|*10.40  |  | 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).                                                                                                                                                                                                  
|*10.41  |  | 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).                                                                                                                                                                                  
|*10.42  |  | 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).                                                                                                                       
|*10.43  |  | 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).                                                                                                                                                                                                
|*10.44  |  | 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).                                                                                                                            
|**10.45 |  | 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).                                                                                                                                                                                                             
|**10.46 |  | 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).                                                                                                                                                                                       
|*10.47  |  | 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).                                                                                                                                                                                                                        
|*10.48  |  | Agreement, dated as of December 23, 1997,
    between Inter-Atlantic Securities Corp. and the Company
    (Exhibit 10.4 to the Registration Statement).                                                                                                                                                                                                                            
|*10.49  |  | 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).                                                                                                                                                                       




59



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|      |  |                                                                                                                      
|----- |  | ---------------------------------------------------------------------------------------------------------------------
|*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).
    (Exhibit 23.1 to the Companys Form 10-K filed on
    April 16, 2003).
|99.1  |  | Section 1350 Certification of the
    Companys Chief Executive Officer and 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 has been filed separately with the Securities
    and Exchange 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 19, 2002 was filed with the
    Securities and Exchange Commission on November 19, 2002,
    reporting Other Events and Required FD Disclosure
    under Item 5.

60



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##### Table of Contents






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: July 1, 2003 |  | By: /s/ JOHN F. BURKEName: John F. Burke
    Title:  Chief Executive Officer and
    Chief Financial Officer




61



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CERTIFICATION

I, John F. Burke, certify that:



|   |                                                                                                                                                                                                                                                                                                                                             
|-- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  
|1. | I have reviewed this annual report on
    Form 10-K/A of Annuity and Life Re (Holdings), Ltd.                                                                                                                                                                                                                                               
|  
|  
|2. | Based on my knowledge, this annual report does
    not contain any untrue statement of a material fact or omit to
    state a material fact necessary to make the statements made, in
    light of the circumstances under which such statements were
    made, not misleading with respect to the period covered by this
    annual report;
|  
|3. | Based on my knowledge, the financial statements,
    and other financial information included in this annual report,
    fairly present in all material respects the financial condition,
    results of operations and cash flows of the registrant as of,
    and for, the periods presented in this annual report;                       
|  
|4. | I am responsible for establishing and maintaining
    disclosure controls and procedures (as defined in Exchange Act
    Rules 13a-14 and 15d-14) for the registrant and have:                                                                                                                                                              



| |    |                                                                                                                                                                                                                                                                                                             
| | -- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | a) | Designed such disclosure controls and procedures
    to ensure that material information relating to the registrant,
    including its consolidated subsidiaries, is made known to me by
    others within those entities, particularly during the period in
    which this annual report is being prepared;
|
| | b) | Evaluated the effectiveness of the
    registrants disclosure controls and procedures as of a
    date within 90 days prior to the filing date of this annual
    report (the Evaluation Date); and                                                                                                      
|
| | c) | Presented in this annual report my conclusions
    about the effectiveness of the disclosure controls and
    procedures based on my evaluation as of the Evaluation Date;                                                                                                                                  



|   |                                                                                                                                                                                                            
|-- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|5. | I have disclosed, based on my most recent
    evaluation, to the registrants auditors and the audit
    committee of registrants board of directors (or persons
    performing the equivalent functions):



| |    |                                                                                                                                                                                                                                                                                                                   
| | -- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | a) | All significant deficiencies in the design or
    operation of internal controls which could adversely affect the
    registrants ability to record, process, summarize and
    report financial data and have identified for the
    registrants auditors any material weaknesses in internal
    controls; and
|
| | b) | Any fraud, whether or not material, that involves
    management or other employees who have a significant role in the
    registrants internal controls; and                                                                                                                                                    



|   |                                                                                                                                                                                                                                                                                                                                                           
|-- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|6. | I have indicated in this annual report whether or
    not there were significant changes in internal controls or in
    other factors that could significantly affect internal controls
    subsequent to the date of my most recent evaluation, including
    any corrective actions with regard to significant deficiencies
    and material weaknesses.




Date: July 1, 2003






| |                            
| | ---------------------------
| | /s/ JOHN F. BURKE          
| |                            
| | John F. Burke,             
| | Chief Executive Officer and
| | Chief Financial Officer    

62



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Exhibit Index

| |       |  |  |                                                                                                                                                                                                                                                  
| | ----- |  |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | *2.1  |  |  | Master Agreement, dated as of December 31,
    2002, by and among Annuity and Life Reassurance, Ltd., 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 Annuity and Life Reassurance, Ltd.,
    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 Annuity and Life Reassurance, Ltd.,
    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 Annuity and Life Reassurance, Ltd.,
    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 Annuity and Life Reassurance, Ltd.,
    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 Annuity and Life Reassurance, Ltd.,
    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 Annuity and Life Reassurance, Ltd.,
    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 Annuity and Life Reassurance, Ltd.,
    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 Annuity and Life Reassurance, Ltd.,
    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 Annuity and Life Reassurance, Ltd.,
    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 Annuity and Life Reassurance, Ltd.,
    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 Annuity and Life
    Reassurance, Ltd. 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 Annuity and Life
    Reassurance, Ltd. 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 Annuity and Life
    Reassurance, Ltd. 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).                                                                                                                                                                         

63



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##### Table of Contents






| |         |  |  |                                                                                                                                                                                                                                    
| | ------- |  |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | *+10.1  |  |  | Employment Agreement, dated as of
    December 5, 1997, among Lawrence S. Doyle, the Company
    and Annuity and Life Reassurance, Ltd. (the Operating
    Company) (Exhibit 10.1 to the Registration Statement).                
| | *+10.2  |  |  | Amendment No. 1, dated as of
    February 27, 1998, to Employment Agreement, dated as of
    December 5, 1997, among Lawrence S. Doyle, the Company
    and the Operating Company (Exhibit 10.8 to the Registration
    Statement).
| | *+10.3  |  |  | Employment Agreement, dated as of
    September 17, 2001, among John F. Burke, the Company
    and the Operating Company (Exhibit 10.2 to the
    Companys Form 10-Q filed on November 14, 2001).                                 
| | *+10.4  |  |  | Employment Agreement, dated as of January 8,
    1998, among Robert J. Reale, the Company and the Operating
    Company (Exhibit 10.6 to the Registration Statement).                                                              
| | *+10.5  |  |  | 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).    
| | *+10.6  |  |  | 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).                            
| | *+10.7  |  |  | 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).                              
| | *+10.8  |  |  | 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).                        
| | *+10.9  |  |  | 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).                                                    
| | *+10.10 |  |  | 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).                                                      
| | *+10.11 |  |  | 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).                          
| | *+10.12 |  |  | 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).                           
| | *+10.13 |  |  | 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).                          
| | *+10.14 |  |  | 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).                           
| | *+10.15 |  |  | 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).                          
| | *+10.16 |  |  | 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).                         
| | *+10.17 |  |  | 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).                     
| | *+10.18 |  |  | 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).                       




64



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##### Table of Contents






| |         |  |  |                                                                                                                                                                                                                      
| | ------- |  |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | *+10.19 |  |  | 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).        
| | *+10.20 |  |  | Retention Agreement, dated as of
    September 4, 2002 (as revised December 19, 2002),
    between the Company and John Lockwood. (Exhibit 10.20 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 Brian G. Holland. (Exhibit 10.21 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 Michael H. Choate. (Exhibit 10.22
    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 David A. Van Der Beek.
    (Exhibit 10.23 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 Ava Zils. (Exhibit 10.24 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 Paul Widhalm. (Exhibit 10.25 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 Carolynne Furhtz. (Exhibit 10.26 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 Cindy Madeiros. (Exhibit 10.27 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 Ronnie Lewis. (Exhibit 10.28 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 Florence Durousseau. (Exhibit 10.29 to
    the Companys Form 10-K filed on April 16, 2003).      
| | *+10.30 |  |  | 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).            
| | *+10.31 |  |  | 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).            
| | *+10.32 |  |  | 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).     
| | *+10.33 |  |  | 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).               
| | *+10.34 |  |  | 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).          
| | *+10.35 |  |  | 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).                                                                    
| | *+10.36 |  |  | Annuity and Life Re (Holdings), Ltd. Restricted
    Stock Plan (Exhibit 10.2 to the Companys
    Form 10-Q filed on May 15, 2002).                                                                                  




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##### Table of Contents






| |         |  |  |                                                                                                                                                                                                                                                                                                                                                                                    
| | ------- |  |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | *+10.37 |  |  | 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).                                                                                                                                                                                                                                 
| | *10.38  |  |  | 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).
| | *10.39  |  |  | 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).
| | *10.40  |  |  | 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).                                                                                                                                                                                                  
| | *10.41  |  |  | 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).                                                                                                                                                                                  
| | *10.42  |  |  | 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).                                                                                                                       
| | *10.43  |  |  | 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).                                                                                                                                                                                                
| | *10.44  |  |  | 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).                                                                                                                            
| | **10.45 |  |  | 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).                                                                                                                                                                                                             
| | **10.46 |  |  | 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).                                                                                                                                                                                       
| | *10.47  |  |  | 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).                                                                                                                                                                                                                        
| | *10.48  |  |  | Agreement, dated as of December 23, 1997,
    between Inter-Atlantic Securities Corp. and the Company
    (Exhibit 10.4 to the Registration Statement).                                                                                                                                                                                                                            
| | *10.49  |  |  | 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).                                                                                                                                                                       
| | *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).
    (Exhibit 23.1 to the Companys Form 10-K filed on
    April 16, 2003).                                                                                                                                                                                                                                                              
| | 99.1    |  |  | Section 1350 Certification of the
    Companys Chief Executive Officer and Chief Financial
    Officer.                                                                                                                                                                                                                                                                           






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|   |                                                                                                                                                                                                                                                                           
|-- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|*  | 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 has been filed separately with the Securities
    and Exchange Commission.
|  
|  
|+  | Management contract or compensatory plan or
    arrangement required to be filed as an exhibit to this
    Form 10-K.                                                                                                                                                     

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