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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) |  |                                                                                                 
|þ          |  | ANNUAL REPORT PURSUANT TO SECTION 13 OR
    15(d) OF
    THE SECURITIES EXCHANGE ACT OF 1934    
|          
|           |  | For the fiscal year ended December 31,
    2001                                                 
|          
|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 0-23625

ANNUITY AND LIFE RE (HOLDINGS), LTD.


(Exact Name of Registrant as Specified in Its
Charter)


|                                                                                                       |  |                                                       
|------------------------------------------------------------------------------------------------------ |  | ------------------------------------------------------
|Bermuda(State or Other Jurisdiction of
    Incorporation or Organization)                              |  | Not Applicable(I.R.S. Employer
    Identification No.)
|Cumberland House, 1 Victoria Street,
    Hamilton, Bermuda(Address of Principal Executive
    Offices) |  | HM 11(Zip Code)                                       

(441) 296-7667


Registrants telephone number, including
area code


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 o          No þ

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.     o

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

As of March 7, 2002, the aggregate market
value of Common Shares, $1.00 par value, held by non-affiliates
was $354,180,000.

As of March 7, 2002, 25,705,328 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 2002 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, 2001.



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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, 2001
is being filed to revise and supplement certain information
provided in the original Form 10-K. In addition, we are
revising our Annual Report on Form 10-K to include restated
financial statements for the fiscal years ended
December 31, 2001 and 2000. We are restating our financial
statements for the fiscal year ended December 31, 2001 to
reflect the bifurcation and separate accounting for embedded
derivatives contained in certain of our annuity reinsurance
contracts in accordance with Statement of Financial Accounting
Standards No. 133  Accounting for Derivative
Instruments and Hedging Activities. In addition, we are
reclassifying the $19,500,000 reserve component of a $33,000,000
charge taken in the fourth quarter of 2001 in connection with
minimum interest guarantees on our largest annuity reinsurance
contract as a reduction of our carried balance for deferred
acquisition costs. Further, portions of the $33,000,000 charge,
and a similar $24,700,000 charge taken in the third quarter of
2001 in connection with the same contract, are being allocated
across certain prior quarters in 2001. The restated financial
information for the fiscal year ended December 31, 2000
that is presented in this report and the accompanying financial
statements recognizes certain minimum interest guarantee
payments made during that year as an expense rather than as a
reduction in our interest sensitive contracts liability. The
impact of the restatement for the fiscal year ended
December 31, 2000 was to reduce our previously reported net
income by approximately $885,000, or 2.2%.

Except for Note 18 to the Consolidated
Financial Statements included in this Amendment No. 1 to
our Annual Report on Form 10-K, 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.

The business of reinsurance generally consists of
reinsurers, such as Annuity and Life Re, entering into
contractual arrangements (known as treaties) with primary
insurers (known as ceding companies or cedents) whereby the
reinsurer agrees to indemnify the ceding company for all or a
portion of the risks associated with an underlying insurance
policy in exchange for a reinsurance premium payable to the
reinsurer. Reinsurers also may enter into retrocessional
reinsurance arrangements with other reinsurers, which operate in
a manner similar to the underlying reinsurance arrangement
described above. Under retrocessional reinsurance arrangements,
the reinsurer shifts a portion of the risk associated with an
underlying reinsurance contract to other reinsurers.

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 of each life 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. Reinsurance can also be on an excess
of loss basis, where a reinsurer indemnifies the ceding company
for a portion of claims exceeding a specified amount retained by
the ceding company in consideration of non-proportional premiums
being paid to the reinsurer. The reinsurers obligation
under an excess of loss contract may be limited to a specified
amount of such excess claim.

We write reinsurance 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.

Our reinsurance treaties may 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. 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 may also have to liquidate

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substantial assets in order to return the assets
supporting the reserve liabilities. In addition, we would no
longer be entitled to receive any investment income from the
premiums paid by the policyholders underlying the recaptured
business and, consequently, we may have to accelerate the
amortization of any unamortized deferred acquisition costs
associated with the recaptured business, which would reduce our
earnings.


Risks Reinsured

We write reinsurance with primary life insurance
companies and other reinsurers. Our major business lines are
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 pay more death benefits in a given time period
than expected, adversely impacting profitability in that period.
For example, in the third quarter of 2001, we recorded an
expense of $12,000,000 in connection with claims resulting from
the attack on the World Trade Center, which had a significant
effect on our net income for the three and nine month periods
ended September 30, 2001. We try to address these risks by
analyzing 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 target
primarily first dollar quota share pools of top
producing direct writing companies under which we participate
proportionately with other reinsurers on all of the ceded risks,
but not necessarily at the same pricing. We seek 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 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.

Our cedents have approximately $1.5 billion
in assets that are held and managed by or for them under our
modified coinsurance and coinsurance funds withheld
arrangements. While we do not own these assets, 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 theses
contracts and are exposed to the risks associated with the
securities the assets supporting the receivable are invested in.
Those assets are primarily invested in fixed income securities
and, with respect to our largest annuity reinsurance contract,
in investment grade 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

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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, reducing our investment income. We may not be
able to fully offset the decline in our investment income with
lower crediting rates on our contracts for the reinsurance of
annuities or 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, claims from such
guaranteed minimum death benefits increase because the spread
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
would receive reduced premiums for this benefit when financial
markets are declining.

We may use interest rate swaps and other hedging
instruments as tools to mitigate the effects of asset/liability
mismatches or the effect of 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.

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 has been the case with
our annuity reinsurance contract with Transamerica Occidental
Life Insurance Company, we may conclude that the contract could
be unprofitable over its expected lifetime, and we could be
required to 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 reinsurance 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 exceed the death benefits payable

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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, so 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
contract, the profitability of the contract 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

|                                                   |                     |                                  |               |            |             |      |               |            |             |   |               |   |             | 
|-------------------------------------------------- | ------------------- | -------------------------------- | ------------- | ---------- | ----------- | ---- | ------------- | ---------- | ----------- | - | ------------- | - | ----------- | 
|                                                   |                     |                                 
|                                                   |                     | Twelve Months Ended December 31,
|                                                   |                     |                                 
|                                                   |                     | 2001                             |               | 2000       |             | 1999
|                                                   |                     |                                  |               |            |             |     
|Policy revenues                                    |                     |                                  |               |            |             |      |               |            |             |   |               |  
|                                                   | Life reinsurance    |                                  |               |            |             |      |               |            |             |   |               |   |            
|                                                   |                     | First year                       |               | $          | 94,746,734  |      |               | $          | 55,047,163  |   |               | $ | 72,268,437  | 
|                                                   |                     | Renewal                          |               |            | 141,607,931 |      |               |            | 96,151,918  |   |               |   | 28,566,570  | 
|                                                   | Annuity reinsurance |                                  |               | 15,438,572 |             |      |               | 17,204,941 |             |   |               |  |            
|                                                   |                     |                                  |               |            |             |      |               |            |             |   |               |  
|                                                   |                     | Total                            |               | $          | 251,793,237 |      |               | $          | 168,404,022 |   |               | $ | 100,835,007 | 
|                                                   |                     |                                  |               |            |             |      |               |            |             |   |               |  
|Insurance in force at end of period (in thousands) |                     | $                                | 117,400,000   |            |             | $    | 77,019,000    |            |             | $ | 45,407,000    |  
|                                                   |                     |                                  |               |            |             |      |               |            |             |   |               |  
|Annuity reinsurance deposits                       |                     | $                                | 1,519,596,075 |            |             | $    | 1,597,928,818 |            |             | $ | 1,603,382,955 |  
|                                                   |                     |                                  |               |            |             |      |               |            |             |   |               |  

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

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

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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 covered by our annuity reinsurance
contract with The Ohio National Life Insurance Company. In
addition to the lifetime minimum guaranteed interest rate
required under state law, the Ohio National policies reinsured
by us guarantee a crediting rate to the policyholders for a six
year period. The crediting rate for the first year of the six
year period is established at the discretion of Ohio National,
subject to the lifetime minimum guaranteed interest rate
required under state law. For the remainder of the six year
period, each years crediting rate is guaranteed to exceed
the prior years actual crediting rate by 0.15%. Our
reinsurance agreement with Ohio National indicates that, at the
expiration of the initial six year period, Ohio National intends
to begin a new six year period with the first years
crediting rate established at the discretion of Ohio National
and guaranteed to increase by 0.15% in each subsequent year of
the period. For the fiscal year ended December 31, 2001,
the average crediting rate of the policies underlying the Ohio
National contract was 5.55%. The average yield rate on the
assets managed by Ohio National that are funding these
policyholder obligations for the fiscal year ended
December 31, 2001 was 7.91%. The Ohio National reinsurance
contract is our second largest annuity reinsurance contract and
represented approximately 15% of our Funds withheld receivable
as of December 31, 2001.

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. 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. 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 die, annuitize or surrender their policy
prior to the value of the underlying assets increasing to a
level where it equals or exceeds the policyholders minimum
guarantee amounts. 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 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
contracts are written on a roll-up basis, which
means that the guaranteed minimum death benefit equals the
premiums paid by the

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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. Such policies may be particularly
disadvantageous to us in light of the recent extended decline in
the 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, 2001, 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
$502 million. Also as of December 31, 2001, the
guaranteed minimum death benefit amount at risk under the other
such contract was between $17 million and $79 million,
depending on the resolution of a dispute between our ceding
company under the contract and one of the primary carriers from
which it had assumed risk. These amounts are an aggregate
measure of our exposure to guaranteed minimum death benefits
assuming 100% mortality experience at December 31, 2001.
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 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. 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 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.

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
policyholders account value. The enhanced earnings benefit
is designed to increase the total payments to the policyholder
with an amount sufficient to pay income taxes on the increase in
the account value. Our net amount at risk under our largest
reinsurance contract reinsuring this benefit at
December 31, 2001 was insignificant.

Policies providing a 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% or
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 that
is based upon more conservative investment and mortality
assumptions than would otherwise be used to calculate prevailing
annuity purchase rates following the

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expiration of the waiting period. We are subject
to investment risk to the extent that investment returns on the
assets supporting the liabilities under these policies will not
be 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.


Underwriting

We have developed underwriting guidelines with
the objective of controlling the risks of the reinsurance
policies we write as well as to determine appropriate pricing
levels. As our business and staff have grown, we have
incorporated peer review procedures to enhance our pricing and
risk management controls. Subject to the approval of our board,
the guidelines may be amended from time to time in response to
changing industry conditions, market developments, changes in
technology and other factors.

In implementing the underwriting guidelines, we
utilize an underwriting team to seek opportunities with
acceptable risk/return profiles. We determine 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
is based on actuarial and investment models which incorporate 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 policy revenues with respect
to ordinary life and annuity reinsurance are written on an
automatic treaty quota share basis with a focus on large blocks
of business where the underlying policies meet our underwriting
criteria. To a lesser extent, we may enter into facultative
reinsurance arrangements with primary insurers when we have
their automatic treaty reinsurance business. We generally
require ceding companies to retain at least 10% of every life
insurance risk reinsured and we limit our own net liability on
any single-life risk to $1,000,000.

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

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, 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 over the past two years 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 the third quarter of 2001 we initiated a review of
the recoverability of the deferred acquisition costs associated
with this contract utilizing revised assumptions for expected
future returns on invested assets and persistency rates. This
review ultimately resulted in the

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$24,700,000 write down of deferred acquisition
costs in the third quarter of 2001. As discussed in greater
detail below, we also recorded significant expenses and charges
associated with minimum interest guarantees under this contract
in the fourth quarter of 2001. In connection with the
restatement of our financial statements, portions of the charges
originally recorded in the third and fourth quarters of 2001
have been allocated to prior quarters in 2001, and we have
recognized $2,800,000 of minimum interest guarantee payments
made during 2000 as an expense rather than as a reduction in our
interest sensitive contracts liability. See Note 2 of our
Notes to Consolidated Financial Statements for more information
regarding the restatement.


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.

The following table sets forth certain financial
information relating to our annuity reinsurance contract with
Transamerica from its inception in 1998 through
December 31, 2001, after giving effect to the restatement
of our financial statements for the fiscal years ended
December 31, 2000 and 2001.

|                  |  |                   |               |                     |  |                      |               |                 |  |   |             |  |  |   |             |  
|----------------- |  | ----------------- | ------------- | ------------------- |  | -------------------- | ------------- | --------------- |  | - | ----------- |  |  | - | ----------- | -
|                  |  | Funds Withheld    |               | Interest Sensitive  |  | Deferred Acquisition |               |                
|Period            |  | at Interest Asset |               | Contracts Liability |  | Cost Asset           |               | Contract Income
|                  |  |                   |               |                     |  |                      |               |                
|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 | )

The first column in the table is the amount of
the Funds withheld at interest asset associated with the
Transamerica contract that was included on our Balance Sheet at
the end of each of the periods indicated. The Funds withheld at
interest asset is a receivable equal to our portion of
Transamericas statutory reserves related to the underlying
policies. The second column sets forth our Interest sensitive
contracts liability included on our Balance Sheet at the end of
each of the periods indicated. This is our proportionate 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 the 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 the third
and fourth quarters of 2001. The effects of such adjustments are
typically reflected in our earnings in the period in which we
revise our estimates of expected gross profits. However, in
connection with the restatement of our financial statements for
the fiscal year ended December 31, 2001, we have allocated
a portion of the charges recorded in the third and fourth
quarters of 2001 across prior quarters in 2001 based upon
information that is now available to us regarding minimum
interest guarantee payments that were made under the
Transamerica contract in 2001. The final column sets forth net
income relating to the contract 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 70.3% of our total assets at December 31, 1998
and 41.6% of our total assets at December 31, 2001. In
similar fashion, the Interest sensitive contract liability
associated with the contract has been a significant portion of
our total liabilities, representing 96.4% of our total
liabilities at December 31, 1998 and 51.9% of our total
liabilities at December 31, 2001. Net income

9



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attributable to the contract peaked at 38.1% of
our total net income for the year ended December 31, 2000.
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 40.5% of our total
Deferred acquisition costs at December 31, 2001.




| |                            
| | ---------------------------
| | 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 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 the 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 have now 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, have
been allocated to prior quarters of 2001. We have 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.

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 file 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.

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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 polices 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 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

Policy benefit liabilities comprise the majority
of our financial obligations. Policy benefit liabilities for our
products other than annuities and interest sensitive contracts
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 for annuities and interest sensitive
products are reported at the accumulated fund balance of these
contracts. Policy benefit liabilities include both mortality and
morbidity claims in the process of settlement and claims that
have been incurred but not yet reported. Actual experience in a
particular period

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may be worse than assumed experience and,
consequently, may adversely affect our operating results for the
period.


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, 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, however,
the issuers capacity to meet its financial commitment on
the security is still considered to be strong. As of
December 31, 2001, our investment guidelines allowed us to
invest in fixed income securities that are rated below
investment grade, but limit these investments to 10% of our
invested assets. We will not invest in any fixed income
securities in emerging markets or securities which 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 Alliance and
Prudential and the fees associated with the arrangements are
periodically reviewed by our Board of Directors.

At December 31, 2001, our invested assets,
including cash and cash equivalents, had an aggregate fair value
of approximately $423,780,000, including unrealized gains of
approximately $6,418,000. At December 31, 2001, our
portfolio was comprised of fixed income securities with a
weighted average credit quality rating of AA+
and a weighted average duration of 3.7 years.

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 have generally not engaged in hedging activities to mitigate
the effects of asset/ liability mismatches or interest rate
changes on our Balance Sheet, although we may do so in the
future. Our results of operations and our financial condition
are also significantly affected by the performance of assets
held and managed by our ceding companies or others under
modified coinsurance and coinsurance funds withheld
arrangements, which are 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 activities with respect to the administration of the
policies. 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

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is domiciled. The underlying investments
purchased with the premiums received from policyholders support
these statutory reserves.


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

We have annuity reinsurance contracts with six
ceding companies. At December 31, 2001, our Funds withheld
receivable related to such contracts had a carrying value of
approximately $1.5 billion. Our contracts with Transamerica
and Ohio National accounted for approximately 80% of our Funds
withheld at interest receivable as of that date. At
December 31, 2001, 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 5.0 years.
In addition, at December 31, 2001 approximately 4.0% 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 4.59% for the year ended
December 31, 2001. The average yield rates earned on the
invested premiums funding our annuity obligations to
Transamerica and Ohio National were approximately 3.94% and
7.91%, respectively, for the year ended December 31, 2001.
For purposes of calculating the average yield rate earned on
assets held and managed by our ceding companies, including with
respect to the Transamerica and Ohio National contracts, we
include net realized capital gains and losses as reported to us
by our ceding companies in accordance with statutory accounting
principles. The performance of these assets depends to a great
extent on the ability of the ceding company or 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. For example, under our annuity reinsurance agreement
with Transamerica, the minimum interest guarantees on the
underlying policies have exceeded the underlying policyholder
account values due to poor investment performance, and we have
been forced to fund our proportionate share of the shortfall out
of our general assets, which has resulted in significant losses.

Our policy is 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, 2001, approximately $962 million of our
Funds withheld at interest receivable and $991 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.
IL Annuity has financial strength or claims paying ratings
of A, A and AA- from
A.M. Best, Standard & Poors and Fitch
Ratings, respectively. Transamerica has financial strength or
claims paying ratings of A+, AA+,
Aa3 and AA+ from A.M. Best,
Standard & Poors, Moodys and Fitch Ratings,
respectively. At December 31, 2001, approximately
$227 million of our Funds withheld at interest receivable
(excluding the fair value of the embedded derivatives) and
$227 million of our Interest sensitive contracts liability
related to our reinsurance contract with Ohio National. Ohio
National has financial strength or claims paying ratings of
A+, AA, A1 and
AA from A.M. Best, Standard &
Poors, Moodys and Fitch Ratings, respectively.

Under the terms of our annuity reinsurance
treaties, mutual debts and credits are offset between us and the
counterparties to each treaty 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 of mutual debts and credits between us and
the counterparties to each treaty in the event of a
counterpartys insolvency. Therefore,

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if a 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 Transamerica,
IL Annuity or Ohio National 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. The investment policies, strategies or results for
the general account assets of such companies are not meaningful
to our investors in analyzing the investment risk related to the
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 under
Item 7. Managements Discussion and
Analysis of Financial Condition and Results of
Operations  Financial Condition 
Transamerica and Item 7. Managements
Discussion and Analysis of Financial Condition and Results of
Operations  Financial Condition  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 net fair value of these embedded derivatives is
classified as part of our Funds withheld asset on our Balance
Sheet. We have developed a cash flow model with the assistance
of outside advisors to arrive at an estimate of the fair value
of this total return swap that uses various assumptions
regarding future cash flows under the affected annuity
reinsurance contracts. The change in fair value of these
embedded derivatives is recorded in our statement of operations
as Net change in fair value of embedded derivatives, which is a
non cash item. The change in fair value of these embedded
derivatives also 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, because we acquired
those agreements prior to the transition date elected by us
under FAS 133, as amended by FAS 137. Because of the nature
of the assets underlying our Transamerica contract, which were
roughly 69% convertible bonds at December 31, 2001, the
bifurcation and separate accounting for the embedded derivatives
contained in that contract would add significant volatility to
our reported results.

Competition

The reinsurance industry is highly competitive.
In our target market of North America, we compete with
approximately 20 reinsurers, both domestic and foreign, of
annuity or life insurance products. These competitors primarily
reinsure life insurance and health insurance risks and, to a
lesser degree, annuity risks. Many of these competitors are well
established, have significant operating histories, strong
financial ratings, long-standing client relationships and
substantially greater financial and management resources than we
do.

Reinsurers 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. We believe that our
primary competitors include Transamerica Occidental Life
Insurance

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Company, Reinsurance Group of America, Inc., ING
Reinsurance, Employers Reassurance Corporation and Swiss
Reinsurance. However, within the reinsurance industry, our
competitors can change from year to year.


Financial Ratings

A.M. Best has assigned a financial strength
rating of A 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 an A rating
from Standard & Poors, which has placed both
companies on CreditWatch with negative implications. Annuity and
Life Reassurance has been rated A by Fitch Ratings,
which also has a negative ratings outlook. A downgrade in any of
our ratings would adversely affect our ability to sell products
and retain existing business. In particular, it is a condition
in some of our reinsurance treaties that we maintain certain
minimum credit ratings of A-.

Employees

As of December 31, 2001, we had fourteen
employees located in Bermuda and nine employees located in the
United States.

Regulation

Bermuda

Annuity and Life Reassurance is licensed as a
long-term insurer under the Bermuda Insurance Act of 1978, as
amended, and related regulations (collectively, the
Insurance Act). The Insurance Act, which regulates
the insurance business of Annuity and Life Reassurance, provides
that no person 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 Bermuda Minister of Finance 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. Some of the significant aspects of the Bermuda
insurance regulatory framework are set forth below.

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

Cancellation of Insurers Registration.An insurers registration may be
cancelled by the Authority on certain grounds specified in the
Insurance Act. These grounds include failure of the insurer to
comply with its obligations under the Insurance Act or, 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

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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.The Insurance Act provides that the
value of the long-term business assets of an insurer carrying on
long term business must exceed the amount of its long-term
business liabilities by at least $250,000. Annuity and Life
Reassurance met the minimum statutory capital and surplus
requirement as of December 31, 2001.

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.
In order to verify or supplement information otherwise provided
to the Authority, the Authority may direct an insurer to produce
documents or information relating to matters connected with the
insurers business.

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

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 Lawrence
S. Doyle, our President and Chief Executive 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.

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. 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.

16



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The transfer of our common shares between persons
regarded as non-resident in Bermuda for exchange control
purposes and our issuance of common shares to such persons may
be effected without specific consent under the Exchange Control
Act 1972 and regulations thereunder. Issues and transfers of the
common shares to any person regarded as resident in Bermuda for
exchange control purposes requires specific prior approval under
the Exchange Control Act 1972. 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 which may constitute the transaction of the business
of insurance, in any jurisdiction in which it is not licensed or
otherwise authorized to engage in such activities.

Our United States operating subsidiary, Annuity
and Life Reassurance America, Inc. 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, Inc. (our
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, Inc. because it is not an
insurer and because Annuity and Life Reassurance America is not
required to register 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
holding company laws.

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

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incurred and payment received shall be allocated
to Annuity and Life Reassurance America in conformity with
customary insurance accounting practices consistently applied;
(iv) the books, accounts and records of each party shall be
so maintained as to clearly and accurately disclose the precise
nature and details of the transactions; and (v) Annuity and
Life Reassurance Americas surplus shall be reasonable in
relation to its outstanding liabilities and adequate to meet its
financial needs. In addition, notice to the Connecticut
Insurance Commissioner, and sometimes the Commissioners
approval, is required prior to Annuity and Life Reassurance
America entering into certain transactions with its affiliates.


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.

Credit for Reinsurance.In addition to the regulatory
requirements imposed by the jurisdictions in which a reinsurer
is licensed, a reinsurers business operations are affected
by regulatory requirements in other jurisdictions in which
ceding companies are domiciled 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
jurisdiction in which the ceding company files statutory
financial statements is permitted to reflect in its statutory
financial statements a credit in an aggregate amount equal to
the liability for policy reserves, claims and other amounts
ceded to 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, 2001,
a significant portion of our invested assets were posted as
collateral to secure our obligations under reinsurance
agreements and letter of credit facilities. If we are unable to
fund these collateral requirements in the future, our ability to
operate our business will be limited.

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Item 6.     Selected
Financial Data

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

|                                                                                                         |                                                           |                                 |             |                  |  |      |            |             |   |   |            |             |   |   |            |            | 
|-------------------------------------------------------------------------------------------------------- | --------------------------------------------------------- | ------------------------------- | ----------- | ---------------- |  | ---- | ---------- | ----------- | - | - | ---------- | ----------- | - | - | ---------- | ---------- | 
|                                                                                                         |                                                           |                                
|                                                                                                         |                                                           | For the Year Ended December 31,
|                                                                                                         |                                                           |                                
|                                                                                                         |                                                           | 2001                            |             | 2000             |  | 1999 |            | 1998       
|                                                                                                         |                                                           |                                 |             |                  |  |      |            |            
|                                                                                                         |                                                           | (As restated)(1)                |             | (As restated)(1) |  |      |            |            
|Income Statement Data                                                                                    |                                                           |                                 |             |                  |  |      |            |             |   |   |            |             |   |   |            |           
|Revenues                                                                                                 |                                                           |                                 |             |                  |  |      |            |             |   |   |            |             |   |   |            |           
|                                                                                                         | Net premiums                                              |                                 | $           | 251,793,237      |  |      | $          | 168,404,022 |   |   | $          | 100,835,007 |   |   | $          | 27,943,890 | 
|                                                                                                         | Investment income, net of related expenses                |                                 |             | 91,128,696       |  |      |            | 136,648,327 |   |   |            | 85,089,811  |   |   |            | 24,130,550 | 
|                                                                                                         | Net realized investment gains (losses)                    |                                 |             | 1,230,038        |  |      |            | (4,817,121  | ) |   |            | (1,284,769  | ) |   |            | 2,673,281  | 
|                                                                                                         | Net change in fair value of embedded derivatives          |                                 |             | 5,029,027        |  |      |            |            |   |   |            |            |   |   |            |           | 
|                                                                                                         | Surrender fees and other revenues                         |                                 |             | 18,519,701       |  |      |            | 6,915,870   |   |   |            | 3,215,429   |   |   |            | 311,243    | 
|                                                                                                         |                                                           |                                 |             |                  |  |      |            |             |   |   |            |             |   |   |            |           
|                                                                                                         | Total Revenues                                            |                                 | $           | 367,700,699      |  |      | $          | 307,151,098 |   |   | $          | 187,855,478 |   |   | $          | 55,058,964 | 
|                                                                                                         |                                                           |                                 |             |                  |  |      |            |             |   |   |            |             |   |   |            |           
|Benefits and Expenses                                                                                    |                                                           |                                 |             |                  |  |      |            |             |   |   |            |             |   |   |            |           
|                                                                                                         | Claim and policy benefits                                 |                                 | $           | 216,025,010      |  |      | $          | 132,810,192 |   |   | $          | 79,953,160  |   |   | $          | 23,297,115 | 
|                                                                                                         | Interest credited to interest sensitive products          |                                 |             | 49,258,418       |  |      |            | 65,842,303  |   |   |            | 22,312,684  |   |   |            | 1,989,000  | 
|                                                                                                         | Policy acquisition costs and other insurance
    expenses |                                 |             | 127,780,549      |  |      |            | 58,985,523  |   |   |            | 42,200,688  |   |   |            | 6,541,872  | 
|                                                                                                         | Operating expenses                                        |                                 |             | 11,552,418       |  |      |            | 10,411,344  |   |   |            | 7,685,802   |   |   |            | 4,219,360  | 
|                                                                                                         |                                                           |                                 |             |                  |  |      |            |             |   |   |            |             |   |   |            |           
|                                                                                                         | Total Benefits and Expenses                               |                                 | $           | 404,616,395      |  |      | $          | 268,049,362 |   |   | $          | 152,152,334 |   |   | $          | 36,047,347 | 
|                                                                                                         |                                                           |                                 |             |                  |  |      |            |             |   |   |            |             |   |   |            |           
|Net (loss) income before cumulative effect
    of a change in accounting principle                       |                                                           | $                               | (36,915,696 | )                |  | $    | 39,101,736 |             |   | $ | 35,703,144 |             |   | $ | 19,011,617 |           
|Cumulative effect of a change in accounting
    principle(2)                                             |                                                           |                                 | (3,665,735  | )                |  |      |           |             |   |   |           |             |   |   |           |           
|                                                                                                         |                                                           |                                 |             |                  |  |      |            |             |   |   |            |             |   |   |            |           
|Net (loss) income                                                                                        |                                                           | $                               | (40,581,431 | )                |  | $    | 39,101,736 |             |   | $ | 35,703,144 |             |   | $ | 19,011,617 |           
|                                                                                                         |                                                           |                                 |             |                  |  |      |            |             |   |   |            |             |   |   |            |           
|Basic (loss) income per common share, before
    cumulative effect of a change in accounting principle   |                                                           | $                               | (1.45       | )                |  | $    | 1.53       |             |   | $ | 1.40       |             |   | $ | 0.81       |           
|Basic (loss) income per common share                                                                     |                                                           | $                               | (1.59       | )                |  | $    | 1.53       |             |   | $ | 1.40       |             |   | $ | 0.81       |           
|Diluted (loss) income per common share,
    before cumulative effect of a change in accounting principle |                                                           | $                               | (1.45       | )                |  | $    | 1.42       |             |   | $ | 1.31       |             |   | $ | 0.76       |           
|Diluted (loss) income per common share                                                                   |                                                           | $                               | (1.59       | )                |  | $    | 1.42       |             |   | $ | 1.31       |             |   | $ | 0.76       |           
|Dividends per common share                                                                               |                                                           | $                               | 0.20        |                  |  | $    | 0.16       |             |   | $ | 0.16       |             |   | $ | 0.04       |           
|Weighted average shares outstanding                                                                      |                                                           |                                 | 25,602,664  |                  |  |      | 25,499,999 |             |   |   | 25,499,999 |             |   |   | 24,020,999 |           

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|                                                         |  |                                 |             |                  |  |      |            |      |  |   |            |  |  |   |            | 
|-------------------------------------------------------- |  | ------------------------------- | ----------- | ---------------- |  | ---- | ---------- | ---- |  | - | ---------- |  |  | - | ---------- | 
|                                                         |  |                                
|                                                         |  | For the Year Ended December 31,
|                                                         |  |                                
|                                                         |  | 2001                            |             | 2000             |  | 1999 |            | 1998
|                                                         |  |                                 |             |                  |  |      |            |     
|                                                         |  | (As restated)(1)                |             | (As restated)(1) |  |      |            |     
|Balance Sheet Data (in thousands)                        |  |                                 |             |                  |  |      |            |      |  |   |            |  |  |   |            | 
|Invested assets, including cash and cash
    equivalents |  | $                               | 423,780     |                  |  | $    | 321,819    |      |  | $ | 304,060    |  |  | $ | 342,614    | 
|Funds withheld                                           |  | $                               | 1,489,689   |                  |  | $    | 1,530,110  |      |  | $ | 1,532,653  |  |  | $ | 1,200,101  | 
|Total assets                                             |  | $                               | 2,310,773   |                  |  | $    | 2,226,602  |      |  | $ | 2,056,086  |  |  | $ | 1,706,510  | 
|Stockholders equity                                     |  | $                               | 402,189     |                  |  | $    | 440,330    |      |  | $ | 392,055    |  |  | $ | 375,340    | 
|                                                        
|Other Financial Data                                     |  |                                 |             |                  |  |      |            |      |  |   |            |  |  |   |            | 
|Book value per common share(3)                           |  | $                               | 15.65       |                  |  | $    | 17.27      |      |  | $ | 15.37      |  |  | $ | 15.63      | 
|Life insurance in force (in thousands)                   |  | $                               | 117,400,000 |                  |  | $    | 77,019,000 |      |  | $ | 45,407,000 |  |  | $ | 22,538,000 | 



---



|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | See Note 2 of Notes to Consolidated
    Financial Statements.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|   
|(2) | Cumulative effect of a change in accounting
    principle reflects our application of FAS 133 
    Accounting for Derivative Instruments and Hedging Activities
    which requires bifurcation and separate accounting for embedded
    derivatives contained in certain of our annuity reinsurance
    agreements. The fair value of these embedded derivatives at
    January 1, 2001 was an unrealized loss of approximately
    $3,666,000 and the change in fair value of these embedded
    derivatives during 2001 was a gain of $5,029,000. An adjustment
    of $1,320,000 was also made to increase the amortization of
    deferred acquisition costs as a result of such gain, resulting
    in a net gain of $43,000 to net income for 2001.
|   
|(3) | Book value per share is computed by dividing
    stockholders equity at the end of the period by the number of
    common shares then outstanding.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        

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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 Selected Financial Data and the
consolidated financial statements and accompanying notes
included elsewhere in this report. 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
bases of assets or liabilities resulting from changes in
estimates are reflected in earnings in the period the estimates
are revised. Certain management estimates are based, in part, on
information provided by ceding companies. 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.

Forward Looking Statements

With the exception of historical information, the
matters contained in the following analysis are
forward-looking statements within the meaning of the
Private Securities Litigation Reform Act. Such statements may
include, but are not limited to, projections of earnings,
revenues, income or loss, capital expenditures, plans for future
operations and financing needs or plans, as well as assumptions
relating to the foregoing. The words expect,
project, estimate, predict,
anticipate, believes, and similar
expressions are also intended to identify forward-looking
statements. Forward-looking statements are inherently subject to
risks and uncertainties, some of which cannot be predicted or
quantified. Future events and actual results, performance and
achievements could differ materially from those set forth in,
contemplated by or underlying the forward-looking statements. We
assume no obligation to update any forward-looking statement to
reflect actual results or changes in or additions to the factors
affecting such forward-looking statements.

Factors that could cause our actual results of
operations or financial condition to differ from those described
in this report include, but are not necessarily limited to, the
following:



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | A decline in our financial ratings would
    adversely affect our business. Insurers and reinsurance
    intermediaries use insurance ratings as an important means of
    assessing the financial strength and quality of reinsurers.
    A.M. Best has assigned an A rating to Annuity
    and Life Reassurance and Annuity and Life Reassurance America.
    A.M. Best has announced that our rating is under review
    with negative implications. Our subsidiaries, Annuity and Life
    Reassurance and Annuity and Life Reassurance America have
    received an A rating from Standard &
    Poors, which has placed both companies on CreditWatch with
    negative implications. Annuity and Life Reassurance has been
    rated A by Fitch Ratings, which also has a negative
    ratings outlook. A downgrade in any of our ratings would
    adversely affect our ability to sell products and retain
    existing business. In particular, it is a condition in some of
    our reinsurance treaties that we maintain certain minimum credit
    ratings of A-.
|
| |  | We face significant competition from major U.S.
    and non-U.S. reinsurers, many of which are well established and
    have substantially greater financial, marketing and management
    resources than we do. Competition in the reinsurance business is
    based on many factors, including premium charges, reputation,
    financial strength, terms and conditions of products offered,
    financial ratings, claims adjudication philosophy and general
    industry experience. If we are unable to maintain or increase
    our position in the market our business could be adversely
    affected. Furthermore, because we rely on a small number of
    clients, our business is more susceptible to the adverse effects
    of competition from other reinsurers.                                                                                                                                                                                                                                                                                                      
|
| |  | Management of our underwriting risk is critical
    to the success of our business. In particular, we structure our
    investments to match our anticipated liabilities under
    reinsurance policies. If our calculations with respect to our
    reinsurance liabilities are incorrect, or if we improperly
    structure our investments to match such liabilities, we could
    have unexpected losses, including losses resulting from forced
    liquidation of investments prior to their maturity.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           

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| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Our success is dependent on our ability to manage
    our investment risks. The success of our investment strategy may
    be affected by general economic conditions, which can adversely
    affect the markets for interest-rate-sensitive securities and
    equity securities, including the level and volatility of
    interest rates and the extent and timing of investor
    participation in these markets. Unexpected volatility or
    illiquidity in the markets in which we directly or indirectly
    hold positions could adversely affect our business. Our
    investment guidelines permit us to make some 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 may also seek to
    hedge the equity related investment risk associated with 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, which, in turn could adversely affect our
    business.
|
| |  | All of the assets supporting our funds withheld
    receivable related to our annuity reinsurance agreements are
    held and managed by our cedents or by investment managers
    appointed by our cedents. The performance of these assets,
    therefore, depends to a great extent on the ability of our
    cedents, or our cedents investment managers, to make
    appropriate investments. If these assets do not accumulate at
    rates sufficient to meet minimum guarantees on the underlying
    policies before the policyholder surrenders the policy, we could
    be forced to fund these minimum guarantees. This could result in
    significant losses which, in turn could adversely affect our
    business.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|
| |  | Some of the products offered by our cedents allow
    policyholders to withdraw their funds under certain
    circumstances. We seek to manage our investment portfolios so as
    to provide and maintain sufficient liquidity to support
    anticipated withdrawal demands. Unanticipated withdrawal or
    surrender activity may, under some circumstances, require us to
    dispose of assets on unfavorable terms, which could have an
    adverse affect on our business.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|
| |  | Terrorist attacks may negatively affect our
    operations. There can be no assurance that there will not be
    further terrorist attacks against the United States or United
    States businesses. As a result of terrorism, the United States
    has entered into an armed conflict which could have a further
    impact on our business. Political and economic instability in
    some regions of the world may also result and could negatively
    impact our business. The consequences of further terrorist
    attacks and these armed conflicts are unpredictable, and we may
    not be able to foresee events that could have an adverse affect
    on our business.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|
| |  | Our success is dependent upon our ability to
    attract and retain key executive officers. The loss of the
    services of key individuals, our inability to hire and retain
    other talented personnel, or our inability to secure appropriate
    work permits could adversely affect our business.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|
| |  | 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.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|
| |  | The market for annuities and many life insurance
    products in the United States is based in part on the favorable
    tax treatment such products receive relative to certain other
    investment alternatives. Any material change in such tax
    treatment would have an adverse affect on the market for such
    products. In addition, many life insurance products are used to
    reduce federal estate tax obligations. The United States
    Congress has recently adopted legislation that eliminates
    federal estate tax over a ten-year period. Under this
    legislation, the demand for life insurance products could be
    reduced, which in turn could adversely affect our business.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|
| |  | A prolonged general economic downturn or a
    prolonged downturn in the equity and other capital markets could
    adversely affect the market for many annuity and life insurance
    products. If the market                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           

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| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |   | for annuities or life insurance were adversely
    affected, it would likely depress the demand for reinsurance of
    annuities or life insurance, which would have an adverse affect
    on our business.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|
| |  | 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 sole source of funds to
    pay expenses and dividends. The payment of dividends to us by
    our subsidiaries is subject to and limited by regulatory
    restrictions. Accordingly, there is no assurance that we will
    declare and pay dividends in the future.                                                                                                                                                                                                                                                                                                                                                                                                                                     
|
| |  | Annuity and Life Re (Holdings) and Annuity and
    Life Reassurance are Bermuda corporations and do not file United
    States tax returns because they do not engage 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 our 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 two major business lines are life reinsurance
and annuity reinsurance. Reinsurance agreements typically remain
in force for the life of the underlying policies reinsured which
range from ten to forty years. Each year, a portion of the
business under an existing treaty terminates due to, among other
things, surrenders and/or lapses of underlying policies, deaths
of underlying insureds and the exercise of recapture options.

Profitability of the 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.

At December 31, 2001 and 2000, our life
insurance in force amounted to approximately $117 billion
and $77 billion, respectively. We retrocede portions of
certain risks in excess of our maximum per life retention of
$1,000,000. At December 31, 2001 and 2000, we had ceded
approximately $493,000,000 and $193,000,000 of life insurance
coverage, respectively, or 0.42% and 0.25% 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 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. This product line can be adversely impacted by the
combined effects of poor market performance and excessive
surrender rates, such as occurred in 2001. At December 31,
2001 and 2000, our liability for annuity contracts amounted to
approximately $1.5 billion.

Critical Accounting Policies

Annuity and Life Re (Holdings), Ltd. is a Bermuda
holding company with operating subsidiaries in Bermuda and the
United States. Our principal business is reinsurance of life and
annuity risks. We consolidate the operations of all of our
subsidiaries in accordance with U.S. GAAP requirements.

In preparing our financial statements, we make
assumptions about our proportionate share of future investment
income that will be earned from the investment of premiums
received from underlying policyholders by our ceding companies
and about future rates of lapse of policies underlying our
annuity reinsurance contracts. These assumptions have a direct
impact on the amount of estimated expected gross profits arising
from these annuity reinsurance contracts and, therefore, on the
recoverability of the deferred acquisition costs

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carried on our Balance Sheet for these contracts.
While these estimates are based upon historical results and
information provided to us by our cedents, actual results could
differ (and, in the past, have differed) materially from our
estimates for a variety of reasons, including the failure of our
ceding companies to report timely information regarding material
developments under our reinsurance agreements. Such differences
could be material to our future results. If our assumptions for
investment returns prove to be inaccurate, or if lapse rates
exceed our assumptions, we may be required to record additional
charges, which would adversely impact our earnings.


We have concluded that there are embedded
derivatives within the Funds withheld at interest receivable
related to certain of our annuity reinsurance contracts written
on a modified coinsurance or coinsurance funds withheld basis
that require bifurcation and separate accounting under Statement
of Financial Accounting Standards No. 133 
Accounting for Derivative Instruments and Hedging Activities.
These embedded derivatives are similar to a total return swap
arrangement on the underlying assets held by our ceding
companies. The net fair value of these embedded derivatives is
classified as part of our Funds withheld asset on our Balance
Sheet. We have developed a cash flow model with the assistance
of outside advisors to arrive at an estimate of the fair value
of this total return swap that uses various assumptions
regarding future cash flows under the affected annuity
reinsurance contracts. The change in fair value of these
embedded derivatives is recorded in our statement of operations
as Net change in fair value of embedded derivatives, which is a
non cash item. The change in fair value of these embedded
derivatives also affects the emergence of expected gross profits
for purposes of amortizing deferred acquisition costs associated
with these contracts. The application of this accounting policy
has increased the volatility of our reported earnings. While we
have made an estimate of the fair value of these embedded
derivatives using a model that we believe to be appropriate and
based upon reasonable assumptions, the assumptions used are
subjective and may require adjustment in the future. In
addition, as industry standards for estimating the fair value of
embedded derivatives develop, it is possible that we may modify
our methodology. Changes in our assumptions and industry
standards could have a significant impact on the fair value of
the embedded derivatives and our reported earnings. We do not
bifurcate and separately account for the embedded derivatives
contained in certain of our contracts, including our
Transamerica annuity 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 69% convertible bonds at December 31, 2001,
the bifurcation and separate accounting for the embedded
derivatives contained in that contract would add significant
volatility to our reported results.

We report our fixed income investments at fair
value (our securities are classified as available for sale) with
any change in their fair value reported as a change in
accumulated other comprehensive income. If we determine that the
value of an investment has declined (other than temporarily), we
write the investment down to its fair value with a charge to
realized losses. Realized gains and losses are determined using
the specific identification method.

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. Deposit
accounting procedures are applied to considerations received or
paid relating to reinsurance contracts that do not qualify for
reinsurance accounting. Policy benefits and claims that are
charged to expense include benefit claims incurred in the period
in excess of related policyholders account balances. These
estimates and assumptions can have a significant effect on the
amounts we report in our financial statements. See Note 3
of the Notes to Consolidated Financial Statements
for additional information regarding our accounting policies.

24



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

Operating Results

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 $(40,581,000) or $(1.59)
per primary and fully diluted common share, compared to net
income of $39,102,000 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 is 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 have now 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, have
been allocated to prior quarters of 2001. We have 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 have written down
deferred acquisition costs to what we believe to be an
appropriate level based upon reasonable assumptions about future
investment performance and surrenders, the write downs are
estimates. Actual amounts of income earned and amounts payable
upon future surrenders may be significantly higher or lower than
the amounts estimated. If actual experience varies significantly
from the assumptions used to write down the deferred acquisition
costs in 2001, additional write downs may be needed in the
future.

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 as they
were reported to us. As discussed elsewhere in this report we
are seeking relief from our ceding reinsurers with respect to
these two life reinsurance contracts. If we are unable to
rescind, recapture, reprice, or otherwise restructure these
agreements, we may incur additional losses on these contracts in
future periods.

Our net income 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 in connection with claims we received as a
result of that event.

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Under FAS 133, we are required to carry the
fair value of the embedded derivatives contained in certain of
our annuity reinsurance contracts on our balance sheet, and
unrealized changes in the fair value of those embedded
derivatives are reflected in our net income. The change in fair
value of the embedded derivatives is influenced by changes in
credit risk, yield curve shifts, changes in expected future cash
flows under the annuity reinsurance contracts and, to a lesser
extent, interest rate changes. The change in fair value also
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 $(3,666,000), or $(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
$251,793,000, an increase of 50% over net premium revenue of
$168,404,000 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 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 $91,129,000, a decrease of
33% from net investment income of $136,648,000 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 in accordance with statutory accounting
principles. 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, to a lesser extent, 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
$5,029,000 for 2001. We implemented FAS 133 effective
January 1, 2001, so we did not record any embedded
derivative gains or losses in 2000. See Note 17 of
Notes to Consolidated Financial Statements for
additional information regarding embedded derivative gains and
losses for each quarter of 2001.

Net Realized Investment Gains (Losses).Net realized investment gains were
approximately $1,230,000 for the year ended December 31,
2001, as compared with realized losses of $(4,817,000) for the
year ended December 31, 2000. These gains and losses result
from normal active management of our investment portfolio
intended to improve performance and increase operating income.
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 $216,025,000 or 86%
of net premium, as compared with $132,810,000 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 inforce 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 are seeking relief from our ceding
reinsurers with

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respect to these two life reinsurance contracts.
If we are unable to rescind, recapture, reprice, or otherwise
restructure these agreements, we may incur additional losses on
these contracts in future periods. The mortality experience of
our life reinsurance business, excluding these two life
reinsurance contracts, is within pricing parameters. 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 $49,258,000 for
the year ended December 31, 2001, as compared with
approximately $65,842,000 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 inforce business due to the high surrender
rate we have experienced on our contract with Transamerica,
partially offset by growth in our Ohio National contract. 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 have now 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 of deferred policy acquisition costs, were
approximately $127,781,000 for the year ended December 31,
2001, as compared with $58,986,000 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.

Other Operating Expenses.Operating expenses were approximately
$11,552,000 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 $10,411,000 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. We consider the operating expense
level to be low by industry standards and in line with our plan
to be a low cost provider.

Year Ended
December 31, 2000 Compared to Year Ended December 31,
1999

Net Income.For the
year ended December 31, 2000, we had consolidated net
income of $39,102,000, which is $1.53 per common share, or $1.42
per common share on a fully diluted basis, as compared with net
income of $35,703,000, or $1.40 per common share, or $1.31 per
common share on a fully diluted basis, for the year ended
December 31, 1999.

Net Premiums.Net
premium revenue for the year ended December 31, 2000 was
$168,404,000, an increase of 67% over net premium revenue of
$100,835,000 for the year ended December 31, 1999. The
majority of premium revenue was derived from traditional
ordinary life reinsurance. The growth reflects the

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level of new business written and the increase in
the face amount of insurance in force. At December 31,
2000, the total face amount of life insurance in force was
approximately $77.0 billion compared with approximately
$45.4 billion at December 31, 1999, an increase of
70%. 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, 2000 was $136,648,000, an increase
of 61% over net investment income of $85,090,000 for the year
ended December 31, 1999. The growth in the investment
income was primarily due to the income earned on the premiums
paid to our ceding companies by the holders of policies
underlying our annuity reinsurance contracts. The average yield
rate earned on an annualized basis on the invested assets, which
excludes Funds withheld, was approximately 6.85% for the year
ended December 31, 2000 compared with 6.29% for the year
ending December 31, 1999, reflecting a lengthening of
maturities of the securities we hold.

Income earned on Funds withheld was $116,522,000
for the year ended December 31, 2000, as compared with
$64,606,000 for the year ended December 31, 1999. The
average yield rate earned on Funds withheld was 7.61% for the
year ended December 31, 2000 compared with 4.73% for the
year ended December 31, 1999, primarily reflecting realized
gains on our annuity reinsurance contract with Transamerica. For
purposes of calculating the average yield rate earned on Funds
withheld, we include net realized capital gains and losses as
reported to us by our ceding companies in accordance with
statutory accounting principles.

Net Realized Investment (Losses).Net realized investment losses were
approximately $(4,817,000) for the year ended December 31,
2000, as compared with realized losses of $(1,285,000) for the
year ended December 31, 1999. These losses resulted from
normal active management of our investment portfolio intended to
improve performance and increase operating income. We make
decisions concerning the sales of invested assets based on a
variety of market, business and other factors. At
December 31, 2000, we had unrealized gains of approximately
$2,065,000, as compared with unrealized losses of $(11,269,000)
at December 31, 1999. The change in unrealized gains and
losses was principally related to movements in the general level
of interest rates.

Claims and Policy Benefits.Claims and policy benefits for the
year ended December 31, 2000 were $132,810,000 or 79% of
net premium, as compared with $79,953,000 or 79% of net premium
for the year ended December 31, 1999. Aggregate mortality
experience was favorable for the period, falling within pricing
parameters.

Interest Credited to Interest Sensitive
Products.Interest credited to
interest sensitive products was approximately $65,842,000 for
the year ended December 31, 2000, as compared with
approximately $22,313,000 for the year ended December 31,
1999. This increase was related to income earned on the premiums
paid to our ceding companies by the holders of policies
underlying our annuity reinsurance contracts. The 2000 expense
also includes approximately $2,800,000 in minimum interest
guarantee payments made during the year ended December 31,
2000 in connection with our annuity reinsurance contract with
Transamerica.

Policy Acquisition Costs and Other Insurance
Expenses.Policy acquisition costs and
other insurance expenses, consisting primarily of allowances and
amortization of deferred policy acquisition costs, were
approximately $58,986,000 for the year ended December 31,
2000, as compared with $42,201,000 for the year ended
December 31, 1999. Generally, policy acquisition costs and
other insurance expenses fluctuate with business volume and
changes in product mix. The increase in these costs reflects the
growth and development of our life reinsurance business, an
increase in the net investment income earned on the Funds
withheld associated with our annuity reinsurance business, as
well as an increase in the amortization rate of the deferred
acquisition costs associated with our annuity reinsurance
contract with Transamerica due to higher than anticipated
surrender rates on the underlying policies. The increased rate
of amortization resulted in an additional $10,000,000 of
deferred acquisition costs being incurred in the year ended
December 31, 2000.

Other Operating Expenses.Operating expenses were approximately
$10,411,000 or 3.4% of total revenue for the year ended
December 31, 2000, as compared with $7,686,000 or 4.1% of
total revenue for the year ended December 31, 1999. The
decrease in the ratio of operating expenses to total revenue was
due to the growth and development of our reinsurance operations
and our revenue base.

28



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##### 



Financial Condition

Investments

Our invested assets, including cash and cash
equivalents, had an aggregate fair value of approximately
$423,780,000 at December 31, 2001, as compared with
approximately $321,819,000 at December 31, 2000. The change
in invested assets during 2001 was due primarily to the receipt
of $137 million from a reinsurer that is used to fund our
ceding companies collateral requirements plus unrealized
gains during the period, offset by funds used by our operating
activities and dividends paid to shareholders. At
December 31, 2001, unrealized gains totaled approximately
$6,418,000, as compared to approximately $2,065,000 at
December 31, 2000. The change in unrealized gains is
principally related to movement in the general level of interest
rates during 2001. At December 31, 2001 and 2000, the
weighted average duration of the fixed income securities
included in our invested assets was 3.7 and 3.2 years,
respectively, and the weighted average investment quality rating
was AA+ and AA, respectively.

Our investments are governed by investment
guidelines established and approved by our Board of Directors.
Our investment objectives are to achieve above average
risk-adjusted total returns, maintain a high quality portfolio,
maximize current income, maintain an adequate level of liquidity
and match the cash flows of our investments to our related
insurance liabilities. Our investment guidelines require our
overall fixed income portfolio to maintain a minimum weighted
average credit quality of A. A fixed income security
rated A by Standard & Poors is considered
to be somewhat susceptible to the adverse effects of changes in
circumstances and economic conditions; however, the
issuers capacity to meet its financial commitment on the
security is still considered to be strong. As of
December 31, 2001, our investment guidelines allowed us to
invest in fixed income securities that are rated below
investment grade, but limit these investments to 10% of our
invested assets. We do not invest in any fixed income securities
in emerging markets or securities which are not rated by a major
rating agency.

Our investment securities are managed by two
professional investment advisors, Alliance Capital Management
Corporation and Prudential Investment Corporation, each of which
manages a portion 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 Alliance and
Prudential and the fees associated with the arrangements are
periodically reviewed by our Board of Directors.

We do not engage in trading our investments 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 a result, our securities are classified
as available for sale and are carried at fair value
on our Balance Sheet.

At December 31, 2001, $3,749,000 at fair
value, or 1.2% of our fixed income securities (0.9% of
Stockholders Equity), consisted of below investment grade
securities, as compared with approximately $8,983,000 or 3.4% of
our fixed income securities (2.0% of Stockholders Equity) at
December 31, 2000. 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 limit our exposure to
below investment grade securities to 10% of our invested assets,
as these investments are subject to a higher degree of credit
risk than investment grade securities. We monitor the
creditworthiness of the portfolio as a whole, and when the fair
market value of a security declines for reasons other than
changes in interest rates or other perceived temporary
conditions, the security is written down to its net realizable
value. At December 31, 2001 there were two impaired
securities, which were written down by $600,000. At
December 31, 2000 there was one impaired security, which
was written down by $1,000,000.

At December 31, 2001, mortgage backed
securities represented approximately 11% of invested assets,
including cash and cash equivalents, as compared with 30% at
December 31, 2000. Investors in these securities are
compensated primarily for reinvestment risk rather than credit
quality risk. Investments in

29



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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, 2001 and 2000.


At December 31, 2001, approximately 2% of
our mortgage backed investment portfolio consisted of planned
amortization class (PAC), target amortization class
(TAC) and sequential instruments, as compared with
25% at December 31, 2000. These investments are designed to
amortize in a more predictable manner by shifting the primary
risk of prepayment of the underlying collateral to investors in
other tranches (support classes) of the 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 have generally not engaged in hedging activities to mitigate
the effects of asset/ liability mismatches or interest rate
changes on our Balance Sheet, although we may do so in the
future. Our results of operations and our financial condition
are also significantly affected by the performance of assets
held and managed by our ceding companies or others under
modified coinsurance and coinsurance funds withheld
arrangements, which are 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) for the periods indicated.

Investment Results

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



---



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



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

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

30



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investment manager to do so, credits interest to
policyholders accounts, processes surrenders and engages
in other activities with respect to the administration of the
policies. 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.


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

We have annuity reinsurance contracts with six
ceding companies. At December 31, 2001, our Funds withheld
receivable related to such contracts had a carrying value of
approximately $1.5 billion. Our contracts with Transamerica
and The Ohio National Life Insurance Company accounted for
approximately 80% of our Funds withheld at interest receivable
as of that date. At December 31, 2001, 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 5.0 years. In addition, at December 31, 2001
approximately 4.0% of such assets were invested in below
investment grade securities. The average yield rate earned on
the assets held and managed by our ceding companies was
approximately 4.59% for the year ended December 31, 2001.
The average yield rates earned on the invested premiums funding
our annuity obligations to Transamerica and Ohio National were
approximately 3.94% and 7.91%, respectively, for the year ended
December 31, 2001. For purposes of calculating the average
yield rate earned on assets held and managed by our ceding
companies, including with respect to the Transamerica and Ohio
National contracts, we include net realized capital gains and
losses as reported to us by our ceding companies in accordance
with statutory accounting principles. The performance of these
assets depends to a great extent on the ability of the ceding
company or 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. For example, under our
annuity reinsurance agreement with Transamerica, the minimum
interest guarantees on the underlying policies have exceeded the
underlying policyholder account values due to poor investment
performance, and we have been forced to fund our proportionate
share of the shortfall out of our general assets, which has
resulted in significant losses.

Our policy is 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, 2001, approximately $962 million of our
Funds withheld at interest receivable and $991 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. IL Annuity has financial strength or claims
paying ratings of A, A and
AA- from A.M. Best, Standard &
Poors and Fitch Ratings, respectively. Transamerica has
financial strength or claims paying ratings of A+,
AA+, Aa3 and AA+ from
A.M. Best, Standard & Poors, Moodys
and Fitch Ratings, respectively. At December 31, 2001,
approximately $227 million of our Funds withheld at
interest receivable and $227 million of our Interest
sensitive contracts liability related to our reinsurance
contract with Ohio National. Ohio National has financial
strength or claims paying ratings of A+,
AA, A1 and AA from
A.M. Best, Standard & Poors, Moodys
and Fitch Ratings, respectively.

31



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Under the terms of our annuity reinsurance
treaties, mutual debts and credits are offset between us and the
counterparties to each treaty 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 of mutual debts and credits between us and
the counterparties to each treaty in the event of a
counterpartys insolvency. Therefore, if a 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 Transamerica, IL Annuity or Ohio National
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. The investment
policies, strategies or results for the general account assets
of such companies are not meaningful to our investors in
analyzing the investment risk related to the 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, 2001, approximately $962 million, or
65%, of our Funds withheld at interest receivable, approximately
$991 million, or 65%, of our Interest sensitive contracts
liability and approximately $85 million of the deferred
acquisition costs on our Balance Sheet related to this contract.
The assets funding the policyholder obligations 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 69% 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. During 2000 and 2001, we were required to pay
approximately $2,800,000 and $13,500,000, respectively, under
this annuity reinsurance contract to cover our proportionate
share of the shortfall that arose due to the fact that the
assets supporting this contract substantially underperformed the
minimum interest guarantees for surrendered VisionMark 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 (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
receivable owed to us by Transamerica.

32



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##### 



As noted in the table below, at December 31,
2001, approximately 69% of the premiums held and managed by
IL Annuity were invested in convertible bonds, with the
remaining 31% in fixed income securities. The value of
convertible bonds is a function of their investment value
(determined by yield in comparison with the yields of other
securities of comparable maturity and quality that do not have a
conversion privilege) and their conversion value (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, 2001 the assets held by IL Annuity and
managed by AmerUS Capital were comprised of:

|                                                            |  |            |               |              |  |            |             |  |  |  |       |  
|----------------------------------------------------------- |  | ---------- | ------------- | ------------ |  | ---------- | ----------- |  |  |  | ----- | -
|Type of Security                                            |  | Book Value |               | Market Value |  | % of Total
|                                                            |  |            |               |              |  |           
|Convertible bonds                                           |  | $          | 702,809,415   |              |  | $          | 679,337,083 |  |  |  | 68.8  | %
|Investment grade U.S corporate bonds                        |  |            | 228,507,362   |              |  |            | 231,490,737 |  |  |  | 23.5  | %
|Below investment grade U.S. corporate bonds                 |  |            | 57,497,799    |              |  |            | 57,066,596  |  |  |  | 5.8   | %
|Short term securities                                       |  |            | 18,815,082    |              |  |            | 18,815,081  |  |  |  | 1.9   | %
|                                                            |  |            |               |              |  |            |             |  |  |  |       |  
|Total book value                                            |  | $          | 1,007,629,658 |              |  | $          | 986,709,497 |  |  |  | 100.0 | %
|                                                            |  |            |               |              |  |            |             |  |  |  |       |  
|Accrued investment income                                   |  |            |               |              |  |            | 8,676,888   |  |  |  |       |  
|                                                            |  |            |               |              |  |            |             |  |  |  |       |  
|Total market value, including accrued investment
    income |  |            |               |              |  | $          | 995,386,385 |  |  |  |       |  
|                                                            |  |            |               |              |  |            |             |  |  |  |       |  

According to data provided to us by Transamerica,
at December 31, 2001 the credit ratings of the assets
(excluding accrued investment income) held by IL Annuity
and managed by AmerUS Capital were approximately:

|                                                            |  |            |               |              |  |            |             |  |  |  |       |  
|----------------------------------------------------------- |  | ---------- | ------------- | ------------ |  | ---------- | ----------- |  |  |  | ----- | -
|Ratings(1)                                                  |  | Book Value |               | Market Value |  | % of Total
|                                                            |  |            |               |              |  |           
|AAA                                                         |  | $          | 161,016,588   |              |  | $          | 169,357,245 |  |  |  | 17.1  | %
|AA                                                          |  |            | 77,021,332    |              |  |            | 73,850,224  |  |  |  | 7.5   | %
|A                                                           |  |            | 225,819,356   |              |  |            | 222,989,626 |  |  |  | 22.6  | %
|BBB                                                         |  |            | 486,274,583   |              |  |            | 463,445,806 |  |  |  | 47.0  | %
|BB and below                                                |  |            | 57,497,799    |              |  |            | 57,066,596  |  |  |  | 5.8   | %
|                                                            |  |            |               |              |  |            |             |  |  |  |       |  
|Total invested assets                                       |  | $          | 1,007,629,658 |              |  | $          | 986,709,497 |  |  |  | 100.0 | %
|                                                            |  |            |               |              |  |            |             |  |  |  |       |  
|Accrued investment income                                   |  |            |               |              |  |            | 8,676,888   |  |  |  |       |  
|                                                            |  |            |               |              |  |            |             |  |  |  |       |  
|Total market value, including accrued investment
    income |  |            |               |              |  | $          | 995,386,385 |  |  |  |       |  
|                                                            |  |            |               |              |  |            |             |  |  |  |       |  






|    |                                                                                                                                                                               
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(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.

33



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##### 



According to data provided to us by Transamerica,
at December 31, 2001 the maturity distribution of the
assets held by IL Annuity and managed by AmerUS Capital was
approximately:

|                       |  |            |               |              |  |            |             |  |  |  |       |  
|---------------------- |  | ---------- | ------------- | ------------ |  | ---------- | ----------- |  |  |  | ----- | -
|Maturity               |  | Book Value |               | Market Value |  | % of Total
|                       |  |            |               |              |  |           
|Within one year        |  | $          | 41,073,695    |              |  | $          | 38,845,620  |  |  |  | 3.9   | %
|From one to five years |  |            | 279,828,931   |              |  |            | 281,167,345 |  |  |  | 28.4  | %
|From six to ten years  |  |            | 269,920,648   |              |  |            | 263,433,788 |  |  |  | 26.8  | %
|More than ten years    |  |            | 416,806,384   |              |  |            | 403,262,744 |  |  |  | 40.9  | %
|                       |  |            |               |              |  |            |             |  |  |  |       |  
|Total all years        |  | $          | 1,007,629,658 |              |  | $          | 986,709,497 |  |  |  | 100.0 | %
|                       |  |            |               |              |  |            |             |  |  |  |       |  

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 70% of
the assets under management as of December 31, 2001. 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 investment 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 are to be
made primarily in convertible bonds having an issue size
exceeding $100 million.

The Investment Grade Bond Strategy represents 16%
of the assets under management as of December 31, 2001.
These assets are heavily weighted towards securities rated
Baa/ 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.

The High Yield Bond Strategy represents 5% of the
assets under management as of December 31, 2001. 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 8% of
the assets under management as of December 31, 2001. 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

34



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##### 



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

The second largest annuity reinsurance contract
we have is with Ohio National. This contract reinsures fixed
annuity policies that guarantee a crediting rate to
policyholders for six years. During that six year period, each
years crediting rate is guaranteed to exceed the prior
years rate by 0.15%. As of December 31, 2001, the
average crediting rate of the policies underlying the contract
was 5.55%. As of December 31, 2001, approximately
$227 million, or 15%, of our Funds withheld at interest
receivable, approximately $227 million, or 15%, of our
Interest sensitive contracts liability and approximately
$12 million of the deferred acquisition costs on our
Balance Sheet related to this contract. The assets funding the
policyholder obligations have an average credit quality of
A- and an average duration of approximately
5.84 years. The assets are held in an escrow account, but
pursuant to the terms of the escrow agreement establishing the
account, Ohio National has the right to remove the assets from
the escrow account at any time and for any reason, or to
terminate the escrow agreement for any reason, each upon
30 days prior written notice. The escrow agreement,
by its terms, does not limit Ohio Nationals ability to
exercise these rights in the event of Ohio Nationals
insolvency. We do not believe that this escrow agreement creates
a security interest in our favor with respect to the assets held
in the escrow. Despite the lack of protection offered to us by
the escrow agreement in the event of Ohio Nationals
insolvency, our annuity reinsurance agreement with Ohio National
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 receivable owed
to us by Ohio National.

According to data provided to us by Ohio
National, at December 31, 2001 the assets managed by Ohio
National were subject to investment risks similar to those
described above with respect to our own investments and were
comprised of:

|                                                            |  |            |             |              |  |            |             |  |  |  |        | 
|----------------------------------------------------------- |  | ---------- | ----------- | ------------ |  | ---------- | ----------- |  |  |  | ------ | 
|Type of Security                                            |  | Book Value |             | Market Value |  | % of Total
|                                                            |  |            |             |              |  |           
|Corporate bonds                                             |  | $          | 160,716,595 |              |  | $          | 164,847,018 |  |  |  | 74.1%  | 
|Asset backed securities                                     |  |            | 54,132,816  |              |  |            | 54,274,991  |  |  |  | 24.4%  | 
|Mortgage backed securities                                  |  |            | 3,134,191   |              |  |            | 3,241,322   |  |  |  | 1.5%   | 
|Equity securities                                           |  |            | 33,333      |              |  |            | 33,333      |  |  |  | 0.0%   | 
|                                                            |  |            |             |              |  |            |             |  |  |  |        | 
|Total invested assets                                       |  | $          | 218,016,935 |              |  | $          | 222,396,664 |  |  |  | 100.0% | 
|                                                            |  |            |             |              |  |            |             |  |  |  |        | 
|Accrued investment income                                   |  |            |             |              |  |            | 3,116,823   |  |  |  |        | 
|                                                            |  |            |             |              |  |            |             |  |  |  |        | 
|Total market value, including accrued investment
    income |  |            |             |              |  | $          | 225,513,487 |  |  |  |        | 
|                                                            |  |            |             |              |  |            |             |  |  |  |        | 

35



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##### 



At December 31, 2001 the credit ratings of
the assets (excluding accrued investment income) held and
managed by Ohio National were approximately:

|                                                            |  |            |             |              |  |            |             |  |  |  |       |  
|----------------------------------------------------------- |  | ---------- | ----------- | ------------ |  | ---------- | ----------- |  |  |  | ----- | -
|Ratings(1)                                                  |  | Book Value |             | Market Value |  | % of Total
|                                                            |  |            |             |              |  |           
|AAA                                                         |  | $          | 31,023,472  |              |  | $          | 31,075,236  |  |  |  | 14.0  | %
|AA                                                          |  |            | 14,776,889  |              |  |            | 14,968,687  |  |  |  | 6.7   | %
|A                                                           |  |            | 93,652,175  |              |  |            | 96,408,460  |  |  |  | 43.3  | %
|BBB                                                         |  |            | 78,564,399  |              |  |            | 79,944,281  |  |  |  | 36.0  | %
|                                                            |  |            |             |              |  |            |             |  |  |  |       |  
|Total invested assets                                       |  | $          | 218,016,935 |              |  | $          | 222,396,664 |  |  |  | 100.0 | %
|                                                            |  |            |             |              |  |            |             |  |  |  |       |  
|Accrued investment income                                   |  |            |             |              |  |            | 3,116,823   |  |  |  |       |  
|                                                            |  |            |             |              |  |            |             |  |  |  |       |  
|Total market value, including accrued investment
    income |  |            |             |              |  | $          | 225,513,487 |  |  |  |       |  
|                                                            |  |            |             |              |  |            |             |  |  |  |       |  



---



|    |                                                                                                                                                                               
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(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.

According to data provided to us by Ohio
National, at December 31, 2001 the maturity distribution of
the assets (excluding accrued investment income) held and
managed by Ohio National was approximately:

|                       |  |            |             |              |  |            |             |  |  |  |       |  
|---------------------- |  | ---------- | ----------- | ------------ |  | ---------- | ----------- |  |  |  | ----- | -
|Maturity               |  | Book Value |             | Market Value |  | % of Total
|                       |  |            |             |              |  |           
|Within one year        |  | $          | 33,333      |              |  | $          | 33,333      |  |  |  | 0.0   | %
|From one to five years |  |            | 8,600,155   |              |  |            | 8,398,855   |  |  |  | 3.9   | %
|From six to ten years  |  |            | 97,212,044  |              |  |            | 99,777,156  |  |  |  | 44.6  | %
|More than ten years    |  |            | 112,171,403 |              |  |            | 114,187,320 |  |  |  | 51.5  | %
|                       |  |            |             |              |  |            |             |  |  |  |       |  
|Total all years        |  | $          | 218,016,935 |              |  | $          | 222,396,664 |  |  |  | 100.0 | %
|                       |  |            |             |              |  |            |             |  |  |  |       |  

The investment objectives for Ohio National are
set forth in our annuity reinsurance agreement. 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

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

36



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##### 



According to information provided by the ceding
companies under these four annuity reinsurance contracts, at
December 31, 2001 the assets held and managed by those
ceding companies were comprised of:

|                                                            |  |            |             |              |  |            |             |  |  |  |       |  
|----------------------------------------------------------- |  | ---------- | ----------- | ------------ |  | ---------- | ----------- |  |  |  | ----- | -
|Type of Security                                            |  | Book Value |             | Market Value |  | % of Total
|                                                            |  |            |             |              |  |           
|Canadian provincial bonds                                   |  | $          | 84,410,006  |              |  | $          | 86,217,892  |  |  |  | 27.4  | %
|Investment grade UK corporate bonds                         |  |            | 80,469,794  |              |  |            | 80,469,794  |  |  |  | 25.6  | %
|Investment grade US corporate bonds                         |  |            | 46,500,253  |              |  |            | 48,406,672  |  |  |  | 15.4  | %
|Mortgage backed securities                                  |  |            | 40,797,760  |              |  |            | 41,581,771  |  |  |  | 13.2  | %
|U.S. government bonds                                       |  |            | 30,982,916  |              |  |            | 31,152,100  |  |  |  | 9.9   | %
|All other securities                                        |  |            | 26,231,524  |              |  |            | 26,600,787  |  |  |  | 8.5   | %
|                                                            |  |            |             |              |  |            |             |  |  |  |       |  
|Total book value                                            |  | $          | 309,392,253 |              |  | $          | 314,429,016 |  |  |  | 100.0 | %
|                                                            |  |            |             |              |  |            |             |  |  |  |       |  
|Accrued investment income                                   |  |            |             |              |  |            | 5,125,842   |  |  |  |       |  
|                                                            |  |            |             |              |  |            |             |  |  |  |       |  
|Total market value, including accrued investment
    income |  |            |             |              |  | $          | 319,554,858 |  |  |  |       |  
|                                                            |  |            |             |              |  |            |             |  |  |  |       |  

According to information provided by the ceding
companies under these four annuity reinsurance contracts, at
December 31, 2001 the credit ratings of the invested
premiums of the assets (excluding accrued investment income)
held and managed by those ceding companies were approximately:

|                                                            |  |            |             |              |  |            |             |  |  |  |       |  
|----------------------------------------------------------- |  | ---------- | ----------- | ------------ |  | ---------- | ----------- |  |  |  | ----- | -
|Ratings(1)                                                  |  | Book Value |             | Market Value |  | % of Total
|                                                            |  |            |             |              |  |           
|AAA                                                         |  | $          | 37,563,295  |              |  | $          | 37,890,269  |  |  |  | 12.1  | %
|AA                                                          |  |            | 32,690,761  |              |  |            | 32,796,394  |  |  |  | 10.4  | %
|A                                                           |  |            | 166,641,469 |              |  |            | 170,074,623 |  |  |  | 54.0  | %
|BBB                                                         |  |            | 69,186,346  |              |  |            | 70,348,901  |  |  |  | 22.4  | %
|BB and below                                                |  |            | 3,310,382   |              |  |            | 3,318,829   |  |  |  | 1.1   | %
|                                                            |  |            |             |              |  |            |             |  |  |  |       |  
|Total invested assets                                       |  | $          | 309,392,253 |              |  | $          | 314,429,016 |  |  |  | 100.0 | %
|                                                            |  |            |             |              |  |            |             |  |  |  |       |  
|Accrued investment income                                   |  |            |             |              |  |            | 5,125,842   |  |  |  |       |  
|                                                            |  |            |             |              |  |            |             |  |  |  |       |  
|Total market value, including accrued investment
    income |  |            |             |              |  | $          | 319,554,858 |  |  |  |       |  
|                                                            |  |            |             |              |  |            |             |  |  |  |       |  



---



|    |                                                                                                                                                                               
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(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.

According to information provided by the ceding
companies under these four annuity reinsurance contracts, at
December 31, 2001 the maturity distribution of the assets
held and managed by those ceding companies was approximately:

|                       |  |            |             |              |  |            |             |  |  |  |       |  
|---------------------- |  | ---------- | ----------- | ------------ |  | ---------- | ----------- |  |  |  | ----- | -
|Maturity               |  | Book Value |             | Market Value |  | % of Total
|                       |  |            |             |              |  |           
|Within one year        |  | $          | 14,153,825  |              |  | $          | 14,323,512  |  |  |  | 4.6   | %
|From one to five years |  |            | 69,427,220  |              |  |            | 71,770,499  |  |  |  | 22.8  | %
|From six to ten years  |  |            | 77,954,081  |              |  |            | 79,154,031  |  |  |  | 25.2  | %
|More than ten years    |  |            | 147,857,127 |              |  |            | 149,180,974 |  |  |  | 47.4  | %
|                       |  |            |             |              |  |            |             |  |  |  |       |  
|Total all years        |  | $          | 309,392,253 |              |  | $          | 314,429,016 |  |  |  | 100.0 | %
|                       |  |            |             |              |  |            |             |  |  |  |       |  

Liquidity and Capital Resources

Our liquidity and capital resources are a measure
of our overall financial strength and our ability to generate
cash flows from our operations to meet operating and growth
needs. Our principal sources of funds are premiums received, net
investment income, proceeds from investments called, redeemed or
sold, funds

37



---



##### 



drawn from our collateral funding facility
(described below) and cash and short term investments. The
principal obligations and uses of the funds are the payment of
policy benefits, acquisition and operating expenses and the
purchase of investments.


During 2001, we entered into a reinsurance
agreement with a third party reinsurer to cede excess U.S.
statutory reserves (the amount by which our cedents U.S.
statutory reserves exceed our U.S. GAAP reserves for certain
life insurance contracts subject to certain state statutory
regulations known as Triple-X) to the reinsurer. Under the
agreement, the reinsurer is obligated to fund the collateral
requirements associated with these excess U.S. statutory
reserves by making cash deposits with us. As of
December 31, 2001, we had received deposits of $137,000,000
from the reinsurer. We expect to cede additional excess U.S.
Statutory reserves to, and receive additional deposits from, the
reinsurer in the future.

This reinsurance agreement does not qualify for
reinsurance accounting under U.S. GAAP. As a result, funds
received under this contract are recorded as a deposit
liability. As part of this contract, we deposited $41,000,000
with the reinsurer, which is included in Deposits and other
reinsurance receivables on our Balance Sheet. We receive the
benefit of investment income from the investment of the funds
received and our deposit with the reinsurer, and we pay the
third party reinsurer certain fees associated with the contract.
For the year 2001, the fees were $1,200,000 and are included in
Other insurance expenses.

Net cash used by operating activities was
$(40,690,000) for the year ended December 31, 2001, as
compared with cash provided by operations of $16,260,000 for the
year ended December 31, 2000. The use of cash by our
operating activities is primarily related to the net loss
incurred for the year and its related payments.

At December 31, 2001 our total
capitalization, which consists entirely of equity, was
$402,189,000. We believe this level of capital is sufficient to
support our insurance writings and growth for the near future.
However, as a Bermuda reinsurer we are required to post
collateral for the statutory reserves ceded to us by U.S. based
insurers and reinsurers. On March 1, 2002 we filed a shelf
registration statement on Form S-3 to register under the
Securities Act of 1933 $200,000,000 of senior debt to be sold in
one or more transactions on a delayed basis. We may issue some
or all of this debt in the future, although the registration
statement is currently not effective and, therefore, we may not
issue debt under it at this time. This debt, if and when issued,
would be used to fund collateral requirements of our cedents. In
the future, we may issue additional debt or other forms of
capital to assist in meeting the collateralization needs of our
cedents. During 2001 our Board of Directors approved a share
repurchase program of up to $25,000,000 of our common shares.
While our Board has given us the flexibility to repurchase our
common shares in the future if market conditions so dictate, at
the present time we anticipate utilizing this capital in the
future to support our business growth.

At December 31, 2001 and 2000 we had no
outstanding debt. At December 31, 2001 and 2000, letters of
credit totaling $197,000,000 and $184,000,000, respectively,
issued in the ordinary course of our business had been issued by
our bankers in favor of certain ceding insurance companies to
provide security and meet regulatory requirements. At
December 31, 2001 and 2000 letters of credit totaling
$101,000,000 and $138,000,000, respectively, were fully
collateralized by our investments. At December 31, 2001 and
2000, investments of $272,000,000 and $66,000,000, respectively,
were held in trust for the benefit of certain ceding insurance
companies to provide security and to meet regulatory
requirements. We may incur indebtedness in the future for
investment or operational purposes.

During the year 2001, the Board of Directors
declared and paid quarterly shareholder dividends of $.05 per
share. The Board intends to continue to declare and pay out of
earnings a quarterly dividend. The continued payment of
dividends is dependent on the ability of our operating
subsidiaries to achieve satisfactory underwriting and investment
results, and no assurance can be given that dividends will be
declared or paid in the future.

We have no material commitments for capital
expenditures as of December 31, 2001.

38



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##### 



Acquisition

On June 1, 2000 we, through Annuity and Life
Re America, completed the acquisition of Annuity and Life
Reassurance America, Inc., formerly Capitol Bankers Life
Insurance Company. Annuity and Life Reassurance America is a
life insurance company domiciled in the United States which is
authorized to conduct its life insurance business in over
40 states of the United States and the District of
Columbia, and will focus its operations on the United States
life reinsurance markets. We contributed additional capital to
Annuity and Life Reassurance America during 2000 of $19,550,000
to bring the total capital and surplus of Annuity and Life
Reassurance America to $25,000,000. The acquisition price and
capital contribution was funded from available cash balances and
proceeds from the sales of fixed income securities held by us.

The acquisition was accounted for as a purchase
and the operating results of Annuity and Life Reassurance
America have been included in our financial statements since the
date of acquisition. Prior to closing, the inforce insurance
business of Annuity and Life Reassurance America was 100%
reinsured by Annuity and Life Reassurance America with its
former owner, a subsidiary of Swiss Re, who will continue to
administer the business reinsured. Accordingly, there will be no
earnings from the in-force business at the acquisition date
accruing to us currently or in the future.

The amounts related to the reinsured business
referred to above are included on our Balance Sheet in the
assets as Receivable for reinsurance ceded and in the
liabilities as Reserves for future policy benefits. At
December 31, 2001 and 2000, these amounts were
$97.8 million and $104.5 million, respectively.

The purchase price exceeded the fair value of the
net assets acquired (the capital and surplus of Annuity and Life
Reassurance America) by $2,301,000, which has been allocated to
the value of the insurance licenses of Annuity and Life
Reassurance America. See Note 3(l) of the Notes to
Consolidated Financial Statements for information
regarding SFAS No. 142.

The proforma balance sheet of Annuity and Life
Reassurance America as of the date of acquisition after giving
effect to the reinsurance transaction is as follows:

|                                          |  |   |             | 
|----------------------------------------- |  | - | ----------- | 
|Assets                                   
|Cash and invested assets                  |  | $ | 10,880,686  | 
|Receivable for reinsurance ceded          |  |   | 108,766,677 | 
|Insurance licenses                        |  |   | 2,301,104   | 
|                                          |  |   |             | 
|Total Assets                              |  | $ | 121,948,467 | 
|                                          |  |   |             | 
|Liabilities and Stockholders Equity      
|Reserves for future policy benefits       |  | $ | 108,766,677 | 
|Stockholders equity                       |  |   | 13,181,790  | 
|                                          |  |   |             | 
|Total Liabilities and Stockholders Equity |  | $ | 121,948,467 | 
|                                          |  |   |             | 

39



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##### 



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

Market risk is the risk of loss arising from
adverse changes in market rates and prices, such as interest
rates, foreign currency exchange rates, and other relevant
market rate or price changes. The following is a discussion of
our primary market risk exposures and how those exposures are
currently managed as of December 31, 2001.

Our major market risk exposure is changing
interest rates, primarily in the United States, because we have
a portfolio of fixed income investments. A change in interest
rates will affect the fair value of our investments and may
affect our operating results and financial condition. Interest
rate risk is managed with effective maturity structures and with
the application of duration management practices.

We have no significant foreign currency risk or
market risk arising from general account equity securities. We
do have significant market risk from our largest annuity
reinsurance contract and minor market and currency risk through
our remaining annuity reinsurance agreements. We do not
currently use derivative financial instruments such as futures
and options to manage risk in our general account or assumed
through our reinsurance agreements, although we may do so in the
future. We manage other risks, including credit and liquidity,
in the normal course of business. In managing credit risk we
establish overall quality and rating guidelines and place limits
on credit exposure by issuer and industry to achieve appropriate
diversification in the portfolio. We do not have a trading
portfolio and are not exposed to market risk from trading
activities.

There were no significant changes in our primary
market risk exposures or in how those exposures are managed
compared to the year ended December 31, 2000, except as
described below with respect to certain investment return and
lapse assumptions underlying our write downs of deferred
acquisition costs related to our annuity reinsurance agreement
with Transamerica. In addition, we have implemented Statement of
Financial Accounting Standards No. 133 
Accounting for Derivative Instruments and Hedging Activities,
effective as of the first quarter of 2001. Our additional
exposure to market risk as of December 31, 2001 due to our
implementation of FAS 133 is described below.

The table below presents as of December 31,
2001 the amortized cost amounts and related weighted average
interest rates by years of maturity for our investment
portfolio. Mortgage backed securities are included in the table
by anticipated year of maturity.

|                          |  |                        |         |                  |  |                |      |                  |  |   |         |  |  |  |      |  
|------------------------- |  | ---------------------- | ------- | ---------------- |  | -------------- | ---- | ---------------- |  | - | ------- |  |  |  | ---- | -
|Weighted Average Interest |  | Cash and Cash          |         | Weighted Average |  | Fixed Maturity |      | Weighted Average
|Rates By Maturity         |  | Equivalents            |         | Interest Rate    |  | Investments    |      | Interest Rate   
|                          |  |                        |         |                  |  |                |      |                 
|                          |  |                       
|                          |  | (dollars in thousands)
|2002                      |  | $                      | 104,793 |                  |  |                | 1.74 | %                |  | $ | 9,913   |  |  |  | 2.19 | %
|2003                      |  |                        |         |                  |  |                |      |                  |  |   | 20,318  |  |  |  | 5.20 | %
|2004                      |  |                        |         |                  |  |                |      |                  |  |   | 45,655  |  |  |  | 5.62 | %
|2005                      |  |                        |         |                  |  |                |      |                  |  |   | 46,717  |  |  |  | 6.20 | %
|2006                      |  |                        |         |                  |  |                |      |                  |  |   | 50,354  |  |  |  | 5.82 | %
|Thereafter                |  |                        |         |                  |  |                |      |                  |  |   | 139,463 |  |  |  | 6.57 | %
|                          |  |                        |         |                  |  |                |      |                  |  |   |         |  |  |  |      |  
|Total                     |  | $                      | 104,793 |                  |  |                | 1.74 | %                |  | $ | 312,421 |  |  |  | 6.76 | %
|                          |  |                        |         |                  |  |                |      |                  |  |   |         |  |  |  |      |  
|Fair Value                |  | $                      | 104,793 |                  |  |                |      |                  |  | $ | 318,987 |  |  |  |      |  
|                          |  |                        |         |                  |  |                |      |                  |  |   |         |  |  |  |      |  

Sensitivity analysis and duration modeling are
used to estimate changes in fair values of fixed income
investments and the potential effects on operating earnings and
cash flows resulting from possible near term changes in interest
rates. The term near term means a period of time
going forward up to one year from the date of our Consolidated
Financial Statements. Durations of fixed income investments are
adjusted for call, put and reset features. Portfolio durations
are calculated on a market value weighted basis, including
accrued investment income. Our duration model uses a
100 basis point change in interest rates to measure the
hypothetical change in fair value of financial instruments
included in the model. The duration model produces a loss in
fair value of the fixed income investments of approximately
$11,500,000 based on a 100 basis point increase in interest
rates as of December 31, 2001. Conversely, gains of similar
amounts will be produced with

40



---



##### 



a 100 basis point decrease in interest
rates. Actual results may differ from the hypothetical change in
fair values assumed in this disclosure, especially since the
analysis does not and cannot reflect the results of any actions
that would be taken by us to mitigate losses or to optimize
gains in fair values.


We believe that our life insurance liabilities
are not highly interest rate sensitive as they arise from
traditional reinsurance arrangements and, therefore, the effects
of fluctuating interest rates on these liability cash flows are
not significant.

The annuity product line is generally regarded as
market and interest rate sensitive. Fluctuations in the general
level of interest rates may cause fluctuations in our results of
operations. The future earnings and cash flows of the annuity
product line are primarily dependent on earning a spread (the
difference between the interest earned on the supporting asset
base and the rate credited to policyholders) and persistency of
the underlying business. All assets supporting interest
sensitive contracts liabilities are managed by our cedents, or
their designated asset managers. If these assets do not achieve
investment returns at rates sufficient to meet our obligations
on the underlying policies, we could experience unexpected
losses. For example, under our annuity reinsurance agreement
with Transamerica, the minimum interest guarantees on the
underlying policies have exceeded the underlying policyholder
account values due to poor investment performance, and we have
been forced to fund our proportionate share of the shortfall out
of our general assets, which has resulted in significant losses.

During the fourth quarter of 2001, we determined
the extent to which the minimum interest guarantees on the
policies underlying the Transamerica contract had been exposed
and, as a result, wrote down our deferred acquisition cost asset
by $19,500,000. As discussed above, portions of this charge have
been allocated to prior quarters in 2001 in connection with the
restatement of our financial statements. In determining the
write down of our deferred acquisition costs, we assumed annual
investment returns on convertible bonds of 10% for 2002 and
8.00% for each year thereafter, and we assumed annual investment
returns of 6.25% on each other asset class in which policyholder
premiums have been invested. We also assumed a lapse rate for
the underlying policies of 26% in 2002, 21% in 2003 and 15% in
2004. These assumed lapse rates include assumptions regarding
full surrenders, partial withdrawals, annuitizations and
policyholder deaths. Consistent with our accounting policies, we
review the key assumptions used in determining this write down
quarterly. A change in these assumptions could result in
additional charges that would adversely impact future earnings.
If our assumptions for investment return prove to be inaccurate,
or if lapse rates exceed our assumptions, we may be required to
record additional charges, which would adversely impact future
earnings. Assuming no change in lapse assumptions, the net
impact of a 100 basis point decrease in our investment
return assumptions in all future years would have required an
additional write down of deferred acquisition costs of
approximately $8,000,000 in the fourth quarter of 2001. Assuming
no change in our investment return assumptions, an initial 1%
increase in our lapse assumptions on our Transamerica annuity
contract in all future years would have required an additional
write down of deferred acquisition costs of approximately
$8,000,000 in the fourth quarter of 2001. Subsequent increases
of our lapse assumptions might result in larger incremental
increases in the required write downs of deferred acquisition
costs.

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

41



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##### 



The methodology we use to determine the fair
value of the embedded derivatives in our annuity reinsurance
agreements that require bifurcation and separate accounting
under FAS 133 is to determine the value of the host
contract (notional asset) based upon expected future cash flows
under the annuity contracts. The fair value of the embedded
derivative is calculated as being the market value of the actual
assets less the fair value of the notional asset. The change in
fair value of the embedded derivative is influenced by changes
in credit risk, yield curve shifts, changes in expected future
cash flows under the annuity contracts and, to a lesser extent,
interest rate changes.

As of December 31, 2001, the net impact on
our embedded derivatives of a 20 basis point increase or
decrease in credit spreads is a loss or gain on the embedded
derivative of approximately $3,800,000.

As of December 31, 2001, the net impact on
our embedded derivatives of a 50 basis point increase or
decrease in interest rates as a result of duration mismatching
is a gain or loss on the embedded derivative of approximately
$263,000. The duration of the actual assets is approximately
6.1 years and the duration of the notional asset is
approximately 6.2 years. As a result, we believe the impact
of interest rate movements on the embedded derivative will be
small.

The table below shows the change in our embedded
derivatives by quarter for 2001. The embedded derivative at fair
value is classified on our Balance Sheet as a component of our
Funds withheld asset.

|                    |  |                    |            |                     |  |   |            |  
|------------------- |  | ------------------ | ---------- | ------------------- |  | - | ---------- | -
|                    |  | Change in Embedded |            | Embedded Derivative
|                    |  | Derivative Value   |            | at Fair Value      
|                    |  |                    |            |                    
|Cumulative Effect   |  | $                  | (3,665,735 | )                   |  | $ | (3,665,735 | )
|First Quarter 2001  |  | $                  | (148,927   | )                   |  | $ | (3,814,662 | )
|Second Quarter 2001 |  | $                  | 1,846,981  |                     |  | $ | (1,967,681 | )
|Third Quarter 2001  |  | $                  | (5,265,396 | )                   |  | $ | (7,233,077 | )
|Fourth Quarter 2001 |  | $                  | 8,596,369  |                     |  | $ | 1,363,292  |  

We implemented FAS 133 effective as of the
first quarter of 2001 and, consequently, there is no comparative
information for 2000. We include the cumulative effect of the
change in accounting principle in the table.

The statements above are forward-looking
statements within the meaning of the Private Securities
Litigation Reform Act. See Forward-Looking
Statements beginning on page 21.

42



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##### 





|        |                                                 
|------- | ------------------------------------------------
|Item 8. | Financial Statements and Supplementary
    Data.

INDEX TO FINANCIAL STATEMENTS AND

FINANCIAL STATEMENT SCHEDULE


ANNUITY AND LIFE RE (HOLDINGS), LTD. AND
SUBSIDIARIES


|                                                                                                                                                    |  |  |    | 
|--------------------------------------------------------------------------------------------------------------------------------------------------- |  |  | -- | 
|Financial Statements                                                                                                                                |  |  |    | 
|Report of Management                                                                                                                                |  |  | 44 | 
|Independent Auditors Report                                                                                                                        |  |  | 45 | 
|Consolidated Balance Sheets at December 31,
    2001 (as restated) and 2000 (as restated)                                                           |  |  | 46 | 
|Consolidated Statements of Operations for the
    years ended December 31, 2001 (as restated), 2000 (as
    restated) and 1999                      |  |  | 47 | 
|Consolidated Statements of Comprehensive (Loss)
    Income for the years ended December 31, 2001 (as restated),
    2000 (as restated) and 1999     |  |  | 48 | 
|Consolidated Statements of Changes in
    Stockholders Equity for the years ended December 31,
    2001 (as restated), 2000 (as restated) and 1999 |  |  | 49 | 
|Consolidated Statements of Cash Flows for the
    years ended December 31, 2001 (as restated), 2000 (as
    restated) and 1999                      |  |  | 50 | 
|Notes to Consolidated Financial Statements                                                                                                          |  |  | 51 | 
|                                                                                                                                                   
|Financial Statement Schedule                                                                                                                        |  |  |    | 
|Schedule II Condensed Financial Information
    of Registrant (as restated)                                                                         |  |  | 70 | 

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

43



---



##### 



REPORT OF MANAGEMENT

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

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

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

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

JOHN F. BURKE

Chief Executive Officer and


Chief Financial Officer


February 28, 2003

44



---



##### 



INDEPENDENT AUDITORS REPORT

The Board of Directors and Shareholders

Annuity and Life Re (Holdings), Ltd.


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

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

In our opinion, the consolidated financial
statements referred to above present fairly, in all material
respects, the financial position of Annuity and Life Re
(Holdings), Ltd. and subsidiaries as of December 31, 2001
and 2000, and the results of their operations and their cash
flows for each of the years ended December 31, 2001, 2000
and 1999 in conformity with accounting principles generally
accepted in the United States of America. Also in our opinion,
the related financial statement schedule, when considered in
relation to the basic consolidated financial statements taken as
a whole, presents fairly, in all material respects, the
information set forth therein.

The accompanying consolidated financial
statements and financial statement schedule have been prepared
assuming that the Company will continue as a going concern. As
discussed in Note 18 to the consolidated financial
statements, the Company has suffered significant losses from
operations and experienced liquidity demands that raise
substantial doubt about its ability to continue as a going
concern. Managements plans with regard to these matters
are also described in Note 18. The consolidated financial
statements and financial statement schedule do not include any
adjustments that might result from the outcome of this
uncertainty.

As discussed in Note 2 to the consolidated
financial statements, the accompanying consolidated balance
sheets as of December 31, 2001 and 2000 and the related
consolidated statements of operations, comprehensive (loss)
income, changes in stockholders equity and cash flows for
the years ended December 31, 2001 and 2000 have been
restated.

As discussed in Note 2 to the consolidated
financial statements, as of January 1, 2001 the Company
changed its method of accounting for derivative financial
instruments and hedging activities.

KPMG

Chartered Accountants


Hamilton, Bermuda


February 11, 2002, except as to Notes 2
and 18, which are as of February 28, 2003


45



---



##### 



ANNUITY AND LIFE RE (HOLDINGS), LTD.

CONSOLIDATED BALANCE SHEETS

(U.S. Dollars)


|                                                                                                                                                                |                                            |                                 |               |               |  |   |               |               | 
|--------------------------------------------------------------------------------------------------------------------------------------------------------------- | ------------------------------------------ | ------------------------------- | ------------- | ------------- |  | - | ------------- | ------------- | 
|                                                                                                                                                                |                                            |                                
|                                                                                                                                                                |                                            | For the Year Ended December 31,
|                                                                                                                                                                |                                            |                                
|                                                                                                                                                                |                                            | 2001                            |               | 2000         
|                                                                                                                                                                |                                            |                                 |               |              
|                                                                                                                                                                |                                            | (as restated)                   |               | (as restated)
|Assets                                                                                                                                                          |                                            |                                 |               |               |  |   |               |              
|Cash and cash equivalents                                                                                                                                       |                                            | $                               | 104,793,019   |               |  | $ | 52,691,974    |              
|Fixed maturity investments at fair value
    (amortized cost of $312,420,719 and $266,967,810 at
    December 31, 2001 and December 31, 2000)                   |                                            |                                 | 318,987,432   |               |  |   | 269,127,422   |              
|Funds withheld at interest                                                                                                                                      |                                            |                                 | 1,489,689,347 |               |  |   | 1,530,109,853 |              
|Accrued investment income                                                                                                                                       |                                            |                                 | 4,897,063     |               |  |   | 3,760,138     |              
|Receivable for investments sold                                                                                                                                 |                                            |                                 | 23,815        |               |  |   |              |              
|Receivable for reinsurance ceded                                                                                                                                |                                            |                                 | 97,807,529    |               |  |   | 104,495,543   |              
|Deposits and other reinsurance receivables                                                                                                                      |                                            |                                 | 76,139,222    |               |  |   | 29,552,630    |              
|Deferred policy acquisition costs                                                                                                                               |                                            |                                 | 209,074,192   |               |  |   | 230,642,936   |              
|Other assets                                                                                                                                                    |                                            |                                 | 9,360,971     |               |  |   | 6,221,248     |              
|                                                                                                                                                                |                                            |                                 |               |               |  |   |               |              
|                                                                                                                                                                | Total Assets                               |                                 | $             | 2,310,772,590 |  |   | $             | 2,226,601,744 | 
|                                                                                                                                                                |                                            |                                 |               |               |  |   |               |              
|Liabilities                                                                                                                                                     |                                            |                                 |               |               |  |   |               |              
|Reserves for future policy benefits                                                                                                                             |                                            | $                               | 221,865,755   |               |  | $ | 174,953,018   |              
|Interest sensitive contracts liability                                                                                                                          |                                            |                                 | 1,519,596,075 |               |  |   | 1,597,928,818 |              
|Other deposit liabilities                                                                                                                                       |                                            |                                 | 137,000,000   |               |  |   |              |              
|Other reinsurance liabilities                                                                                                                                   |                                            |                                 | 17,340,304    |               |  |   | 7,623,822     |              
|Payable for investments purchased                                                                                                                               |                                            |                                 | 2,030,516     |               |  |   | 25,863        |              
|Accounts payable and accrued expenses                                                                                                                           |                                            |                                 | 10,751,098    |               |  |   | 5,739,906     |              
|                                                                                                                                                                |                                            |                                 |               |               |  |   |               |              
|                                                                                                                                                                | Total Liabilities                          |                                 | $             | 1,908,583,748 |  |   | $             | 1,786,271,427 | 
|                                                                                                                                                                |                                            |                                 |               |               |  |   |               |              
|Stockholders Equity                                                                                                                                            |                                            |                                 |               |               |  |   |               |              
|Preferred shares (par value $1.00; 50,000,000
    shares authorized; no shares outstanding)                                                                     |                                            | $                               |              |               |  | $ |              |              
|Common shares (par value $1,00; 100,000,000
    shares authorized; 25,705,328 and 25,499,999 shares outstanding
    at December 31, 2001 and December 31, 2000) |                                            |                                 | 25,705,328    |               |  |   | 25,499,999    |              
|Additional paid-in capital                                                                                                                                      |                                            |                                 | 332,447,062   |               |  |   | 329,496,091   |              
|Notes receivable from stock sales                                                                                                                               |                                            |                                 | (1,317,259    | )             |  |   | (1,367,241    | )            
|Accumulated other comprehensive income                                                                                                                          |                                            |                                 | 6,418,469     |               |  |   | 2,064,971     |              
|Retained earnings                                                                                                                                               |                                            |                                 | 38,935,242    |               |  |   | 84,636,497    |              
|                                                                                                                                                                |                                            |                                 |               |               |  |   |               |              
|                                                                                                                                                                | Total Stockholders Equity                 |                                 | $             | 402,188,842   |  |   | $             | 440,330,317   | 
|                                                                                                                                                                |                                            |                                 |               |               |  |   |               |              
|                                                                                                                                                                | Total Liabilities and Stockholders Equity |                                 | $             | 2,310,772,590 |  |   | $             | 2,226,601,744 | 
|                                                                                                                                                                |                                            |                                 |               |               |  |   |               |              

See accompanying notes to consolidated financial
statements.

46



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##### 



ANNUITY AND LIFE RE (HOLDINGS), LTD.

CONSOLIDATED STATEMENTS OF
OPERATIONS

(U.S. Dollars)


|                                                                                                    |                   |                                 |             |               |   |      |             |            |  |   |             |            | 
|--------------------------------------------------------------------------------------------------- | ----------------- | ------------------------------- | ----------- | ------------- | - | ---- | ----------- | ---------- |  | - | ----------- | ---------- | 
|                                                                                                    |                   |                                
|                                                                                                    |                   | For the Year Ended December 31,
|                                                                                                    |                   |                                
|                                                                                                    |                   | 2001                            |             | 2000          |   | 1999
|                                                                                                    |                   |                                 |             |               |   |     
|                                                                                                    |                   | (as restated)                   |             | (as restated) |   |     
|Revenues                                                                                            |                   |                                 |             |               |   |      |             |            |  |   |             |           
|Net premiums                                                                                        |                   | $                               | 251,793,237 |               |   | $    | 168,404,022 |            |  | $ | 100,835,007 |           
|Investment income, net of related expenses                                                          |                   |                                 | 91,128,696  |               |   |      | 136,648,327 |            |  |   | 85,089,811  |           
|Net realized investment gains (losses)                                                              |                   |                                 | 1,230,038   |               |   |      | (4,817,121  | )          |  |   | (1,284,769  | )         
|Net change in fair value of embedded derivatives                                                    |                   |                                 | 5,029,027   |               |   |      |            |            |  |   |            |           
|Surrender fees and other revenues                                                                   |                   |                                 | 18,519,701  |               |   |      | 6,915,870   |            |  |   | 3,215,429   |           
|                                                                                                    |                   |                                 |             |               |   |      |             |            |  |   |             |           
|Total Revenues                                                                                      |                   | $                               | 367,700,699 |               |   | $    | 307,151,098 |            |  | $ | 187,855,478 |           
|                                                                                                    |                   |                                 |             |               |   |      |             |            |  |   |             |           
|Benefits and Expenses                                                                               |                   |                                 |             |               |   |      |             |            |  |   |             |           
|Claim and policy benefits                                                                           |                   | $                               | 216,025,010 |               |   | $    | 132,810,192 |            |  | $ | 79,953,160  |           
|Interest credited to interest sensitive products                                                    |                   |                                 | 49,258,418  |               |   |      | 65,842,303  |            |  |   | 22,312,684  |           
|Policy acquisition costs and other insurance
    expenses                                           |                   |                                 | 127,780,549 |               |   |      | 58,985,523  |            |  |   | 42,200,688  |           
|Operating expenses                                                                                  |                   |                                 | 11,552,418  |               |   |      | 10,411,344  |            |  |   | 7,685,802   |           
|                                                                                                    |                   |                                 |             |               |   |      |             |            |  |   |             |           
|Total Benefits and Expenses                                                                         |                   | $                               | 404,616,395 |               |   | $    | 268,049,362 |            |  | $ | 152,152,334 |           
|                                                                                                    |                   |                                 |             |               |   |      |             |            |  |   |             |           
|Net (loss) income before cumulative effect of a
    change in accounting principle                  |                   | $                               | (36,915,696 | )             |   | $    | 39,101,736  |            |  | $ | 35,703,144  |           
|Cumulative effect of a change in accounting
    principle (Note 2)                                  |                   |                                 | (3,665,735  | )             |   |      |            |            |  |   |            |           
|                                                                                                    |                   |                                 |             |               |   |      |             |            |  |   |             |           
|                                                                                                    | Net (Loss) Income |                                 | $           | (40,581,431   | ) |      | $           | 39,101,736 |  |   | $           | 35,703,144 | 
|                                                                                                    |                   |                                 |             |               |   |      |             |            |  |   |             |           
|Net (loss) income per common share before
    cumulative effect of a change in accounting principle |                   |                                 |             |               |   |      |             |            |  |   |             |           
|                                                                                                    | Basic             |                                 | $           | (1.45         | ) |      | $           | 1.53       |  |   | $           | 1.40       | 
|                                                                                                    | Diluted           |                                 | $           | (1.45         | ) |      | $           | 1.42       |  |   | $           | 1.31       | 
|Cumulative effect of a change in accounting
    principle per common share                          |                   |                                 |             |               |   |      |             |            |  |   |             |           
|                                                                                                    | Basic             |                                 | $           | (0.14         | ) |      | $           |           |  |   | $           |           | 
|                                                                                                    | Diluted           |                                 | $           | (0.14         | ) |      | $           |           |  |   | $           |           | 
|Net (loss) income per common share                                                                  |                   |                                 |             |               |   |      |             |            |  |   |             |           
|                                                                                                    | Basic             |                                 | $           | (1.59         | ) |      | $           | 1.53       |  |   | $           | 1.40       | 
|                                                                                                    | Diluted           |                                 | $           | (1.59         | ) |      | $           | 1.42       |  |   | $           | 1.31       | 

See accompanying notes to consolidated financial
statements.

47



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##### 



ANNUITY AND LIFE RE (HOLDINGS), LTD.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE
(LOSS) INCOME

(U.S. Dollars)


|                                                                                          |  |                                 |             |               |  |      |            |   |  |   |             |  
|----------------------------------------------------------------------------------------- |  | ------------------------------- | ----------- | ------------- |  | ---- | ---------- | - |  | - | ----------- | -
|                                                                                          |  |                                
|                                                                                          |  | For the Year Ended December 31,
|                                                                                          |  |                                
|                                                                                          |  | 2001                            |             | 2000          |  | 1999
|                                                                                          |  |                                 |             |               |  |     
|                                                                                          |  | (as restated)                   |             | (as restated) |  |     
|Net (loss) income for the period                                                          |  | $                               | (40,581,431 | )             |  | $    | 39,101,736 |   |  | $ | 35,703,144  |  
|Other comprehensive income:                                                               |  |                                 |             |               |  |      |            |   |  |   |             |  
|Unrealized holding gains (losses) on
    securities arising during the period             |  |                                 | 5,583,536   |               |  |      | 8,517,066  |   |  |   | (16,276,579 | )
|Less reclassification adjustment for realized
    gains and (losses) in net (loss) income |  |                                 | 1,230,038   |               |  |      | (4,817,121 | ) |  |   | (1,284,769  | )
|                                                                                          |  |                                 |             |               |  |      |            |   |  |   |             |  
|Other comprehensive income (loss)                                                         |  |                                 | 4,353,498   |               |  |      | 13,334,187 |   |  |   | (14,991,810 | )
|                                                                                          |  |                                 |             |               |  |      |            |   |  |   |             |  
|Total Comprehensive (Loss) Income                                                         |  | $                               | (36,227,933 | )             |  | $    | 52,435,923 |   |  | $ | 20,711,334  |  
|                                                                                          |  |                                 |             |               |  |      |            |   |  |   |             |  

See accompanying notes to consolidated financial
statements.

48



---



##### 



ANNUITY AND LIFE RE (HOLDINGS), LTD.

CONSOLIDATED STATEMENTS OF CHANGES IN
STOCKHOLDERS EQUITY

(U.S. Dollars)


|                                                  |  |                                 |             |               |  |      |             |   |  |   |             |  
|------------------------------------------------- |  | ------------------------------- | ----------- | ------------- |  | ---- | ----------- | - |  | - | ----------- | -
|                                                  |  |                                
|                                                  |  | For the Year Ended December 31,
|                                                  |  |                                
|                                                  |  | 2001                            |             | 2000          |  | 1999
|                                                  |  |                                 |             |               |  |     
|                                                  |  | (as restated)                   |             | (as restated) |  |     
|Preferred shares par value $1.00                  |  |                                 |             |               |  |      |             |   |  |   |             |  
|Balance at beginning and end of period            |  | $                               |            |               |  | $    |            |   |  | $ |            |  
|                                                  |  |                                 |             |               |  |      |             |   |  |   |             |  
|Common shares par value $1.00                     |  |                                 |             |               |  |      |             |   |  |   |             |  
|Balance at beginning of period                    |  | $                               | 25,499,999  |               |  | $    | 25,499,999  |   |  | $ | 25,499,999  |  
|Issuance of shares                                |  |                                 | 205,329     |               |  |      |            |   |  |   |            |  
|                                                  |  |                                 |             |               |  |      |             |   |  |   |             |  
|Balance at end of period                          |  | $                               | 25,705,328  |               |  | $    | 25,499,999  |   |  | $ | 25,499,999  |  
|                                                  |  |                                 |             |               |  |      |             |   |  |   |             |  
|Additional paid-in capital                        |  |                                 |             |               |  |      |             |   |  |   |             |  
|Balance at beginning of period                    |  | $                               | 329,496,091 |               |  | $    | 329,496,091 |   |  | $ | 329,517,104 |  
|Issuance of shares                                |  |                                 | 2,950,971   |               |  |      |            |   |  |   | (21,013     | )
|                                                  |  |                                 |             |               |  |      |             |   |  |   |             |  
|Balance at end of period                          |  | $                               | 332,447,062 |               |  | $    | 329,496,091 |   |  | $ | 329,496,091 |  
|                                                  |  |                                 |             |               |  |      |             |   |  |   |             |  
|Notes receivable from stock sales                 |  |                                 |             |               |  |      |             |   |  |   |             |  
|Balance at beginning of period                    |  | $                               | (1,367,241  | )             |  | $    | (1,286,741  | ) |  | $ | (1,391,068  | )
|Repayments                                        |  |                                 | 150,000     |               |  |      |            |   |  |   | 175,000     |  
|Accrued interest during period                    |  |                                 | (100,018    | )             |  |      | (80,500     | ) |  |   | (70,673     | )
|                                                  |  |                                 |             |               |  |      |             |   |  |   |             |  
|Balance at end of period                          |  | $                               | (1,317,259  | )             |  | $    | (1,367,241  | ) |  | $ | (1,286,741  | )
|                                                  |  |                                 |             |               |  |      |             |   |  |   |             |  
|Accumulated other comprehensive income
    (loss) |  |                                 |             |               |  |      |             |   |  |   |             |  
|Balance at beginning of period                    |  | $                               | 2,064,971   |               |  | $    | (11,269,216 | ) |  | $ | 3,722,594   |  
|Net unrealized gains (losses) on securities       |  |                                 | 4,353,498   |               |  |      | 13,334,187  |   |  |   | (14,991,810 | )
|                                                  |  |                                 |             |               |  |      |             |   |  |   |             |  
|Balance at end of period                          |  | $                               | 6,418,469   |               |  | $    | 2,064,971   |   |  | $ | (11,269,216 | )
|                                                  |  |                                 |             |               |  |      |             |   |  |   |             |  
|Retained earnings                                 |  |                                 |             |               |  |      |             |   |  |   |             |  
|Balance at beginning of period                    |  | $                               | 84,636,497  |               |  | $    | 49,614,761  |   |  | $ | 17,991,617  |  
|Net (loss) income                                 |  |                                 | (40,581,431 | )             |  |      | 39,101,736  |   |  |   | 35,703,144  |  
|Stockholder dividends                             |  |                                 | (5,119,824  | )             |  |      | (4,080,000  | ) |  |   | (4,080,000  | )
|                                                  |  |                                 |             |               |  |      |             |   |  |   |             |  
|Balance at end of period                          |  | $                               | 38,935,242  |               |  | $    | 84,636,497  |   |  | $ | 49,614,761  |  
|                                                  |  |                                 |             |               |  |      |             |   |  |   |             |  
|Total Stockholders Equity                        |  | $                               | 402,188,842 |               |  | $    | 440,330,317 |   |  | $ | 392,054,894 |  
|                                                  |  |                                 |             |               |  |      |             |   |  |   |             |  

See accompanying notes to consolidated financial
statements.

49



---



##### 



ANNUITY AND LIFE RE (HOLDINGS), LTD.

CONSOLIDATED STATEMENTS OF CASH
FLOWS

(U.S. Dollars)


|                                                                                                |                                                      |                                 |              |               |   |      |              |            |   |   |              |             |  
|----------------------------------------------------------------------------------------------- | ---------------------------------------------------- | ------------------------------- | ------------ | ------------- | - | ---- | ------------ | ---------- | - | - | ------------ | ----------- | -
|                                                                                                |                                                      |                                
|                                                                                                |                                                      | For the Year Ended December 31,
|                                                                                                |                                                      |                                
|                                                                                                |                                                      | 2001                            |              | 2000          |   | 1999
|                                                                                                |                                                      |                                 |              |               |   |     
|                                                                                                |                                                      | (as restated)                   |              | (as restated) |   |     
|Cash flows from operating activities                                                            |                                                      |                                 |              |               |   |      |              |            |   |   |              |            
|Net (loss) income                                                                               |                                                      | $                               | (40,581,431  | )             |   | $    | 39,101,736   |            |   | $ | 35,703,144   |            
|Adjustments to reconcile net (loss) income
    to cash (used) provided by operating activities: |                                                      |                                 |              |               |   |      |              |            |   |   |              |            
|Cumulative effect of change in accounting
    principle                                         |                                                      |                                 | 3,665,735    |               |   |      |             |            |   |   |             |            
|Net realized investment (gains) losses                                                          |                                                      |                                 | (1,230,038   | )             |   |      | 4,817,121    |            |   |   | 1,284,769    |            
|Net change in fair value of embedded derivatives                                                |                                                      |                                 | (5,029,027   | )             |   |      |             |            |   |   |             |            
|Changes in:                                                                                     |                                                      |                                 |              |               |   |      |              |            |   |   |              |            
|Accrued investment income                                                                       |                                                      |                                 | (1,136,925   | )             |   |      | 519,342      |            |   |   | (467,418     | )          
|Deferred policy acquisition costs                                                               |                                                      |                                 | 21,568,744   |               |   |      | (27,132,686  | )          |   |   | (43,927,964  | )          
|Deposits and other reinsurance receivables                                                      |                                                      |                                 | (39,898,578  | )             |   |      | (21,717,824  | )          |   |   | (7,834,806   | )          
|Other assets                                                                                    |                                                      |                                 | (3,139,723   | )             |   |      | (229,580     | )          |   |   | (3,347,968   | )          
|Reserves for future policy benefits                                                             |                                                      |                                 | 46,912,737   |               |   |      | 26,703,552   |            |   |   | 21,727,514   |            
|Interest sensitive contracts, net of funds
    withheld                                         |                                                      |                                 | (36,548,945  | )             |   |      | (2,911,000   | )          |   |   | (12,844,576  | )          
|Other reinsurance liabilities                                                                   |                                                      |                                 | 9,716,482    |               |   |      | (3,122,447   | )          |   |   | (11,709,168  | )          
|Accounts payable                                                                                |                                                      |                                 | 5,011,192    |               |   |      | 231,311      |            |   |   | 2,496,316    |            
|                                                                                                |                                                      |                                 |              |               |   |      |              |            |   |   |              |            
|                                                                                                | Net cash (used) provided by operating
    activities |                                 | $            | (40,689,777   | ) |      | $            | 16,259,525 |   |   | $            | (18,920,157 | )
|                                                                                                |                                                      |                                 |              |               |   |      |              |            |   |   |              |            
|Cash flows from investing activities                                                            |                                                      |                                 |              |               |   |      |              |            |   |   |              |            
|Proceeds from sales of fixed maturity investments                                               |                                                      | $                               | 320,615,200  |               |   | $    | 284,671,582  |            |   | $ | 226,566,212  |            
|Purchase of fixed maturity investments                                                          |                                                      |                                 | (362,910,836 | )             |   |      | (262,084,085 | )          |   |   | (239,048,394 | )          
|Acquisition of a company                                                                        |                                                      |                                 |             |               |   |      | (13,181,790  | )          |   |   |             |            
|                                                                                                |                                                      |                                 |              |               |   |      |              |            |   |   |              |            
|                                                                                                | Net cash (used) provided by investing
    activities |                                 | $            | (42,295,636   | ) |      | $            | 9,405,707  |   |   | $            | (12,482,182 | )
|                                                                                                |                                                      |                                 |              |               |   |      |              |            |   |   |              |            
|Cash flows from financing activities                                                            |                                                      |                                 |              |               |   |      |              |            |   |   |              |            
|Issuance of shares                                                                              |                                                      | $                               | 3,156,300    |               |   | $    |             |            |   | $ | (21,013      | )          
|Repayment of notes receivable, less accrued
    interest                                        |                                                      |                                 | 49,982       |               |   |      | (80,500      | )          |   |   | 104,327      |            
|Dividends paid to stockholders                                                                  |                                                      |                                 | (5,119,824   | )             |   |      | (4,080,000   | )          |   |   | (4,080,000   | )          
|Increase in Deposit Liability                                                                   |                                                      |                                 | 137,000,000  |               |   |      |             |            |   |   |             |            
|                                                                                                |                                                      |                                 |              |               |   |      |              |            |   |   |              |            
|                                                                                                | Net cash provided (used) by financing
    activities |                                 | $            | 135,086,458   |   |      | $            | (4,160,500 | ) |   | $            | (3,996,686  | )
|                                                                                                |                                                      |                                 |              |               |   |      |              |            |   |   |              |            
|Increase (decrease) in cash and cash
    equivalents                                            |                                                      | $                               | 52,101,045   |               |   | $    | 21,504,732   |            |   | $ | (35,399,025  | )          
|Cash and cash equivalents, beginning of period                                                  |                                                      |                                 | 52,691,974   |               |   |      | 31,187,242   |            |   |   | 66,586,267   |            
|                                                                                                |                                                      |                                 |              |               |   |      |              |            |   |   |              |            
|Cash and cash equivalents, end of period                                                        |                                                      | $                               | 104,793,019  |               |   | $    | 52,691,974   |            |   | $ | 31,187,242   |            
|                                                                                                |                                                      |                                 |              |               |   |      |              |            |   |   |              |            

See accompanying notes to consolidated financial
statements.

50



---



##### 



ANNUITY AND LIFE RE (HOLDINGS), LTD.

NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS

1. Organization

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

2. Restatement

In July 2002, the Company announced that it had
determined that it had embedded derivatives in certain of its
annuity reinsurance contracts that are required to be bifurcated
from their host contracts and accounted for separately pursuant
to Statement of Financial Accounting
Standard 133  Accounting for Derivative
Instruments and Hedging Activities. The Company is required to
carry these embedded derivatives on its balance sheet at fair
value (see Note 3(k)) and the unrealized changes in the
value of these embedded derivatives are reflected in net income
as Net change in fair value of embedded derivatives. The fair
value of these embedded derivatives at January 1, 2001 was
a loss of $3,665,735 and this has been accounted for as a
cumulative effect of a change in accounting principle. The
change in fair value of the Companys embedded derivatives
during 2001 was a gain of $5,029,027. Additionally, an
adjustment of $1,320,184 has been made to increase the
amortization of deferred acquisition costs to reflect the
revised emergence of profits on the affected reinsurance
agreements as a result of the change in fair value of the
embedded derivatives. For the fiscal year ended
December 31, 2001, the net impact on reported earnings was
a $43,107 gain.

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

Further, based on information now available to
the Company, the Company has also restated its financial
statements for the fiscal years ended December 31, 2001 and
2000 to record approximately $13,500,000 and $2,800,000,
respectively, of minimum interest guarantee payments made in the
periods in which they were paid. The $13,500,000 of payments
made in 2001 were included in the $33,000,000 charge taken in
the fourth quarter of 2001. The Company originally recorded the
full $13,500,000 expense in the fourth quarter of 2001 because
that was the quarter in which the Company first received data
that enabled it to estimate the amount of such payments
accurately. As part of the restatement of the Companys
financial statements for the fiscal year ended December 31,
2001, the $13,500,000 expense has been reallocated to the
quarterly periods in that year in which the payments were made.
Similarly, the Company has recognized the $2,800,000 of minimum
interest guarantee payments made in 2000 as an expense rather
than as a reduction in Interest sensitive contracts liabilities.
There was a corresponding decrease of $1,914,853 in the
amortization of deferred acquisition costs in 2000 as a result
of the minimum interest guarantee payments made in that year.
The net effect on the Companys net income in 2000 was a
reduction of $885,459. The decrease in the amortization of
deferred acquisition costs in 2000 had the effect of increasing
the amount of unamortized deferred acquisition costs as at
December 31, 2000. Because the Company determined that
deferred acquisition costs on the

51



---



##### 



ANNUITY AND LIFE RE (HOLDINGS), LTD.


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 (Continued)

Companys largest annuity reinsurance
contract should be written down to their estimated recoverable
amount during 2001, the write down in costs in 2001 has been
adjusted to reflect the increased balance of unamortized
deferred acquisition costs that existed at December 31,
2000. The impact of this aspect of the restatement on net income
in 2001 was a reduction of $1,914,853. Certain components of the
Companys Consolidated Balance Sheets as of
December 31, 2001 and 2000, as well as certain components
of the Companys Consolidated Statements of Operations for
the years then ended have changed as a result of this
restatement.

The following table summarizes the effect of each
of these changes to the Companys previously issued
financial statements for the fiscal years ended
December 31, 2001 and 2000. The restatement described above
had no net effect on the Companys cash flows (used)
provided by operating activities for the periods then ended, so
no information regarding the Companys Consolidated
Statements of Cash Flows is presented in the table.

|                                                                               |  |             |               |           |  |                  |            |           |  |             |             |   |  |   |            |   |  |   |               |  
|------------------------------------------------------------------------------ |  | ----------- | ------------- | --------- |  | ---------------- | ---------- | --------- |  | ----------- | ----------- | - |  | - | ---------- | - |  | - | ------------- | -
|                                                                               |  |             |               |           |  |                 
|                                                                               |  |             |               | Effect of |  |                 
|                                                                               |  |             |               |           |  |                 
|                                                                               |  |             |               |           |  | Minimum          |            |          
|                                                                               |  | As Reported |               | FAS 133   |  | Reclassification |            | Guarantee |  | As Restated
|                                                                               |  |             |               |           |  |                  |            |           |  |            
|Consolidated Balance Sheet at
    December 31, 2001                            |  |             |               |           |  |                  |            |           |  |             |             |   |  |   |            |   |  |   |               |  
|Funds withheld at interest                                                     |  | $           | 1,488,326,056 |           |  | $                | 1,363,291  |           |  | $           |            |   |  | $ |           |   |  | $ | 1,489,689,347 |  
|Deferred acquisition costs                                                     |  |             | 229,894,376   |           |  |                  | (1,320,184 | )         |  |             | (19,500,000 | ) |  |   |           |   |  |   | 209,074,192   |  
|Interest sensitive contracts liability                                         |  |             | 1,536,295,763 |           |  |                  |           |           |  |             | (19,500,000 | ) |  |   | 2,800,312  |   |  |   | 1,519,596,075 |  
|Stockholders equity                                                           |  |             | 404,946,046   |           |  |                  | 43,107     |           |  |             |            |   |  |   | (2,800,312 | ) |  |   | 402,188,842   |  
|                                                                              
|Consolidated Balance Sheet at
    December 31, 2000                            |  |             |               |           |  |                  |            |           |  |             |             |   |  |   |            |   |  |   |               |  
|Funds withheld at interest                                                     |  | $           | 1,530,109,853 |           |  |                  |           |           |  | $           |            |   |  | $ |           |   |  | $ | 1,530,109,853 |  
|Deferred acquisition costs                                                     |  |             | 228,728,083   |           |  |                  |           |           |  |             |            |   |  |   | 1,914,853  |   |  |   | 230,642,936   |  
|Interest sensitive contracts liability                                         |  |             | 1,595,128,506 |           |  |                  |           |           |  |             |            |   |  |   | 2,800,312  |   |  |   | 1,597,928,818 |  
|Stockholders equity                                                           |  |             | 441,215,776   |           |  |                  |           |           |  |             |            |   |  |   | (885,459   | ) |  |   | 440,330,317   |  
|                                                                              
|Consolidated Statements of Operations for the
    year ended December 31, 2001 |  |             |               |           |  |                  |            |           |  |             |             |   |  |   |            |   |  |   |               |  
|Net change in fair value of embedded derivatives                               |  | $           |              |           |  | $                | 5,029,027  |           |  | $           |            |   |  | $ |           |   |  | $ | 5,029,027     |  
|Interest credited to interest sensitive products                               |  |             | 68,758,418    |           |  |                  |           |           |  |             | (19,500,000 | ) |  |   |           |   |  |   | 49,258,418    |  
|Policy acquisition and other insurance expenses                                |  |             | 105,045,512   |           |  |                  | 1,320,184  |           |  |             | 19,500,000  |   |  |   | 1,914,853  |   |  |   | 127,780,549   |  
|Cumulative effect of a change in accounting
    principle                      |  |             |              |           |  |                  | (3,665,735 | )         |  |             |            |   |  |   |           |   |  |   | (3,665,735    | )
|Net (Loss)                                                                     |  |             | (38,709,686   | )         |  |                  | 43,107     |           |  |             |            |   |  |   | (1,914,853 | ) |  |   | (40,581,431   | )
|                                                                              
|Consolidated Statements of Operations for the
    year ended December 31, 2000 |  |             |               |           |  |                  |            |           |  |             |             |   |  |   |            |   |  |   |               |  
|Interest credited to interest sensitive products                               |  | $           | 63,041,991    |           |  | $                |           |           |  | $           |            |   |  | $ | 2,800,312  |   |  | $ | 65,842,303    |  
|Policy acquisition and other insurance expenses                                |  |             | 60,900,376    |           |  |                  |           |           |  |             |            |   |  |   | (1,914,853 | ) |  |   | 58,985,523    |  
|Net Income                                                                     |  |             | 39,987,195    |           |  |                  |           |           |  |             |            |   |  |   | (885,459   | ) |  |   | 39,101,736    |  

Information regarding the Companys
accounting policy for embedded derivatives is provided in
Note 3(k); information regarding the effect of the
restatement on earnings per share is provided in Note 6;

52



---



##### 



ANNUITY AND LIFE RE (HOLDINGS), LTD.


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 (Continued)

information regarding the effect of the
restatements on pro forma earnings per share, had compensation
cost been determined under SFAS 123, Accounting for
Stock-Based Compensation, is provided in Note 8;
additional information regarding the Companys annuity
reinsurance contracts with Transamerica and Ohio National is
included in Note 10; and information regarding the fair
value of the embedded derivatives is included in Note 11.

Additional information about the restated results
is also available in Note 17, which summarizes selected
financial information by quarter. In addition to its
reallocation of minimum interest guarantee payments made in
2001, the Company has also allocated portions of the $19,500,000
reserve component of the $33,000,000 charge taken in the fourth
quarter of 2001, and a similar $24,700,000 charge taken in the
third quarter of 2001 in connection with the same contract,
across prior quarters in that year. This reallocation does not
affect the reported net (loss) for the year ended
December 31, 2001, but it does affect reported net income
(loss) for each of the quarters in that year.

3. Summary of significant accounting
policies

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

(a) Basis
of consolidation

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

(b) Premium
income and related expenses

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

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

Premiums from universal life and investment-type
contracts are reported in the balance sheet as interest
sensitive contracts liability. Revenues from these investment
type contracts consist of income earned on the assets and
amounts assessed during the period against policyholders
account balances for mortality charges, policy administration
charges and surrender charges. Policy benefits and claims that
are charged to expense include benefit claims incurred in the
period in excess of related policyholders account balances.

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

53



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##### 



ANNUITY AND LIFE RE (HOLDINGS), LTD.


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 (Continued)

(c) Deferred
policy acquisition costs

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

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

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

(d) Insurance
licenses, net of amortization

The Company has classified as insurance licenses
the cost in excess of fair value of net assets acquired in a
purchase transaction. This cost is being amortized on a
straight-line basis over 20 years (see Note 3(l)
below).

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

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

The Companys liability for contracts
providing reinsurance for life insurance policies is recorded in
the balance sheet as reserves for future policy benefits. The
reserve is estimated using a net level premium method utilizing
actuarial assumptions for mortality, persistency, interest and
expenses established when the contract is underwritten. These
assumptions are based on anticipated experience with a margin
for adverse deviation. If the reserves for future policy
benefits plus the present value of expected future gross
premiums are insufficient to provide for expected future
benefits and expenses, deferred policy acquisition costs are
written down and, if required, a premium deficiency reserve is
established by a charge to income. Benefit liabilities for
traditional annuities that contain mortality risk are recorded
at the present value of expected future benefit payments.

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

54



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##### 



ANNUITY AND LIFE RE (HOLDINGS), LTD.


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 (Continued)

(f) Investments

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

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

(g) Translation
of foreign currencies

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

(h) Income
per common share

The Company calculates basic income per common
share and income per common share assuming dilution.

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

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

(i) Cash
and cash equivalents

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

(j) Stock
plans

The Company accounts for stock option grants in
accordance with APB opinion No. 25, Accounting for
Stock Issued to Employees and FASB Interpretation
No. 44, Accounting for Certain Transactions Involving
Stock Compensation, an Interpretation of APB No. 25.
Compensation expense for stock option grants is recognized to
the extent that the fair value of the stock exceeds the exercise
price of the option at the measurement date. Any resulting
compensation expense is recorded over the shorter of the vesting
or service period.

(k) Funds
withheld at interest and embedded derivatives

Funds withheld at interest represents a
receivable balance equivalent to the Companys
proportionate share of its ceding companies statutory
reserves related to policies reinsured by the Company under
annuity reinsurance agreements written on a modified coinsurance
or coinsurance funds withheld basis. The premiums received by a
ceding company on the policies underlying these types of
reinsurance agreements are used to purchase investment
securities that are managed by that ceding company or investment
managers appointed by it. Net investment income includes the
Companys proportionate share of the investment income and

55



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##### 



ANNUITY AND LIFE RE (HOLDINGS), LTD.


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 (Continued)

realized capital gains and losses on the sale of
investments purchased with those premiums, as well as
distributions from the embedded derivatives contained in certain
of these agreements.

A portion of the Companys Funds withheld
receivable assets contains embedded derivatives which require
bifurcation and separate accounting under
FAS 133  Accounting for Derivative Instruments
and Hedging Activities, which the Company adopted as of
January 1, 2001. The net fair value of these embedded
derivatives is classified as part of the Companys Funds
withheld asset on its balance sheet. The change in the fair
value of these embedded derivatives is recorded in the
Companys statement of operations as Net change in fair
value of embedded derivatives, which is a non-cash item. The
Company, with the assistance of outside advisors, has developed
a cash flow model to arrive at an estimate of the fair value of
these embedded derivatives that uses various assumptions
regarding future cash flows under the affected annuity
reinsurance contracts. While the Company has made an estimate of
the fair value of these embedded derivatives using a model which
it believes 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 the Company may modify its methodology. The
Company does not bifurcate and separately account for the
embedded derivatives contained in certain of its contracts,
including its annuity reinsurance agreement with Transamerica
Occidental Life Insurance Company, because the Company acquired
those agreements prior to the transition date elected by it
under FAS 133, as amended by FAS 137.

(l) Accounting
pronouncements

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

The Standards require that all business
combinations be accounted for using the purchase method and
establish specific criteria for the recognition of intangible
assets separately from goodwill. Under the standards, goodwill
will no longer be amortized but will be subject to an impairment
test on at least an annual basis. At December 31, 2001 and
2000, the Company was carrying goodwill of $2.1 million and
$2.2 million, respectively. Goodwill amortization for the
years ended December 31, 2001 and 2000 was $116,000 and
$58,000, respectively. When the Company adopts this new
standard, goodwill will not be amortized, but instead will be
analyzed for impairment at least annually. No impairment is
expected.

4. Investments

(a)The amortized
cost and fair values of investments in fixed income securities
classified as available for sale at December 31, 2001 and
2000 are as follows:

|                               |  |           |             |            |  |            |           |       |  |   |           |  |  |   |             | 
|------------------------------ |  | --------- | ----------- | ---------- |  | ---------- | --------- | ----- |  | - | --------- |  |  | - | ----------- | 
|                               |  | Amortized |             | Unrealized |  | Unrealized |           | Fair 
|2001                           |  | Cost      |             | Gain       |  | Loss       |           | Value
|                               |  |           |             |            |  |            |           |      
|U.S. Government Securities     |  | $         | 123,839,962 |            |  | $          | 3,140,538 |       |  | $ | 539,290   |  |  | $ | 126,441,210 | 
|Non U.S. Government Securities |  |           | 5,052,082   |            |  |            | 151,503   |       |  |   |          |  |  |   | 5,203,585   | 
|U.S. Corporate Securities      |  |           | 126,011,190 |            |  |            | 2,635,734 |       |  |   | 758,471   |  |  |   | 127,888,453 | 
|Non U.S. Corporate Securities  |  |           | 12,643,848  |            |  |            | 641,580   |       |  |   |          |  |  |   | 13,285,428  | 
|Mortgage Securities            |  |           | 44,873,637  |            |  |            | 1,306,222 |       |  |   | 11,103    |  |  |   | 46,168,756  | 
|                               |  |           |             |            |  |            |           |       |  |   |           |  |  |   |             | 
|                               |  | $         | 312,420,719 |            |  | $          | 7,875,577 |       |  | $ | 1,308,864 |  |  | $ | 318,987,432 | 
|                               |  |           |             |            |  |            |           |       |  |   |           |  |  |   |             | 

56



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##### 



ANNUITY AND LIFE RE (HOLDINGS), LTD.


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 (Continued)

|                               |  |           |             |            |  |            |           |       |  |   |         |  |  |   |             | 
|------------------------------ |  | --------- | ----------- | ---------- |  | ---------- | --------- | ----- |  | - | ------- |  |  | - | ----------- | 
|                               |  | Amortized |             | Unrealized |  | Unrealized |           | Fair 
|2000                           |  | Cost      |             | Gain       |  | Loss       |           | Value
|                               |  |           |             |            |  |            |           |      
|U.S. Government Securities     |  | $         | 74,968,192  |            |  | $          | 1,280,454 |       |  | $ | 10,661  |  |  | $ | 76,237,985  | 
|Non U.S. Government Securities |  |           | 6,396,324   |            |  |            | 22,824    |       |  |   |        |  |  |   | 6,419,148   | 
|U.S. Corporate Securities      |  |           | 84,615,039  |            |  |            | 359,949   |       |  |   | 172,612 |  |  |   | 84,802,376  | 
|Non U.S. Corporate Securities  |  |           | 5,280,484   |            |  |            | 193,741   |       |  |   |        |  |  |   | 5,474,225   | 
|Mortgage Securities            |  |           | 95,707,771  |            |  |            | 614,242   |       |  |   | 128,325 |  |  |   | 96,193,688  | 
|                               |  |           |             |            |  |            |           |       |  |   |         |  |  |   |             | 
|                               |  | $         | 266,967,810 |            |  | $          | 2,471,210 |       |  | $ | 311,598 |  |  | $ | 269,127,422 | 
|                               |  |           |             |            |  |            |           |       |  |   |         |  |  |   |             | 

A deferred tax liability of $313,910 and $94,641
has been provided against unrealized gains on fixed income
securities as of December 31, 2001 and December 31,
2000, respectively.

(b)The following
table sets forth certain information regarding the investment
ratings of the Companys fixed income securities portfolio
at December 31, 2001 and 2000.

|           |  |                |             |      |  |                |       |   |  |   |             |  |  |  |       |  
|---------- |  | -------------- | ----------- | ---- |  | -------------- | ----- | - |  | - | ----------- |  |  |  | ----- | -
|           |  |                |             |     
|           |  | 2001           |             | 2000
|           |  |                |             |     
|Ratings(1) |  | Amortized Cost |             | %    |  | Amortized Cost |       | %
|           |  |                |             |      |  |                |       |  
|AAA        |  | $              | 167,299,542 |      |  |                | 53.6  | % |  | $ | 173,372,069 |  |  |  | 65.0  | %
|AA         |  |                | 22,020,044  |      |  |                | 7.0   | % |  |   | 18,789,047  |  |  |  | 7.0   | %
|A          |  |                | 64,538,138  |      |  |                | 20.7  | % |  |   | 38,004,996  |  |  |  | 14.2  | %
|BAA        |  |                | 54,813,709  |      |  |                | 17.5  | % |  |   | 27,818,913  |  |  |  | 10.4  | %
|BA         |  |                | 2,651,113   |      |  |                | 0.8   | % |  |   | 7,465,525   |  |  |  | 2.8   | %
|Below BA   |  |                | 1,098,173   |      |  |                | 0.4   | % |  |   | 1,517,260   |  |  |  | 0.6   | %
|           |  |                |             |      |  |                |       |   |  |   |             |  |  |  |       |  
|           |  | $              | 312,420,719 |      |  |                | 100.0 | % |  | $ | 266,967,810 |  |  |  | 100.0 | %
|           |  |                |             |      |  |                |       |   |  |   |             |  |  |  |       |  




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

(c) At
December 31, 2001 and 2000 letters of credit totaling
$197 million and $184 million, respectively, issued in
the ordinary course of the Companys business had been
issued by the Companys bankers in favor of certain ceding
insurance companies. At December 31, 2001 and 2000 cash and
investments of $112 million and $161 million, respectively, were
pledged as collateral for these letters of credit.


At December 31, 2001 and December 31,
2000 cash and investments of $272 million and
$66 million, respectively, were held in trust for the
benefit of certain ceding companies.

(d)The maturity
distribution of fixed income securities held as of
December 31, 2001 and 2000 is shown below. Actual maturity
dates may differ from contractual maturity dates because certain
borrowers have the ability to prepay their obligations without
penalty.

|                            |  |           |             |       |  |           |             |       |  |   |             |  |  |   |             | 
|--------------------------- |  | --------- | ----------- | ----- |  | --------- | ----------- | ----- |  | - | ----------- |  |  | - | ----------- | 
|                            |  |           |             |      
|                            |  | 2001      |             | 2000 
|                            |  |           |             |      
|                            |  | Amortized |             | Fair  |  | Amortized |             | Fair 
|                            |  | Cost      |             | Value |  | Cost      |             | Value
|                            |  |           |             |       |  |           |             |      
|Within one year             |  | $         | 9,912,893   |       |  | $         | 9,860,685   |       |  | $ | 11,275,786  |  |  | $ | 11,265,144  | 
|From one year to five years |  |           | 162,295,676 |       |  |           | 166,459,434 |       |  |   | 93,260,097  |  |  |   | 93,066,484  | 
|From six to ten years       |  |           | 83,066,476  |       |  |           | 84,374,357  |       |  |   | 53,652,320  |  |  |   | 55,105,843  | 
|More than ten years         |  |           | 12,272,037  |       |  |           | 12,124,200  |       |  |   | 13,071,836  |  |  |   | 13,496,263  | 
|Mortgage Securities         |  |           | 44,873,637  |       |  |           | 46,168,756  |       |  |   | 95,707,771  |  |  |   | 96,193,688  | 
|                            |  |           |             |       |  |           |             |       |  |   |             |  |  |   |             | 
|                            |  | $         | 312,420,719 |       |  | $         | 318,987,432 |       |  | $ | 266,967,810 |  |  | $ | 269,127,422 | 
|                            |  |           |             |       |  |           |             |       |  |   |             |  |  |   |             | 

57



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##### 



ANNUITY AND LIFE RE (HOLDINGS), LTD.


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 (Continued)

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

|                                           |  |      |            |      |  |      |             |   |  |   |            |  
|------------------------------------------ |  | ---- | ---------- | ---- |  | ---- | ----------- | - |  | - | ---------- | -
|                                           |  | 2001 |            | 2000 |  | 1999
|                                           |  |      |            |      |  |     
|Interest income                            |  | $    | 21,434,452 |      |  | $    | 21,181,034  |   |  | $ | 22,004,986 |  
|Investment income earned on funds withheld |  |      | 70,963,486 |      |  |      | 116,521,841 |   |  |   | 64,606,466 |  
|Amortization of premium/discount           |  |      | (839,580   | )    |  |      | (360,445    | ) |  |   | (659,506   | )
|Investment expenses                        |  |      | (429,662   | )    |  |      | (694,103    | ) |  |   | (862,135   | )
|                                           |  |      |            |      |  |      |             |   |  |   |            |  
|                                           |  | $    | 91,128,696 |      |  | $    | 136,648,327 |   |  | $ | 85,089,811 |  
|                                           |  |      |            |      |  |      |             |   |  |   |            |  

Gross realized investment gains for
December 31, 2001, 2000, and 1999 were $3,659,762,
$1,376,373, and $1,104,026, respectively. Gross realized losses
for the same periods were $2,429,724, $6,193,494, and
$2,388,795, respectively.

5. Stockholders Equity

Preferred
Stock

The Company is authorized to issue 50,000,000
preferred shares of par value $1.00 each. Currently, there are
no preferred shares issued or outstanding.

Common
Stock

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

The common shareholders have no pre-emptive,
redemption, conversion or sinking fund rights. Subject to
certain voting restrictions, which limit the voting power of
United States persons to less than 10%, and non-United States
persons to less than 17%, of the combined voting power of the
issued voting shares of the Company, each holder is entitled to
one vote per share.

In the event of a liquidation, dissolution or
winding up of the Company, the holders of the common shares are
able to share equally in the assets of the Company, if any
remain after payment of all liabilities and the liquidation
preference of any outstanding preference shares. Certain
restrictions exist with respect to the transfer of shares,
should such a transfer cause the number of shares held by one
United States person to be 10% or more, or a non-United States
person to be 17% or more, of the Companys outstanding
common shares.

Class A
Warrants

In connection with the initial capitalization of
the Company, the Company issued Class A Warrants which
entitle the holders to purchase up to 3,059,990 common shares in
the Company.

The exercise price of the Warrants, which is
subject to adjustment, is $15.00, which was equal to the initial
public offering price per share of the Companys common
shares. The Class A Warrants are all currently exercisable.
The Class A Warrants will expire on January 15, 2008.
No Class A Warrants have been exercised at
December 31, 2001.

Class B
Warrants

In connection with the direct sales of equity
securities to certain Strategic Investors in
connection with the Companys initial public offering, the
Company issued Class B Warrants that enable the holders to
purchase an aggregate of 397,500 common shares of the Company.
The exercise price of the Warrants, which is subject to
adjustment, is $15.00 per share, which was equal to the price of
the common shares in the initial

58



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##### 



ANNUITY AND LIFE RE (HOLDINGS), LTD.


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 (Continued)

public offering. The Class B Warrants are
all currently exercisable and expire on April 15, 2008. No
Class B Warrants have been exercised at December 31,
2001.

6. (Loss) Income Per Share

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

|                                                                                                                        |                                                                            |                        |             |                        |  |      |            |           |  |   |            |           | 
|----------------------------------------------------------------------------------------------------------------------- | -------------------------------------------------------------------------- | ---------------------- | ----------- | ---------------------- |  | ---- | ---------- | --------- |  | - | ---------- | --------- | 
|                                                                                                                        |                                                                            | 2001                   |             | 2000                   |  | 1999
|                                                                                                                        |                                                                            |                        |             |                        |  |     
|                                                                                                                        |                                                                            | (dollars, as restated) |             | (dollars, as restated) |  |     
|Net (loss) income available to common
    shareholders before cumulative effect of a change in accounting
    principle |                                                                            | $                      | (36,915,696 | )                      |  | $    | 39,101,736 |           |  | $ | 35,703,144 |          
|Cumulative effect of a change in accounting
    principle                                                               |                                                                            |                        | (3,665,735  | )                      |  |      |           |           |  |   |           |          
|                                                                                                                        |                                                                            |                        |             |                        |  |      |            |           |  |   |            |          
|Net (loss) income available to common shareholders                                                                      |                                                                            | $                      | (40,581,431 | )                      |  | $    | 39,101,736 |           |  | $ | 35,703,144 |          
|                                                                                                                        |                                                                            |                        |             |                        |  |      |            |           |  |   |            |          
|Basic:                                                                                                                  |                                                                            |                        |             |                        |  |      |            |           |  |   |            |          
|Weighted average number of common shares
    outstanding                                                                |                                                                            |                        | 25,602,664  |                        |  |      | 25,499,999 |           |  |   | 25,499,999 |          
|Net (loss) income per share before cumulative
    effect of a change in accounting principle                            |                                                                            | $                      | (1.45       | )                      |  | $    | 1.53       |           |  | $ | 1.40       |          
|Cumulative effect of a change in accounting
    principle                                                               |                                                                            |                        | (0.14       | )                      |  |      |           |           |  |   |           |          
|                                                                                                                        |                                                                            |                        |             |                        |  |      |            |           |  |   |            |          
|(Loss) income per common share                                                                                          |                                                                            | $                      | (1.59       | )                      |  | $    | 1.53       |           |  | $ | 1.40       |          
|                                                                                                                        |                                                                            |                        |             |                        |  |      |            |           |  |   |            |          
|Diluted:                                                                                                                |                                                                            |                        |             |                        |  |      |            |           |  |   |            |          
|Weighted average number of common shares
    outstanding                                                                |                                                                            |                        | 25,602,664  |                        |  |      | 25,499,999 |           |  |   | 25,499,999 |          
|                                                                                                                        | Plus: incremental shares from assumed exercise of
    options and warrants |                        |             |                       |  |      |            | 1,970,746 |  |   |            | 1,722,636 | 
|                                                                                                                        |                                                                            |                        |             |                        |  |      |            |           |  |   |            |          
|Diluted weighted average number of common shares
    outstanding                                                        |                                                                            |                        | 25,602,664  |                        |  |      | 27,470,745 |           |  |   | 27,222,635 |          
|                                                                                                                        |                                                                            |                        |             |                        |  |      |            |           |  |   |            |          
|Net (loss) income per share before cumulative
    effect of a change in accounting principle                            |                                                                            | $                      | (1.45       | )                      |  | $    | 1.42       |           |  | $ | 1.31       |          
|Cumulative effect of a change in accounting
    principle                                                               |                                                                            |                        | (0.14       | )                      |  |      |           |           |  |   |           |          
|                                                                                                                        |                                                                            |                        |             |                        |  |      |            |           |  |   |            |          
|(Loss) income per common share                                                                                          |                                                                            | $                      | (1.59       | )                      |  | $    | 1.42       |           |  | $ | 1.31       |          
|                                                                                                                        |                                                                            |                        |             |                        |  |      |            |           |  |   |            |          

As of December 31, 2001, 2000 and 1999 the
Company had 1,860,536, 1,903,365, and 1,497,865 options
outstanding, respectively. There were Class A and
Class B warrants outstanding representing the right to
acquire 3,457,490 shares in each of the above years. Inclusion
of the incremental shares from assumed exercise of options and
warrants is anti-dilutive in 2001. Consequently, they are not
included in diluted (loss) income per common share.

7. Agreements with Related
Parties

Inter-Atlantic
Capital Partners, Inc.

Certain directors of the Company are also owners,
directors, or officers of Inter-Atlantic Capital Partners, Inc.
(Inter-Atlantic). In 1998, Inter-Atlantic agreed to
provide financial advisory and other services to the Company for
a term of five years in exchange for four annual payments of
$600,000. Such services include,

59



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##### 



ANNUITY AND LIFE RE (HOLDINGS), LTD.


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 (Continued)

among other things, assistance in the development
of products, financial planning, management of assets and
liabilities, international marketing efforts and such other
services as the Company may request. In 1999, the Company
prepaid this fee at a discount of 10%. The prepayment is being
amortized over the period the services are provided with the
unamortized amount included in other assets.

Shareholders

One of the Companys major shareholders is
affiliated with The Prudential Investment Corporation, which
serves as one of the Companys investment managers. The
Company has agreed to pay a fee for investment management
services to The Prudential Investment Corporation based upon the
amount of funds managed. The fee is based upon a sliding scale
and has been determined on an arms-length basis. The Company has
entered into a life reinsurance agreement with the Prudential
Insurance Company of America and an annuity reinsurance
agreement with XL Mid Ocean Reinsurance, Ltd., a subsidiary of
XL Capital, Ltd. Both Prudential and XL Capital are major
shareholders of the Company. These contracts have been
negotiated under normal commercial terms. As discussed in
Note 10, the Company has also entered into an additional
agreement with a subsidiary of XL Capital.

Transactions
with management

During 1998, certain of the Companys
officers purchased 163,121 shares in the Company and the Company
made loans to the officers to partially finance such purchases.
The loans bear interest at 7% per annum and must be repaid
within five years.

At December 31, 2001 and 2000 loans
outstanding from management for such stock purchases were
$1,000,000 and $1,150,000, respectively. Accrued interest on the
notes was $317,259 and $217,241, respectively. Interest income
of $100,018, $80,500, and $70,673 has been recognized for the
years December 31, 2001, 2000 and 1999, respectively, on
these loans.

8. Stock Option Plans

In 1998 the Board of Directors adopted a Stock
Option Plan (the Plan) under which it may grant,
subject to certain restrictions, Incentive Stock Options
(ISOs) and Non-Qualified Stock Options
(NQSOs). The aggregate number of common shares
for which options may be granted under the Plan was limited to
1,552,500 Common Shares. In 1999 the Plan was amended such that
options may be granted in any fiscal year equal to not more than
2% of the adjusted average of the outstanding common shares of
the Company, as that number is determined by the Company to
calculate fully diluted earnings per share. Only eligible
employees of the Company are entitled to ISOs, while
NQSOs may be granted to eligible employees, non-employee
directors and consultants. The Plan is administered by the
Compensation Committee of the Board of Directors.

The term of the options granted under the Plan
will not be more than ten years from the date of grant. Unless
otherwise provided in the option agreement related to a specific
grant, options granted under the Plan will be exercisable in
three equal annual installments, commencing on the first
anniversary of the grant date.

Each person who becomes an eligible non-employee
director, as defined in the plan, is automatically granted an
option to purchase 15,000 common shares on the date he or she
becomes an eligible non-employee director. These options have an
exercise price equal to the fair market value of the optioned
common shares on the date the options are granted and are
exercisable in three equal installments commencing with the
first anniversary of the grant date. In addition, subject to
certain conditions, each non-employee director is automatically
granted an option to purchase 2,500 common shares at each
successive annual general meeting. These options have an
exercise price equal to the fair market value of the optioned
common shares on the date the options are granted and are
immediately exercisable if granted after April 8, 1999.

60



---



##### 



ANNUITY AND LIFE RE (HOLDINGS), LTD.


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 (Continued)

|                                 |  |           |           |                  |  |           |       |                  |  |  |           |   |  |   |       | 
|-------------------------------- |  | --------- | --------- | ---------------- |  | --------- | ----- | ---------------- |  |  | --------- | - |  | - | ----- | 
|                                 |  |           |           |                 
|                                 |  | 2001      |           | 2000            
|                                 |  |           |           |                 
|                                 |  | Number    |           | Weighted Average |  | Number    |       | Weighted Average
|                                 |  | of Shares |           | Exercise Price   |  | of Shares |       | Exercise Price  
|                                 |  |           |           |                  |  |           |       |                 
|Outstanding at beginning of year |  |           | 1,903,365 |                  |  | $         | 17.17 |                  |  |  | 1,497,865 |   |  | $ | 15.65 | 
|Granted                          |  |           | 172,500   |                  |  | $         | 28.98 |                  |  |  | 422,500   |   |  | $ | 22.46 | 
|Exercised                        |  |           | (205,329  | )                |  | $         | 15.37 |                  |  |  |          |   |  | $ |      | 
|Forfeitures                      |  |           | (10,000   | )                |  | $         | 22.37 |                  |  |  | (17,000   | ) |  | $ | 15.60 | 
|                                 |  |           |           |                  |  |           |       |                  |  |  |           |   |  |   |       | 
|Outstanding at end of year       |  |           | 1,860,536 |                  |  | $         | 18.44 |                  |  |  | 1,903,365 |   |  | $ | 17.17 | 
|                                 |  |           |           |                  |  |           |       |                  |  |  |           |   |  |   |       | 

At December 31, 2001, options to acquire
1,446,855 common shares were exercisable. The weighted average
remaining contractual life of these exercisable options was
6.6 years.

The Company applies APB Opinion No. 25 and
FASB Interpretation No. 44 in accounting for the Plan.
Accordingly, no compensation cost has been recognized as the
intrinsic value of the options was $nil at the measurement date.
The net income and earnings per common share would have been
reduced to the pro forma amounts indicated below, had
compensation cost been determined based on the fair value of the
options at the grant date, consistent with the method of SFAS
No. 123, Accounting for Stock-Based
Compensation.

|                                                                                                        |               |               |   |               |   |      |   |            |  |  |   |            | 
|------------------------------------------------------------------------------------------------------- | ------------- | ------------- | - | ------------- | - | ---- | - | ---------- |  |  | - | ---------- | 
|                                                                                                        |               | 2001          |   | 2000          |   | 1999
|                                                                                                        |               |               |   |               |   |     
|                                                                                                        |               | (as restated) |   | (as restated) |   |     
|Net (loss) income before cumulative effect of a
    change in accounting principle:                     |               |               |   |               |   |      |   |            |  |  |   |           
|                                                                                                        |  as reported |               | $ | (36,915,696   | ) |      | $ | 39,101,736 |  |  | $ | 35,703,144 | 
|                                                                                                        |  pro forma   |               |   | (40,274,490   | ) |      |   | 34,397,159 |  |  |   | 32,437,835 | 
|(Loss) earnings per share before cumulative
    effect of a change in accounting principle as reported: |               |               |   |               |   |      |   |            |  |  |   |           
|                                                                                                        |  Basic       |               | $ | (1.45         | ) |      | $ | 1.53       |  |  | $ | 1.40       | 
|                                                                                                        |  Diluted     |               | $ | (1.45         | ) |      | $ | 1.42       |  |  | $ | 1.31       | 
|Pro forma (loss) earnings per share before
    cumulative effect of a change in accounting principle:   |               |               |   |               |   |      |   |            |  |  |   |           
|                                                                                                        |  Basic       |               | $ | (1.57         | ) |      | $ | 1.35       |  |  | $ | 1.27       | 
|                                                                                                        |  Diluted     |               | $ | (1.57         | ) |      | $ | 1.25       |  |  | $ | 1.19       | 
|Net (loss) income:                                                                                      |               |               |   |               |   |      |   |            |  |  |   |           
|                                                                                                        |  as reported |               | $ | (40,581,431   | ) |      | $ | 39,101,736 |  |  | $ | 35,703,144 | 
|                                                                                                        |  pro forma   |               | $ | (43,940,225   | ) |      | $ | 34,397,159 |  |  | $ | 32,437,835 | 
|(Loss) earnings per share as reported:                                                                  |               |               |   |               |   |      |   |            |  |  |   |           
|                                                                                                        |  Basic       |               | $ | (1.59         | ) |      | $ | 1.53       |  |  | $ | 1.40       | 
|                                                                                                        |  Diluted     |               | $ | (1.59         | ) |      | $ | 1.42       |  |  | $ | 1.31       | 
|Pro forma (loss) earnings per share:                                                                    |               |               |   |               |   |      |   |            |  |  |   |           
|                                                                                                        |  Basic       |               | $ | (1.72         | ) |      | $ | 1.35       |  |  | $ | 1.27       | 
|                                                                                                        |  Diluted     |               | $ | (1.72         | ) |      | $ | 1.25       |  |  | $ | 1.19       | 

61



---



##### 



ANNUITY AND LIFE RE (HOLDINGS), LTD.


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 (Continued)

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

|              |  |          |      |            |  |                  |       |                  |  |  |      |   |  |   |       | 
|------------- |  | -------- | ---- | ---------- |  | ---------------- | ----- | ---------------- |  |  | ---- | - |  | - | ----- | 
|              |  | Dividend |      | Expected   |  | Weighted Average |       | Weighted Average
|Year of Grant |  | Yield    |      | Volatility |  | Risk Free Rate   |       | Fair Value      
|              |  |          |      |            |  |                  |       |                 
|1998          |  |          | 1.07 | %          |  |                  | 26.00 | %                |  |  | 5.60 | % |  | $ | 6.47  | 
|1999          |  |          | 0.80 | %          |  |                  | 25.00 | %                |  |  | 5.60 | % |  | $ | 9.85  | 
|2000          |  |          | 0.70 | %          |  |                  | 35.00 | %                |  |  | 5.80 | % |  | $ | 11.79 | 
|2001          |  |          | 0.69 | %          |  |                  | 37.07 | %                |  |  | 5.05 | % |  | $ | 15.19 | 

9. Retrocession Agreements

The Company has entered into a retrocession
agreement, which enables it to limit the amount of life
reinsurance it retains to $1,000,000 per single life. The
contract is automatic and effective for risks assumed and in
force from January 1, 1997. The limit of cover is $50
million and covers all single and joint life reinsurance assumed
by the Company. At December 31, 2001 and 2000 the Company
ceded approximately $493 million and $193 million of in force
insurance coverage for a premium of $1,449,000 and $1,146,000,
respectively. At December 31, 2001, $1,150,000 was
recoverable from our reinsurers. There was no recoverable at
December 31, 2000.

It should be noted that retrocession agreements
do not relieve the Company from its obligations to its
reinsureds and failure of the Companys reinsurers to honor
their obligations could result in losses to the Company. The
Company evaluates the financial condition of its reinsurers and
monitors any concentrations of credit risk that may develop to
minimize its exposure. The parties to the retrocession agreement
described above have current credit rating of A+ or better, as
assigned by A. M. Best.

Annuity and Life Reassurance America also
purchased reinsurance as discussed in Note 13.



|    |                                                                         
|--- | ------------------------------------------------------------------------
|10. | Vulnerability to Concentrations, Use of
    Estimates, and Contingencies

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

The Companys largest annuity reinsurance
contract is a retrocessional contract whereby the Company
reinsures Transamerica Occidental Life Insurance Company. At
December 31, 2001, approximately $962 million of the
Companys funds withheld at interest receivable and
$991 million of the Companys interest sensitive
contracts liability related to its 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 the Companys obligations to Transamerica. IL
Annuity has financial strength or claims paying ratings of A, A
and AA- from A.M. Best, Standard & Poors and
Fitch Ratings, respectively. Transamerica has financial strength
or claims paying ratings of A+, AA+, Aa3 and AA+ from A.M. Best,
Standard & Poors, Moodys and Fitch Ratings,
respectively. At December 31, 2001, approximately
$227 million of the Companys funds withheld at
interest (excluding the fair value of the embedded derivatives)
and $227 million of the Companys interest sensitive
contracts liability related to the Companys reinsurance
contract with The Ohio National Life Insurance Company. Ohio
National has financial strength or claims paying ratings of A+,
AA, A1 and AA from A.M. Best, Standard & Poors,
Moodys and Fitch Ratings, respectively.

62



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##### 



ANNUITY AND LIFE RE (HOLDINGS), LTD.


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 (Continued)

During 2001, the Company recorded $59,615,000 of
charges and payments related to the Transamerica reinsurance
contract, made up of $13,500,000 of payments made under the
contract for minimum interest guarantees to policyholders who
surrendered their policies and writedowns of deferred
acquisition costs of $46,115,000. These charges are the result
of a high level of surrenders by policyholders coupled with poor
investment performance on the premiums paid by the holders of
policies underlying the reinsurance contract. In writing down
the deferred acquisition costs to their estimated recoverable
amount, management has estimated the future levels of surrenders
of the underlying policies together with the estimated future
level of investment return on the invested premiums. While
management has written down deferred acquisition costs to what
it believes to be an appropriate level based upon reasonable
assumptions about future investment performance and surrenders,
the write down is an estimate. Actual amounts of income earned
and amounts payable upon future surrenders may be significantly
higher or lower than the amounts currently estimated. If actual
experience varies significantly from the assumptions used to
write down the deferred acquisition costs, additional write
downs may be needed in the future. A subsidiary of XL Capital, a
major shareholder in the Company, has agreed to provide
additional protection for up to $10,000,000 against further
minimum interest guarantee payments on this contract occurring
after January 31, 2002 in excess of a $33,000,000
deductible.

On January 21, 2002, the Company served
written notice of arbitration in connection with its largest
annuity contract. The Company is seeking monetary damages and/or
equitable relief from its ceding insurer. The claim is based
upon certain actions and/or omissions by the cedent that the
Company asserts have, without limitation, deprived it of the
benefit of this reinsurance transaction. The parties are in the
process of selecting an arbitration panel. It is not feasible to
determine the outcome of this arbitration at the current time.

The Company plans to invoke the arbitration
provisions of its reinsurance agreement in connection with its
largest life reinsurance contract. The claim is based upon the
Companys contention that the cedent failed to disclose
material facts, known to the cedent, about the block of business
being reinsured when it was underwritten.

The Company also plans to pursue arbitration or
other legal action to terminate a second life reinsurance
agreement underwritten in 1998. The claim is based upon the
Companys contention that the cedent is unable to provide
support for its underwriting assumptions used to secure the
reinsurance and has ceded business that is excluded from the
agreement. Further, the cedent is unable to segregate from its
records business that is properly covered under the agreement.

11. Fair Value of Financial
Instruments

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

Fixed
Income Securities

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

Cash
and Cash Equivalents

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

63



---



##### 



ANNUITY AND LIFE RE (HOLDINGS), LTD.


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 (Continued)

Embedded
Derivatives

Certain of the Companys modified
coinsurance and coinsurance funds withheld annuity reinsurance
agreements have features that constitute embedded derivatives
that require bifurcation and separate accounting under
FAS 133  Accounting for Derivative Instruments
and Hedging Activities. The valuation of these embedded
derivatives requires cash flow modeling that uses various
assumptions regarding future cash flows under these agreements.
At December 31, 2001, the net fair value of the
Companys embedded derivatives was $1,363,000 and was
classified as part of the Companys Funds withheld asset.

Other
items

Fair value disclosures are not required for
reinsurance balances recoverable, deferred policy acquisition
costs, or liabilities arising from insurance contracts. As a
result, they have not been determined by the Company. Fair
values of other assets and liabilities approximate their
carrying values due to their short-term nature.

12. Segments

The Company writes a number of ordinary life
reinsurance and annuity reinsurance contracts. The Company views
life and annuity reinsurance as one business segment and
accumulates financial data for this segment when assessing
performance and allocating resources.

13. Acquisition

On June 1, 2000 the Company, through Annuity
and Life Re America, completed the acquisition of Annuity and
Life Reassurance America, Inc., formerly Capitol Bankers Life
Insurance Company. Annuity and Life Reassurance America is a
life insurance company domiciled in the United States, which is
authorized to conduct its life insurance business in over 40
states of the United States and the District of Columbia, and
will focus its operations on the United States life reinsurance
markets. The Company contributed additional capital to Annuity
and Life Reassurance America during the fiscal year of
$19,550,000 to bring the total capital and surplus of Annuity
and Life Reassurance America to $25,000,000. The acquisition
price and capital contribution was funded from available cash
balances and proceeds from the sales of fixed income securities
held by the Company.

The acquisition has been accounted for as a
purchase and the operating results of Annuity and Life
Reassurance America have been included in the Companys
financial statements since the date of acquisition. Prior to
closing, the in-force insurance business of Annuity and Life
Reassurance America was 100% reinsured by Annuity and Life
Reassurance America with its former owner, a subsidiary of Swiss
Re, who will continue to administer the business reinsured.
Accordingly, there will be no earnings from the in-force
business at the acquisition date accruing to the Company
currently or in the future.

The amounts related to the reinsured business
referred to above are included on the Companys Balance
Sheet as Receivable for reinsurance ceded and Reserves for
future policy benefits. At December 31, 2001 and 2000, the
amounts included in these accounts were $97,800,000 and
$104,500,000, respectively.

The purchase price of $13,200,000 exceeded the
fair value of the net assets acquired (the capital and surplus
of Annuity and Life Reassurance America) by $2,301,000. The
excess, which has been allocated to the value of the insurance
licenses possessed by Annuity and Life Reassurance America, is
being amortized over 20 years (see Note 3(l) above).

64



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##### 



ANNUITY AND LIFE RE (HOLDINGS), LTD.


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 (Continued)

14. Deposit Liability

During 2001, the Company entered into a
reinsurance agreement with a third party reinsurer to cede
excess U.S. Statutory reserves (the amount by which the cedents
U.S. Statutory reserves exceeds our U.S. GAAP reserves for
certain life insurance contracts subject to certain state
statutory regulations known as Triple-X) to the reinsurer. Under
the agreement, the reinsurer is obligated to fund the collateral
requirements associated with these excess U.S. Statutory
reserves by making cash deposits with the Company. As of
December 31, 2001, the Company had received deposits of
$137 million from the reinsurer. The Company expects to
cede additional excess U.S. Statutory reserves to, and receive
additional deposits from, the reinsurer in the future.

This reinsurance agreement does not qualify for
reinsurance accounting under U.S. GAAP. As a result, funds
received under this contract are recorded as a deposit
liability. As part of this contract the Company deposited
$41.0 million with the reinsurer, which is included in
Deposits and other reinsurance receivables. The Company receives
the benefit of investment income from the funds received and
pays the third party reinsurer certain fees associated with the
contract. For the year 2001, the fees were $1.2 million and
are included in other insurance expenses.

15. Taxation

The effective tax rate provided for in the
financial statements is computed at a rate of zero.
Substantially all income is exempt from taxation.

Under current Bermuda law neither Holdings nor
Annuity and Life Reassurance is required to pay any taxes in
Bermuda on either income or capital gains. Holdings and Annuity
and Life Reassurance have each received an assurance from the
Minister of Finance in Bermuda that in the event of any such
taxes being imposed the Company will be exempted from taxation
until the year 2016. Annuity and Life Reassurance intends to
operate in a manner such that it will not be liable to United
States tax other than premium excise taxes and withholding taxes
on certain investments.

Annuity and Life Re America and Annuity and Life
Reassurance America are subject to all applicable Federal and
State taxes of the United States. U.S. income taxes applicable
to our U.S. operations are not material to the consolidated
financial statements and, therefore, no separate item appears on
the income statement or balance sheet. At December 31, 2001
and 2000 the Company had reflected a deferred tax liability of
$314,000 and $95,000, respectively, related to U.S. income taxes
on unrealized gains from its U.S. operations. No deferred
tax asset or liability related to operating income has been
recognized. GAAP net operating income (loss) for the year ending
2001, 2000, and 1999 was $891,000, $(945,000), and $(219,000),
respectively. The GAAP net operating loss carryforward of
$273,000 begins expiring in 2020. The tax basis net operating
loss carryforward at December 31, 2001 was $5,680,000,
which begins expiring in 2019.

16. Statutory Requirements and Dividend
Restrictions

The Companys ability to pay dividends
depends on the ability of its operating subsidiaries to pay
dividends to the Company. While the Company itself is not
subject to any significant legal prohibitions on the payment of
dividends, its operating subsidiaries may be subject to
regulatory constraints, which affect their ability to pay
dividends to the Company.

Under the Bermuda Insurance Act, 1978, and
related regulations, Annuity and Life Reassurance is required to
maintain certain solvency levels. Annuity and Life Reassurance
is prohibited from declaring or paying a dividend if such a
payment would reduce its statutory surplus below the required
minimum of $250,000. This requirement was met at the balance
sheet date and, therefore, no such restriction currently exists.

65



---



##### 



ANNUITY AND LIFE RE (HOLDINGS), LTD.


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 (Continued)

Annuity and Life Reassurance America is subject
to statutory regulations of the state of Connecticut of the
United States that restrict the payment of dividends. It may not
pay dividends in any 12-month period in excess of the greater of
the prior years statutory operating income or 10% of
capital and surplus at the end of the preceding year, without
regulatory approval. At December 31, 2001 the statutory
capital and surplus of Annuity and Life Reassurance America is
$19,749,000.

17. Unaudited Quarterly Financial
Data

The unaudited quarterly financial data for the
years ended December 31, 2001, 2000, and 1999 are as
follows:

|                                                                                                              |  |               |            |               |  |               |            |               |  |   |             |   |  |   |            |  
|------------------------------------------------------------------------------------------------------------- |  | ------------- | ---------- | ------------- |  | ------------- | ---------- | ------------- |  | - | ----------- | - |  | - | ---------- | -
|                                                                                                              |  | First         |            | Second        |  | Third         |            | Fourth       
|2001                                                                                                          |  | Quarter       |            | Quarter       |  | Quarter       |            | Quarter      
|                                                                                                              |  |               |            |               |  |               |            |              
|                                                                                                              |  | (as restated) |            | (as restated) |  | (as restated) |            | (as restated)
|Net premiums                                                                                                  |  | $             | 53,513,153 |               |  | $             | 61,628,943 |               |  | $ | 66,813,664  |   |  | $ | 69,837,477 |  
|Investment income, net of related expenses                                                                    |  |               | 23,089,810 |               |  |               | 19,605,194 |               |  |   | 24,239,602  |   |  |   | 24,194,090 |  
|Net realized investment gains (losses)                                                                        |  |               | 25,621     |               |  |               | 320,629    |               |  |   | 1,078,933   |   |  |   | (195,145   | )
|Net change in fair value of embedded derivatives                                                              |  |               | (148,927   | )             |  |               | 1,846,981  |               |  |   | (5,265,396  | ) |  |   | 8,596,369  |  
|Claims and policy benefits                                                                                    |  |               | 41,624,668 |               |  |               | 45,201,447 |               |  |   | 74,873,807  |   |  |   | 54,325,088 |  
|Interest credited to interest sensitive products                                                              |  |               | 8,291,470  |               |  |               | 7,797,407  |               |  |   | 14,401,290  |   |  |   | 18,768,251 |  
|Policy acquisition and other insurance expenses                                                               |  |               | 25,025,150 |               |  |               | 26,889,334 |               |  |   | 43,306,421  |   |  |   | 32,559,644 |  
|Net income (loss) before cumulative effect of a
    change in accounting principle                            |  |               | 2,006,770  |               |  |               | 5,469,204  |               |  |   | (42,680,474 | ) |  |   | (1,711,196 | )
|Net income (loss) per common share (diluted)
    before cumulative effect of a change in accounting principle |  | $             | 0.08       |               |  | $             | 0.19       |               |  | $ | (1.66       | ) |  | $ | (0.07      | )
|Cumulative effect of a change in accounting
    principle                                                     |  |               | (3,665,735 | )             |  |               |           |               |  |   |            |   |  |   |           |  
|Net (loss) income                                                                                             |  |               | (1,658,965 | )             |  |               | 5,469,204  |               |  |   | (42,680,474 | ) |  |   | (1,711,196 | )
|Net (loss) income per common share (diluted)                                                                  |  | $             | (0.07      | )             |  | $             | 0.19       |               |  | $ | (1.66       | ) |  | $ | (0.07      | )

|                                                 |  |               |            |               |  |               |            |               |  |   |            |   |  |   |            |  
|------------------------------------------------ |  | ------------- | ---------- | ------------- |  | ------------- | ---------- | ------------- |  | - | ---------- | - |  | - | ---------- | -
|                                                 |  | First         |            | Second        |  | Third         |            | Fourth       
|2000                                             |  | Quarter       |            | Quarter       |  | Quarter       |            | Quarter      
|                                                 |  |               |            |               |  |               |            |              
|                                                 |  | (as restated) |            | (as restated) |  | (as restated) |            | (as restated)
|Net premiums                                     |  | $             | 36,230,006 |               |  | $             | 37,684,372 |               |  | $ | 44,588,022 |   |  | $ | 49,901,622 |  
|Investment income, net of related expenses       |  |               | 26,797,697 |               |  |               | 25,819,232 |               |  |   | 23,745,266 |   |  |   | 60,286,132 |  
|Net realized investment (losses)                 |  |               | (562,825   | )             |  |               | (2,417,880 | )             |  |   | (702,549   | ) |  |   | (1,133,867 | )
|Claims and policy benefits                       |  |               | 32,958,111 |               |  |               | 29,898,304 |               |  |   | 36,040,180 |   |  |   | 33,913,597 |  
|Interest credited to interest sensitive products |  |               | 8,763,595  |               |  |               | 8,063,576  |               |  |   | 5,322,440  |   |  |   | 43,692,693 |  
|Policy acquisition and other insurance expenses  |  |               | 12,856,683 |               |  |               | 14,919,657 |               |  |   | 14,922,217 |   |  |   | 16,286,966 |  
|Net income                                       |  |               | 7,702,876  |               |  |               | 7,628,231  |               |  |   | 10,706,839 |   |  |   | 13,063,790 |  
|Net income per common share (diluted)            |  | $             | 0.28       |               |  | $             | 0.28       |               |  | $ | 0.39       |   |  | $ | 0.48       |  

66



---



##### 



ANNUITY AND LIFE RE (HOLDINGS), LTD.


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 (Continued)

|                                                 |  |         |            |         |  |         |            |         |  |   |            |   |  |   |            |  
|------------------------------------------------ |  | ------- | ---------- | ------- |  | ------- | ---------- | ------- |  | - | ---------- | - |  | - | ---------- | -
|                                                 |  | First   |            | Second  |  | Third   |            | Fourth 
|1999                                             |  | Quarter |            | Quarter |  | Quarter |            | Quarter
|                                                 |  |         |            |         |  |         |            |        
|Net premiums                                     |  | $       | 18,247,012 |         |  | $       | 18,372,285 |         |  | $ | 21,101,366 |   |  | $ | 43,114,334 |  
|Investment income, net of related expenses       |  |         | 18,159,060 |         |  |         | 20,677,325 |         |  |   | 19,528,879 |   |  |   | 26,724,547 |  
|Net realized investment gains (losses)           |  |         | 263,458    |         |  |         | (157,755   | )       |  |   | (793,008   | ) |  |   | (597,464   | )
|Claims and policy benefits                       |  |         | 15,765,869 |         |  |         | 15,507,499 |         |  |   | 13,232,038 |   |  |   | 31,447,754 |  
|Interest credited to interest sensitive products |  |         | 3,876,829  |         |  |         | 3,948,668  |         |  |   | 4,762,521  |   |  |   | 9,724,666  |  
|Policy acquisition and other insurance expenses  |  |         | 7,405,339  |         |  |         | 8,991,772  |         |  |   | 9,052,163  |   |  |   | 16,751,414 |  
|Net income                                       |  |         | 8,482,279  |         |  |         | 8,746,243  |         |  |   | 8,715,060  |   |  |   | 9,759,562  |  
|Net income per common share (diluted)            |  | $       | 0.31       |         |  | $       | 0.32       |         |  | $ | 0.32       |   |  | $ | 0.36       |  

The Company has restated its financial statements
for the fiscal years ended December 31, 2001 and 2000, as
well as for each of the fiscal quarters in those years. See
Note 2 for a discussion of this restatement. The following
table summarizes the changes in net income, by quarter, as a
result of the restatement.

|                                                                                 |          |                                      |             |             |   |            |             |             |   |   |            |            |  
|-------------------------------------------------------------------------------- | -------- | ------------------------------------ | ----------- | ----------- | - | ---------- | ----------- | ----------- | - | - | ---------- | ---------- | -
|                                                                                 |          |                                     
|                                                                                 |          | Net Income (Loss)                   
|                                                                                 |          | For the Year Ended December 31, 2001
|                                                                                 |          |                                     
|                                                                                 |          |                                      |             | Increase   
|                                                                                 |          | As Reported                          |             | As Restated |   | (Decrease)
|                                                                                 |          |                                      |             |             |   |           
|Cumulative effect of a change in accounting
    principle, as at January 1, 2001 |          | $                                    |            |             |   | $          | (3,665,735  | )           |   | $ | (3,665,735 | )         
|First Quarter 2001                                                               |          |                                      | 11,715,314  |             |   |            | 2,006,770   |             |   |   | (9,708,544 | )         
|Second Quarter 2001                                                              |          |                                      | 13,202,085  |             |   |            | 5,469,204   |             |   |   | (7,732,881 | )         
|Third Quarter 2001                                                               |          |                                      | (38,826,289 | )           |   |            | (42,680,474 | )           |   |   | (3,854,185 | )         
|Fourth Quarter 2001                                                              |          |                                      | (24,800,796 | )           |   |            | (1,711,196  | )           |   |   | 23,089,600 |           
|                                                                                 |          |                                      |             |             |   |            |             |             |   |   |            |           
|                                                                                 | Net loss |                                      | $           | (38,709,686 | ) |            | $           | (40,581,431 | ) |   | $          | (1,871,745 | )
|                                                                                 |          |                                      |             |             |   |            |             |             |   |   |            |           

|                    |            |                                      |            |             |  |            |            |            |  |   |          |          |  
|------------------- | ---------- | ------------------------------------ | ---------- | ----------- |  | ---------- | ---------- | ---------- |  | - | -------- | -------- | -
|                    |            |                                     
|                    |            | Net Income (Loss)                   
|                    |            | For the Year Ended December 31, 2000
|                    |            |                                     
|                    |            |                                      |            | Increase   
|                    |            | As Reported                          |            | As Restated |  | (Decrease)
|                    |            |                                      |            |             |  |           
|First Quarter 2000  |            | $                                    | 7,813,768  |             |  | $          | 7,702,876  |            |  | $ | (110,892 | )       
|Second Quarter 2000 |            |                                      | 7,822,293  |             |  |            | 7,628,231  |            |  |   | (194,062 | )       
|Third Quarter 2000  |            |                                      | 10,900,901 |             |  |            | 10,706,839 |            |  |   | (194,062 | )       
|Fourth Quarter 2000 |            |                                      | 13,450,233 |             |  |            | 13,063,790 |            |  |   | (386,443 | )       
|                    |            |                                      |            |             |  |            |            |            |  |   |          |         
|                    | Net income |                                      | $          | 39,987,195  |  |            | $          | 39,101,736 |  |   | $        | (885,459 | )
|                    |            |                                      |            |             |  |            |            |            |  |   |          |         

The following tables summarize the changes to
income (loss) per common share, by quarter, as a result of the
restatement.

|                    |  |                                      |       |             |  |            |       |   |  |   |       |  
|------------------- |  | ------------------------------------ | ----- | ----------- |  | ---------- | ----- | - |  | - | ----- | -
|                    |  |                                     
|                    |  | Basic Income (Loss) Per Share       
|                    |  | For the Year Ended December 31, 2001
|                    |  |                                     
|                    |  |                                      |       | Increase   
|                    |  | As Reported                          |       | As Restated |  | (Decrease)
|                    |  |                                      |       |             |  |           
|First Quarter 2001  |  | $                                    | 0.46  |             |  | $          | (0.07 | ) |  | $ | (0.53 | )
|Second Quarter 2001 |  |                                      | 0.52  |             |  |            | 0.21  |   |  |   | (0.31 | )
|Third Quarter 2001  |  |                                      | (1.51 | )           |  |            | (1.66 | ) |  |   | (0.15 | )
|Fourth Quarter 2001 |  |                                      | (0.97 | )           |  |            | (0.07 | ) |  |   | 0.90  |  

67



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##### 



ANNUITY AND LIFE RE (HOLDINGS), LTD.


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 (Continued)

|                    |  |                                      |       |             |  |            |       |   |  |   |       |  
|------------------- |  | ------------------------------------ | ----- | ----------- |  | ---------- | ----- | - |  | - | ----- | -
|                    |  |                                     
|                    |  | Diluted Income (Loss) Per Share     
|                    |  | For the Year Ended December 31, 2001
|                    |  |                                     
|                    |  |                                      |       | Increase   
|                    |  | As Reported                          |       | As Restated |  | (Decrease)
|                    |  |                                      |       |             |  |           
|First Quarter 2001  |  | $                                    | 0.42  |             |  | $          | (0.07 | ) |  | $ | (0.49 | )
|Second Quarter 2001 |  |                                      | 0.47  |             |  |            | 0.19  |   |  |   | (0.28 | )
|Third Quarter 2001  |  |                                      | (1.51 | )           |  |            | (1.66 | ) |  |   | (0.15 | )
|Fourth Quarter 2001 |  |                                      | (0.97 | )           |  |            | (0.07 | ) |  |   | 0.90  |  

|                    |  |                                      |      |             |  |            |      |  |  |   |       |  
|------------------- |  | ------------------------------------ | ---- | ----------- |  | ---------- | ---- |  |  | - | ----- | -
|                    |  |                                     
|                    |  | Basic Income (Loss) Per Share       
|                    |  | For the Year Ended December 31, 2000
|                    |  |                                     
|                    |  |                                      |      | Increase   
|                    |  | As Reported                          |      | As Restated |  | (Decrease)
|                    |  |                                      |      |             |  |           
|First Quarter 2000  |  | $                                    | 0.31 |             |  | $          | 0.30 |  |  | $ | (0.01 | )
|Second Quarter 2000 |  |                                      | 0.31 |             |  |            | 0.30 |  |  |   | (0.01 | )
|Third Quarter 2000  |  |                                      | 0.43 |             |  |            | 0.42 |  |  |   | (0.01 | )
|Fourth Quarter 2000 |  |                                      | 0.53 |             |  |            | 0.51 |  |  |   | (0.02 | )

|                    |  |                                      |      |             |  |            |      |  |  |   |       |  
|------------------- |  | ------------------------------------ | ---- | ----------- |  | ---------- | ---- |  |  | - | ----- | -
|                    |  |                                     
|                    |  | Diluted Income (Loss) Per Share     
|                    |  | For the Year Ended December 31, 2000
|                    |  |                                     
|                    |  |                                      |      | Increase   
|                    |  | As Reported                          |      | As Restated |  | (Decrease)
|                    |  |                                      |      |             |  |           
|First Quarter 2000  |  | $                                    | 0.28 |             |  | $          | 0.28 |  |  | $ |      |  
|Second Quarter 2000 |  |                                      | 0.29 |             |  |            | 0.28 |  |  |   | (0.01 | )
|Third Quarter 2000  |  |                                      | 0.40 |             |  |            | 0.39 |  |  |   | (0.01 | )
|Fourth Quarter 2000 |  |                                      | 0.49 |             |  |            | 0.48 |  |  |   | (0.01 | )

The following table presents the items of the
Companys Consolidated Balance Sheets as of the end of each
fiscal quarter in the fiscal years ended December 31, 2001
and 2000 that changed as a result of the restatement:

|                                       |  |                   |               |                  |  |                       |               |                      |  |   |               |  |  |   |               | 
|-------------------------------------- |  | ----------------- | ------------- | ---------------- |  | --------------------- | ------------- | -------------------- |  | - | ------------- |  |  | - | ------------- | 
|2001                                   |  | At March 31, 2001 |               | At June 30, 2001 |  | At September 30, 2001 |               | At December 31, 2001
|                                       |  |                   |               |                  |  |                       |               |                     
|                                       |  | (as restated)     |               | (as restated)    |  | (as restated)         |               | (as restated)       
|Funds withheld at interest             |  | $                 | 1,489,906,302 |                  |  | $                     | 1,506,045,913 |                      |  | $ | 1,591,867,557 |  |  | $ | 1,489,689,347 | 
|Deferred policy acquisition costs      |  |                   | 227,124,140   |                  |  |                       | 234,056,284   |                      |  |   | 226,527,941   |  |  |   | 209,074,192   | 
|Interest sensitive contracts liability |  |                   | 1,557,752,788 |                  |  |                       | 1,558,516,301 |                      |  |   | 1,641,141,849 |  |  |   | 1,519,596,075 | 
|Stockholders Equity                   |  |                   | 441,839,271   |                  |  |                       | 445,850,148   |                      |  |   | 408,620,661   |  |  |   | 402,188,842   | 

|                                       |  |                   |               |                  |  |                       |               |                      |  |  |               |  |  |  |               | 
|-------------------------------------- |  | ----------------- | ------------- | ---------------- |  | --------------------- | ------------- | -------------------- |  |  | ------------- |  |  |  | ------------- | 
|2000                                   |  | At March 31, 2000 |               | At June 30, 2000 |  | At September 30, 2000 |               | At December 31, 2000
|                                       |  |                   |               |                  |  |                       |               |                     
|                                       |  | (as restated)     |               | (as restated)    |  | (as restated)         |               | (as restated)       
|Deferred policy acquisition costs      |  |                   | 193,765,066   |                  |  |                       | 182,720,143   |                      |  |  | 194,082,177   |  |  |  | 230,642,936   | 
|Interest sensitive contracts liability |  |                   | 1,651,592,103 |                  |  |                       | 1,570,542,643 |                      |  |  | 1,481,515,935 |  |  |  | 1,597,928,818 | 
|Stockholders Equity                   |  |                   | 398,842,755   |                  |  |                       | 408,577,013   |                      |  |  | 422,079,528   |  |  |  | 440,330,317   | 

68



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##### 



ANNUITY AND LIFE RE (HOLDINGS), LTD.


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 (Continued)



|    |                                    
|--- | -----------------------------------
|18. | Going Concern and Subsequent Events

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

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

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

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

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

69



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##### 



ANNUITY AND LIFE RE (HOLDINGS), LTD.

CONDENSED FINANCIAL INFORMATION OF
REGISTRANT

SCHEDULE II


BALANCE SHEETS

(Parent Company in U.S. Dollars)


|                                                                                                                                                                |  |                                 |             |               |  |   |             |  
|--------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------------------------- | ----------- | ------------- |  | - | ----------- | -
|                                                                                                                                                                |  |                                
|                                                                                                                                                                |  | For the Year Ended December 31,
|                                                                                                                                                                |  |                                
|                                                                                                                                                                |  | 2001                            |             | 2000         
|                                                                                                                                                                |  |                                 |             |              
|                                                                                                                                                                |  | (as restated)                   |             | (as restated)
|Assets                                                                                                                                                          |  |                                 |             |               |  |   |             |  
|Investment in common stock of subsidiaries(1)                                                                                                                   |  | $                               | 400,110,921 |               |  | $ | 437,393,742 |  
|Cash and cash equivalents                                                                                                                                       |  |                                 | 2,341,747   |               |  |   | 2,965,855   |  
|Other assets                                                                                                                                                    |  |                                 |            |               |  |   | 15,813      |  
|                                                                                                                                                                |  |                                 |             |               |  |   |             |  
|Total Assets                                                                                                                                                    |  | $                               | 402,452,668 |               |  | $ | 440,375,410 |  
|                                                                                                                                                                |  |                                 |             |               |  |   |             |  
|Liabilities                                                                                                                                                     |  |                                 |             |               |  |   |             |  
|Accounts payable and accrued expenses                                                                                                                           |  |                                 | 263,826     |               |  |   | 45,093      |  
|                                                                                                                                                                |  |                                 |             |               |  |   |             |  
|Total Liabilities                                                                                                                                               |  | $                               | 263,826     |               |  | $ | 45,093      |  
|                                                                                                                                                                |  |                                 |             |               |  |   |             |  
|Stockholders Equity                                                                                                                                            |  |                                 |             |               |  |   |             |  
|Preferred shares (par value $1.00; 50,000,000
    shares authorized; no shares outstanding)                                                                     |  | $                               |            |               |  | $ |            |  
|Common shares (par value $1,00; 100,000,000
    shares authorized; 25,705,328 and 25,499,999 shares outstanding
    at December 31, 2001 and December 31, 2000) |  |                                 | 25,705,328  |               |  |   | 25,499,999  |  
|Additional paid-in capital                                                                                                                                      |  |                                 | 332,447,062 |               |  |   | 329,496,091 |  
|Notes receivable from stock sales                                                                                                                               |  |                                 | (1,317,259  | )             |  |   | (1,367,241  | )
|Accumulated other comprehensive income                                                                                                                          |  |                                 | 6,418,469   |               |  |   | 2,064,971   |  
|Retained earnings                                                                                                                                               |  |                                 | 38,935,242  |               |  |   | 84,636,497  |  
|                                                                                                                                                                |  |                                 |             |               |  |   |             |  
|Total Stockholders Equity                                                                                                                                      |  | $                               | 402,188,842 |               |  | $ | 440,330,317 |  
|                                                                                                                                                                |  |                                 |             |               |  |   |             |  
|Total Liabilities and Stockholders Equity                                                                                                                      |  | $                               | 402,452,668 |               |  | $ | 440,375,410 |  
|                                                                                                                                                                |  |                                 |             |               |  |   |             |  




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

70



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##### 



ANNUITY AND LIFE RE (HOLDINGS), LTD.

CONDENSED FINANCIAL INFORMATION OF
REGISTRANT

SCHEDULE II


STATEMENT OF OPERATIONS

(Parent Company in U.S. Dollars)


|                                                       |                   |                                 |             |               |   |      |            |            |  |   |            |            | 
|------------------------------------------------------ | ----------------- | ------------------------------- | ----------- | ------------- | - | ---- | ---------- | ---------- |  | - | ---------- | ---------- | 
|                                                       |                   |                                
|                                                       |                   | For the Year Ended December 31,
|                                                       |                   |                                
|                                                       |                   | 2001                            |             | 2000          |   | 1999
|                                                       |                   |                                 |             |               |   |     
|                                                       |                   | (as restated)                   |             | (as restated) |   |     
|Revenues                                               |                   |                                 |             |               |   |      |            |            |  |   |            |           
|Interest income                                        |                   | $                               | 225,103     |               |   | $    | 264,853    |            |  | $ | 305,605    |           
|                                                       |                   |                                 |             |               |   |      |            |            |  |   |            |           
|Total Revenues                                         |                   | $                               | 225,103     |               |   | $    | 264,853    |            |  | $ | 305,605    |           
|                                                       |                   |                                 |             |               |   |      |            |            |  |   |            |           
|Expenses                                               |                   |                                 |             |               |   |      |            |            |  |   |            |           
|Operating expenses                                     |                   |                                 | 1,280,215   |               |   |      | 878,816    |            |  |   | 860,899    |           
|                                                       |                   |                                 |             |               |   |      |            |            |  |   |            |           
|Net (loss) before equity in earnings of
    subsidiary |                   |                                 | (1,055,112  | )             |   |      | (613,963   | )          |  |   | (555,294   | )         
|Equity in (loss) earnings of subsidiaries              |                   |                                 | (39,526,319 | )             |   |      | 39,715,699 |            |  |   | 36,258,438 |           
|                                                       |                   |                                 |             |               |   |      |            |            |  |   |            |           
|                                                       | Net (loss) income |                                 | $           | (40,581,431   | ) |      | $          | 39,101,736 |  |   | $          | 35,703,144 | 
|                                                       |                   |                                 |             |               |   |      |            |            |  |   |            |           

71



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##### 



ANNUITY AND LIFE RE (HOLDINGS), LTD.

CONDENSED FINANCIAL INFORMATION OF
REGISTRANT

SCHEDULE II


STATEMENT OF CASH FLOWS

(Parent Company in U.S. Dollars)


|                                                                                 |  |                                 |             |               |  |      |             |   |  |   |             |  
|-------------------------------------------------------------------------------- |  | ------------------------------- | ----------- | ------------- |  | ---- | ----------- | - |  | - | ----------- | -
|                                                                                 |  |                                
|                                                                                 |  | For the Year Ended December 31,
|                                                                                 |  |                                
|                                                                                 |  | 2001                            |             | 2000          |  | 1999
|                                                                                 |  |                                 |             |               |  |     
|                                                                                 |  | (as restated)                   |             | (as restated) |  |     
|Operating Activities                                                             |  |                                 |             |               |  |      |             |   |  |   |             |  
|Net (loss) income                                                                |  | $                               | (40,581,431 | )             |  | $    | 39,101,736  |   |  | $ | 35,703,144  |  
|Adjustments to reconcile net (loss) income
    to net cash (used) by operations: |  |                                 |             |               |  |      |             |   |  |   |             |  
|Equity in earnings (loss) of subsidiaries                                        |  |                                 | 39,526,319  |               |  |      | (39,715,699 | ) |  |   | (36,258,438 | )
|Other assets                                                                     |  |                                 | 15,813      |               |  |      |            |   |  |   | (813        | )
|Accounts payable                                                                 |  |                                 | 218,733     |               |  |      | 7,497       |   |  |   | 26,075      |  
|                                                                                 |  |                                 |             |               |  |      |             |   |  |   |             |  
|Net cash (used) by operating activities                                          |  |                                 | (820,566    | )             |  |      | (606,466    | ) |  |   | (530,032    | )
|                                                                                 |  |                                 |             |               |  |      |             |   |  |   |             |  
|Investing Activities                                                             |  |                                 |             |               |  |      |             |   |  |   |             |  
|Dividends received from subsidiary                                               |  |                                 | 5,110,000   |               |  |      | 4,080,000   |   |  |   | 1,020,000   |  
|Return of capital from subsidiary                                                |  |                                 | 2,000,000   |               |  |      | 19,550,000  |   |  |   | 9,000,000   |  
|Investment in subsidiary                                                         |  |                                 | (5,000,000  | )             |  |      | (19,550,000 | ) |  |   | (9,193,500  | )
|                                                                                 |  |                                 |             |               |  |      |             |   |  |   |             |  
|Net cash provided by investing activities                                        |  |                                 | 2,110,000   |               |  |      | 4,080,000   |   |  |   | 826,500     |  
|                                                                                 |  |                                 |             |               |  |      |             |   |  |   |             |  
|Financing Activities                                                             |  |                                 |             |               |  |      |             |   |  |   |             |  
|Net proceeds from sale of company stock                                          |  |                                 | 3,156,300   |               |  |      |            |   |  |   | (21,013     | )
|Repayment of notes receivable, less accrued
    interest                         |  |                                 | 49,982      |               |  |      | (80,500     | ) |  |   | 104,327     |  
|Dividends paid to shareholders                                                   |  |                                 | (5,119,824  | )             |  |      | (4,080,000  | ) |  |   | (4,080,000  | )
|                                                                                 |  |                                 |             |               |  |      |             |   |  |   |             |  
|Net cash (used) by financing activities                                          |  |                                 | (1,913,542  | )             |  |      | (4,160,500  | ) |  |   | (3,996,686  | )
|                                                                                 |  |                                 |             |               |  |      |             |   |  |   |             |  
|(Decrease) in cash and cash equivalents                                          |  |                                 | (624,108    | )             |  |      | (686,966    | ) |  |   | (3,700,218  | )
|Cash and equivalents, beginning of period                                        |  |                                 | 2,965,855   |               |  |      | 3,652,821   |   |  |   | 7,353,039   |  
|                                                                                 |  |                                 |             |               |  |      |             |   |  |   |             |  
|Cash and equivalents, end of period                                              |  | $                               | 2,341,747   |               |  | $    | 2,965,855   |   |  | $ | 3,652,821   |  
|                                                                                 |  |                                 |             |               |  |      |             |   |  |   |             |  

72



---



##### 





|         |                        
|-------- | -----------------------
|Item 11. | Executive Compensation.

Except as set forth herein, the information
required by Item 11 is hereby incorporated by reference to
our definitive proxy statement filed with the Commission on
April 2, 2002. We are revising certain information reported
in our definitive proxy statement as part of the table headed
Aggregated Option Exercises in 2001 and 2001 Year-End
Option Values with respect to Robert J. Reale and
William W. Atkin. The revised information is set forth in
the table below:

|                 |  |             |         |          |  |                            |           |                         |  |             |         |               |  |  |        |  |  |   |           |  |  |   |        | 
|---------------- |  | ----------- | ------- | -------- |  | -------------------------- | --------- | ----------------------- |  | ----------- | ------- | ------------- |  |  | ------ |  |  | - | --------- |  |  | - | ------ | 
|                 |  |             |         |          |  |                            |           |                        
|                 |  |             |         |          |  | Number of Securities       |           | Value of Unexercised   
|                 |  |             |         |          |  | Underlying Unexercised     |           | In-The-Money Options at
|                 |  | Shares      |         |          |  | Options at Fiscal Year End |           | Fiscal Year End (1)    
|                 |  | Acquired    |         | Value    |  |                            |           |                        
|Name             |  | on Exercise |         | Realized |  | Exercisable                |           | Unexercisable           |  | Exercisable |         | Unexercisable
|                 |  |             |         |          |  |                            |           |                         |  |             |         |              
|Robert J. Reale  |  |             | 25,000  |          |  | $                          | 460,945   |                         |  |             | 170,165 |               |  |  | 33,334 |  |  | $ | 1,597,456 |  |  | $ | 91,168 | 
|William W. Atkin |  |             | 132,499 |          |  | $                          | 2,353,410 |                         |  |             |        |               |  |  |       |  |  |   |          |  |  |   |       | 



---



|    |                                                                                                                                                                          
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | The value of unexercised options is based on the
    difference between the exercise price and the closing price of
    the Companys Common Shares on December 31, 2001.



|         |                                                                    
|-------- | -------------------------------------------------------------------
|Item 12. | Security Ownership of Certain Beneficial
    Owners and Management.

Except as set forth herein, the information
required by Item 12 is hereby incorporated by reference to
our definitive proxy statement filed with the Commission on
April 2, 2002. We are revising certain information reported
in our definitive proxy statement as part of the table contained
under the heading, Principal Shareholders with
respect to Robert J. Reale and Jon W. Yoskin, II. The
revised information is set forth in the table below:

|                                      |  |           |         |          |  |  |   | 
|------------------------------------- |  | --------- | ------- | -------- |  |  | - | 
|                                      |  | Number    |         | Percent 
|Name and Address of Beneficial Owners |  | of Shares |         | of Class
|                                      |  |           |         |         
|Robert J. Reale(11)                   |  |           | 229,709 |          |  |  | * | 
|Jon W. Yoskin, II(17)                 |  |           | 26,200  |          |  |  | * | 



---



|  |              
|- | -------------
|* | Less than 1%.



|     |                                                                                                                                                                                                                         
|---- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(11) | Includes 186,832 Common Shares issuable upon
    exercise of options that are currently exercisable. Does not
    include 46,667 Common Shares issuable upon exercise of options
    that are not currently exercisable.
|    
|(17) | Includes 22,000 Common Shares issuable upon
    exercise of options that are currently exercisable.                                                                                                                     



|         |                                                    
|-------- | ---------------------------------------------------
|Item 13. | Certain Relationships and Related
    Transactions.

During 2001, we 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 is obligated to fund the collateral
requirements associated with these excess U.S. statutory
reserves by making cash deposits with us. As of
December 31, 2001, we had received deposits of $137,000,000
from the reinsurer. These deposits are primarily funded through
a $265,000,000 credit agreement to which the reinsurer is a
party. The reinsurers obligations under the credit
agreement are guaranteed through a financial guaranty insurance
policy issued by an affiliate of XL Capital Ltd, one of our
shareholders. Pursuant to the policy, the affiliate of XL
Capital had received premiums and other payments of
approximately $89,000 from the reinsurer as of December 31,
2001.

The other information required by Item 13 is
hereby incorporated by reference to our definitive proxy
statement filed with the Commission on April 2, 2002.

Item 14.     Exhibits,
Financial Statement Schedules, and Reports on
Form 8-K.



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

1.     Financial
Statements

73



---



##### 



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 43.

2.     Financial
Statement Schedule

The schedule listed in the Index to Financial
Statements and Financial Statement Schedule appearing on
pages 69-71.

3.     Exhibits

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

| |      |     |  |                                                                                                                                                                                                                                                                                                                                                                                    
| | ---- | --- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | *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 4 to the Companys Form 10-Q filed on
    May 14, 2001).                                                                                                                                                                                                                                                                         
| | *4   | .1  |  | Form of Amended and Restated Class A Warrant
    (Exhibit 4.2 to the Registration Statement).                                                                                                                                                                                                                                                                                      
| | *4   | .2  |  | Form of Class B Warrant (Exhibit 4.3 to
    the Registration Statement).                                                                                                                                                                                                                                                                                                           
| | *10 | .1  |  | Employment Agreement, dated as of
    December 5, 1997, between Lawrence S. Doyle and the Company
    (Exhibit 10.1 to the Registration Statement).                                                                                                                                                                                                                                
| | *10 | .2  |  | Amendment No. 1, dated as of
    February 27, 1998, to Employment Agreement, dated as of
    December 5, 1997, between Lawrence S. Doyle and the Company
    (Exhibit 10.8 to the Registration Statement).                                                                                                                                                                         
| | *10 | .3  |  | Employment Agreement, dated as of January 5,
    1998, between Robert P. Mills, Jr. and the Company
    (Exhibit 10.7 to the Registration Statement).                                                                                                                                                                                                                              
| | *10 | .4  |  | Amendment No. 1, dated as of
    February 27, 1998, between Robert P. Mills, Jr. and
    the Company (Exhibit 10.10 to the Registration Statement).                                                                                                                                                                                                                                
| | *10 | .5  |  | Employment Agreement, dated as of January 8,
    1998, between Robert J. Reale and the Company (Exhibit 10.6
    to the Registration Statement).                                                                                                                                                                                                                                   
| | *10 | .6  |  | Amendment No. 1, dated as of
    February 1, 1998, to Employment Agreement, dated as of
    January 8, 1998, between Robert J. Reale and the Company
    (Exhibit 10.9 to the Registration Statement).                                                                                                                                                                             
| | *10 | .7  |  | Employment Agreement, dated as of March 5,
    1998, between Richard Tucker and the Company (Exhibit 10.16
    to the Registration Statement).                                                                                                                                                                                                                                     
| | *10  | .8  |  | Agreement, dated as of December 23, 1997,
    between Inter-Atlantic Securities Corp. and the Company
    (Exhibit 10.4 to the Registration Statement).                                                                                                                                                                                                                            
| | *10 | .9  |  | 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  | .10 |  | 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  | .11 |  | Form of Securities Purchase Agreement entered
    into by The Prudential Insurance Company of America and the
    Company, EXEL Limited and the Company, Risk Capital Reinsurance
    Company and the Company, Insurance Partners, L.P. and the
    Company and Insurance Partners Offshore (Bermuda), L.P. and the
    Company (Exhibit 10.12 to the Registration Statement).     
| | *10  | .12 |  | 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  | .13 |  | Letter Agreement, dated as of May 1, 2000,
    between 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).                                                                                                                                                                                

74



---



##### 



| |      |     |  |                                                                                                                                                                                                                                                             
| | ---- | --- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | *10  | .14 |  | Letter Agreement, dated as of December 23,
    1997, between Prudential Securities Incorporated and the Company
    and related indemnification agreement (Exhibit 10.17 to the
    Registration Statement).                                                
| | *10  | .15 |  | 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 | .16 |  | Employment Agreement, dated as of January 1,
    1999, among Gary Scofield, Annuity and Life Reassurance, Ltd.
    and the Company (Exhibit 10.17 to the Companys
    Form 10-K filed on March 29, 2000).                                                  
| | *10 | .17 |  | 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 | .18 |  | Employment Agreement, dated as of
    October 24, 2000 between Patricia E. McWeeney and the
    Company (Exhibit 10.1 to the Companys Form 10-Q
    filed on November 14, 2001).                                                                           
| | *10 | .19 |  | Employment Agreement, dated as of
    September 17, 2001 between John F. Burke and the Company
    (Exhibit 10.2 to the Companys Form 10-Q filed on
    November 14, 2001).                                                                                
| | *10  | .20 |  | 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).     
| | *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).                                                                                                                                                                                                                  



---



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



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



| |     |                                                                                                                                       
| | --- | --------------------------------------------------------------------------------------------------------------------------------------
| | (b) | No reports on Form 8-K were filed with the
    Securities and Exchange Commission during the three months ended
    December 31, 2001.

75



---



##### 



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.



| |     |                  
| | --- | -----------------
| | By: | /s/ JOHN F. BURKE

| |                    
| | -------------------
| | Name: JOHN F. BURKE

| |        |                                                        
| | ------ | -------------------------------------------------------
| | Title: | Chief Executive Officer and Chief Financial
    Officer

Date: March 20, 2003

76



---



##### 



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; and
|
| | 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.                           



| |                    
| | -------------------
| | /s/ JOHN F. BURKE  
| |                    
| | Name: JOHN F. BURKE

| |        |                                                        
| | ------ | -------------------------------------------------------
| | Title: | Chief Executive Officer and Chief Financial
    Officer

March 20, 2003

77



---



##### 



EXHIBIT INDEX

| |      |     |  |                                                                                                                                                                                                                                                                                                                                                                                    
| | ---- | --- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | *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 4 to the Companys Form 10-Q filed on
    May 14, 2001).                                                                                                                                                                                                                                                                         
| | *4   | .1  |  | Form of Amended and Restated Class A Warrant
    (Exhibit 4.2 to the Registration Statement).                                                                                                                                                                                                                                                                                      
| | *4   | .2  |  | Form of Class B Warrant (Exhibit 4.3 to
    the Registration Statement).                                                                                                                                                                                                                                                                                                           
| | *10 | .1  |  | Employment Agreement, dated as of
    December 5, 1997, between Lawrence S. Doyle and the Company
    (Exhibit 10.1 to the Registration Statement).                                                                                                                                                                                                                                
| | *10 | .2  |  | Amendment No. 1, dated as of
    February 27, 1998, to Employment Agreement, dated as of
    December 5, 1997, between Lawrence S. Doyle and the Company
    (Exhibit 10.8 to the Registration Statement).                                                                                                                                                                         
| | *10 | .3  |  | Employment Agreement, dated as of January 5,
    1998, between Robert P. Mills, Jr. and the Company
    (Exhibit 10.7 to the Registration Statement).                                                                                                                                                                                                                              
| | *10 | .4  |  | Amendment No. 1, dated as of
    February 27, 1998, between Robert P. Mills, Jr. and
    the Company (Exhibit 10.10 to the Registration Statement).                                                                                                                                                                                                                                
| | *10 | .5  |  | Employment Agreement, dated as of January 8,
    1998, between Robert J. Reale and the Company (Exhibit 10.6
    to the Registration Statement).                                                                                                                                                                                                                                   
| | *10 | .6  |  | Amendment No. 1, dated as of
    February 1, 1998, to Employment Agreement, dated as of
    January 8, 1998, between Robert J. Reale and the Company
    (Exhibit 10.9 to the Registration Statement).                                                                                                                                                                             
| | *10 | .7  |  | Employment Agreement, dated as of March 5,
    1998, between Richard Tucker and the Company (Exhibit 10.16
    to the Registration Statement).                                                                                                                                                                                                                                     
| | *10  | .8  |  | Agreement, dated as of December 23, 1997,
    between Inter-Atlantic Securities Corp. and the Company
    (Exhibit 10.4 to the Registration Statement).                                                                                                                                                                                                                            
| | *10 | .9  |  | 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  | .10 |  | 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  | .11 |  | Form of Securities Purchase Agreement entered
    into by The Prudential Insurance Company of America and the
    Company, EXEL Limited and the Company, Risk Capital Reinsurance
    Company and the Company, Insurance Partners, L.P. and the
    Company and Insurance Partners Offshore (Bermuda), L.P. and the
    Company (Exhibit 10.12 to the Registration Statement).     
| | *10  | .12 |  | 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  | .13 |  | Letter Agreement, dated as of May 1, 2000,
    between 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  | .14 |  | Letter Agreement, dated as of December 23,
    1997, between Prudential Securities Incorporated and the Company
    and related indemnification agreement (Exhibit 10.17 to the
    Registration Statement).                                                                                                                                                                       
| | *10  | .15 |  | 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 | .16 |  | Employment Agreement, dated as of January 1,
    1999, among Gary Scofield, Annuity and Life Reassurance, Ltd.
    and the Company (Exhibit 10.17 to the Companys
    Form 10-K filed on March 29, 2000).                                                                                                                                                                         

78



---



##### 



| |      |     |  |                                                                                                                                                                                                                                                        
| | ---- | --- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | *10 | .17 |  | 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 | .18 |  | Employment Agreement, dated as of
    October 24, 2000 between Patricia E. McWeeney and the
    Company (Exhibit 10.1 to the Companys Form 10-Q
    filed on November 14, 2001).                                                                      
| | *10 | .19 |  | Employment Agreement, dated as of
    September 17, 2001 between John F. Burke and the Company
    (Exhibit 10.2 to the Companys Form 10-Q filed on
    November 14, 2001).                                                                           
| | *10  | .20 |  | 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).
| | *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).                                                                                                                                                                                                             



---



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



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

79