10-Q

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

Form 10-Q

(Mark One)
þ	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
	For the quarterly period ended September 30, 2003
or
o	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
	For the transition period from           to

Commission File Number 1-16561

ANNUITY AND LIFE RE (HOLDINGS), LTD.

(Exact Name of Registrant as Specified in Its Charter)

Bermuda	Not applicable
(State or Other Jurisdiction of Incorporation or Organization)	(IRS Employer Identification No.)
Cumberland House, 1 Victoria Street, Hamilton, Bermuda	HM11
(Address of Principal Executive Offices)	(Zip Code)

441-296-7667

(Registrant’s Telephone Number, Including Area Code)

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

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

      The number of the registrant’s Common Shares (par value $1.00 per share) outstanding as of November 5, 2003 was 26,473,728.

INDEX TO FORM 10-Q

		Page
	PART I FINANCIAL INFORMATION
Item 1.	Unaudited Consolidated Financial Statements
	Consolidated Balance Sheets September 30, 2003 and December 31, 2002		1
	Consolidated Statements of Operations Three Months and Nine Months ended September 30, 2003 and September 30, 2002		2
	Consolidated Statements of Comprehensive (Loss) Three Months and Nine Months ended September 30, 2003 and September 30, 2002		3
	Consolidated Statements of Cash Flows Nine Months ended September 30, 2003 and September 30, 2002		4
	Consolidated Statements of Changes in Stockholders’ Equity Nine Months ended September 30, 2003 and September 30, 2002		5
	Notes to Unaudited Consolidated Financial Statements		6
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		19
Item 3.	Quantitative and Qualitative Disclosures About Market Risk		39
Item 4.	Controls and Procedures		41
	PART II OTHER INFORMATION
Item 1.	Legal Proceedings		42
Item 2.	Changes in Securities and Use of Proceeds		42
Item 5.	Other Information		43
Item 6.	Exhibits and Reports on Form 8-K		44
Signatures			45

PART I

FINANCIAL INFORMATION

Item 1. Unaudited Consolidated Financial Statements

ANNUITY AND LIFE RE (HOLDINGS), LTD.

CONSOLIDATED BALANCE SHEETS

(U.S. dollars)

		September 30,			December 31,
		2003			2002
		(Unaudited)
Assets
Cash and cash equivalents		$	113,859,239		$	152,930,908
Fixed maturity investments at fair value (amortized cost of $96,058,034 and $146,487,903 at September 30, 2003 and December 31, 2002)			98,810,759			153,415,429
Funds withheld at interest			695,573,638			1,427,093,380
Accrued investment income			1,083,924			2,141,338
Receivable for reinsurance ceded			89,506,699			93,669,173
Other reinsurance receivables			6,775,426			25,025,453
Deferred policy acquisition costs			74,844,406			187,913,648
Other assets			965,194			2,508,858
	Total Assets	$	1,081,419,285		$	2,044,698,187
Liabilities
Reserves for future policy benefits		$	187,391,334		$	269,619,809
Interest sensitive contracts liability			700,977,967			1,443,143,080
Other reinsurance liabilities			38,013,037			51,139,164
Accounts payable and accrued expenses			8,637,124			12,459,423
	Total Liabilities	$	935,019,462		$	1,776,361,476
Stockholders’ Equity
Preferred shares (par value $1.00; 50,000,000 shares authorized; no shares outstanding)		$	—		$	—
Common shares (par value $1.00; 100,000,000 shares authorized; 26,473,728 and 26,106,328 shares outstanding at September 30, 2003 and December 31, 2002)			26,473,728			26,106,328
Additional paid-in capital			334,481,610			335,334,932
Notes receivable from stock sales			—			(1,626,493	)
Unamortized stock grant compensation			(1,732,985	)		(2,514,693	)
Stock warrants			1,250,000			—
Accumulated other comprehensive income			2,211,223			6,162,525
(Accumulated deficit)			(216,283,753	)		(95,125,888	)
	Total Stockholders’ Equity	$	146,399,823		$	268,336,711
	Total Liabilities and Stockholders’ Equity	$	1,081,419,285		$	2,044,698,187

See accompanying Notes to Unaudited Consolidated Financial Statements

1

ANNUITY AND LIFE RE (HOLDINGS), LTD.

CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited and in U.S. dollars)

		For the Three Months Ended						For the Nine Months Ended
		September 30,						September 30,
		2003			2002			2003			2002
Revenues
Net premiums		$	28,657,263		$	84,934,401		$	148,586,899		$	255,007,035
Investment income, net of related expenses			16,250,225			31,127,396			30,143,651			82,083,855
Net realized investment (losses) gains			(52,025	)		9,297,351			6,508,019			10,813,315
Net change in fair value of embedded derivatives			2,808,427			(13,277,823	)		14,845,749			(18,254,530	)
Surrender fees and other revenues			1,667,997			3,549,362			6,061,022			13,606,694
Total Revenues		$	49,331,887		$	115,630,687		$	206,145,340		$	343,256,369
Benefits and Expenses
Claim and policy benefits		$	19,075,004		$	91,381,831		$	178,589,650		$	224,640,576
Interest credited to interest sensitive products			3,821,854			18,345,349			12,911,155			57,215,862
Policy acquisition costs and other insurance expenses			22,796,448			17,492,342			119,928,722			73,700,329
Collateral costs			—			3,731,580			—			6,080,321
Operating expenses			3,605,189			3,826,602			15,873,678			10,626,666
Total Benefits and Expenses		$	49,298,495		$	134,777,704		$	327,303,205		$	372,263,754
Net Income (Loss)		$	33,392		$	(19,147,017	)	$	(121,157,865	)	$	(29,007,385	)
Net income (loss) per common share
	Basic	$	0.00		$	(0.74	)	$	(4.69	)	$	(1.13	)
	Diluted	$	0.00		$	(0.74	)	$	(4.69	)	$	(1.13	)

See accompanying Notes to Unaudited Consolidated Financial Statements

2

ANNUITY AND LIFE RE (HOLDINGS), LTD.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS)

(Unaudited and in U.S. dollars)

	For the Three Months Ended						For the Nine Months Ended
	September 30,						September 30,
	2003			2002			2003			2002
Net income (loss) for the period	$	33,392		$	(19,147,017	)	$	(121,157,865	)	$	(29,007,385	)
Other comprehensive (loss) income:
Unrealized holding (losses) gains on securities arising during the period		(482,029	)		17,633,359			2,556,717			20,486,539
Less reclassification adjustment for realized losses and gains in net income (loss)		(52,025	)		9,297,351			6,508,019			10,813,315
Other comprehensive (loss) income	$	(430,004	)	$	8,336,008		$	(3,951,302	)	$	9,673,224
Total Comprehensive (Loss)	$	(396,612	)	$	(10,811,009	)	$	(125,109,167	)	$	(19,334,161	)

See accompanying Notes to Unaudited Consolidated Financial Statements

3

ANNUITY AND LIFE RE (HOLDINGS), LTD.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited and in U.S. dollars)

		For the Nine Months Ended
		September 30,
		2003			2002
Cash flows from operating activities
Net (loss)		$	(121,157,865	)	$	(29,007,385	)
Adjustments to reconcile net (loss) to cash (used) provided by operating activities:
Net realized investment (gains)			(6,508,019	)		(10,813,315	)
Net change in fair value of embedded derivatives			(14,845,749	)		18,254,530
Amortization of stock grant compensation			295,786			541,344
Unrealized loss on interest rate swap			—			2,005,000
Stock warrants expense			1,250,000			—
Changes in:
Accrued investment income			1,057,414			833,266
Deferred policy acquisition costs			113,069,242			(19,015,030	)
Other reinsurance receivables			22,412,502			(2,215,364	)
Other assets			1,543,664			1,834,484
Reserves for future policy benefits			(82,228,475	)		59,050,154
Interest sensitive contracts, net of funds withheld			4,200,378			1,386,015
Other reinsurance liabilities			(13,126,127	)		5,560,803
Accounts payable and accrued expenses			(3,822,299	)		2,980,910
	Net cash (used) provided by operating activities	$	(97,859,548	)	$	27,726,444
Cash flows from investing activities
Proceeds from sales of fixed maturity investments		$	329,135,148		$	467,314,155
Purchase of fixed maturity investments			(271,973,762	)		(485,627,324	)
	Net cash provided (used) by investing activities	$	57,161,386		$	(18,313,169	)
Cash flows from financing activities
Interest accrued on notes receivable		$	(43,998	)	$	(74,437	)
Interest collected on notes receivable			420,491			38,620
Repayments (issuances) of notes receivable			1,250,000			(250,000	)
Dividends paid to stockholders			—			(3,867,909	)
Increase in deposit liability			—			10,000,000
	Net cash provided by financing activities	$	1,626,493		$	5,846,274
(Decrease) increase in cash and cash equivalents		$	(39,071,669	)	$	15,259,549
Cash and cash equivalents, beginning of period			152,930,908			104,793,019
Cash and cash equivalents, end of period		$	113,859,239		$	120,052,568

See accompanying Notes to Unaudited Consolidated Financial Statements

4

ANNUITY AND LIFE RE (HOLDINGS), LTD.

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

(Unaudited and in U.S. dollars)

	For the Nine Months Ended
	September 30,
	2003			2002
Preferred shares par value $1.00
Balance at beginning and end of period	$	—		$	—
Common shares par value $1.00
Balance at beginning of period	$	26,106,328		$	25,705,328
Issuance of shares		575,000			401,000
(Cancellation) of shares		207,600			—
Balance at end of period	$	26,473,728		$	26,106,328
Additional paid-in capital
Balance at beginning of period	$	335,334,932		$	332,447,062
Issuance of shares		353,250			2,887,870
(Cancellation) of shares		(1,206,572	)		—
Balance at end of period	$	334,481,610		$	335,334,932
Notes receivable from stock sales
Balance at beginning of period	$	(1,626,493	)	$	(1,317,259	)
Repayments (issuances)		1,250,000			(250,000	)
Interest collected on notes receivable		420,491			38,620
Accrued interest during period		(43,998	)		(74,437	)
Balance at end of period	$	—		$	(1,603,076	)
Unamortized stock grant compensation
Balance at beginning of period	$	(2,514,693	)	$	—
(Issuance) of stock grants		(928,250	)		(3,288,870	)
Cancellation of stock grants		1,414,172			—
Amortization of stock grants		295,786			541,344
Balance at end of period	$	(1,732,985	)	$	(2,747,526	)
Stock warrants outstanding
Balance at beginning of period	$	—		$	—
Issuance of warrants		1,250,000			—
Balance at end of period	$	1,250,000		$	—
Accumulated other comprehensive income
Balance at beginning of period	$	6,162,525		$	6,418,469
Net unrealized (losses) gains on securities		(3,951,302	)		9,673,224
Balance at end of period	$	2,211,223		$	16,091,693
(Accumulated deficit) retained earnings
Balance at beginning of period	$	(95,125,888	)	$	38,935,242
Net (loss)		(121,157,865	)		(29,007,385	)
Stockholder dividends		—			(3,867,909	)
Balance at end of period	$	(216,283,753	)	$	6,059,948
Total Stockholders’ Equity	$	146,399,823		$	379,242,299

See accompanying Notes to Unaudited Consolidated Financial Statements

5

ANNUITY AND LIFE RE (HOLDINGS), LTD.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

1.     Organization

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

2.     Going Concern Basis of Presentation

      The accompanying unaudited consolidated financial statements of the Company have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) for interim financial information and in accordance with Regulation S-X. Accordingly, they do not include all of the information and footnotes required by U.S. GAAP for complete financial statements. These consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto contained in the Company’s Form 10-K for the fiscal year ended December 31, 2002, as amended. In the opinion of management, all adjustments considered necessary for a fair presentation have been included in these financial statements.

      The accompanying unaudited consolidated financial statements of the Company 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 2002 and the first six months of 2003. Further, the financial strength ratings of the Company’s operating subsidiaries were downgraded in 2002 and 2003 by A.M. Best, Standard & Poor’s, and Fitch Ratings to C+, BB-, and C, respectively. At the Company’s request, all three financial ratings have been withdrawn.

      In addition, the Company is required to post collateral for the statutory reserves ceded to it by U.S. based insurers and reinsurers. As of September 30, 2003, the Company did not have sufficient available cash and investments to satisfy the collateral requirements asserted by CIGNA, the cedent under the Company’s only guaranteed minimum death benefit and guaranteed minimum income benefit agreement. The collateral requirement for this agreement is determined at the end of each calendar year and does not change in interim periods. As of December 31, 2002, CIGNA asserted that the Company was required to satisfy additional collateral requirements of approximately $59.0 million in excess of the $11.0 million of collateral posted. The Company has not agreed with CIGNA’s computation of the $70.0 million collateral requirement and has not posted any additional collateral under the agreement. As a result, CIGNA has alleged that the Company is in breach of its agreement, and may institute arbitration or litigation proceedings to seek remedies for the alleged breach. If the Company does not prevail in any such arbitration or litigation proceedings, it would have a material adverse effect on the Company’s financial condition and the Company may be required to liquidate its operations. As of September 30, 2003, the Company had met the collateral requirements of its other cedents, and the Company expects to be able to meet any collateral requirements asserted at December 31, 2003, other than CIGNA.

      As of September 30, 2003, the Company had $26.7 million of outstanding unsecured letters of credit issued on its behalf by Citibank that expire on December 31, 2003. In November 2003, Citibank agreed to renew the Company’s unsecured letter of credit facility until December 31, 2004 if the Company reduces the unsecured balance of the letter of credit facility to $17.0 million by November 30, 2003. If the Company does not reduce the unsecured balance of the letter of credit facility to $17.0 million by November 30, 2003 and Citibank does not renew the letters of credit, the letters of credit will expire on December 31, 2003 and the

6

ANNUITY AND LIFE RE (HOLDINGS), LTD.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Company’s cedents will be entitled to draw on the letters of credit. The Company would then be obligated to repay Citibank for any amounts drawn.

      Under Bermuda law, a single creditor could make a statutory demand upon the Company for satisfaction of obligations owed to that creditor. If the statutory demand is held to be valid, and the Company is unable to satisfy its obligations to that creditor, the creditor may institute proceedings seeking the liquidation of the Company. As of the date of this report, the Company has been served with three statutory demands under Bermuda law. The Company satisfied or otherwise eliminated its obligations to two of the parties making those demands. The third demand relates to an allegation that the Company owes $640,000 to Imagine Re, a Bermuda based reinsurance company, as reimbursement for expenses incurred by Imagine Re in connection with a proposed December 2002 capital raising transaction with the Company that was not consummated. The Company believes that Imagine Re is not entitled to reimbursement of these expenses under the applicable agreement and intends to defend against Imagine Re’s claims. If an undisputed creditor of the Company successfully pursues this statutory process and the Company is unable to discharge its obligations, liquidation proceedings could be commenced against the Company.

      Transamerica Occidental Life Insurance Company (“Transamerica”) has alleged that the Company owes $14.9 million under its annuity reinsurance agreement with it. The Company has not agreed that such amount currently is owed to Transamerica and the parties are attempting to resolve their issues. Transamerica has indicated that if the parties cannot resolve their issues, it will attempt to put the Company’s Bermuda operating subsidiary into liquidation.

      In addition to the discussions with Transamerica related to the alleged amounts owed to it, the Company has been attempting to engage Transamerica, and ultimately IL Annuity and Insurance Company, the primary insurance company under the Transamerica agreement, in discussions aimed at improving investment returns from the convertible bond portfolio and potentially redesigning the Vision Mark product to reduce the minimum guarantee exposures from the Transamerica agreement. If the Company is not successful in convincing Transamerica and IL Annuity to restructure the portfolio and/or to redesign the product, the Company may incur additional write downs of deferred acquisition costs in the future.

      On November 20, 2002, the State of Connecticut Insurance Department and the Company’s United States domiciled operating subsidiary entered into a letter agreement acknowledging that the Connecticut Insurance Department is monitoring the financial condition of the Company’s United States domiciled operating subsidiary. The letter agreement requires 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. In addition, the Connecticut Insurance Department has requested weekly updates from senior management of the U.S. operating subsidiary on the status of the Company and any changes in the status of the U.S. operating subsidiary. The letter agreement continues to be effective until March 1, 2004.

      In January 2003, the Company instituted substantial premium rate increases on all of its non-guaranteed premium yearly renewable term agreements. All of the Company’s cedents subject to the rate increase, except The Metropolitan Life Insurance Companies (“MetLife”) and one other cedent who has accepted the rate increase, have recaptured their reinsurance agreements. MetLife has made the rate increase a subject of arbitration with the Company, and has indicated that its election to recapture is dependent upon the arbitration panel’s conclusion about the validity of the rate increase. On October 3, 2003, MetLife drew approximately $7.4 million of assets held in trust for its benefit. The Company believes the draw was inappropriate due to the pending arbitration, but has chosen at this time not to attempt to challenge the draw, as the Company will likely request that the arbitration panel make it a subject of the arbitration. The arbitration proceeding is scheduled to commence on December 15, 2003.

7

ANNUITY AND LIFE RE (HOLDINGS), LTD.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

      The MetLife reinsurance agreement is the Company’s largest life reinsurance agreement. During the first nine months of 2003, it produced $29.9 million of premium revenue and $6.3 million of loss for the Company. If the Company is not successful in obtaining the rate increase through the arbitration and MetLife does not recapture the agreement, the Company is likely to continue to incur losses from this agreement for the foreseeable future. If the Company is successful in the arbitration and MetLife recaptures the agreement, the Company’s annual premium revenues will decline, but the Company would no longer incur losses under the agreement.

      The Company continues to consider its strategic alternatives, including the possibility of raising new capital, but has not been able to successfully raise new capital to date. The Company has ceased to write new reinsurance agreements and is not accepting any new business under existing treaties on their current terms. The Company does not anticipate writing new reinsurance agreements in the foreseeable future. In addition, the Company is a defendant in a shareholder class action suit. The plaintiffs have not disclosed the damages sought. These aforementioned factors raise substantial doubt about the Company’s ability to continue as a going concern.

      To date, the Company’s plans have involved reducing its collateral requirements by negotiating the recapture, retrocession, novation or sale of certain of its reinsurance agreements. During the first nine months of 2003, these types of transactions resulted in significant losses for the Company. While the Company may enter into similar transactions in the future, it is not actively seeking to do so.

      There can be no assurance that the Company will be able to improve its operations and liquidity. If the Company is unable to reposition its general account investment portfolio to achieve a substantially higher yield within its investment guidelines, successfully defend against the pending shareholder class action suit, attain a favorable outcome from the MetLife arbitration, and settle its issues with Transamerica regarding their annuity reinsurance agreement, the Company may not be able to meet its obligations. The Company’s failure to achieve any one of the foregoing items could have a material adverse effect on its financial condition and results of operations. The accompanying unaudited consolidated financial statements do not include any adjustments that might be necessary should the Company be unable to continue as a going concern.

3.     Income (Loss) Per Share

      The following table sets forth the computation of basic and diluted income (loss) per share for the three month and nine month periods ended September 30:

	Three Months Ended					Nine Months Ended
	September 30,					September 30,
	2003		2002			2003			2002
Net income (loss) available to common shareholders	$	33,392	$	(19,147,017	)	$	(121,157,865	)	$	(29,007,385	)
Basic:
Weighted average number of common shares outstanding		25,893,861		25,733,141			25,848,999			25,722,016
Net income (loss) per share	$	0.00	$	(0.74	)	$	(4.69	)	$	(1.13	)
Diluted:
Weighted average number of common shares outstanding		26,350,616		25,733,141			25,848,999			25,722,016
Net income (loss) per share	$	0.00	$	(0.74	)	$	(4.69	)	$	(1.13	)

8

ANNUITY AND LIFE RE (HOLDINGS), LTD.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

4.     Business Segments

      The Company separately tracks financial results of the Company’s life and annuity operations in segments. Each segment is defined by a dominant risk characteristic inherent in all products in that segment. The life segment consists of all products where the dominant risk characteristic is mortality risk. The annuity segment comprises all products where the dominant risk characteristic is investment risk, including those products that provide minimum guarantees on variable annuity products. In addition, certain of the Company’s modified coinsurance annuity reinsurance agreements have features that constitute embedded derivatives that require bifurcation and separate accounting under FAS 133 — Accounting for Derivative Instruments and Hedging Activities. The change in the fair value of these embedded derivatives is included in the annuity segment. Both the life and annuity segments have specific assets, liabilities, stockholders’ equity, revenue, benefits and expenses that apply only to them. The corporate segment contains all stockholders’ equity not otherwise deployed to the life or annuity segment. In addition, the corporate segment includes all capital gains and losses from sales of securities in the Company’s portfolio and investment income on undeployed invested assets. Operating expenses are allocated to the segments proportionately based upon the amount of stockholders’ equity deployed to the segment, except for capital raising costs, which are charged directly to the corporate segment. Capital raising costs incurred in 2002 have been reallocated to the corporate segment to maintain comparability with the presentation for 2003. The Company believes that investors will better understand the Company’s profitability, risk profile, and capital deployment through this segment reporting method. There are no intersegment transactions. The following table displays several key measurements for each of the Company’s business segments:

Three Months Ended	Life		Annuity
September 30, 2003	Reinsurance		Reinsurance		Corporate			Consolidated
Revenues	$	30,013,563	$	19,097,603	$	220,721		$	49,331,887
Benefits and Expenses		29,412,349		18,718,677		1,167,469			49,298,495
Segment Income (Loss)	$	601,214	$	378,926	$	(946,748	)	$	33,392
Total Assets	$	273,604,371	$	726,777,967	$	81,036,947		$	1,081,419,285

Three Months Ended	Life			Annuity
September 30, 2002	Reinsurance			Reinsurance			Corporate		Consolidated
Revenues	$	86,708,167		$	18,535,565		$	10,386,955	$	115,630,687
Benefits and Expenses		96,647,003			36,789,209			1,341,492		134,777,704
Segment (Loss) Income	$	(9,938,836	)	$	(18,253,644	)	$	9,045,463	$	(19,147,017	)
Total Assets	$	657,422,016		$	1,549,867,709		$	113,368,735	$	2,320,658,460

Nine Months Ended	Life			Annuity
September 30, 2003	Reinsurance			Reinsurance			Corporate		Consolidated
Revenues	$	147,690,979		$	50,967,532		$	7,486,829	$	206,145,340
Benefits and Expenses		231,574,262			91,523,023			4,205,920		327,303,205
Segment (Loss) Income	$	(83,883,283	)	$	(40,555,491	)	$	3,280,909	$	(121,157,865	)
Total Assets	$	273,604,371		$	726,777,967		$	81,036,947	$	1,081,419,285

9

ANNUITY AND LIFE RE (HOLDINGS), LTD.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Nine Months Ended	Life		Annuity
September 30, 2002	Reinsurance		Reinsurance			Corporate		Consolidated
Revenues	$	260,319,388	$	66,846,670		$	16,090,311	$	343,256,369
Benefits and Expenses		256,465,768		111,901,285			3,896,701		372,263,754
Segment Income (Loss)	$	3,853,620	$	(45,054,615	)	$	12,193,610	$	(29,007,385	)
Total Assets	$	657,422,016	$	1,549,867,709		$	113,368,735	$	2,320,658,460

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NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

5.     Accounting Standards

FASB Statement Number 148

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

	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2003			2002			2003			2002
Net income (loss) — as reported	$	33,392		$	(19,147,017	)	$	(121,157,865	)	$	(29,007,385	)
Pro forma effect on net income (loss) of applying fair value accounting to pre January 1, 2003 option grants		(345,248	)		(862,121	)		(1,440,849	)		(2,586,363	)
Net (loss) — pro forma	$	(311,856	)	$	(20,009,138	)	$	(122,598,714	)	$	(31,593,748	)
Income (loss) per share as reported:
Basic	$	0.00		$	(0.74	)	$	(4.69	)	$	(1.13	)
Diluted	$	0.00		$	(0.74	)	$	(4.69	)	$	(1.13	)
Pro forma effect on net income (loss) per share of applying fair value accounting to pre January 1, 2003 option grants:
Basic	$	(0.01	)	$	(0.04	)	$	(0.05	)	$	(0.10	)
Diluted	$	(0.01	)	$	(0.04	)	$	(0.05	)	$	(0.10	)
Pro forma (loss) per share:
Basic	$	(0.01	)	$	(0.78	)	$	(4.74	)	$	(1.23	)
Diluted	$	(0.01	)	$	(0.78	)	$	(4.74	)	$	(1.23	)

AICPA Statement of Position (SOP 03-1)

      In July 2003, the Accounting Standards Executive Committee of the AICPA issued Statement of Position (SOP) 03-1, Accounting and Reporting by Insurance Enterprises for Certain Non-Traditional Long-Duration Contracts and for Separate Accounts. The SOP provides guidance on accounting and reporting by insurance enterprises for certain nontraditional long-duration contracts and for separate accounts. The SOP

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will change the manner in which life insurance companies account for certain types of insurance and reinsurance contracts including those that cover risks such as guaranteed minimum death benefits and guaranteed minimum income benefits. Additionally, the SOP provides accounting guidance for sales inducements paid to contract holders and provides guidance for establishing liabilities for contracts with features that may result in more than one potential account balance. The SOP is effective for financial statements for fiscal years beginning after December 15, 2003, with earlier adoption encouraged. The SOP may not be applied retroactively to prior years’ financial statements, and initial application should be as of the beginning of an entity’s fiscal year. The Company has an annuity reinsurance agreement with Transamerica and a combined GMDB/GMIB contract with CIGNA that may be affected by the adoption of this new SOP. Management is in the process of reviewing the SOP and assessing its impact on the Company’s financial reporting, but has not yet completed its analysis. Management believes that the impact on the Company’s accounting for the annuity reinsurance agreement with Transamerica could be significant as a result of adopting the SOP. Management also believes that the Company’s carried reserves for its GMDB/GMIB contract will not change significantly as a result of adopting the SOP.

6.     Related Party Transactions

XL Life Ltd

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

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

      The Company and XL Life have been in discussions with respect to each party’s rights and obligations under the novation and retrocession agreements entered into at December 31, 2002, as well as a $10.0 million excess of loss reinsurance policy and a catastrophe excess of loss cover that were each purchased by the Company from XL Life in the first quarter of 2002 and two annuity reinsurance agreements ceded to the Company by an affiliate of XL Life. The $10.0 million excess of loss reinsurance policy was purchased to protect against lifetime minimum interest guarantee (“LMIG”) payments under the Company’s annuity reinsurance agreement with Transamerica, and full recovery under the policy had been anticipated in establishing the Company’s deferred acquisition cost asset. The catastrophe excess of loss cover expired by its terms on December 31, 2002, but the parties had continued to discuss with XL Life the remaining obligations asserted under the agreement. The two annuity reinsurance agreements had been in effect since December 17, 1999, and represented approximately $95.9 million (including a cumulative loss from embedded derivatives of approximately $2.8 million) of the Company’s Funds withheld at interest and approximately $95.6 million of the Company’s Interest sensitive contract and other liabilities at June 30, 2003.

      As a result of the Company’s discussions with XL Life, the Company and XL Life and its affiliate agreed to mutually discharge their respective rights and obligations under all of the agreements described in the

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

Transactions with management

      During 1998, certain of the Company’s officers purchased 163,121 shares in the Company, and the Company made loans to the officers to partially finance such purchases. The loans accrued interest at 7% per annum and certain unpaid loans became due and payable in April 2003. In connection with the renegotiation or termination of certain officers’ employment agreements, the Company has deemed the outstanding loans of those officers to have been repaid in exchange for the officers agreeing to forego certain bonus, severance or other payments that are or may become payable to them. During the nine months ended September 30, 2003, loans of $1.0 million with accrued interest of $402,812 were deemed repaid in this manner.

7.     Restricted Stock

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

      During the first quarter of 2003, the Company issued 200,000 shares of restricted stock to the Company’s President and Chief Executive Officer. These shares vest in three equal annual installments commencing on the first anniversary of the grant date. In addition, during the second quarter of 2003, the Company issued an additional 375,000 shares of restricted stock in connection with retention grants to employees. These shares also vest in three equal annual installments commencing on the first anniversary of the grant date. During the first nine months of 2003, 207,600 shares of restricted stock were cancelled as a result of certain employees terminating their employment with the Company. The fair value as determined at the date of grant of the restricted stock awards that remain outstanding on September 30, 2003 was approximately $2,500,000 and is reflected in the Company’s balance sheet as common shares and additional paid-in-capital. The fair value of the outstanding restricted stock is being amortized on a straight-line basis over the three-year vesting period. The unamortized balance of outstanding restricted stock is reflected in the balance sheet as a component of unamortized stock grant compensation.

8.     Vulnerability Due to Concentrations

      The Company has entered into a significant deferred annuity reinsurance agreement with Transamerica and a significant life reinsurance agreement with MetLife. Due to the size of these agreements, there is a material concentration of net premiums, net investment income, interest credited to interest sensitive products, funds withheld at interest, deferred policy acquisition costs and interest sensitive contract liabilities with one or both of the underlying parties to these agreements.

      At September 30, 2003 and December 31, 2002, approximately $625.3 million and $733.7 million, respectively, of the Company’s funds withheld at interest receivable and approximately $628.1 million and

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NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

$755.9 million, respectively of the Company’s interest sensitive contracts liability related to its reinsurance agreement with Transamerica, which is a retrocessional reinsurance arrangement covering policies issued by IL Annuity. In addition, deferred acquisition costs of approximately $33.6 million and $50.0 million related to the Transamerica reinsurance agreement at September 30, 2003 and December 31, 2002, respectively. Transamerica’s agreement with IL Annuity is structured on a modified coinsurance basis, so IL Annuity maintains ownership and control of the assets supporting the Company’s obligations to Transamerica. At September 30, 2003, IL Annuity’s financial strength rating was BB+ from Standard & Poor’s. At September 30, 2003, Transamerica had financial strength or claims paying ratings of A+, AA, Aa3 and AA+ (with a negative outlook) from A.M. Best, Standard & Poor’s, Moody’s Ratings and Fitch Ratings, respectively.

      During 2002, the Company recorded a write down of deferred acquisition costs in connection with the Transamerica agreement of approximately $27.5 million. This charge was the result of a high level of surrenders of the underlying policies coupled with poor investment performance on the premiums paid by the holders of policies underlying the reinsurance agreement. In writing down the deferred acquisition costs to their estimated recoverable amount, management estimated the future levels of surrenders of the underlying policies together with the estimated future level of investment return on the invested premiums. As a result of the comprehensive settlement with XL Life, approximately $6.2 million of minimum interest guarantee payments that would have been recovered subsequent to June 30, 2003 were deemed recovered in the third quarter. In connection with this deemed recovery, deferred acquisition costs of approximately $6.2 million were amortized in the quarter ended September 30, 2003. The comprehensive settlement did not impact the Company’s expected income under the Transamerica agreement. While management has established its deferred acquisition cost asset at what it believes to be an appropriate level based upon reasonable assumptions about future investment performance and surrenders, if actual experience varies significantly from the assumptions used to establish the deferred acquisition cost asset, additional write downs may be needed in the future.

      For the three and nine months ended September 30, 2003, the Company recorded losses of approximately $2.4 million and $6.3 million, respectively, related to its life reinsurance agreement with MetLife. Premiums associated with this agreement for the three and nine months ended September 30, 2003, were approximately $10.0 million and $29.9 million, respectively.

      In January 2003, the Company provided written notice to MetLife of a premium rate increase in connection with this agreement, effective March 5, 2003, which has become a subject of the Company’s arbitration with MetLife. On October 3, 2003, MetLife drew approximately $7.4 million of assets held in trust for its benefit. The Company believes the draw was inappropriate due to the pending arbitration, but has chosen at this time not to attempt to challenge the draw, as the Company will likely request that the arbitration panel make it a subject of the arbitration. As a result of novations and recaptures of certain of the Company’s life reinsurance agreements during the year ended December 31, 2002 and the first nine months of 2003, MetLife now represents a significant percentage of the Company’s premium, revenue and net loss. If the Company is not successful in obtaining the rate increase through the arbitration and MetLife does not recapture the agreement, the Company is likely to continue to incur losses from this agreement for the foreseeable future. If the Company is successful in the arbitration and MetLife recaptures the agreement, the Company’s annual premium revenues will decline, but the Company would no longer incur losses under the agreement.

      On December 31, 2002, the Company entered into a transaction with XL Life pursuant to which the Company transferred certain blocks of life reinsurance business to XL Life. Under the agreement with XL Life, the Company novated five blocks of life reinsurance business to XL Life, which in turn entered into a 50% quota share reinsurance agreement with the Company with respect to four of those blocks of business. On August 5, 2003, XL Life served the Company with notice of its intention to recapture the 50% quota share reinsurance agreement with the Company. The Company and XL Life and its affiliate agreed to mutually

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NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

discharge their respective rights and obligations under this agreement, along with four other agreements, in a comprehensive settlement effective as of July 1, 2003. Under the terms of the comprehensive settlement, the Company paid $6.0 million to XL Life and was released from any and all obligations to XL Life and its affiliate under all of the reinsurance agreements among the parties.

      As a result of the recapture or termination of many of the Company’s reinsurance agreements, certain of the Company’s remaining agreements, which previously did not represent a significant percentage of the Company’s business, have become more prominent. For the three and nine months ended September 30, 2003, the Company recorded losses of approximately $2.2 million and $1.8 million, respectively, related to its life reinsurance agreement with Phoenix Home Life. Premiums associated with this agreement for the three and nine months ended September 30, 2003 were approximately $3.2 million and $11.6 million, respectively. For the three and nine months ended September 30, 2003, the Company recorded losses of approximately $0.4 million and $2.4 million, respectively, related to its life reinsurance agreement with National States Life. Premiums associated with this agreement for the three and nine months ended September 30, 2003 were approximately $3.1 million and $9.1 million, respectively. For the three and nine months ended September 30, 2003, the Company recorded income of approximately $0.2 million and losses of $1.5 million, respectively, related to its remaining life reinsurance agreement with Fidelity & Guarantee Life. Premiums associated with this agreement for the three and nine months ended September 30, 2003, were approximately $4.5 million and $11.8 million, respectively.

      The Company’s United States domiciled operating subsidiary, Annuity and Life Reassurance America, was purchased from a subsidiary of SwissRe on May 31, 2000. Immediately prior to the acquisition, 100% of Annuity and Life Reassurance America’s life and annuity policies were reinsured with Reassure America Life Insurance Company (“Reassure”), a subsidiary of SwissRe, under an indemnity co-insurance agreement. Following the acquisition, the policies continue to be 100% reinsured with Reassure; however, Annuity and Life Reassurance America remains the primary carrier. Reassure is required to indemnify Annuity and Life Reassurance America for any losses associated with these policies. Reserves ceded under its reinsurance agreement amounted to approximately $87.9 million and $92.0 million at September 30, 2003 and December 31, 2002, respectively. Reassure is rated A++ by AM Best, its highest rating.

9.     Contingencies

      As of September 30, 2003, the Company did not have sufficient available cash and investments to post collateral to satisfy the collateral requirements asserted by CIGNA, the cedent under the Company’s only guaranteed minimum death benefit and guaranteed minimum income benefit agreement. As of December 31, 2002, CIGNA asserted that the Company was required to satisfy additional collateral requirements of approximately $59.0 million in excess of the $11.0 million of collateral the Company had posted. The Company has not agreed with CIGNA regarding the computation of the $70.0 million collateral requirement and has not posted any additional collateral under the agreement. As a result, CIGNA has alleged that the Company is in breach of its agreement and may institute arbitration or litigation proceedings to seek remedies for the alleged breach. If the Company does not prevail in any such arbitration or litigation proceedings, it would have a material adverse effect on the Company’s financial condition and the Company may be required to liquidate its operations.

      While the Company plans to attempt to continue receiving premiums and paying claims under its remaining reinsurance treaties, the Company has ceased to write new reinsurance agreements and is not accepting any new business under existing treaties on their current terms. The Company does not anticipate writing new reinsurance agreements in the foreseeable future. To date, the Company’s plans have involved reducing its collateral requirements by negotiating the recapture, retrocession, novation or sale of certain of its reinsurance agreements. During the first nine months of 2003, these types of transactions resulted in

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NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

significant losses for the Company. While the Company may enter into similar transactions in the future, it is not actively seeking to do so.

      In April 2002, the Company served written notice of arbitration on MetLife, the cedent under its largest life reinsurance agreement, seeking equitable relief and monetary damages based on MetLife’s misrepresentation of and failure to disclose material facts relating to the agreement. In January 2003, the Company also provided written notice to MetLife of a premium rate increase, effective March 5, 2003, which also has become a subject of this arbitration. On October 3, 2003, MetLife drew approximately $7.4 million of assets held in trust for its benefit. The Company believes the draw was inappropriate due to the pending arbitration, but has chosen at this time not to attempt to challenge the draw, as the Company will likely request that the arbitration panel make it a subject of the arbitration. If the Company is not successful in obtaining the rate increase through the arbitration and MetLife recaptures the agreement, the Company is likely to continue to incur losses from this agreement for the foreseeable future. If the Company is successful in the arbitration and MetLife recaptures the agreement, the Company’s annual premium revenues will decline, but the Company would no longer incur losses under the agreement. The arbitration is scheduled to commence on December 15, 2003.

      As of September 30, 2003, the Company had $26.7 million of outstanding unsecured letters of credit issued on its behalf by Citibank that expire on December 31, 2003. In November 2003, Citibank agreed to renew the Company’s unsecured letter of credit facility until December 31, 2004 if the Company reduces the unsecured balance of the letter of credit facility to $17.0 million by November 30, 2003. If the Company does not reduce the unsecured balance of the letter of credit facility to $17.0 million by November 30, 2003 and Citibank does not renew the letters of credit, the letters of credit will expire on December 31, 2003 and the Company’s cedents will be entitled to draw on the letters of credit. The Company would then be obligated to repay Citibank for any amounts drawn.

      On November 20, 2002, the State of Connecticut Insurance Department and the Company’s United States domiciled operating subsidiary entered into a letter agreement acknowledging that the Connecticut Insurance Department is monitoring the financial condition of the Company’s United States domiciled operating subsidiary. The letter agreement requires 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. In addition, the Connecticut Insurance Department has requested weekly updates from senior management of the U.S. operating subsidiary on the status of the Company and any changes in the status of the U.S. operating subsidiary. The letter agreement continues to be effective until March 1, 2004.

      On and since December 4, 2002, certain of the Company’s shareholders filed purported shareholder class action lawsuits against the Company and certain of its present and former officers and directors in the United States District Court for the District of Connecticut seeking unspecified monetary damages. The plaintiffs claim that the defendants violated certain provisions of the United States securities laws by making various alleged material misstatements and omissions in public filings and press releases. No assurance can be given that the Company will not be required to pay monetary damages in connection with these lawsuits.

      As discussed in Note 6 above, on December 31, 2002, the Company entered into a transaction with XL Life pursuant to which the Company transferred certain blocks of life reinsurance business to XL Life. Under the agreement with XL Life, the Company novated five blocks of life reinsurance business to XL Life, which in turn entered into a 50% quota share reinsurance agreement with the Company with respect to four of those blocks of business. On August 5, 2003, XL Life served the Company with notice of its intention to recapture the 50% quota share reinsurance agreement with the Company. As a result, the Company determined it would not be able to recover the deferred acquisition costs carried for this agreement from future expected income, and wrote down approximately $21.0 million of such deferred acquisition costs in the three months ended June 30, 2003.

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NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

      The Company and XL Life have been in discussions with respect to each party’s rights and obligations under the novation and retrocession agreements entered into at December 31, 2002, as well as a $10.0 million excess of loss reinsurance policy and a catastrophe excess of loss cover that were each purchased by the Company from XL Life in the first quarter of 2002 and two annuity reinsurance agreements ceded to the Company by an affiliate of XL Life. The $10.0 million excess of loss reinsurance policy was purchased to protect against LMIG payments under the Company’s annuity reinsurance agreement with Transamerica, and full recovery under the policy had been anticipated in establishing the Company’s deferred acquisition cost asset. The catastrophe excess of loss cover expired by its terms on December 31, 2002, but the Company had continued to discuss with XL Life the remaining obligations asserted under the agreement. The two annuity reinsurance agreements had been in effect since December 17, 1999, and represented approximately $95.9 million (including a cumulative loss from embedded derivatives of approximately $2.8 million) of the Company’s Funds withheld at interest and approximately $95.6 million of the Company’s Interest sensitive contract and other liabilities at June 30, 2003.

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

      On April 8, 2003, the Company received notice from the New York Stock Exchange that it did not satisfy the NYSE’s continued listing standards as of that date because the average closing price of the Company’s common shares had been below $1.00 for a 30 consecutive trading day period. The notice stated that if the Company did not achieve (i) a $1.00 average share price for the 30 consecutive trading days prior to October 7, 2003, the expiration of the six month period following the date of the receipt of the notification, and (ii) a $1.00 share price on October 7, 2003, then the NYSE would commence suspension and delisting procedures with respect to the Company’s common shares. In addition, the NYSE informed the Company that it was considering whether it continued to meet certain of the NYSE’s qualitative continued listing standards due to concerns over the Company’s financial condition. On October 14, 2003, the NYSE informed the Company that it had satisfied the NYSE’s continued listing standards, and as a result would not be delisted from the Exchange.

      On October 8, 2003, the Company was served with a statutory demand for $640,000 from Imagine Re, a Bermuda based reinsurance company. Imagine Re alleges that the Company is obligated to reimburse it for expenses incurred by Imagine Re in connection with a proposed December 2002 capital raising transaction that was not consummated. The Company believes that Imagine Re is not entitled to reimbursement of these expenses under the applicable agreement and intends to defend against Imagine Re’s claims.

      Transamerica has alleged that the Company owes $14.9 million under its annuity reinsurance agreement with it. The Company has not agreed that such amount currently is owed to Transamerica and the parties are attempting to resolve their issues. Transamerica has indicated that if the parties cannot resolve their issues, it will attempt to put the Company’s Bermuda operating subsidiary into liquidation.

      In addition to the discussions with Transamerica related to the alleged amounts owed to it, the Company has been attempting to engage Transamerica, and ultimately IL Annuity, in discussions aimed at improving investment returns from the convertible bond portfolio and potentially redesigning the VisionMark product to reduce the minimum guarantee exposures from the Transamerica agreement. If the Company is not successful in convincing Transamerica and IL Annuity to restructure the portfolio and/or to redesign the product, the Company may incur additional write downs of deferred acquisition costs in the future.

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NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

      There can be no assurance that the Company will be able to improve its operations and liquidity. If the Company is unable to reposition its general account investment portfolio to achieve a substantially higher yield within its investment guidelines, successfully defend against the pending shareholder class action suit, attain a favorable outcome from the MetLife arbitration, and settle its issues with Transamerica regarding their annuity reinsurance agreement, the Company may not be able to meet its obligations. The Company’s failure to achieve any one of the foregoing items could have a material adverse effect on its financial condition and results of operations. The accompanying unaudited consolidated financial statements do not include any adjustments that might be necessary should the Company be unable to continue as a going concern.

10.     Stock Warrants

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

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

General

      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. For more information regarding the business and operations of our company and its subsidiaries, please see our Annual Report on Form 10-K for the year ended December 31, 2002, as amended.

      As discussed in greater detail elsewhere in this report, our company continued to encounter significant difficulties during the nine month period ended September 30, 2003. In addition to reporting a significant operating loss for the first nine months of 2003, we currently do not have sufficient available cash and investments to satisfy the collateral requirements asserted by CIGNA, the cedent under our only guaranteed minimum death benefit (GMDB) and guaranteed minimum income benefit (GMIB) agreement. CIGNA has asserted that we must satisfy additional collateral requirements of approximately $59,000,000 in excess of the $11,000,000 of collateral we currently have posted under the agreement. We have not agreed with CIGNA’s computation of the $70,000,000 collateral requirement and have not posted any additional collateral under the agreement. As a result, CIGNA has alleged that we are in breach of our agreement, and may institute arbitration or litigation proceeding to seek remedies for the alleged breach. If we do not prevail in any such arbitration or litigation proceedings, it would have a material adverse effect on our financial condition and we may be required to liquidate our operations. As of September 30, 2003, we had met the collateral requirements of our other cedents, and we expect to be able to meet any collateral requirements asserted at December 31, 2003, other than CIGNA.

      As of September 30, 2003, we had $26,700,000 of outstanding unsecured letters of credit issued on our behalf by Citibank that expire on December 31, 2003. In November 2003, Citibank agreed to renew our unsecured letter of credit facility until December 31, 2004 if we reduce the unsecured balance of the letter of credit facility to $17,000,000 by November 30, 2003. If we do not reduce the unsecured balance of the letter of credit facility to $17,000,000 by November 30, 2003 and Citibank does not renew the letters of credit, the letters of credit will expire on December 31, 2003 and our cedents will be entitled to draw on the letters of credit. We would then be obligated to repay Citibank for any amounts drawn.

      As discussed in Note 6 to our unaudited consolidated financial statements included elsewhere in this report, on December 31, 2002, we entered into a transaction with XL Life Ltd pursuant to which we transferred certain blocks of life reinsurance business to XL Life. Under the agreement with XL Life, we novated five blocks of life reinsurance business to XL Life, which in turn entered into a 50% quota share reinsurance agreement with us with respect to four of those blocks of business. On August 5, 2003, XL Life served us with notice of its intention to recapture the 50% quota share reinsurance agreement with us. As a result, we determined we would not be able to recover the deferred acquisition costs carried for this agreement from future expected income, and we wrote down approximately $21,000,000 of such deferred acquisition costs during the three months ended June 30, 2003.

      We have been in discussions with XL Life with respect to each party’s rights and obligations under the novation and retrocession agreements entered into at December 31, 2002, as well as a $10,000,000 excess of loss reinsurance policy and a catastrophe excess of loss cover that were each purchased by us in the first quarter of 2002 from XL Life and two annuity reinsurance agreements ceded to us by an affiliate of XL Life. The $10,000,000 excess of loss reinsurance policy was purchased to protect against lifetime minimum interest guarantee (LMIG) payments under our annuity reinsurance agreement with Transamerica Occidental Life Insurance Company (Transamerica), and full recovery under the policy had been anticipated in establishing our deferred acquisition cost asset. The catastrophe excess of loss cover expired by its terms on December 31, 2002, but we had continued to discuss with XL Life the remaining obligations asserted under the agreement.

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The two annuity reinsurance agreements had been in effect since December 17, 1999, and represented approximately $95,900,000 (including a cumulative loss from embedded derivatives of approximately $2,800,000) of our Funds withheld at interest and approximately $95,600,000 of our Interest sensitive contract and other liabilities at June 30, 2003.

      As a result of our discussions with XL Life, we and XL Life and its affiliate agreed to mutually discharge our respective rights and obligations under all of the agreements described in the preceding paragraph in a comprehensive settlement effective as of July 1, 2003. Under the terms of the comprehensive settlement, we paid $6,000,000 to XL Life and were released from any and all obligations to XL Life and its affiliate under all of the agreements among the parties. In addition, as part of the comprehensive settlement, we are obligated to pay $2,000,000 to XL Life if prior to June 30, 2004 our stock trades above $2.00 per share for a period of 20 out of 30 consecutive trading days and we raise an aggregate $35,000,000 of equity or debt.

      In January 2003, we instituted substantial premium rate increases on all of our non-guaranteed premium yearly renewable term agreements. All of our cedents subject to the rate increase, except The Metropolitan Life Insurance Companies (MetLife) and one other cedent who has accepted the rate increase, have recaptured their reinsurance agreements. MetLife has made the rate increase a subject of arbitration with us, and has indicated that its election to recapture is dependent upon the arbitration panel’s conclusion about the validity of the rate increase. On October 3, 2003, MetLife drew approximately $7,400,000 of assets held in trust for its benefit. We believe the draw was inappropriate due to the pending arbitration, but have chosen at this time not to attempt to challenge the draw, as we will likely request that the arbitration panel make it a subject of the arbitration. If we are not successful in obtaining the rate increase through arbitration and MetLife does not recapture the agreement, we are likely to continue to incur losses from this agreement for the foreseeable future. If we are successful in the arbitration and MetLife recaptures the agreement, our future annual premium revenues will decline, but we would no longer incur losses under the agreement. The arbitration is scheduled to commence on December 15, 2003.

      Transamerica has alleged that we owe $14,900,000 under our annuity reinsurance agreement with it. We have not agreed that such amount currently is owed to Transamerica and we are attempting to resolve our issues with Transamerica. Transamerica has indicated that if we cannot resolve our issues, it will attempt to put our Bermuda operating subsidiary into liquidation.

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

      To date, our plans have involved reducing our collateral requirements by negotiating the recapture, retrocession, novation or sale of certain of our reinsurance agreements. During the first nine months of 2003, these types of transactions resulted in significant losses for us. While we may enter into similar transactions in the future, we are not actively seeking to do so.

      There can be no assurance that we will be able to improve our operations and liquidity. If we are unable to reposition our general account investment portfolio to achieve a substantially higher yield within our investment guidelines, successfully defend against the pending shareholder class action suit, attain a favorable outcome from the MetLife arbitration, and settle our issues with Transamerica regarding our annuity reinsurance agreement, we may not be able to meet our obligations. Our failure to achieve any one of the foregoing items could have a material adverse effect on our financial condition and results of operations. The accompanying unaudited consolidated financial statements do not include any adjustments that might be necessary should we be unable to continue as a going concern.

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Critical Accounting Policies

      Our consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States of America, which require our management to make estimates and assumptions that affect the amounts of our assets, liabilities, stockholders’ equity and net income. We believe that the following critical accounting policies, as well as those set forth in our Form 10-K for the year ended December 31, 2002, as amended, detail the more significant estimates and assumptions used in the preparation of our consolidated financial statements.

      Deferred Policy Acquisition Costs. The costs of acquiring new business, principally allowances, which vary with and are primarily related to the production of new business, are deferred. For traditional life and annuity policies with life contingencies, deferred policy acquisition costs are charged to expense using assumptions consistent with those used in computing policy reserves. Assumptions as to anticipated premiums are estimated at the date of the policy issuance, or the effective date of the most recent premium rate increase, and are consistently applied during the life of the agreements. Deviations from estimated experience are reflected in earnings in the period such deviations occur. For these agreements, the amortization periods are generally the estimated life of the policies. As discussed elsewhere in this report, we have novated and recaptured a majority of our reinsurance agreements during the first nine months of 2003. We may novate or recapture other reinsurance agreements in the future. If these novations and recaptures are done on unfavorable terms, we will incur additional deferred acquisition cost write-downs.

      In preparing our financial statements, we make assumptions about our proportionate share of future investment income that will be earned from the investment of premiums received from underlying policyholders by our ceding companies and about future rates of lapse of policies underlying our annuity reinsurance agreements when estimating gross profits arising from such agreements. These assumptions have a direct impact on the amount of expected future LMIG payments and our estimated expected gross profits on these annuity reinsurance agreements and, therefore, on the recoverability of the deferred acquisition costs carried on our balance sheet for these agreements. 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 make additional LMIG payments and record additional charges, which would adversely impact our earnings.

      Embedded Derivatives. We have concluded that there are embedded derivatives within the Funds withheld at interest receivable related to one of our annuity reinsurance agreements written on a modified coinsurance 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 company under the reinsurance agreement. 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 agreement. The fair value of the embedded derivative is influenced by changes in credit risk, changes in expected future cash flows under the annuity agreement and interest rates. The change in fair value of these embedded derivatives is recorded in our statement of operations as Net change in fair value of embedded derivatives, which is a non-cash item. The change in fair value of these embedded derivatives also impacts the emergence of expected gross profits for purposes of amortizing deferred acquisition costs associated with this agreement. 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

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separately account for the embedded derivatives contained in our Transamerica annuity reinsurance agreement or our GMDB/GMIB reinsurance agreement with CIGNA, because we acquired those agreements prior to the transition date elected by us under FAS 133, as amended by FAS 137 and FAS 149. Because of the nature of the assets underlying our Transamerica agreement, which were roughly 65% convertible bonds at September 30, 2003, the bifurcation and separate accounting for the embedded derivatives contained in that agreement would add significant volatility to our reported results. If we bifurcated and separately accounted for the embedded derivative contained in our GMBD/GMIB reinsurance agreement, it also would add volatility to our reported results.

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

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

      We reinsure certain minimum guarantees associated with variable annuity agreements. These have historically included GMDB, GMIB, and enhanced earnings benefits (EEB), although, as of September 30, 2003, our combined GMDB/GMIB agreement with CIGNA was the only reinsurance agreement we had covering minimum guarantees associated with variable annuity agreements. Our accounting policy is designed to establish reserves for expected claim payments based upon the view of expected losses over the life of the underlying policies, based upon original pricing assumptions. Our reserving policy allows us to increase reserves if reported claim amounts or claims volume exceed what was anticipated in pricing.

      Policy benefit liabilities for annuity agreements are reflected on our balance sheet as “Interest sensitive contracts liability” and are reported at the accumulated policyholder balance of these accounts.

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

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

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with Transamerica and a combined GMDB/GMIB contract with CIGNA that may be affected by the adoption of this new SOP. We are in the process of reviewing the SOP and assessing its impact on our financial reporting, but have not yet completed our analysis. We believe that the impact on our accounting for the annuity reinsurance agreement with Transamerica could be significant as a result of adopting the SOP. We also believe that our carried reserves for our GMDB/GMIB contract will not change significantly as a result of adopting the SOP.

Operating Results

      Net Income (Loss). For the three months ended September 30, 2003, we had net income of $33,392, or $0.00 per basic and fully diluted common share, as compared with a net loss of $(19,147,017), or $(0.74) per basic and fully diluted common share, for the three months ended September 30, 2002. For the nine months ended September 30, 2003, we had a net loss of $(121,157,865), or $(4.69) per basic and fully diluted common share, as compared to a net loss of $(29,007,385), or $(1.13) per basic and fully diluted common share, for the nine months ended September 30, 2002. Net income in the third quarter of 2003 was primarily the result of a $9,000,000 benefit resulting from the comprehensive settlement between XL Life and us, partially offset by a $2,397,000 loss on our MetLife agreement, a $2,174,000 loss on our now second largest life reinsurance agreement due to seasonal fluctuations in premiums and a large claim under that agreement during the quarter, a loss of $1,180,000 on recaptured life reinsurance agreements other than the comprehensive settlement with XL Life, litigation costs of approximately $1,000,000 and employee compensation expenses of approximately $1,000,000. Other losses include an approximate $800,000 reserve increase for our combined GMDB/GMIB agreement with CIGNA and a loss of approximately $630,000 on the Transamerica annuity agreement. The loss for the first nine months of 2003 was primarily the result of losses associated with recaptures and terminations of life and annuity reinsurance agreements, as well as adverse claims experience under our life reinsurance agreements.

      During the nine months ended September 30, 2003, we negotiated the recapture and termination of certain of our life and annuity reinsurance agreements. During the three months ended September 30, 2003, we experienced a gain of approximately $7,820,000, reflecting the effect of a $9,000,000 benefit from our comprehensive settlement with XL Life, partially offset by net charges resulting from other recaptures and terminations of approximately $1,180,000. These charges resulted from the write down of deferred acquisition costs and cash payments made to cedents net of reserve releases associated with the recaptures. We incurred charges related to recaptures and terminations of approximately $86,200,000 for the nine months ended September 30, 2003, including charges incurred in the second quarter with respect to Hartford Life’s recapture of our then largest GMDB agreement of approximately $20,400,000 and the write down in the second quarter of deferred acquisition costs of approximately $21,000,000 associated with the expected recapture of our 50% quota share reinsurance agreement with XL Life. We also recorded income of approximately $620,000 and a loss of approximately $20,000,000, respectively, for the three and nine month periods ended September 30, 2003 on the life, annuity and GMDB agreements that were recaptured or terminated during the respective periods. Reduced investment gains and increased operating expenses due to litigation costs and employee compensation also contributed to our net loss for the nine month period ended September 30, 2003.

      Net Premiums. Net premium revenue for the three and nine month periods ended September 30, 2003 was $28,657,264 and $148,586,899, respectively, a decrease of 66% and 42%, respectively, from net premium revenue of $84,934,401 and $255,007,035, respectively, for the three and nine month periods ended September 30, 2002. Substantially all premium revenue was derived from traditional ordinary life reinsurance. The decline in premium revenue reflects the significant reduction of business in force resulting from the novation and recapture of life reinsurance agreements in the fourth quarter of 2002 and the first nine months of 2003. At September 30, 2003, the total face amount of life reinsurance in force had decreased to approximately $30 billion, as compared with approximately $151 billion at September 30, 2002. Approximately $17 billion of business covered by our 50% quota share reinsurance agreement with XL Life was recaptured during the third quarter of 2003. Of the $30 billion still in force at September 30, 2003, approximately $10.4 billion related to our MetLife agreement, which is currently the subject of arbitration, as described elsewhere in this report. Our next largest life reinsurance agreement represented approximately

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$7.2 billion of the business in force at September 30, 2003. We have stopped writing new reinsurance agreements and are not accepting any new business under existing treaties on their current terms. The novation, termination and recaptures of reinsurance agreements during the first nine months of 2003 will reduce net premiums in future periods.

      Net Investment Income. Total net investment income for the three and nine month periods ended September 30, 2003 was $16,250,225 and $30,143,651, respectively, as compared with $31,127,396 and $82,083,855, respectively, for the three and nine month periods ended September 30, 2002. Net investment income is comprised of income earned on our general account assets and income earned on assets held and managed by our reinsurance cedents under modified coinsurance agreements, which we refer to as Funds withheld. Both sources of investment income declined from the comparable prior periods.

      Net investment income earned on general account assets for the three and nine month periods ended September 30, 2003 was approximately $1,100,000 and $4,408,000, respectively, as compared to approximately $5,845,000 and $19,080,000, respectively, for the three and nine month periods ended September 30, 2002. The decrease in net investment income for the three and nine months periods ended September 30, 2003 was primarily the result of our return of approximately $147,000,000 of invested assets on December 31, 2002 related to the termination of a reinsurance agreement that provided cash deposits to us that were used to secure collateral obligations of our U.S. based cedents, as well as lower investment returns resulting from the shift in our general account assets towards a greater cash position. Because the amount of our cash and invested assets has decreased significantly due to our operating losses, as well as the recapture and termination of certain of our reinsurance agreements, we expect our net investment income for the balance of 2003 to be substantially less than the comparable period of 2002.

      The average annualized yield rate earned on our general account assets for the three and nine months ended September 30, 2003 was approximately 2.01% and 2.45%, respectively, as compared with approximately 5.14% and 5.28%, respectively, for the three and nine months ended September 30, 2002. The decline in yield rates primarily reflects our decision to invest funds supporting our letters of credit in cash equivalents in an effort to maximize our collateral funding ability and to minimize the impact of changing interest rates on our collateral obligations.

      Net investment income earned on Funds withheld for the three and nine month periods ended September 30, 2003 was approximately $15,151,000 and $24,623,000, respectively, as compared to approximately $25,282,000 and $63,004,000, respectively, for the three and nine month periods ended September 30, 2002. The decrease in investment income on our Funds withheld for the three and nine month periods ended September 30, 2003 is primarily due to a significant reduction in Funds withheld as a result of terminations of several large annuity reinsurance agreements and continued lapses under remaining reinsurance agreements, which reduce the invested asset base that generates investment returns.

      The average annualized yield rates earned on Funds withheld were approximately 5.16% and 3.03%, respectively, for the three and nine months ended September 30, 2003, as compared with 6.97% and 5.90%, respectively, for the three and nine months ended September 30, 2002. This reduction in yield rates is primarily the result of the termination of our annuity reinsurance agreement with Ohio National in the first quarter of 2003 and lower investment returns on the assets underlying our Transamerica annuity reinsurance agreement in 2003.

      Net Realized Investment (Losses) Gains. Net realized investment (losses) gains for the three and nine month periods ended September 30, 2003 were $(52,025) and $6,508,019, respectively, as compared with net realized investment gains of $9,297,351 and $10,813,315, respectively, for the three and nine month periods ended September 30, 2002. The decrease in net realized investment gains for the three and nine months ended September 30, 2003 was the result of a smaller invested asset base and our decision to maintain a significant portion of our investment portfolio in cash and cash equivalents. We plan to shift a significant portion of our cash position into other investments during the fourth quarter if market opportunities present themselves. Realized gains and losses will fluctuate from period to period, and we make decisions concerning the sales of our invested assets based on a variety of market, business and other factors.

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      Net Change in Fair Value of Embedded Derivatives. For the three and nine month periods ended September 30, 2003, the net change in fair value of our embedded derivatives was a gain of $2,808,427 and $14,845,749, respectively. For the three and nine month periods ended September 30, 2002, the net change in fair value of our embedded derivatives was a loss of $(13,277,823) and $(18,254,530), respectively. The net change in fair value of our embedded derivatives during the three month period ended September 30, 2003 largely reflects the termination of an annuity reinsurance agreement with an affiliate of XL Life in the third quarter of 2003 as part of our comprehensive settlement with XL Life. The primary reason for the net change in fair value of our embedded derivatives for the nine month period ended September 30, 2003 was the termination of certain of our annuity reinsurance agreements, including our agreement with Ohio National. Widening credit spreads and bond defaults in the portfolio of assets supporting these agreements had caused unrealized losses in our embedded derivatives in prior periods.

      Surrender Fees and Other Revenue. Surrender fees and other revenue for the three and nine month periods ended September 30, 2003 were $1,667,997 and $6,061,022, respectively, as compared with $3,549,362 and $13,606,694, respectively, for the three and nine month periods ended September 30, 2002. This income is primarily derived from surrender fees related to our annuity reinsurance agreement with Transamerica. The decrease in revenue for the three and nine month periods ended September 30, 2003 is mainly due to a smaller policyholder base resulting in a lower absolute level of withdrawals, as well as reduced lapse rates during those periods as compared with the three and nine month periods ended September 30, 2002.

      Claims and Policy Benefits. Claims and policy benefits for the three month period ended September 30, 2003 and 2002 were $19,075,004 and $91,381,831, or 67% and 108% of net premiums, respectively. The large decline was the result of a reduction of life insurance in force from $151 billion at September 30, 2002 to approximately $30 billion at September 30, 2003 and reserve releases associated with our comprehensive settlement with XL Life. Approximately $7,300,000 of the reduction in claims and policy benefits for the three months ended September 30, 2003 was attributable to the recapture or termination in 2003 of life and annuity reinsurance agreements that were in effect during the comparable prior period. For the nine months ended September 30, 2003 and 2002, claims and policy benefits were $178,589,650 and $224,640,576, or 120% and 88% of net premiums, respectively. The decrease for the nine months ended September 30, 2003 was primarily due to the reduced amount of life insurance in force as a result of recaptures of life reinsurance agreements and the Hartford Life and XL Life reserve releases, offset by approximately $24,000,000 of costs resulting from the termination of life and annuity reinsurance agreements. Claims and policy benefits as a percentage of net premiums have been adversely affected by the recaptures and terminations during the first nine months of 2003. Claims and policy benefits for the three and nine months ended September 30, 2003 includes $800,000 and $3,750,000, respectively of reserve increases related to our remaining GMDB/ GMIB agreement with CIGNA.

      We continue to monitor and analyze our experience under our remaining agreements. If claim experience continues at the levels observed during the fourth quarter of 2002 and the first nine months of 2003, or increases from those levels, our operating results would be materially and adversely affected. The novation, termination and recaptures of reinsurance agreements during the nine months of 2003 will reduce claims and policy benefits in future periods and may affect the level of claims and policy benefits as a percentage of premiums.

      During October 2003, we updated our analysis of carried reserves for incurred but not reported (IBNR) claims. In determining the amount of IBNR required at September 30, 2003, we considered the full trending of claims reported through September 30, 2003. As a result of our review, our reserve for IBNR at September 30, 2003 was $6,500,000. We will continue to examine these IBNR levels in relation to past experience each quarter.

      We are currently seeking relief from MetLife, our largest cedent of life insurance, with respect to a reinsurance agreement that has generated mortality experience beyond our initial pricing parameters and is currently producing losses. If we are unable to rescind or recapture this agreement, we may incur additional losses in future periods. This life reinsurance agreement is currently in arbitration with respect to representations made to us at the time we underwrote the agreement and with respect to a rate increase we instituted in

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the first quarter of 2003. In April 2003, MetLife informed us that if the arbitration panel scheduled to hear these claims in December 2003 finds the rate increase is valid, MetLife would recapture the reinsurance agreement effective as of March 5, 2003, the effective date of the increase. On October 3, 2003, MetLife drew approximately $7,400,000 of assets held in trust for its benefit. We believe the draw is inappropriate due to the pending arbitration, but have chosen not to attempt to block the draw and will likely request that the arbitration panel make it a subject of the arbitration. If we are not successful in obtaining the rate increase through the arbitration and MetLife does not recapture the agreement, we are likely to continue to incur losses from this agreement for the foreseeable future. If we are successful in the arbitration and MetLife recaptures the agreement, annual premium revenues will decline, but we would no longer incur losses under the agreement. The arbitration is scheduled to commence on December 15, 2003.

      Interest Credited to Interest Sensitive Contracts Liabilities. Interest credited to Interest sensitive contract liabilities, which are liabilities we assume under certain annuity reinsurance agreements, was $3,821,854 and $12,911,155, respectively, for the three and nine month periods ended September 30, 2003, as compared with $18,345,349 and $57,215,862, respectively, for the three and nine month periods ended September 30, 2002. Included in Interest credited to interest sensitive contracts liabilities for the three and nine month periods ended September 30, 2003 are LMIG payments under our Transamerica annuity reinsurance agreement of approximately $3,196,000 and $13,022,000, respectively, as compared to LMIG payments of approximately $8,977,000 and $21,750,000, respectively, for the comparable prior periods in 2002. The decline in Interest credited to interest sensitive contracts liabilities for the three and nine month periods ended September 30, 2003 was primarily the result of our comprehensive settlement with XL Life, the terminations of annuity reinsurance agreements, particularly our agreement with Ohio National, which was our second largest annuity agreement at the time of its termination, and a smaller base of policyholders account values as well as reduced lapse rates on our annuity reinsurance agreement with Transamerica. We terminated our annuity reinsurance agreement with Ohio National on February 14, 2003, another large annuity reinsurance agreement on April 1, 2003 and two annuity reinsurance agreements with an affiliate of XL Life as of July 1, 2003.

      Policy Acquisition and Other Insurance Expenses. Policy acquisition and other insurance expenses, consisting primarily of allowances and amortization and write downs of deferred policy acquisition costs, for the three and nine month periods ended September 30, 2003 were $22,796,448 and $119,928,722, respectively, as compared with $17,492,342 and $73,700,329, respectively, for the comparable prior periods in 2002. The increase for the three and nine months ended September 30, 2003 is primarily due to the net write down of deferred acquisition costs associated with the recapture and termination of agreements of approximately $4,660,000 and $78,870,000, respectively, for the three and nine month periods ended September 30, 2003. During the nine months ending September 30, 2002, we wrote down $24,796,000 of deferred acquisition costs associated with our Transamerica annuity reinsurance agreement.

      Operating Expenses. Operating expenses for the three month period ended September 30, 2003 were $3,605,189 or 7.7% of total revenue (excluding the net change in fair value of embedded derivatives), as compared with $3,826,602 or 3% of total revenue (excluding the net change in fair value of embedded derivatives) for three month period ended September 30, 2002. Operating expenses for the nine month period ended September 30, 2003 were $15,873,678 or 8.3% of total revenue (excluding the net change in fair value of embedded derivatives), as compared to $10,626,666 or 3% of total revenue (excluding the net change in fair value of embedded derivatives) for the comparable prior period in 2002. The increase in operating expenses for the nine month period of 2003 reflects the write off of approximately $2,100,000 of goodwill associated with our United States operating subsidiary in the second quarter of 2003, costs associated with renegotiating employment arrangements and other employee compensation, increased costs of directors and officers liability insurance coverage and increased legal and audit fees.

Segment Results

      We separately track financial results of our life and annuity operations in segments. Each segment is defined by a dominant risk characteristic inherent in products in that segment. The life segment consists of all products where the dominant risk characteristic is mortality risk. The annuity segment comprises all products

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where the dominant risk characteristic is investment risk. In addition, certain of our remaining modified coinsurance annuity reinsurance agreements have features that constitute embedded derivatives that require bifurcation and separate accounting under FAS 133 — Accounting for Derivative Instruments and Hedging Activities. The change in the fair value of these embedded derivatives is included in the annuity segment. Both the life and annuity segments have specific assets, liabilities, stockholders’ equity, revenue, benefits and expenses that apply only to them. The corporate segment contains all stockholders’ equity not otherwise deployed to the life or annuity segment. In addition, the corporate segment includes all capital gains and losses from sales of securities in our portfolio and investment income on undeployed invested assets. Operating expenses are generally allocated to the segments proportionately based upon the amount of stockholders’ equity deployed to the segment, except for capital raising costs, which are charged directly to the corporate segment. Segment results are reported in Note 4 to our unaudited consolidated financial statements included elsewhere in this report.

      Life Segment. 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 a yearly renewable term basis. In addition, we reinsured the mortality risk inherent in universal life insurance policies, variable universal life insurance policies and variable life insurance policies.

      Life segment income for the three month period ended September 30, 2003 was $601,214, as compared with segment loss of $(9,938,836) for the comparable prior period of 2002. Life segment income in the third quarter of 2003 was primarily the result of a $6,800,000 benefit resulting from our comprehensive settlement with XL Life, partially offset by a loss of approximately $2,397,000 on our MetLife agreement, a loss of approximately $2,174,000 on our now second largest life reinsurance agreement due to seasonal fluctuations in premiums and a large claim under that agreement during the quarter and a loss of $1,180,000 on recaptured life reinsurance agreements other than the comprehensive settlement with XL Life, as well as increased litigation costs and employee compensation expenses. Segment loss for the nine months ended September 30, 2003 was $(83,883,283) compared to segment income of $3,853,620 for the nine months ended September 30, 2002. Segment loss for the nine months ended September 30, 2003 reflects charges for recaptures of life reinsurance agreements of approximately $54,600,000, including the second quarter write down of deferred acquisition costs of approximately $21,000,000 associated with the expected recapture of our 50% quota share reinsurance agreement with XL Life. These charges reflect the write down of deferred acquisition costs and cash payments made to cedents net of reserve releases associated with the recaptures. The net cost of recaptures in the third quarter of 2003 was not significant. Our results for the nine month period ending September 30, 2003 were also adversely affected by reported claims from deaths prior to 2003 exceeding our estimated reserves for such claims at December 31, 2002 by approximately $5,000,000.

      Segment revenues for the three month period ended September 30, 2003 declined 65% to $30,013,563 from $86,708,167 in the third quarter of 2002. Segment revenues for the nine month period ended September 30, 2003 declined 43% to $147,690,979 from $260,319,388 for the first nine months of 2002. These declines reflect our reduced levels of life reinsurance in force as a result of novations and recaptures of life reinsurance agreements during the fourth quarter of 2002 and the first nine months of 2003. We anticipate similar declines in segment revenue in the fourth quarter of 2003, relative to prior years, as the result of these novations and recaptures. In addition, net investment income attributable to the life segment for the first nine months of 2003 decreased approximately $8,400,000, as compared with the first nine months of 2002, reflecting a reduction in invested assets in the segment and lower asset yields.

      Segment policy benefits and expenses decreased 69% to $29,412,349 for the three month period ended September 30, 2003, as compared with $96,647,003 for the three month period ended September 30, 2002. Segment policy benefits and expenses for the nine month period ended September 30, 2003 were $231,574,262 compared to $256,465,768 for the comparable prior period. The impact of recaptures and the comprehensive settlement with XL Life was a net reduction of policy benefits and expenses of approximately $5,600,000 for the three month period ended September 30, 2003 and a net increase in policy benefits and expenses of approximately $54,600,000 for the nine month period ended September 30, 2003. For the third quarter of 2003, recapture costs were comprised of write downs of deferred acquisition costs of approximately

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$20,110,000, and the return of unearned premium reserves to our cedents of $1,900,000, both offset by policy benefit reserve reductions of $20,830,000. Policy benefits and expenses for the nine month period ended September 30, 2003 included the second quarter write down of deferred acquisition costs of approximately $21,000,000 associated with the expected recapture of our 50% quota share reinsurance agreement with XL Life and reported claims for deaths prior to 2003 that exceeded our estimated reserves for such claims at December 31, 2002 by approximately $5,000,000. This includes $7,800,000 of reduced benefits and claims resulting from the comprehensive settlement with XL Life. If claim experience continues at the levels observed during the fourth quarter of 2002 and the first nine months of 2003, or increases from those levels, our operating results would be materially and adversely affected. The novation, termination and recapture of additional reinsurance agreements will reduce claims and policy benefits at an aggregate level in future periods, and may affect the level of claims and policy benefits as a percentage of premiums.

      During October 2003, we updated our analysis of carried reserves for incurred but not reported (IBNR) claims. In determining the amount of IBNR required at September 30, 2003, we considered the full trending of claims reported through September 30, 2003. As a result of our review, our reserve for IBNR at September 30, 2003 was $6,500,000. We will continue to examine these IBNR levels in relation to past experience each quarter.

      Annuity Segment. Our annuity reinsurance segment is the reinsurance of general account fixed deferred annuities 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 involve the tax-deferred accumulation of interest on a single premium paid by the policyholder (accumulation phase policies). Accumulation phase policies are subject primarily to investment risk and persistency (lapse) risk. We have also historically reinsured certain guarantees associated with variable annuity agreements, including GMDB, EEB and GMIB. As of September 30, 2003, we reinsured only GMDB and GMIB through a single reinsurance agreement with CIGNA.

      Our annuity segment contains the majority of our assets. While we would expect it be a small contributor to our net income, it contains significant volatility from two sources. First, under FAS 133 — Accounting for Derivative Instruments and Hedging Activities we must value embedded derivatives in certain of our annuity reinsurance agreements. This unrealized change in the value of the derivative is reported in our income statement each quarter. The change in the value of the derivative can be large, and is driven by financial market conditions, most notably credit risk related changes. Second, our Transamerica annuity reinsurance agreement has exhibited volatility due to write downs of our deferred acquisition cost balance which are based upon management’s estimates of future investment performance and lapse experience. Our annuity reinsurance agreement with Transamerica, which represented 90% of our annuity segment assets at September 30, 2003, is not expected to generate significant income going forward.

      Segment income was $378,926 for the three month period ended September 30, 2003, as compared with a loss of $(18,253,644) for the three month period ended September 30, 2002. Annuity segment income for the three months ended September 30, 2003 includes a $(568,000) loss from the termination of two annuity reinsurance agreements associated with our comprehensive settlement with XL Life, a $(630,000) loss on the Transamerica agreement and $800,000 of additional reserves for our GMDB/GMIB agreement with CIGNA, offset by a net gain from embedded derivatives of approximately $2,808,000. For the first nine months of 2003, segment loss was $(40,555,491), as compared with $(45,054,615) for the first nine months of 2002. The 2003 loss includes the items noted above plus a $(38,200,000) charge related to costs of recaptures and associated experience during the first six months of 2003 (including the recapture of our then largest GMDB agreement and our then second largest deferred annuity reinsurance agreement). The nine months ended September 30, 2002 includes the $24,796,000 write down of deferred acquisition costs associated with our annuity reinsurance agreement with Transamerica.

      Under FAS 133, we are required to bifurcate and separately account for embedded derivatives contained in certain of our annuity reinsurance agreements. The change in the fair value of the embedded derivatives is influenced by changes in credit risk, changes in expected future cash flows under the annuity reinsurance agreements and interest rate changes. For the three and nine month periods ended September 30, 2003, the

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net change in fair value of our embedded derivatives was a gain of $2,808,427 and $14,845,749, respectively. For the three and nine month periods ended September 30, 2002, the net change in fair value of our embedded derivatives was a loss of $(13,277,823) and $(18,254,530) respectively. The net change in fair value of our embedded derivatives during the three month period ended September 30, 2003 largely reflects the termination of an annuity reinsurance agreement with an affiliate of XL Life in the third quarter of 2003 as part of our comprehensive settlement with XL Life. The primary reason for the net change in fair value of our embedded derivatives for the nine month period ended September 30, 2003 was the termination of certain of our annuity reinsurance agreements, including our agreement with Ohio National. Widening credit spreads and bond defaults in the portfolio of assets supporting these agreements had caused unrealized losses in our embedded derivatives in prior periods.

      As a result of the recapture of our GMDB agreement with Hartford Life, we decreased our reserves for expected claim payments associated with GMDB and EEB agreements by approximately $10,850,000 in the second quarter of 2003. During the third quarter, we increased our reserve for our GMDB/GMIB reinsurance agreement with CIGNA by $800,000, bringing our total carried reserves for all minimum guarantees associated with variable annuity agreements to $10,200,000 at September 30, 2003. Our reinsurance agreement with CIGNA is our only remaining GMDB and GMIB reinsurance agreement.

      Total revenue for our annuity segment increased 3% to $19,097,603 for the three month period ended September 30, 2003, as compared with $18,535,565 for the three month period ended September 30, 2002. This is due to the increase in net change in the fair value of embedded derivatives of $16,086,000 for the three month period ended September 30, 2003 as compared with the comparable prior period of 2002, offset by lower policy premiums of approximately $2,000,000, lower surrender fees of approximately $1,900,000 and reduced investment income of approximately $11,600,000.

      Total revenue for our annuity segment declined 24% to $50,967,532 for the nine month period ended September 30, 2003, as compared with $66,846,670 for the nine month period ended September 30, 2002. This decrease is primarily related to lower GMDB/GMIB premiums and surrender fees of approximately $9,700,000 for the nine months ending September 30, 2003, as well as reduced investment income attributable to Funds Withheld of $38,900,000. This reduction is a result of annuity agreement terminations during the first nine months of 2003, most notably our annuity reinsurance agreements with Ohio National. Surrender fees from our Transamerica annuity reinsurance agreement also decreased by approximately $7,500,000 for the nine months ended September 30, 2003 as compared with the first nine months of 2002, which is reflected in lower revenues as mentioned above. The decline in segment revenue was offset by an increase in the net change in the fair value of embedded derivatives of $33,100,000 for the nine month period ended September 30, 2003 as compared with the first nine months of 2002.

      Policy benefits and expenses for the annuity segment, which include interest credited to policyholders, segment specific expenses, and allocated expenses, declined 49% to $18,718,677 for the three month period ended September 30, 2003, as compared with $36,789,209 for the three month period ended September 30, 2002. As a result of the recapture of our GMDB agreement with Hartford Life in the second quarter of 2003, our policy benefit and expenses in the third quarter of 2003 declined by approximately $12,100,000, as compared to the same quarter last year. Also, as a result of a smaller base of policyholders and slightly lower lapse rates on the Transamerica annuity reinsurance agreement, LMIG payments in the third quarter of 2003 declined by approximately $5,800,000, as compared to the same quarter last year.

      Policy benefits and expenses declined 18% to $91,523,023 for the nine months ended September 30, 2003, as compared with $111,901,285 for the nine months ended September 30, 2002. The nine months ended September 30, 2003 includes a charge of $20,400,000 for the recapture of our GMDB agreement with Hartford Life and LMIG payments of approximately $13,022,000. The nine months ended September 30, 2002 includes a write off of $24,796,000 of deferred acquisition costs associated with our annuity reinsurance agreement with Transamerica and LMIG payments of $21,750,000.

      Corporate Segment. The corporate segment includes all of our capital gains and losses, investment income on undeployed invested assets, capital raising costs and a proportionate share of operating expenses based upon the relative distribution of stockholders’ equity to all three segments. As a result, the corporate

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segment, while small relative to our total company, will likely have volatile results. For the three and nine month periods ended September 30, 2003, segment (loss) income was $(946,748) and $3,280,909, respectively, as compared with segment income of $9,045,463 and $12,193,610, respectively, for the three and nine month periods ended September 30, 2002. Revenues diminished 98% to $220,721 for the three month period ended September 30, 2003, as compared with $10,386,955 for the three month period ended September 30, 2002, and declined by 54% to $7,486,829 for the nine month period ended September 30, 2003, as compared with $16,090,312 for the nine month period ended September 30, 2002. Net realized investment (losses) gains of $(52,025) and $6,508,019 in the three and nine month periods ended September 30, 2003, respectively, as compared to $9,297,351 and $10,813,315, respectively, for the three and nine month periods ended September 30, 2002 were the principal reason for the declines.

      Segment benefits and expenses increased slightly to $1,167,469 and $4,205,920 for the three and nine month periods ended September 30, 2003, respectively, as compared with $1,341,492 and $3,896,702, respectively, for the comparable prior periods in 2002.

Financial Condition

Investments

      At September 30, 2003 and December 31, 2002, virtually all of our invested assets were posted as collateral to secure our obligations under reinsurance agreements and letter of credit facilities or were required to maintain the statutory capital and surplus requirements of our U.S. operating subsidiary. At September 30, 2003, our invested assets, including cash and cash equivalents, had an aggregate fair value of $212,669,998, including unrealized gains of $2,211,223, as compared with an aggregate fair value of $306,346,337, including unrealized gains of $6,162,525, at December 31, 2002. The decline in our invested assets was primarily the result of claim payments on recaptured or terminated reinsurance agreements and unearned premium payments made to effect the recaptures. At September 30, 2003 and December 31, 2002, the weighted average duration of the fixed income securities included in our invested assets was 3.7 and 3.8 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 in our portfolio and match the cash flows of our investments to our related insurance liabilities. Our investment guidelines require our overall fixed income portfolio to maintain a minimum weighted average credit quality of “A.” A fixed income security rated “A” by Standard & Poor’s is considered to be somewhat more susceptible to the adverse effects of changes in circumstances and economic conditions than higher rated issuer; however, the issuer’s capacity to meet its financial commitment on the security is still considered to be strong. As of July 31, 2002, our investment guidelines were amended to prohibit us from investing in fixed income securities that are rated below investment grade at the time of purchase. We do not invest in any fixed income securities in emerging markets or securities that are not rated by a major rating agency.

      At both September 30, 2003 and December 31, 2002, less than 1% of our fixed income securities consisted of below investment grade securities. The fair value of such investments varies depending on economic and market conditions, the level of interest rates and the perceived creditworthiness of the issuer. As noted above, our investment guidelines prohibit the purchase of below investment grade securities, as these investments are subject to a higher degree of credit risk than investment grade securities. We monitor the creditworthiness of the portfolio as a whole, and when the fair market value of a security declines for reasons other than changes in interest rates or other perceived temporary conditions, the security is written down to its fair value.

      At September 30, 2003, mortgage-backed securities represented approximately 12% of our invested assets, including cash and cash equivalents, as compared with approximately 10% at December 31, 2002. Investors in these securities are compensated primarily for reinvestment risk rather than credit quality risk. Investments in mortgage-backed securities include collateralized mortgage obligations (CMO’s) and mortgage-backed pass-through securities. Mortgage-backed securities generally are collateralized by mortgages

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issued by the Government National Mortgage Association (GNMA), the Federal National Mortgage Association and the Federal Home Loan Mortgage Corporation. 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 September 30, 2003 and December 31, 2002.

      At September 30, 2003, none of our mortgage-backed investment portfolio consisted of securities with planned repayment schedules, as compared with 7% at December 31, 2002. These investments are designed to amortize in a more predictable manner by shifting the primary risk of prepayment of the underlying collateral to investors in other tranches of the CMO.

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

Investment Results

	Nine Months Ended						Twelve Months Ended
	September 30,						December 31,
	2003			2002			2002			2001			2000
	(Dollars in thousands)
Total invested assets, including cash and cash equivalents(1)	$	212,670		$	475,213		$	306,346		$	423,780		$	321,819
Investment income, net of related expenses	$	4,508		$	19,080		$	25,931		$	20,165		$	20,126
Effective annualized yield rate(2)		2.45	%		5.28	%		5.28	%		5.74	%		6.85	%
Realized investment gains (losses)	$	6,508		$	10,813		$	19,749		$	1,230		$	(4,817	)

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

      The effective annualized yield rate on our invested assets has declined significantly during the first nine months of 2003. This decline is the result of the shift in our general account assets towards a greater cash position. We had increased our cash position to maximize the amount of collateral we can provide to our cedents and letter of credit providers and to minimize market risk related to our collateral requirements. Our investment portfolio is approximately 54% invested in cash and cash equivalents at September 30, 2003. However, we plan to invest a significant percentage of this money during the fourth quarter if market opportunities present themselves.

Funds Withheld at Interest

      At September 30, 2003, our Funds withheld receivable was approximately $696,000,000, as compared with approximately $1.4 billion at December 31, 2002. Historically, when a ceding company enters into a reinsurance agreement structured as a modified coinsurance or coinsurance funds withheld arrangement with us, a portion of the ceding company’s liability to the policyholders or, in the case of a retrocessional arrangement, the primary insurer, is ceded to us. Our remaining modified coinsurance arrangements are on a quota share basis, so the portion that is ceded to us is a fixed percentage of the liabilities arising from the underlying policies. Our share of the ceding company’s liability is included on our balance sheet as “Interest sensitive contracts liabilities.” However, unlike other reinsurance arrangements in which we receive cash or investments as consideration for assuming a portion of the ceding company’s liability, under these types of arrangements, we have established a receivable called “Funds withheld at interest.” For annuity reinsurance agreements, the Funds withheld at interest receivable is equal to our fixed portion of the statutory reserves carried by the ceding company. For life reinsurance agreements, the Funds withheld at interest receivable is equal to the value of the ceding company’s GAAP reserves related to the policies underlying our life reinsurance agreements, which includes reserves for pending claims and reserves for incurred but not reported

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claims. We are allocated our share of the investment income and realized capital gains and losses that arise from the securities in the investment portfolio underlying the Funds withheld at interest under each type of agreement.

      At September 30, 2003, our Funds withheld at interest receivable related to our annuity reinsurance agreements had a carrying value of approximately $688,000,000. Our agreement with Transamerica accounted for approximately 90% of annuity related Funds withheld at interest receivable as September 30, 2003, as compared to 51% at December 31, 2002. The increase in the proportion of our Funds withheld at interest asset related to the Transamerica agreement generally reflects the termination of our annuity reinsurance agreement with Ohio National, as well as other annuity agreements, during 2003. At September 30, 2003, the assets held and managed by our ceding companies under our annuity reinsurance agreements were invested in convertible bonds and fixed income securities having a weighted average credit quality of “A” and a weighted average duration of 5.9 years. In addition, at September 30, 2003, approximately 5.5% of such assets were invested in below investment grade securities, as compared with 4.2% of such assets at December 31, 2002. At December 31, 2002, these assets had a weighted average credit quality of “A” and a weighted average duration of 5.3 years.

      The average annualized yield rate earned on the assets held and managed by our ceding companies under our annuity reinsurance agreements was approximately 5.16% and 3.03% for the three and nine month periods ended September 30, 2003, as compared to 6.97% and 5.90% for the three and nine month periods ended September 30, 2002. The average annualized yield rate earned on the assets funding our annuity obligations to Transamerica was approximately 5.11% and 2.59% for the three and nine month periods ended September 30, 2003, as compared with 7.18% and 5.30% for the three and nine month periods ended September 30, 2002. For purposes of calculating the average yield rate earned on assets held and managed by our ceding companies, including Transamerica, we include net realized capital gains and losses as reported to us by our ceding companies.

Transamerica

      Our annuity reinsurance agreement with Transamerica is our largest annuity reinsurance agreement. As of September 30, 2003, approximately $625,000,000, or 90% of our Funds withheld at interest receivable, approximately $628,000,000, or 90% of our Interest sensitive contracts liability and approximately $34,000,000 of our Deferred policy acquisition costs asset related to this agreement. As a result of the changes to our company resulting from the recapture, termination, and novations of numerous blocks of business, we expect that the assets and liabilities associated with the Transamerica agreement will also represent a significant portion of our total assets and liabilities in future periods. We do not expect the Transamerica agreement to generate significant income in future periods.

      At September 30, 2003, the assets funding the policyholder obligations under the Transamerica agreement had an average credit quality of “A” and an average duration of 6.2 years, as compared with an average credit quality of “A-” and an average duration of 4.2 years at December 31, 2002. The agreement is a retrocessional arrangement covering VisionMark fixed annuity products issued by IL Annuity and Insurance Company, the primary insurance company. AmerUS Capital Management, the investment manager appointed by IL Annuity, manages the assets underlying the Transamerica agreement. At September 30, 2003 and December 31, 2002, AmerUS Capital Management had invested approximately 65% of the premiums paid in connection with the underlying policies in investment grade convertible bonds and had invested the remaining premiums in investment grade bonds, high yield bonds and mortgage-backed securities. The value of convertible bonds is a function of their investment value (determined by comparing their yield with the yields of other securities of comparable maturity and quality that do not have a conversion privilege) and their conversion value (at market value, if converted into the underlying common stock). 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.

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      While convertible bonds would typically be expected to produce lower investment income than other fixed income securities, convertible bonds provide the potential for higher total returns through the underlying equity component of the bonds, which are passed on to VisionMark policyholders through the total return adjustment upon surrender of the policies. As with the holders of other single premium deferred annuity policies, a VisionMark policyholder is guaranteed a return of premiums paid plus a guaranteed minimum interest rate of 3% to 3.5% per annum over the life of the policy. During the nine months ended September 30, 2003 and the year ended December 31, 2002, we paid approximately $13,022,000 and $26,763,000, respectively, under our annuity reinsurance agreement 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 LMIG for surrendered policies.

      According to data provided to us by Transamerica, at September 30, 2003, the assets held by IL Annuity and managed by AmerUS Capital were comprised of the following:

						% of Total
Type of Security		Book Value(1)		Market Value		Market Value
Investment grade convertible bonds		$	410,652,803	$	402,837,815		65.2	%
Investment grade U.S. corporate bonds			113,512,308		117,430,283		19.0	%
Below investment grade U.S. corporate bonds			33,224,270		34,141,139		5.5	%
Mortgage-backed securities			30,993,440		31,009,308		5.0	%
Short term securities			32,285,333		32,324,401		5.2	%
	Total invested assets	$	620,668,154	$	617,742,947		100.0	%
Accrued investment income					3,875,935
	Total market value, including accrued investment income			$	621,618,882

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

      According to data provided to us by Transamerica, at September 30, 2003, the credit ratings of the assets (excluding accrued investment income) held by IL Annuity and managed by AmerUS Capital were approximately as follows:

						% of Total
Ratings(1)		Book Value(2)		Market Value		Market Value
AAA		$	128,497,001	$	127,977,688		20.7	%
AA			47,648,955		45,680,422		7.4	%
A			157,940,656		158,941,039		25.7	%
BBB			252,040,161		249,762,779		40.4	%
BB and below			34,541,381		35,381,019		5.7	%
	Total invested assets	$	620,668,154	$	617,742,947		100.0	%
Accrued investment income					3,875,935
	Total market value, including accrued investment income			$	621,618,882

(1)	As assigned by Standard & Poor’s, or, if unrated by Standard & Poor’s, based on an equivalent rating assigned by the National Association of Insurance Commissioners.
(2)	Book values are those reported to us by the cedent for the underlying investments and do not represent the value of our Funds withheld at interest receivable.

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      According to data provided to us by Transamerica, at September 30, 2003, the maturity distribution of the assets held by IL Annuity and managed by AmerUS Capital was approximately as follows:

						% of Total
Maturity		Book Value(1)		Market Value		Book Value
Within one year		$	49,113,545	$	49,150,872		8.0	%
From one to five years			129,715,360		130,174,555		21.0	%
From six to ten years			134,401,515		135,734,041		22.0	%
More than ten years			307,437,734		302,683,479		49.0	%
	Total all years	$	620,668,154	$	617,742,947		100.0	%

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

Other Annuity Reinsurance Agreement

      At September 30, 2003, we had one other annuity reinsurance agreement that guaranteed crediting rates that vary in amount and duration. At September 30, 2003, the assets funding the policyholder obligations under this agreement had an average credit quality of “A-” and an average duration of approximately 3.77 years, as compared with an average credit quality of “A” and an average duration of approximately 7.04 years for the other annuity agreements in force at December 31, 2002.

      According to information provided by the ceding company under this annuity reinsurance agreement, at September 30, 2003, the assets held and managed by this ceding company were comprised of as follows:

						% of Total
Type of Security		Book Value(1)		Market Value		Market Value
Investment grade US corporate bonds		$	58,788,630	$	62,651,550		82.9	%
Short term securities			5,389,555		5,389,555		7.1	%
Mortgage securities			4,441,242		5,083,146		6.7	%
Below investment grade bonds			3,540,278		2,454,656		3.3	%
	Total invested assets	$	72,159,705	$	75,578,907		100.0	%
Accrued investment income					1,105,237
	Total market value, including accrued investment income			$	76,684,144

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

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      According to information provided by the ceding company under this annuity reinsurance agreement, at September 30, 2003, the credit ratings of the assets (excluding accrued investment income) held and managed by this ceding company were approximately as follows:

						% of Total
Ratings(1)		Book Value(2)		Market Value		Market Value
AAA		$	5,990,875	$	5,978,700		7.9	%
AA			3,585,596		3,818,954		5.1	%
A			24,109,602		25,769,487		34.1	%
BBB			34,933,354		37,557,110		49.7	%
BB and below			3,540,278		2,454,656		3.2	%
	Total invested assets	$	72,159,705	$	75,578,907		100.0	%
Accrued investment income					1,105,237
	Total market value, including accrued investment income			$	76,684,144

(1)	As assigned by Standard & Poor’s, or, if unrated by Standard & Poor’s, based on an equivalent rating assigned by the National Association of Insurance Commissioners.
(2)	Book values are those reported to us by the cedent for the underlying investments and do not represent the value of our Funds withheld at interest receivable.

      According to information provided by the ceding companies under this annuity reinsurance agreement, at September 30, 2003, the maturity distribution of the assets held and managed by this ceding company was approximately as follows:

						% of Total
Maturity		Book Value(1)		Market Value		Book Value
Within one year		$	13,319,669	$	13,410,982		17.7	%
From one to five years			24,212,414		26,132,038		34.6	%
From six to ten years			27,231,188		28,252,552		37.4	%
More than ten years			7,396,434		7,783,335		10.3	%
	Total all years	$	72,159,705	$	75,578,907		100.0	%

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

Liquidity and Capital Resources

      Our liquidity and capital resources are a measure of our overall financial strength and our ability to generate cash flows from our operations to meet our operating and growth needs. Our principal sources of funds are premiums received, net investment income, proceeds from investments called, redeemed or sold and cash and short-term investments. The principal obligations and uses of the funds are to post collateral for the statutory reserves ceded to us by U.S. based insured and reinsurers, the payment of policy benefits, operating expenses and the purchase of investments. Under the terms of our reinsurance agreements, we are required to provide letters of credit or fund trust accounts with liquid assets to satisfy the collateral requirements of our cedents. At September 30, 2003 and December 31, 2002, letters of credit totaling $75,000,000 and $174,000,000, respectively, had been issued in the ordinary course of our business by our bankers in favor of certain ceding insurance companies (including our U.S. operating subsidiary) to provide security and meet regulatory requirements. At September 30, 2003 and December 31, 2002, cash and investments of approximately $64,000,000 and $115,000,000, respectively, were pledged as collateral for letters of credit. At September 30, 2003 and December 31, 2002, cash and investments of $98,675,000 and $125,085,000

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respectively were held in trust for the benefit of certain ceding insurance companies to provide security and to meet regulatory requirements.

      We have two reinsurance operating subsidiaries, the largest of which is based in and operates out of Bermuda. Our other reinsurance operating subsidiary is based in and operates out of the United States. Our Bermuda operating subsidiary reinsures a large portion of the reinsurance business written by our U.S. operating subsidiary. The primary purpose of this reinsurance is to provide reinsurance capacity to our U.S. operating subsidiary so that it can compete in its market place. Our Bermuda operating subsidiary has made capital infusions into the U.S. operating subsidiary to allow the U.S. company to maintain targeted statutory surplus levels and to provide cash and securities as collateral for the reinsurance cessions the U.S. operating subsidiary makes to the Bermuda operating company. At September 30, 2003, approximately $49,000,000 of our cash and cash equivalents and fixed income securities were held by the U.S. operating subsidiary and were not available to our Bermuda operating subsidiary to fund our liquidity or collateral needs. In addition, our U.S. operating company has entered into a letter agreement with the Connecticut Insurance Department that, among other things, restricts the U.S. operating company from paying dividends or settling inter-company balances with us or our Bermuda operating company.

      As discussed in Note 6 to our unaudited consolidated financial statements included elsewhere in this report, on December 31, 2002, we entered into a transaction with XL Life pursuant to which we novated five blocks of life reinsurance business to XL Life, which in turn entered into a 50% quota share reinsurance agreement with us with respect to four of those blocks of business. On August 5, 2003, XL Life served us with notice of its intention to recapture the 50% quota share reinsurance agreement with us. As a result, we determined we would not be able to recover our deferred acquisition costs carried for this agreement from future expected income, and wrote down approximately $21,000,000 of such deferred acquisition costs in the three months ended June 30, 2003.

      We have been in discussions with XL Life with respect to each party’s rights and obligations under the novation and retrocession agreements entered into at December 31, 2002, as well as a $10,000,000 excess of loss reinsurance policy and a catastrophe excess of loss cover that were each purchased by us from XL Life in the first quarter of 2002 and two annuity reinsurance agreements between our company and XL Life or its affiliates. The excess of loss reinsurance policy was purchased to protect against LMIG payments under our annuity reinsurance agreement with Transamerica, and full recovery under the policy has been anticipated in establishing our deferred acquisition cost asset. The catastrophe excess of loss cover expired by its terms on December 31, 2002, but we continued to discuss with XL Life remaining obligations asserted under the agreement. The two annuity reinsurance agreements represent approximately $95,900,000 (including a cumulative loss from embedded derivatives of approximately $2,800,000) of our Funds withheld at interest and approximately $95,600,000 of our Interest sensitive contract and other liabilities.

      As a result of our discussions with XL Life, we and XL Life and its affiliate agreed to mutually discharge our respective rights and obligations under all of the agreements described in the preceding paragraph in a comprehensive settlement effective as of July 1, 2003. Under the terms of the comprehensive settlement, we paid $6,000,000 to XL Life and were released from any and all obligations to XL Life and its affiliate under all of the agreements among the parties. In addition, as part of the comprehensive settlement, we are obligated to pay $2,000,000 to XL Life if prior to June 30, 2004 our stock trades above $2.00 per share for a period of 20 out of 30 consecutive trading days and we raise an aggregate $35,000,000 of equity or debt.

      We did not have sufficient available cash and investments at September 30, 2003 to satisfy the collateral requirements asserted by CIGNA, the cedent under our only GMDB/ GMIB agreement. As of December 31, 2002, CIGNA asserted that we must satisfy additional collateral requirements of approximately $59,000,000 in excess of the $11,000,000 of collateral we currently have posted. We have not agreed with CIGNA’s computation of the $70,000,000 collateral requirement and have not posted any additional collateral under the agreement. As a result, CIGNA has alleged that we have breached our agreement and may institute arbitration or litigation proceedings to seek remedies for the alleged breach. If we do not prevail in any such arbitration or litigation proceedings, it would have a material adverse effect on our financial condition and we may be required to liquidate our operations. As of September 30, 2003, we had met the collateral requirements

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of our other cedents, and we expect to be able to meet any collateral requirements asserted at December 31, 2003, other than CIGNA.

      As of September 30, 2003, we had $26,700,000 of outstanding unsecured letters of credit issued on its behalf by Citibank that expire on December 31, 2003. In November 2003, Citibank agreed to renew our unsecured letter of credit facility until December 31, 2004 if we reduce the unsecured balance of the letter of credit facility to $17,000,000 by November 30, 2003. If we do not reduce the unsecured balance of the letter of credit facility to $17,000,000 by November 30, 2003 and Citibank does not renew the letters of credit, the letters of credit will expire on December 31, 2003 and our cedents will be entitled to draw on the letters of credit. We would then be obligated to repay Citibank for any amounts drawn.

      At September 30, 2003, our total capitalization, which consisted entirely of equity, was $146,399,823. For the nine months ended September 30, 2003, we utilized $97,859,548 of our cash and cash equivalents to fund our operating activities, as compared with generating cash and cash equivalents of $27,726,444 from our operating activities for the nine months ended September 30, 2002. The utilization of our cash and cash equivalents during the first nine months was primarily the result of claim payments on recaptured or terminated reinsurance agreements and unearned premium payments made to effect the recaptures.

      In January 2003, we instituted substantial premium rate increases on all of our non-guaranteed premium yearly renewable term agreements. All of our cedents subject to the rate increase, except MetLife and one other cedent who has accepted the rate increase, have recaptured their reinsurance agreements. MetLife has made the rate increase a subject of arbitration with us, and has indicated that its election to recapture is dependent upon the arbitration panel’s conclusion about the validity of the rate increase. If we are not successful in obtaining the rate increase through arbitration and MetLife does not recapture the agreement, we are likely to continue to incur losses from this agreement for the foreseeable future. If we are successful in the arbitration and MetLife recaptures the agreement, our annual premium revenues will decline, but we would no longer incur losses under the agreement. The arbitration is scheduled to commence on December 15, 2003.

      Transamerica has alleged that we owe $14,900,000 under our annuity reinsurance agreement with it. We have not agreed that such amount currently is owed to Transamerica, and we are attempting to resolve our issues with Transamerica. Transamerica has indicated that if we cannot resolve our issues, it will attempt to put our Bermuda operating subsidiary into liquidation.

      In addition to the discussions with Transamerica related to the alleged amounts owed to it, we have been attempting to engage Transamerica, and ultimately IL Annuity, in discussions aimed at improving investment returns from the convertible bond portfolio and potentially redesigning the VisionMark product to reduce the minimum guarantee exposures from the Transamerica agreement. If we are not successful in convincing Transamerica and IL Annuity to restructure the portfolio and/or to redesign the product, we may incur additional write downs of deferred acquisition costs in the future.

      While we plan to continue receiving premiums and paying claims under our remaining reinsurance treaties, we have ceased to write new reinsurance agreements and are not accepting any new business under existing treaties on their current terms. We do not anticipate writing new reinsurance agreements in the foreseeable future. To date, our plans have involved reducing our collateral requirements by negotiating the recapture, retrocession, novation or sale of certain of our reinsurance agreements. During the first nine months of 2003, these types of transactions resulted in significant losses for us. While we may enter into similar transactions in the future, we are not actively seeking to do so.

      Both we and our Bermuda operating subsidiary, Annuity and Life Reassurance, are required to comply with the provisions of the Bermuda Companies Act that regulate the payment of dividends and the making of distributions from contributed surplus. Neither we nor Annuity and Life Reassurance may declare or pay a dividend, or make a distribution out of contributed surplus, if there are reasonable grounds for believing that: (i) the relevant company is, or would be after the payment, unable to pay its liabilities as they become due; or (ii) the realizable value of the relevant company’s assets would thereby be less than the aggregate of its liabilities and its issued share capital and share premium accounts. As of December 31, 2002, we could not reasonably determine that we met these grounds. Accordingly, on February 19, 2003, we announced that we

37

would not declare or pay a dividend on our common shares during the first quarter of 2003. No dividends have been paid since. The declaration and payment of future dividends to holders of our common shares will be at the discretion of our Board of Directors and will depend upon our earnings and financial condition, capital requirements of our subsidiaries, the ability of our operating subsidiaries to pay dividends to us, regulatory considerations and other factors the Board of Directors deems relevant. We do not expect to declare or pay dividends in the near future.

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

      We had no material commitments for capital expenditures as of September 30, 2003, but as noted above, we have significant obligations that we may not be able to satisfy. There can be no assurance that the actions taken by us have been sufficient to improve our operations and liquidity. In addition, we cannot predict the outcome of several pending issues and the impact those outcomes may have on us. If we are unable to reposition our general account investment portfolio to achieve a substantially higher yield within our investment guidelines, successfully defend ourselves against the pending shareholder class action suit, attain a favorable outcome from the MetLife arbitration and settle our issues with Transamerica regarding our annuity reinsurance agreement, we may not be able to meet our obligations. Any failure to achieve one of the foregoing items could have a material adverse effect on our financial condition and results of operations. The accompanying unaudited consolidated financial statements do not include any adjustments that might be necessary should we be unable to meet such obligations.

Forward-Looking and Cautionary Statements

      This report, together with other statements and information we may provide, contains “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. These statements may include, but are not limited to, projections of revenues, income or loss, capital expenditures, plans for future operations and financing needs or plans, as well as assumptions relating to the foregoing. The words “expect,” “project,” “estimate,” “predict,” “anticipate,” “believe” and similar expressions are intended to identify forward-looking statements, although not all forward-looking statements include these expressions. Forward-looking statements are inherently subject to risks and uncertainties, some of which cannot be predicted or quantified. Future events and actual results, performance and achievements could differ materially from those set forth in, contemplated by or underlying the forward-looking statements. Factors that could materially and adversely affect our operations and financial condition and/or cause our actual results of operations or financial condition to differ from those expressed or implied in our forward-looking statements include, but are not necessarily limited to, our ability to meet the obligations associated with our current business and to fund our continuing operations; our ability to reduce or otherwise satisfy our collateral obligations through novations, recaptures or otherwise; the outcome of pending legal proceedings involving us; our ability to obtain adequate financial ratings; the ability of our cedents to manage successfully assets they hold on our behalf; our success in managing our investments; our ability to maintain the listing of our common shares on the New York Stock Exchange; changes in mortality, morbidity and claims experience; our ability to make accurate estimates and assumptions regarding future mortality, persistency, lapses, expenses and investment performance based upon historical results and information provided to us by our cedents; our ability to underwrite business; unanticipated withdrawal or surrender activity; changes in market conditions, including changes in interest rate levels; the competitive environment; the impact of recent and possible future terrorist attacks and the U.S. government’s response thereto; our ability to attract and retain clients; the loss of a key executive; regulatory changes (such as changes in U.S. tax law and insurance regulation that directly affect the competitive environment for our products); and a prolonged economic downturn. Investors are also directed to consider the risks and uncertainties discussed in other documents we have filed with the Securities and Exchange Commission, and in particular, our Annual Report on Form 10-K for the year ended December 31, 2002, as amended. We do not undertake to update any forward-looking statement that may be made from time to time by or on our behalf.

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Item 3. 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 September 30, 2003.

      Our major market risk exposure is changing interest rates, primarily in the United States. We have a portfolio of fixed income investments and 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 equity securities in our general account. We have significant market risk, including equity risk, from our largest annuity reinsurance agreement and our GMDB/ GMIB agreement. 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.

      Our primary market risk exposures as of September 30, 2003 have changed since the year ended December 31, 2002 as a result of a decrease in the amount of our invested assets and funds withheld. In addition, the recapture of our GMDB reinsurance agreement with Hartford Life has significantly decreased our market risk exposures. Our GMDB exposure at December 31, 2002 was approximately $1.23 billon, but has diminished to approximately $139,000,000 at September 30, 2003.

      The table below presents as of September 30, 2003 the amortized cost amounts and related weighted average interest rates by years of maturity for our investment portfolio. Mortgage-backed securities are included in the table by anticipated year of maturity.

Weighted Average	Cash and Cash		Weighted Average			Fixed Maturity		Weighted Average
Interest Rates By Maturity	Equivalents		Interest Rate			Investments		Interest Rate
	(Dollars in thousands)
2003	$	113,859		0.85	%
2004						$	4,850		4.53	%
2005							7,101		5.37	%
2006							9,404		5.59	%
2007							8,977		5.70	%
Thereafter							65,726		5.33	%
Total	$	113,859		0.85	%	$	96,058
Fair Value	$	113,859				$	98,810

      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 $3,600,000 based on a 100 basis point increase in interest rates as of September 30, 2003. Conversely, the model produces gains of similar amounts with a 100 basis point decrease in interest rates. Actual results may differ from the hypothetical change in fair

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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.

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

      The methodology we use to determine the fair value of the embedded derivatives in our annuity reinsurance agreements that require bifurcation and separate accounting under FAS 133 is to determine the fair value of the host contract (notional asset) based upon expected future cash flows under the annuity agreements. The fair value of the embedded derivative is calculated as being the market value of the actual assets less the fair value of the notional asset. The change in fair value of the embedded derivative is influenced by changes in credit risk, changes in expected future cash flows under the annuity agreements and interest rate changes. This methodology, which applies to all of our fixed annuity reinsurance agreements other than Transamerica, results in a valuation of the embedded derivative reflecting the market risk inherent in the underlying agreements.

      As of September 30, 2003, 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 $218,000, respectively. Also, as of September 30, 2003 and after giving effect to the termination or recapture of certain annuity reinsurance agreements, 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 $293,000, respectively. The duration of the actual assets is approximately 3.77 years and the duration of the notional asset is approximately 4.04 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 2002 and 2003:

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

      Our accounting policy for guaranteed minimum death benefit, minimum guaranteed income benefit and enhanced earnings benefit agreements is discussed in Note 3 to our consolidated financial statements for the fiscal year ended December 31, 2002. As of December 31, 2002, we had established reserves of approximately $18,500,000 related to these types of minimum guarantees associated with variable annuity products. Our exposure for GMIB benefits has not materially changed since December 31, 2002. Our reserve for GMDB and GMIB as of September 30, 2003 was $10,200,000. These reserves are calculated on the basis of actuarial assumptions related to projected benefits and related contract charges over the lives of the agreements. Our reserve methodology for these variable annuity minimum guarantee products is not directly market sensitive, although we do make assumptions about the state of the financial markets when we establish our reserves for

40

these exposures. After giving effect to the recapture of our largest guaranteed minimum death benefit agreement, we estimate little impact on our reserve for guaranteed minimum death benefits and guaranteed minimum income benefits based on our preliminary review of the Statement of Position 03-1 “Accounting and Reporting by Insurance Enterprises for Certain Nontraditional Long-Duration Contracts and for Separate Accounts.”

      We refer you to Part II, Item 7A, “Quantitative and Qualitative Disclosures About Market Risk” of our Annual Report on Form 10-K for the year ended December 31, 2002 for additional information regarding our exposure to market risk.

      The statements above are forward-looking statements within the meaning of the Private Securities Litigation Reform Act. See “Forward-Looking and Cautionary Statements.”

Item 4. Controls and Procedures

      As of the end of the period covered by this Form 10-Q, the Company’s management, including its Chief Executive Officer/ Chief Financial Officer, conducted an evaluation of the effectiveness of the Company’s disclosure controls and procedures. Based on that evaluation, the Chief Executive Officer/ Chief Financial Officer concluded that the Company’s disclosure controls and procedures were effective. There have been no changes in the Company’s internal controls over financial reporting during the period ended September 30, 2003 that have materially affected, or are reasonably likely to materially affect, the Company’s internal controls over financial reporting.

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PART II

OTHER INFORMATION

Item 1. Legal Proceedings

      On April 23, 2002, we served written notice of arbitration on The Metropolitan Life Insurance Companies (MetLife), the cedent under our largest life reinsurance agreement, seeking equitable relief and monetary damages based on MetLife’s misrepresentation of and failure to disclose material facts known to it relating to the agreement. On January 30, 2003, we also provided written notice to MetLife of a premium rate increase, effective March 5, 2003, which also has become a subject of this arbitration. In April 2003, MetLife informed us that, if the arbitration panel finds the premium rate increase valid, MetLife would recapture the reinsurance agreement as of March 5, 2003. On October 3, 2003, MetLife drew approximately $7,400,000 of assets held in trust for its benefit. We believe the draw was inappropriate due to the pending arbitration, but have chosen at this time not to attempt to challenge the draw, as we will likely request that the arbitration panel make it a subject of the arbitration. The arbitration is scheduled to commence on December 15, 2003.

      On and since December 4, 2002, certain of our shareholders have filed purported shareholder class action lawsuits against us and certain of our present and former officers and directors in the United States District Court for the District of Connecticut seeking unspecified monetary damages. The plaintiffs claim that the defendants violated certain provisions of the United States securities laws by making various alleged material misstatements and omissions in public filings and press releases. The plaintiffs filed a single consolidated amended complaint in July 2003, adding as defendants XL Capital Ltd and two additional directors. On October 1, 2003, we answered the amended and consolidated complaint and denied liability on the claims the plaintiffs have asserted.

      On March 18, 2003, Hartford Life Insurance Company, the cedent under our largest guaranteed minimum death benefit reinsurance agreement, served notice seeking to institute arbitration proceedings against us alleging that we had failed to satisfy additional collateral requirements under the agreement of approximately $59,000,000. On July 17, 2003, Hartford Life agreed to recapture its guaranteed minimum death benefits reinsurance agreement with us. As consideration for the recapture, Hartford Life retained approximately $31,000,000 of the funds it had drawn from a trust account and letters of credit that had been posted as collateral under the agreement, and we issued warrants to purchase an aggregate one million of our common shares to Hartford Life. Under the terms of the recapture, we have no further obligations to Hartford Life.

      On October 8, 2003, we were served with a statutory demand for $640,000 from Imagine Re, a Bermuda based reinsurance company. Imagine Re alleges that we are obligated to reimburse it for expenses incurred by Imagine Re in connection with a December 2002 capital raising transaction that was not consummated. We believe that Imagine Re is not entitled to reimbursement of these expenses under the applicable agreement and intend to defend against Imagine Re’s claims.

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

Item 2. Changes in Securities and Use of Proceeds

      On July 17, 2003, we issued warrants to purchase an aggregate one million of our common shares at an exercise price of $1.25 per share to Hartford Life, the ceding company under our largest guaranteed minimum death benefit reinsurance agreement. The warrants were issued in connection with the recapture of the agreement and expire on June 30, 2013. The issuance of the warrants was exempt from the registration requirements of the Securities Act of 1933, as amended, pursuant to Section 4(2) thereof.

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Item 5. Other Information

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

      On October 8, 2003, we were served with a statutory demand for $640,000 from Imagine Re, a Bermuda based reinsurance company. Imagine Re alleges that we are obligated to reimburse it for expenses incurred by Imagine Re in connection with a December 2002 capital raising transaction that was not consummated. We believe that Imagine Re is not entitled to reimbursement of these expenses under the applicable agreement and intend to defend against Imagine Re’s claims.

      On August 13, 2003, Martin A. Berkowitz joined our Board of Directors. Mr. Berkowitz replaced Mark Grier, who resigned from the Board of Directors effective May 14, 2003.

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Item 6.     Exhibits and Reports on Form 8-K

      (a) Exhibits —

4	Form of Warrant issued to Hartford Life and Annuity Insurance Company and Hartford Life Insurance Company (incorporated by reference to Exhibit 4 to the registrant’s Form 10-Q for the quarterly period ended June 30, 2003).
10.1	Amended and Restated Employment Agreement, dated as of July 28, 2003, by and between Annuity and Life Re (Holdings), Ltd., Annuity and Life Reassurance, Ltd. and John F. Burke (incorporated by reference to Exhibit 10.1 to the registrant’s Form 10-Q for the quarterly period ended June 30, 2003).
10.2	Recapture Agreement and General Release of Guaranteed Minimum Death Benefit Reinsurance Agreements, dated as of June 30, 2003, among Hartford Life and Annuity Insurance Company, Hartford Life Insurance Company and Annuity and Life Reassurance, Ltd. (incorporated by reference to Exhibit 10.3 to the registrant’s Form 10-Q for the quarterly period ended June 30, 2003).
10.3	Settlement and Commutation Agreement, dated as of November 4, 2003, by and among XL Life Ltd, XL Re Ltd (formerly known as XL MidOcean Reinsurance Ltd), Annuity and Life Reassurance Ltd., and Annuity and Life Re (Holdings), Ltd.
31	Rule 13a-14(a)/15d-14(a) Certification of the Company’s Chief Executive Officer and Chief Financial Officer.
32	Section 1350 Certification of the Company’s Chief Executive Officer and Chief Financial Officer.

      (b) Reports on Form 8-K —

      Current Report on Form 8-K (Items 7 and 12) dated and filed on August 7, 2003, reporting several recent developments that had occurred with respect to the Company, including the recapture of the Company’s largest guaranteed minimum death benefits reinsurance agreement and the announcement that XL Life Ltd had served notice that it intended to recapture four life reinsurance agreements ceded to the Company on a 50% quota share basis.

      Current Report on Form 8-K (Items 7 and 12) dated August 14, 2003 and filed on August 15, 2003, regarding the Company’s release of its financial results for the three month period ended June 30, 2003.

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ANNUITY AND LIFE RE (HOLDINGS), LTD.

SIGNATURES

      Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

ANNUITY AND LIFE RE (HOLDINGS), LTD.

/s/ JOHN F. BURKE

Name: John F. Burke

Title: Chief Executive Officer and

Chief Financial Officer

Date: November 14, 2003

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EXHIBIT INDEX

4	Form of Warrant issued to Hartford Life and Annuity Insurance Company and Hartford Life Insurance Company (incorporated by reference to Exhibit 4 to the registrant’s Form 10-Q for the quarterly period ended June 30, 2003).
10.1	Amended and Restated Employment Agreement, dated as of July 28, 2003, by and between Annuity and Life Re (Holdings), Ltd., Annuity and Life Reassurance, Ltd. and John F. Burke (incorporated by reference to Exhibit 10.1 to the registrant’s Form 10-Q for the quarterly period ended June 30, 2003).
10.2	Recapture Agreement and General Release of Guaranteed Minimum Death Benefit Reinsurance Agreements, dated as of June 30, 2003, among Hartford Life and Annuity Insurance Company, Hartford Life Insurance Company and Annuity and Life Reassurance, Ltd. (incorporated by reference to Exhibit 10.3 to the registrant’s Form 10-Q for the quarterly period ended June 30, 2003).
10.3	Settlement and Commutation Agreement, dated as of November 4, 2003, by and among XL Life Ltd, XL Re Ltd (formerly known as XL MidOcean Reinsurance Ltd), Annuity and Life Reassurance Ltd., and Annuity and Life Re (Holdings), Ltd.
31	Rule 13a-14(a)/15d-14(a) Certification of the Company’s Chief Executive Officer and Chief Financial Officer.
32	Section 1350 Certification of the Company’s Chief Executive Officer and Chief Financial Officer.

EX-10.3

                                                                    EXHIBIT 10.3

                      SETTLEMENT AND COMMUTATION AGREEMENT

        This SETTLEMENT AND COMMUTATION AGREEMENT (the "Agreement") is dated as
of November 4, 2003, by and among XL LIFE LTD ("XL"), XL RE LTD, formerly known
as XL MidOcean Reinsurance Ltd ("XL Re"), ANNUITY AND LIFE REASSURANCE, LTD.
("ALRe"), and ANNUITY AND LIFE RE (HOLDINGS), LTD. ("Holdings").

        WHEREAS, XL and ALRe entered into a Master Agreement dated as of
December 31, 2002 (the "Master Agreement") setting forth, among other things,
the terms under which ALRe would novate certain reinsurance agreements (the
"Novated Contracts");

        WHEREAS, XL and ALRe entered into a retrocession agreement dated as of
December 31, 2002 (the "December 31 Retrocession Agreement") under which XL
retroceded 50% of the business covered by certain of the Novated Contracts (the
"Novated Viva Contracts") to ALRe;

        WHEREAS, XL and ALRe entered into a Reinsurance Administration Agreement
dated as of December 31, 2002 (the "Administration Agreement") for purposes of
facilitating the administration of the Novated Contracts;

        WHEREAS, the Administration Agreement and the December 31 Retrocession
Agreement have been terminated pursuant to a Notice of Termination dated August
5, 2003 delivered to ALRe by XL;

        WHEREAS, XL Re entered into a retrocession agreement effective as of
December 17, 1999 (the "35% Old Mutual Agreement") under which XL Re retroceded
certain reinsurance business to ALRe;

        WHEREAS, XL Re entered into a retrocession agreement effective as of
December 17, 1999 (the "15% Old Mutual Agreement," and, together with the 35%
Old Mutual Agreement the "Old Mutual Agreements" and, together with the December
31 Retrocession Agreement, the "Retrocession Agreements") under which XL Re
retroceded certain reinsurance business to ALRe;

        WHEREAS, XL and ALRe entered into a letter of intent with a stated
effective date of January 1, 2002 (the "TransAmerica LOI") with respect to
Lifetime Minimum Interest Guarantee losses incurred by ALRe under its
reinsurance agreement with TransAmerica Occidental Life Insurance Company;

        WHEREAS, XL and ALRe entered into a letter of intent dated as of
February 28, 2002 (the "Catastrophic Excess of Loss Cover LOI", and, together
with the Transamerica LOI the "Letters of Intent") with respect to certain
losses incurred by ALRe under its reinsurance agreements with certain U.S. and
Canadian insurance companies;





        WHEREAS, XL, XL Re and ALRe disagree as to and have engaged in extensive
negotiations with respect to, their respective obligations under and in
connection with the Retrocession Agreements, the Master Agreement and the
TransAmerica LOI;

        WHEREAS, ALRe is a wholly-owned subsidiary of Holdings;

        WHEREAS, the board of directors of each of the parties hereto having
approved the terms of this Agreement, the parties hereto now wish to fully and
finally determine and settle all liabilities and obligations of XL, XL Re and
ALRe under the Retrocession Agreements, the Master Agreement, the Administration
Agreement and the Letters of Intent;

        NOW, THEREFORE, in consideration of the mutual covenants contained
herein and the payments to be made hereunder, the parties agree as follows:

                                   ARTICLE I
                         REPRESENTATIONS AND WARRANTIES

       A. The parties hereto expressly warrant and represent (as to themselves
and their affiliates, but not as to the other party):

                (i) that the execution of this Agreement is fully authorized by
        each of them;

                (ii) that the person or persons executing this Agreement have
        the necessary and appropriate authority to do so;

                (iii) that this Agreement is valid, binding and enforceable in
        accordance with its terms;

                (iv) that no consent of any government entity is required to
        make this Agreement valid and binding upon them;

                (v) that the execution of this Agreement does not conflict with,
        result in a breach or violation or imposition of any lien, charge or
        encumbrance upon any property or assets of the parties or any of their
        respective subsidiaries pursuant to, (a) the charter or by-laws or other
        organizational document of the parties or any of their respective
        subsidiaries, (b) the terms of any indenture, contract, lease, mortgage,
        deed of trust, note agreement, loan agreement or other agreement,
        obligation, condition, covenant or instrument to which the parties or
        any of their respective subsidiaries is a party or bound or to which its
        or their respective property is subject, or (c) any statute, law, rule,
        regulation, judgment, order or decree applicable to the parties or any
        of their respective subsidiaries of any court, regulatory body,
        administrative agency, governmental body, arbitrator or other authority
        having jurisdiction over the parties or any of their respective
        subsidiaries or any of their respective properties; and

                (vi) that none of the claims being released pursuant to this
        Agreement have been previously assigned or transferred in any way to any
        person.



                                      -2-


       B. ALRe and Holdings each hereby expressly warrants, represents and
covenants that (before and after giving effect to this Agreement):

                (i) it is a company incorporated in Bermuda;

                (ii) the fair value of its assets and the assets of its
        subsidiaries taken as a whole, at a fair valuation, exceeds and is
        expected to exceed their debts and liabilities, subordinated, contingent
        or otherwise;

                (iii) the present fair salable value of its property and the
        property of its subsidiaries taken as a whole is and is expected to be
        greater than the amount that is expected to be required to pay their
        probable liability on their debts and other liabilities, subordinated,
        contingent, or otherwise, as such debts and other liabilities become
        absolute and matured;

                (iv) it and its subsidiaries taken as a whole are and are
        expected to be able to pay their debts and liabilities, subordinated,
        contingent or otherwise, as such debts and liabilities become absolute
        and matured;

                (v) it and its subsidiaries taken as a whole do not and are not
        expected to have unreasonably small capital with which to conduct the
        businesses in which they are engaged as such businesses are now
        conducted and are presently proposed to be conducted following the date
        hereof;

                (vi) as of the date hereof there is no insolvency proceeding of
        any character, voluntary or involuntary, relating to ALRe, Holdings or
        any of their subsidiaries, which is pending or, to the best of its
        knowledge, threatened (except for possible threats that were disclosed
        to XL in writing on November 2, 2003); neither ALRe, Holdings nor any of
        their subsidiaries has made any assignment for the benefit of creditors
        or taken any action with a view to, or which would constitute a basis
        for, the institution of an insolvency proceeding;

                (vii) it is not insolvent under Bermuda law;

                (viii) all known claims under the Novated Contracts in respect
        of deaths before December 31, 2002 (after due inquiry) have been
        disclosed fully and accurately to XL; and

                (ix) all expectations and all statements regarding contingent
        liabilities in the foregoing representations and warranties are held in
        good faith and ALRe and Holdings have a reasonable basis therefor.

                                   ARTICLE II
                    PAYMENTS; PREPAYMENTS; EVENTS OF DEFAULT

        A. Payments. In full settlement and commutation of all obligations and
liabilities, known and unknown, under the Retrocession Agreements, the Master
Agreement, the Administration Agreement and the TransAmerica LOI, ALRe agrees to
pay XL the sum of US



                                      -3-


$7,000,000 (Seven Million Dollars). Said funds are to be paid in an installment
of $750,000 on the date hereof and the balance in equal monthly installments of
$250,000 on the 15th day of each month beginning November 15, 2003. Such
payments to XL shall be made by wire transfer to the account of XL at Citibank
NA, ABA# 021000089, CHIPS# 0008, SWIFT CITIUS33, For further credit to: The Bank
of Bermuda Limited, CHIPS UID# 005584, SWIFT Code BBDA BMHM, Account Number:
10921671, For further credit to: Account Name: XL Life Ltd. - Lighthouse,
Account Number: 1510 816253

        B. Mandatory Prepayments. Amounts owed to XL pursuant to paragraph A
above shall be mandatorily prepayable in an amount equal to 100% of the proceeds
of any indebtedness for borrowed money or the equivalent incurred by ALRe,
Holdings or any of their subsidiaries unless such indebtedness is expressly
subordinated to such amounts owed to XL on terms satisfactory to XL.

        C. Optional Prepayments. Amounts owed to XL pursuant to paragraph A
above shall be prepayable at any time at the option of ALRe. Prior to November
15, 2003, ALRe may at its option elect to pay to XL $6,000,000 (Six Million
Dollars), less any other amounts paid to XL hereunder, in full satisfaction of
the amounts due under Article II.A above.

        D. No Penalty. There shall be no prepayment penalties for any mandatory
or optional prepayments made by ALRe to XL pursuant to this Article II.

        E. Application of Prepayments. Any mandatory or optional prepayments
made pursuant to this Article II shall be applied in inverse order to the
installments then due pursuant to paragraph A above.

        F. Events of Default. Each of the following is an "Event of Default:"

                (i) the default by ALRe for more than ten (10) business days in
        the payment when due of any installment set forth in paragraph A above;

                (ii) the failure by ALRe or Holdings to comply with any of the
        other agreements set forth herein;

                (iii) the institution of any bankruptcy, rehabilitation,
        liquidation, conservation or other delinquency or insolvency
        proceedings, including, without limitation, the filing of any scheme of
        arrangement, concerning ALRe, Holdings or any of their affiliates;
        provided that, in the case of any such institution or filing that is
        involuntary, if not dismissed within 60 days.

                (iv) ALRe shall cease to be a wholly-owned subsidiary of
        Holdings.

        G. Remedies. Upon the occurrence of an Event of Default set forth in
clause F(iii) above, all outstanding amounts owed pursuant to this Article II
shall become due and payable immediately without further action or notice by XL.
Upon the occurrence of any other Event of Default, XL may declare all
outstanding amounts owed pursuant to this Article II due and payable upon
written notice to ALRe.

        H. Business Days. If any payment would otherwise be due on a day that is
not a business day it shall be paid on the next business day. A business day is
a day on which banks in New York and Bermuda are open for business.



                                      -4-


                                  ARTICLE III
                   TERMINATION AND COMMUTATION OF AGREEMENTS

        A. As of the date hereof, the Master Agreement and the TransAmerica LOI
are terminated with all past, present and future obligations or liabilities of
any of the parties thereto being extinguished; provided that Section 6.3 of the
Master Agreement is hereby amended to read as set forth on Exhibit A attached
hereto and (together with the relevant defined terms from the Master Agreement)
shall remain in full force and effect as so amended.

        B. ALRe acknowledges that (i) the Catastrophic Excess of Loss Cover LOI
has not been in effect since December 31, 2002 and (ii) the December 31
Retrocession Agreement and the Administration Agreement were validly and
effectively terminated by notice dated August 5, 2003 but the parties agree
that, for their mutual convenience, such terminations shall be deemed to have
occurred as of July 1, 2003. The parties to the Catastrophic Excess of Loss
Cover LOI, the December 31 Retrocession Agreement and the Administration
Agreement agree that all past, present and future obligations or liabilities of
any of the parties thereto are extinguished; provided that Section 5.D of the
December 31 Retrocession Agreement shall be amended by adding the words "50% of"
before the words "such Federal Excise Tax Liability" and, as so amended, shall
remain in full force and effect.

        C. The parties agree that the Old Mutual Agreements are terminated with
all past, present and future obligations or liabilities of any of the parties
thereto being extinguished but the parties agree that, for their mutual
convenience, such terminations shall be deemed to have occurred as of July 1,
2003.

        D. This Agreement supercedes all of the provisions of the other
documents referred to this Article III including without limitation the
arbitration provisions thereof.

                                   ARTICLE IV
                                 MUTUAL RELEASES

        A. In consideration of the agreements of ALRe and Holdings hereunder, XL
and XL Re release and forever discharge ALRe and Holdings, their subsidiaries,
predecessors, successors and assigns, and each of their respective officers,
directors and affiliates (the "ALRe Related Parties") from any and all
liabilities and obligations of the ALRe Related Parties arising under or related
to the Retrocession Agreements, the Administration Agreement, the Master
Agreement and the Letters of Intent, whether known or unknown, reported or
unreported and whether currently existing or arising in the future, including,
but not limited to, all claims, debts, demands, causes of action, duties, sums
of money, covenants, contracts, controversies, agreements, promises, doings,
omissions, damages, judgments, costs, expenses, and losses whatsoever (including
without limitation any claims based on fraud, bad faith or extracontractual
liabilities). XL and XL Re further acknowledge that the provisions of this
Agreement are in complete accord, satisfaction, settlement and commutation of
ALRe's liabilities and obligations under the Retrocession Agreements, the
Administration Agreement, the Master Agreement and the Letters of Intent;
provided that, for the avoidance of doubt, nothing in this Agreement shall be
construed to (i) release or relieve ALRe or Holdings from any indemnification
obligation that it owes or may owe in the future to any of its directors that
are officers, directors, or designees of, or otherwise related to, XL, (ii)
release or relieve ALRe or Holdings from any obligation that it may have, now or
in the future, to any affiliate of XL as a shareholder or warrantholder of



                                      -5-


Holdings, (iii) release any party from its obligations under this Agreement or
(iv) preclude XL from making any claims or cross-claims in connection with
existing or future shareholder lawsuits against Holdings.

        B. In consideration of the agreements of XL and XL Re hereunder, ALRe
and Holdings hereby release and forever discharge XL and XL Re, their
subsidiaries , predecessors, successors and assigns, and each of their
respective officers, directors and affiliates (the "XL Related Parties") from
any and all liabilities and obligations of the XL Related Parties arising under
or related to the Retrocession Agreements, the Administration Agreement, the
Master Agreement, and the Letters of Intent, whether known or unknown, reported
or unreported, and whether currently existing or arising in the future,
including, but not limited to, all claims, debts, demands, causes of action,
duties, sums of money, covenants, contracts, controversies, agreements,
promises, doings, omissions, damages, judgments, costs, expenses, and losses
whatsoever (including without limitation all claims based on fraud, bad faith or
extracontractual liabilities). ALRe and Holdings further acknowledge that the
provisions of this Agreement are in complete accord, satisfaction, settlement
and commutation of XL's and XL Re's liabilities and obligations under the
Retrocession Agreements, the Master Agreement and the Letters of Intent,
provided that nothing in this Agreement shall be construed to release any party
from its obligations under this Agreement.

        C. In the event that a court of Bermuda, the United States or any state
of the United States (i) avoids or does not enforce or give full effect to the
releases given by any party herein or (ii) avoids or does not give full effect
to any payment or obligation made or required to be made by any party hereunder,
then this Agreement and the releases herein by the parties shall, at the option
of XL if the party referred to in (i) or (ii) is ALRe or Holdings or at the
option of ALRe if the party referred to in (i) is XL or XL Re, be null and void.

        D. Each of the parties agrees and covenants that it will not file or
cause to be filed any lawsuit, arbitration or other proceeding asserting any
claim released by the release executed by it. In the event a party files any
such lawsuit, arbitration or other proceeding, the party so filing will
indemnify the other parties for all costs incurred in defending against such
proceeding, including attorneys' fees.

        E. The parties shall not seek to reopen, set aside or otherwise dispute
the effectiveness of this Agreement on any grounds whatsoever, including without
limitation, (i) that this Agreement is void or voidable on the grounds of
intentional fraud, misrepresentation, mistake of law, mistake of fact or any
other basis (it being understood that neither party has relied on any statement
of any other party not set forth as an express warranty herein and that there is
no fact that is or could be known to one party the disclosure of which would
have caused the other party not to enter into this Agreement), (ii) that any of
the parties in the future becomes aware of any mistake of law (including such
mistake arising as a result of a subsequent change of law, which shall include,
without limitation, a settled understanding of the law which is subsequently
departed from by judicial decision) and/or (iii) any mistake of fact in any way
whatsoever connected with this Agreement.



                                      -6-


                                   ARTICLE V
                               FURTHER ASSURANCES

        The parties hereto agree to do or cause to be done such further acts and
things and deliver or cause to be delivered to the other parties such additional
assignments, agreements, powers and instruments as such parties may reasonably
require or deem advisable to carry into effect the purposes of this Agreement or
to better assure and confirm unto the other parties hereto the rights, powers
and remedies of each hereunder.

                                   ARTICLE VI
                                    EXPENSES

        All expenses incurred in connection with this Agreement (including the
fees and disbursements of legal, actuarial, accounting and other advisors
incurred on or before the date hereof) shall be paid by the party incurring such
expenses.

                                  ARTICLE VII
                                   SUCCESSORS

        The rights, duties and obligations of this Agreement shall be binding
upon and inure to the benefit of any and all successors, assigns, parents,
shareholders, affiliates, officers, directors, employees, liquidators,
rehabilitators, receivers, or trustees of the parties hereto.

                                  ARTICLE VIII
                                ENTIRE AGREEMENT

        A. This Agreement shall constitute the entire agreement between the
parties hereto related to the subject matter hereof. All discussions and
agreements previously entertained between the parties concerning the subject
matter of this settlement and commutation are merged into this Agreement. This
Agreement may not be amended, nor any of its provisions waived, except by
written amendment or waiver executed by all of the parties.

        B. This Agreement may be executed and delivered in multiple
counterparts, each of which, when so executed and delivered, shall be an
original, but such counterparts shall together constitute but one and the same
instrument and agreement.



                                      -7-


                                   ARTICLE IX
                    GOVERNING LAW AND EXCLUSIVE JURISDICTION

        This Agreement shall be governed by and construed in accordance with the
substantive laws of the State of New York that would be applicable to agreements
made and to be performed entirely within such state without regard to the
principals of conflicts of law thereof and the parties hereto submit to the
exclusive jurisdiction of any state or federal court sitting in the borough of
Manhattan, State of New York in respect of any dispute, action, proceeding or
counterclaim hereunder. The parties hereto hereby irrevocably waive, to the
fullest extent they may effectively do so under applicable law, any objection
which they may now or hereafter have to the laying of the venue of any such
suit, action or proceeding brought in any such court and any claim that any such
suit, action or proceeding brought in any such court has been brought in an
inconvenient forum. The parties hereby agree and consent that service of process
shall be effective if served in any manner permitted by the New York Civil
Practice Law and Rules or the United States Federal Rules of Civil Procedure or
by any form of mail requiring a return receipt at the addresses set forth below:

        If to be served on XL or XL Re:

               c/o XL Capital Ltd
               XL House
               One Bermudiana Road
               Hamilton, Bermuda  HM 11

        If to be served on ALRe or Holdings:

               c/o Annuity and Life Reassurance, Ltd.
               Cumberland House
               One Victoria Street
               Hamilton, Bermuda  HM 11



                                      -8-


        IN WITNESS WHEREOF, the parties have executed this Agreement by their
respective authorized officers.


Signed in Hamilton, Bermuda,          XL LIFE LTD
this 4th day of November, 2003

                                      By:     /s/ Paul S. Giordano
                                         ---------------------------------------
                                      Name:  Paul S. Giordano
                                      Title: EVP & Secretary

Signed in Hamilton, Bermuda,          XL RE LTD
this 4th day of November, 2003

                                      By:     /s/ Paul S. Giordano
                                         ---------------------------------------
                                      Name:  Paul S. Giordano
                                      Title: EVP & Secretary

Signed in Hamilton, Bermuda,          ANNUITY AND LIFE REASSURANCE, LTD.
this 4th day of November, 2003

                                      By:       /s/ John F. Burke
                                         ---------------------------------------
                                      Name:  John F. Burke
                                      Title:  CEO & CFO

Signed in Hamilton Bermuda,           ANNUITY AND LIFE RE (HOLDINGS), LTD.
this 4th day of November, 2003

                                      By:       /s/ John F. Burke
                                         ---------------------------------------
                                      Name:  John F. Burke
                                      Title:  CEO & CFO





                                                                       EXHIBIT A

        A. 6.3 Success Fee.

        If (i) ALRe and/or Annuity and Life Re (Holdings) Ltd. complete one or
more equity and/or debt financings during the eighteen (18) months following the
Closing Date in an aggregate amount of at least $35.0 million and (ii) at any
time during such eighteen month period, the trading price of the common shares
of Annuity and Life Re (Holdings) Ltd. is at or above $2.00 per share for at
least twenty (20) out of any thirty (30) consecutive trading days, then, in
recognition of XL's and its Affiliates' participation in the Transactions and
the contribution that such participation has made to the ability of ALRe to
complete such debt and/or equity financings, to pay to XL $2.0 million in cash
(or, in the sole discretion of XL, the equivalent thereof).

EX-31

                                                                      EXHIBIT 31

                                  CERTIFICATION

I, John F. Burke, certify that:

1.      I have reviewed this quarterly report on Form 10-Q of Annuity and Life
        Re (Holdings), Ltd.;

2.      Based on my knowledge, this 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 report;

3.      Based on my knowledge, the financial statements, and other financial
        information included in this 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 report;

4.      I am responsible for establishing and maintaining disclosure controls
        and procedures (as defined in Exchange Act Rules 13a-15(e) and
        15d-15(e)) for the registrant and have:

                (a) Designed such disclosure controls and procedures, or caused
                such disclosure controls and procedures to be designed under my
                supervision, to ensure that material information relating to the
                registrant, including its consolidated subsidiaries, is made
                known to me by others within those entities, particularly during
                the period in which this report is being prepared;

                (b) Evaluated the effectiveness of the registrant's disclosure
                controls and procedures and presented in this report my
                conclusions about the effectiveness of the disclosure controls
                and procedures, as of the end of the period covered by this
                report based on such evaluation; and

                (c) Disclosed in this report any change in the registrant's
                internal control over financial reporting that occurred during
                the registrant's most recent fiscal quarter (the registrant's
                fourth fiscal quarter in the case of an annual report) that has
                materially affected, or is reasonably likely to materially
                affect, the registrant's internal control over financial
                reporting; and

5.      I have disclosed, based on my most recent evaluation of internal control
        over financial reporting, to the registrant's auditors and the audit
        committee of the registrant's board of directors (or persons performing
        the equivalent functions):

                (a) All significant deficiencies and material weaknesses in the
                design or operation of internal control over financial reporting
                which are reasonably likely to adversely affect the registrant's
                ability to record, process, summarize and report financial
                information; and

                (b) Any fraud, whether or not material, that involves management
                or other employees who have a significant role in the
                registrant's internal control over financial reporting.


Date: November 14, 2003


/s/ John F. Burke
- ---------------------------------
Name:  John F. Burke,
Title:  Chief Executive Officer
and Chief Financial Officer

EX-32

                                                                      EXHIBIT 32

                CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350,
        AS ADOPTED PURSUANT TO SECTION 906 OF SARBANES-OXLEY ACT OF 2002

        I, John F. Burke, Chief Executive Officer and Chief Financial Officer of
Annuity and Life Re (Holdings), Ltd. (the "Company"), hereby certify, pursuant
to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002, that (1) the Form 10-Q of the Company for the
quarterly period ended September 30, 2003 (the "Form 10-Q"), fully complies with
the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of
1934 (15 U.S.C. 78m or 78o(d)); and (2) the information contained in the Form
10-Q fairly presents, in all material respects, the financial condition and
results of operations of the Company.

Date: November 14, 2003


/s/ John F. Burke
- --------------------------------
Name: John F. Burke,
Title: Chief Executive Officer
and Chief Financial Officer