ANNUITY & LIFE RE HOLDINGS LTD - 10-K Annual Report

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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
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FORM 10-K
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FOR ANNUAL AND TRANSITION REPORTS PURSUANT TO SECTION 13

OR

15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

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

FOR THE FISCAL YEAR ENDED DECEMBER 31, 2001

OR

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

FOR THE TRANSITION PERIOD FROM TO

COMMISSION FILE NUMBER 0-23625

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

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

REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE (441) 296-7667

SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:

SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:

NONE
(TITLE OF CLASS)

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

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

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

As of March 7, 2002, 25,705,328 Common Shares, $1.00 par value, were
outstanding.

DOCUMENTS INCORPORATED BY REFERENCE.

Certain information required by Items 10, 11, 12 and 13 of Form 10-K is
incorporated by reference into Part III hereof from the registrant's proxy
statement for its 2002 Annual Meeting of Shareholders, which is expected to be
filed with the Securities and Exchange Commission within 120 days of the close
of the registrant's fiscal year ended December 31, 2001.
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TABLE OF CONTENTS

PART I
Item 1. Business.................................................... 1
Item 2. Properties.................................................. 7
Item 3. Legal Proceedings........................................... 8
Item 4. Submission of Matters to a Vote of Security Holders......... 8

PART II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters......................................... 9
Item 6. Selected Financial Data..................................... 10
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................... 11
Item 7A. Quantitative and Qualitative Disclosures about Market
Risk........................................................ 21
Item 8. Financial Statements and Supplementary Data................. 23
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure.................................... 47

PART III
Item 10. Directors and Executive Officers of the Registrant.......... 47
Item 11. Executive Compensation...................................... 47
Item 12. Security Ownership of Certain Beneficial Owners and
Management.................................................. 47
Item 13. Certain Relationships and Related Transactions.............. 47

PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form
8-K......................................................... 48

PART I

ITEM 1. BUSINESS.

OVERVIEW

Annuity and Life Re (Holdings), Ltd. was incorporated on December 2, 1997
under the laws of Bermuda. We provide annuity and life reinsurance to select
insurers and reinsurers through our wholly-owned subsidiaries: Annuity and Life
Reassurance, Ltd., which is licensed under the insurance laws of Bermuda as a
long term insurer; and Annuity and Life Re America, Inc., an insurance holding
company based in the United States, and its subsidiary, Annuity and Life
Reassurance America, Inc., a life insurance company authorized to conduct
business in 43 states of the United States. We acquired Annuity and Life
Reassurance America on June 1, 2000.

BUSINESS WRITTEN

General

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

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

We write reinsurance predominantly on a direct basis with primary life
insurance companies by capitalizing on relationships developed by our executive
officers with senior executives at both primary insurers and other reinsurers.
Our major business lines are traditional life reinsurance and annuity
reinsurance, which cover the following categories of risks: (i) mortality, (ii)
investment, (iii) lapsation, (iv) interest rate and (v) expense.

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

Distribution of Policy Revenues and Insurance in Force

Our life reinsurance line 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, universal life insurance policies, and joint and survivor insurance
policies.

Our annuity reinsurance line is the reinsurance of general account fixed
deferred annuities and general account payout annuity structures. In the future,
we may also reinsure variable annuities and certain structured settlement
contracts.

Underwriting

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

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

The majority of our policy revenues with respect to ordinary life and
annuity reinsurance are written on an automatic treaty quota share basis with a
focus on large blocks of business where the underlying policies meet our
underwriting criteria. To a lesser extent, we may enter into facultative
reinsurance arrangements with primary insurers when we have their automatic
treaty reinsurance business. We generally require ceding companies to retain at
least 10% of every life insurance risk reinsured and limit our own net liability
on any single-life risk to $1.0 million.

The reinsurance agreements typically remain in force for the life of the
underlying policies reinsured. However, some agreements allow the ceding company
to recapture (reassume) all or a portion of the risk formerly ceded to the
reinsurer after an agreed upon period of time (generally 10 years) subject to
certain other conditions. Recapture is a variable considered when pricing a
reinsurance agreement.

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POLICY BENEFIT LIABILITIES

Policy benefit liabilities comprise the majority of our financial
obligations. Policy benefit liabilities for products other than annuities and
interest sensitive life insurance contracts are based upon our estimates of
mortality, persistency, investment income and expenses, with allowances for
adverse deviation. The liabilities for policy benefits established by us with
respect to individual risks or classes of business may be greater or less than
those established by ceding companies due to the use of different mortality and
other assumptions. Policy benefit liabilities for annuities and interest
sensitive life insurance products are reported at the accumulated fund balance
of these contracts, which includes any minimum interest guarantees. Policy
benefit liabilities include both mortality and morbidity claims in the process
of settlement and claims that have been incurred but not yet reported. Actual
experience in a particular period may be worse than assumed experience and,
consequently, may adversely affect our operating results for the period. See
Note 2(e) of "Notes to Consolidated Financial Statements" for certain additional
information regarding reserve assumptions under accounting principles generally
accepted in the United States of America ("U.S. GAAP").

INVESTMENTS

Invested Assets

All investments are governed by investment guidelines established and
approved by our Board of Directors.

Our investment objectives are to achieve above average risk-adjusted total
returns, maintain a high quality portfolio, maximize current income, maintain an
adequate level of liquidity, and match the cash flows to their related insurance
liabilities. Our investment guidelines require our overall fixed income
portfolio to maintain a minimum weighted average credit quality of "A." A fixed
income security rated "A" by Standard & Poor's is considered to be somewhat
susceptible to the adverse effects of changes in circumstances and economic
conditions, however, the issuer's capacity to meet its financial commitment on
the security is still considered to be strong. We will not invest in any fixed
income securities in emerging markets or which are not rated by a major rating
agency. Our investment guidelines allow us to invest in fixed income securities
that are rated below investment grade. These investments are limited to 10% of
invested assets. At December 31, 2001 below investment grade securities were
approximately 1.2% of total invested assets.

Our investment securities are managed by two professional investment
advisors, Alliance Capital Management Corporation ("ACM") and Prudential
Investment Corporation ("PRU"), each of which manages a segment of the
portfolio. Our agreements with ACM and PRU may be terminated by either party
with 45 days notice. The performance of ACM and PRU and the fees associated with
the arrangements are periodically reviewed by our Board of Directors.

At December 31, 2001, our invested assets, including cash and cash
equivalents, had an aggregate fair value of $423,780,000. The portfolio is
comprised of fixed maturities with a weighted average credit quality rating of
"AA+" with a weighted average duration of 3.6 years. If market interest rates
move up rapidly and we were required to sell these fixed income securities we
could sustain losses on the portfolio. Conversely, if significant rapid
decreases in market interest rates were to occur, we could earn less income than
is credited on our contracts. These consequences could have a material adverse
effect on our capital resources and financial condition.

Funds Withheld at Interest

Assets related to annuity reinsurance agreements are held and managed by
the cedent or investment managers appointed by the cedent. Net investment income
recognized by us is dependent upon the performance of the underlying portfolios.
These assets are included on our Balance Sheet as Funds Withheld at Interest. At
December 31, 2001, the carrying value was approximately $1.5 billion.

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COMPETITION

The reinsurance industry is highly competitive. Our target market is North
America. We compete with approximately 25 reinsurers of annuity or life
insurance products located in the United States. There are also numerous foreign
reinsurers who compete for reinsurance business in the United States and abroad.
These competitors primarily reinsure life insurance and health insurance risks
and, to a lesser degree, annuity risks. Most, if not all, of these competitors
are expected to compete for annuity and life reinsurance business in the future
and, are well established, have significant operating histories, strong claims
paying ability ratings, and long-standing client relationships.

Reinsurers compete on the basis of many factors, including premium charges,
reputation, financial strength, terms and conditions, financial ratings, claims
adjudication philosophy, and general industry experience. We believe that our
primary competitors include Transamerica Occidental Life Insurance Company,
Reinsurance Group of America, Inc., ING Reinsurance, Employers Reassurance
Corporation and Swiss Reinsurance. However, within the reinsurance industry, our
competitors can change from year to year.

FINANCIAL RATINGS

A.M. Best has assigned an "A" rating to Annuity and Life Re (Holdings),
Annuity and Life Reassurance and Annuity and Life Reassurance America. A.M. Best
has announced that our rating is under review with negative implications. Our
subsidiaries, Annuity and Life Reassurance and Annuity and Life Reassurance
America have received an "A" rating from Standard & Poor's, which has placed
both companies on CreditWatch with negative implications. Annuity and Life
Reassurance has been rated "A" by Fitch Ratings, which also has a negative
ratings outlook. A downgrade in any of our ratings would adversely affect our
ability to sell products and retain existing business. In particular, it is a
condition in some of our reinsurance treaties that we maintain certain minimum
credit ratings of "A-".

EMPLOYEES

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

REGULATION

Bermuda

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

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

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

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

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

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

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

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

Annual Statutory Financial Return. Annuity and Life Reassurance is
required to file with the Registrar of Companies in Bermuda a Statutory
Financial Return no later than four months after its financial year-end (unless
specifically extended). The Statutory Financial Return includes, among other
matters, a report of the approved independent auditor on the Statutory Financial
Statements of the insurer, a solvency certificate, Statutory Financial
Statements, and a certificate of the approved actuary. The solvency certificate
must be signed by our principal representative, two directors of the insurer,
and our independent auditor. Where an insurer's accounts have been audited for
any purpose other than compliance with the Insurance Act, a statement to that
effect must be filed with the Statutory Financial Return.

Supervision, Investigation and Intervention. The Authority may appoint an
inspector with extensive powers to investigate the affairs of an insurer. In
order to verify or supplement information otherwise provided to the Authority,
the Authority may direct an insurer to produce documents or information relating
to matters connected with the insurer's business.

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

Under the Insurance Act, an insurer is required to maintain a principal
office in Bermuda and to appoint and maintain a principal representative in
Bermuda. For the purpose of the Insurance Act, the principal office of Annuity &
Life Reassurance is at our offices in Hamilton, Bermuda, and Lawrence S. Doyle,
our President and Chief Executive Officer, is the principal representative of
Annuity & Life Reassurance. Without a reason acceptable to the Authority, an
insurer may not terminate the appointment of its principal representative, and
the principal representative may not cease to act as such, unless 30 days notice
in writing to the Authority is given of the intention to do so. It is the duty
of the principal representative, within 30 days of reaching the view

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that there is a likelihood of the insurer, for which the principal
representative acts, of becoming insolvent or that a reportable "event" has, to
the principal representative's knowledge, occurred or is believed to have
occurred, to make a report in writing to the Authority setting out all the
particulars of the case that are available to the principal representative.
Examples of such a reportable "event" include failure by the insurer to comply
substantially with a condition imposed upon the insurer by the Authority
relating to a solvency margin or liquidity or other ratio.

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

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

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

United States

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

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

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Annuity and Life Re America, Inc. (our U.S. Holding Company) is domiciled
in Delaware and regulated as a Delaware corporation. The Delaware insurance
holding company system laws and regulations generally do not apply to Annuity
and Life Re America, Inc. because it is not an insurer and because Annuity and
Life Reassurance America is not required to register with the Delaware Insurance
Commissioner under applicable provisions of such laws and regulations. The books
and records of Annuity and Life Re America, Inc. may be subject to inspection by
the Connecticut insurance regulators because Annuity and Life Re America, Inc.
is an affiliate of Annuity and Life Reassurance America, which is subject to
Connecticut's holding company laws.

The Connecticut insurance laws (applicable to Annuity and Life Reassurance
America) require that transactions between or among Annuity and Life Reassurance
America and any of its affiliates, including the payment of ordinary dividends
to shareholders, shall be subject to the following requirements: (1) the terms
shall be fair and reasonable; (2) charges or fees for services performed shall
be reasonable; (3) expenses incurred and payment received shall be allocated to
Annuity and Life Reassurance America in conformity with customary insurance
accounting practices consistently applied; (4) the books, accounts and records
of each party shall be so maintained as to clearly and accurately disclose the
precise nature and details of the transactions; and (5) Annuity and Life
Reassurance America's surplus shall be reasonable in relation to its outstanding
liabilities and adequate to its financial needs. In addition, notice to the
Connecticut Insurance Commissioner, and sometimes the Commissioner's approval,
is required prior to Annuity and Life Reassurance America entering into certain
transactions with its affiliates.

Current Connecticut law permits the payment of ordinary shareholder
dividends or distributions, the fair market value of which, together with that
of other dividends or distributions made during the preceding twelve months,
does not exceed the greater of (i) 10% of Annuity and Life Reassurance America's
statutory surplus as regards policyholders as of the immediately preceding
December 31, or (ii) statutory net gain from operations for the immediately
preceding calendar year, excluding pro rata distributions of any class of
Annuity and Life Reassurance America's own securities. Any proposed dividend in
excess of this amount is considered an "extraordinary dividend" and may not be
paid until it has been approved, or a 30-day waiting period has passed during
which it has not been disapproved by the Connecticut Insurance Commissioner. In
addition, except as otherwise provided by law, no dividend or other distribution
exceeding an amount equal to Annuity and Life Reassurance America's "earned
surplus" may be paid without the prior approval of the Connecticut Insurance
Commissioner.

If the Connecticut Insurance Commissioner determines that Annuity and Life
Reassurance America paid or is about to pay a dividend, or committed or is about
to commit another act, in violation of the Connecticut insurance laws referenced
above, the Commissioner may, among other things, apply for an order enjoining
Annuity and Life Reassurance America from violating or continuing such violation
of the insurance laws.

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

ITEM 2. PROPERTIES.

We conduct our operations from leased office space located at Cumberland
House, 1 Victoria Street, Hamilton, HM 11, Bermuda. Annuity and Life Re America
conducts its operations from leased space located at 280 Trumbull Street,
Hartford, Connecticut, USA. We believe our space is adequate to meet our current
and expected needs.

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ITEM 3. LEGAL PROCEEDINGS.

On January 21, 2002, we served written notice of arbitration in connection
with our largest annuity contract. We are seeking monetary damages and/or
equitable relief from our ceding insurer, Transamerica Occidental Life Insurance
Company. The claim is based upon certain actions and/or omissions by the cedent
that we assert have deprived us of the benefit of this reinsurance transaction.
The parties are in the process of selecting an arbitration panel.

On February 28, 2002 we served written notice of our intent to invoke the
arbitration provisions of our reinsurance agreement in connection with our
largest life reinsurance contract. The claim is based upon our contention that
the cedent failed to disclose material facts, known to the cedent, about the
block of business being reinsured when it was underwritten.

On March 05, 2002 we served written notice to another life insurer to
terminate a reinsurance agreement underwritten in 1998. The claim is based upon
our contention that the cedent is unable to provide support for their
underwriting assumptions used to secure the reinsurance and has ceded business
that is excluded from the agreement. Further, the cedent is unable to segregate
from their records business that is properly covered under the agreement.

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

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

During the fourth quarter of 2001, no matters were submitted to our
security holders for a vote.

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PART II

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

MARKET INFORMATION

Our common shares began trading on the New York Stock Exchange on August 1,
2001 (ticker symbol ANR). Prior to August 1, 2001, our shares were traded on the
NASDAQ National Market under the symbol "ALRE". Based upon publicly available
information on trading in our shares on both the NYSE and NASDAQ the high, low,
and closing prices of our common shares for each calendar quarter for the years
2001 and 2000 were as follows:

As of March 7, 2002, there were approximately 2,700 holders of the
outstanding common shares, including participants in securities position
listings. At March 7, 2002 the closing price of our stock was $17.26 per common
share.

DIVIDENDS

Quarterly dividends of $0.05 and $0.04 per common share were declared in
2001 and 2000, respectively. On February 13, 2002, our Board of Directors
declared a dividend of $0.05 per share payable on March 21, 2002 to stockholders
of record on March 7, 2002.

The declaration and payment of future dividends to holders of our common
shares will be at the discretion of our Board of Directors and will depend upon
our earnings and financial condition, capital requirements of our subsidiaries,
regulatory considerations and other factors the Board of Directors deems
relevant. (See "Liquidity and Capital Resources" in Management's Discussion and
Analysis of Financial Condition and Results of Operations and Note 15 of "Notes
to Consolidated Financial Statements" included elsewhere in this report.). Our
general policy is to retain most of our earnings to finance the growth and
development of our business. Currently, there is no Bermuda withholding tax on
dividends paid by us to shareholders.

9

ITEM 6. SELECTED FINANCIAL DATA.

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

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

10

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

The following analysis of our consolidated financial condition and results
of operations should be read in conjunction with "Selected Financial Data" and
the consolidated financial statements and accompanying notes included elsewhere
in this report. The preparation of financial statements in conformity with
generally accepted accounting principles requires the use of estimates and
assumptions developed by our management. Any adjustments to reported bases of
assets or liabilities resulting from changes in estimates are reflected in
earnings in the period the estimates are revised. Certain management estimates
are based, in part, on information provided by ceding companies. Our ceding
companies periodically update, refine and revise the reinsurance information
they provide to us. This revised data is reflected in earnings as changes in
estimates.

FORWARD LOOKING STATEMENTS

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

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

- A decline in our financial ratings would adversely affect our business.
Insurers and reinsurance intermediaries use insurance ratings as an
important means of assessing the financial strength and quality of
reinsurers. A.M. Best has assigned an "A" rating to Annuity and Life Re
(Holdings), Annuity and Life Reassurance and Annuity and Life Reassurance
America. A.M. Best has announced that our rating is under review with
negative implications. Our subsidiaries, Annuity and Life Reassurance and
Annuity and Life Reassurance America have received an "A" rating from
Standard & Poor's, which has placed both companies on CreditWatch with
negative implications. Annuity and Life Reassurance has been rated "A" by
Fitch Ratings, which also has a negative ratings outlook. A downgrade in
any of our ratings would adversely affect our ability to sell products
and retain existing business. In particular, it is a condition in some of
our reinsurance treaties that we maintain certain minimum credit ratings
of "A-."

- We face significant competition from major U.S. and non-U.S. reinsurers,
many of which are well established and have substantially greater
financial, marketing and management resources than we do. Competition in
the reinsurance business is based on many factors, including premium
charges, reputation, financial strength, terms and conditions of products
offered, financial ratings, claims adjudication philosophy and general
industry experience. If we are unable to maintain or increase our
position in the market our business could be adversely affected.
Furthermore, because we rely on a small number of clients, our business
is more susceptible to the adverse effects of competition from other
reinsurers.

- Management of our underwriting risk is critical to the success of our
business. In particular, we structure our investments to match our
anticipated liabilities under reinsurance policies. If our calculations
with respect to our reinsurance liabilities are incorrect, or if we
improperly structure our investments to match such liabilities, we could
have unexpected losses, including losses resulting from forced
liquidation of investments prior to their maturity.

- Our success is dependent on our ability to manage our investment risks.
The success of our investment strategy may be affected by general
economic conditions, which can adversely affect the markets for

11

interest-rate-sensitive securities and equity securities, including the
level and volatility of interest rates and the extent and timing of
investor participation in these markets. Unexpected volatility or
illiquidity in the markets in which we directly or indirectly hold
positions could adversely affect our business. Our investment guidelines
permit us to make some investments in below investment grade fixed income
securities. While any investment carries some risk, the risks associated
with lower-rated securities generally are greater than the risks
associated with investment grade securities. We may also seek to hedge
the equity related investment risk associated with our products. If we
fail to match the equity related asset risk accurately with the equity
related liabilities we could be exposed to the volatility of the equity
markets. This could result in losses, which, in turn could adversely
affect our business.

- All of our funds withheld assets related to our annuity reinsurance
agreements are held and managed by our cedents or by investment managers
appointed by our cedents. The performance of these assets, therefore,
depends to a great extent on the ability of our cedents, or our cedents'
investment managers, to make appropriate investments. If these assets do
not accumulate at rates sufficient to meet minimum guarantees on the
underlying policies before the policyholder surrenders the policy, we
could be forced to fund these minimum guarantees. This could result in
significant losses which, in turn could adversely affect our business.

- Some of the products offered by our cedents allow policyholders to
withdraw their funds under certain circumstances. We seek to manage our
investment portfolios so as to provide and maintain sufficient liquidity
to support anticipated withdrawal demands. Unanticipated withdrawal or
surrender activity may, under some circumstances, require us to dispose
of assets on unfavorable terms, which could have an adverse affect on our
business.

- Terrorist attacks may negatively affect our operations. There can be no
assurance that there will not be further terrorist attacks against the
United States or United States businesses. As a result of terrorism, the
United States has entered into an armed conflict which could have a
further impact on our business. Political and economic instability in
some regions of the world may also result and could negatively impact our
business. The consequences of further terrorist attacks and these armed
conflicts are unpredictable, and we may not be able to foresee events
that could have an adverse affect on our business.

- Our success is dependent upon our ability to attract and retain key
executive officers. The loss of the services of key individuals, our
inability to hire and retain other talented personnel, or our inability
to secure appropriate work permits could adversely affect our business.

- We are subject to the laws and regulations of the jurisdictions in which
we conduct business. These laws and regulations cover many aspects of our
business, including licensure, premium rates, marketing practices and
capital adequacy. Recently, the insurance and reinsurance regulatory
framework has become subject to increased scrutiny in many jurisdictions
and regulators have started to reexamine existing laws and regulations.
Changes in these laws and regulations could have an adverse affect on our
operations.

- The market for annuities and many life insurance products in the United
States is based in part on the favorable tax treatment such products
receive relative to certain other investment alternatives. Any material
change in such tax treatment would have an adverse affect on the market
for such products. In addition, many life insurance products are used to
reduce federal estate tax obligations. The United States Congress has
recently adopted legislation that eliminates federal estate tax over a
ten-year period. Under this legislation, the demand for life insurance
products could be reduced, which in turn could adversely affect our
business.

- A prolonged general economic downturn or a prolonged downturn in the
equity and other capital markets could adversely affect the market for
many annuity and life insurance products. If the market for annuities or
life insurance were adversely affected, it would likely depress the
demand for reinsurance of annuities or life insurance, which would have
an adverse affect on our business.

12

- As a holding company, we have no significant operations or assets other
than our ownership of the capital stock of our subsidiaries. Dividends
and other permitted payments from our subsidiaries are our sole source of
funds to pay expenses and dividends. The payment of dividends to us by
our subsidiaries is subject to and limited by regulatory restrictions.
Accordingly, there is no assurance that we will declare and pay dividends
in the future.

- Annuity and Life Re (Holdings) and Annuity and Life Reassurance are
Bermuda corporations and do not file United States tax returns because we
do not engage in business in the United States. However, because there is
no definitive guidance as to what constitutes being engaged in trade or
business in the United States, there can be no assurance that in the
future the Internal Revenue Service may not contend that we are engaged
in trade or business in the United States. If we were considered to be
engaged in business in the United States, we could be subject to United
States tax at regular corporate rates on our taxable income that is
effectively connected with our United States business plus an additional
30% "branch profits" tax on such income remaining after the regular tax.
Such taxes would have an adverse affect on our business.

GENERAL

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

Profitability of the life reinsurance line depends in large part on the
volume and amount of death claims incurred. While death claims are reasonably
predictable over a long time horizon, they are less predictable over shorter
periods and are subject to fluctuation from quarter to quarter and year to year.
Significant fluctuations from period to period could adversely affect the
results of operations.

At December 31, 2001 and 2000, our life insurance in force amounted to
approximately $117 billion and $77 billion, respectively. We retrocede portions
of certain risks in excess of our maximum per life retention of $1 million. At
December 31, 2001 and 2000, we had ceded approximately $493 million and $193
million of life insurance coverage, respectively, or 0.42% and 0.25% of our life
insurance in force, respectively.

Our primary annuity products are reinsurance of fixed deferred annuities
and payout annuities structures. Profitability of the annuity reinsurance line
is primarily dependent on earning a spread between the interest rate earned on
the assets under management and the interest rate credited to the policyholder.
This product line is market and interest rate sensitive. Fluctuations in the
general level of interest rates, fixed income markets, and equity markets from
period to period may cause fluctuations in the results of operations. This
product line can be adversely impacted by the combined effects of poor market
performance and excessive surrender rates, which occurred in 2001. At December
31, 2001 and 2000, our liability for annuity contracts amounted to approximately
$1.5 billion.

CRITICAL ACCOUNTING POLICIES

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

In preparing our financial statements we use estimates and assumptions
based upon the best information available, and management's best judgment, at
the time our financial statements are prepared. The most significant estimates
relate to policyholder benefit reserves for both life and annuity business and
deferred acquisition costs. These valuation accounts are estimates requiring us
to make assumptions about future mortality, lapses, expenses, and investment
results. While these estimates are based upon historical results and information
provided to us by our cedents, actual results could differ materially from our
estimates.

We report our fixed maturity investments at fair value (our securities are
classified as available for sale) with any change in their fair value reported
as a change in accumulated comprehensive income. If we
13

determine that the value of an investment has declined (other than temporarily)
we write the investment down to its fair value with a charge to realized losses.
Realized gains and losses are determined using the specific identification
method.

Reinsurance premium revenues from life products with mortality risk are
recognized when due from the policyholders. For those policies with premium
paying periods that are significantly shorter than the total period over which
benefits are expected to be provided, profits are deferred and recognized as
income in a constant relationship to the insurance in force or, for annuities,
in relation to the amount of expected future benefit payments. Premiums from
universal life and investment-type contracts are reported in the balance sheet
as interest sensitive contracts liability. Revenues from these investment type
contracts consist of income earned on the assets and amounts assessed during the
period against policyholders' account balances for mortality charges, policy
administration charges and surrender charges. Deposit accounting procedures are
applied to considerations received or paid relating to reinsurance contracts
that do not qualify for reinsurance accounting. Policy benefits and claims that
are charged to expense include benefit claims incurred in the period in excess
of related policyholders' account balances.

These estimates and assumptions can have a significant effect on the
amounts we report in our financial statements. See Note 2 of the "Notes to
Consolidated Financial Statements" for additional information regarding our
accounting policies.

OPERATING RESULTS

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

Net Loss. For the year ended December 31, 2001, we had a consolidated net
loss of $(38,710,000), $(1.51) per primary and fully diluted common share,
compared to net income of $39,987,000, $1.57 per primary common share and $1.46
per fully diluted common share, for the year ended December 31, 2000. As more
fully discussed below, our results for 2001 were adversely affected by poor
performance on a major annuity reinsurance contract, adverse mortality
experience on two major life reinsurance contracts, and the September 11th
tragedy.

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

Our net operating loss for the year ended December 31, 2001 was
$(39,940,000), compared with net operating income of $44,804,000 for the year
ended December 31, 2000. The net operating loss was the result of a $33,000,000
charge related to minimum interest guarantees, a $24,700,000 charge for
non-recoverable deferred acquisition costs, a $16,000,000 loss from adverse
mortality experience on two of our inforce life reinsurance contracts
underwritten in 1998, and a $12,000,000 charge for the September 11 tragedy. The
first two charges both relate to our largest annuity reinsurance contract, and
result from the combined impact of excessive surrenders and poor investment
performance. As discussed elsewhere in this report we are seeking relief from
our ceding reinsurers with respect to the two life reinsurance contracts
mentioned above. If we are unable to rescind, recapture, reprice, or otherwise
restructure these agreements, we may incur additional losses on these contracts
in future periods.

Net Premiums. Net premium revenue for the year ended December 31, 2001 was
$251,793,000, an increase of 50% over the year ended December 31, 2000. The
majority of premium revenue was derived from traditional ordinary life
reinsurance developed directly and through the use of intermediaries. The growth
reflects the level of new business written and the increase in the face amount
of insurance in force. At December 31, 2001 the total face amount of life
insurance in force was approximately $117 billion compared with approximately
$77 billion at December 31, 2000, an increase of 52%. New business writings and
premium

14

revenue levels are significantly influenced by large transactions and therefore
can fluctuate from period to period.

Net Investment Income. Total net investment income for the year ended
December 31, 2001 was $91,129,000, a decrease of 33% from the year ended
December 31, 2000. The decline was primarily due to the reduction in net
investment income from our largest annuity reinsurance contract. As a result,
income earned in 2001 on Funds Withheld declined to $70,963,000 from
approximately $116,522,000 for the year ended December 31, 2000, reflecting a
general decline in interest rates and poor investment performance on the assets
managed by the cedent. The average yield rate earned on an annualized basis on
the invested assets, excluding Funds Withheld, was approximately 5.74% for the
year ended December 31, 2001 compared with 6.85% for the year ending December
31, 2000, reflecting an overall decline in interest rates.

Realized Investment Gains (Losses). Realized investment gains were
approximately $1,230,000 for the year ended December 31, 2001 compared with
realized losses of $(4,817,000) for the year ended December 31, 2000. These
gains and losses result from normal active management of our investment
portfolio intended to improve performance and increase operating income. We do
not consider realized gains and losses to be recurring components of earnings.
We make decisions concerning the sale of invested assets based on a variety of
market, business and other factors.

At December 31, 2001 we had unrealized gains of approximately $6,418,000,
as compared with unrealized gains of $2,064,000 at December 31, 2000. The change
in unrealized gains and losses is principally related to movements in the
general level of interest rates.

Claims and Policy Benefits. Claims and Policy Benefits includes both life
and annuity benefits. Life Insurance Claims and Policy Benefits for the year
ended December 31, 2001 were $200,866,000 or 85% of net premium as compared with
$115,953,000 or 77% of net premium for the year ended December 31, 2000.
Aggregate mortality experience has been negatively impacted by $16,000,000 of
adverse mortality experience on two of the Company's inforce life reinsurance
contracts underwritten in 1998 and a $12,000,000 charge for the World Trade
Center tragedy. As discussed elsewhere in this report we are seeking relief from
our ceding reinsurers with respect to these two life reinsurance contracts. If
we are unable to rescind, recapture, reprice, or otherwise restructure these
agreements, we may incur additional losses on these contracts in future periods.
The mortality experience of our book, excluding the two early life reinsurance
contracts, is within pricing parameters. Although we expect mortality to be
fairly constant over long periods of time, it will fluctuate from period to
period. Reserves for future policy benefits are in part determined by claims
reported from ceding companies, our aggregate experience and overall mortality
trends.

Interest Credited to Interest Sensitive Contract Liabilities. Interest
credited to interest sensitive contract liabilities was approximately
$68,758,000 for the year ended December 31, 2001, as compared with approximately
$63,042,000 for the year ended December 31, 2000. The 2001 expense includes a
$33,000,000 charge for minimum interest guarantees resulting from poor
investment performance and excessive surrender rates on our largest annuity
reinsurance contract. After adjusting for this charge interest credited for the
year 2001 is $35,758,000, a reduction of $27,284,000 from last year reflecting
the general decline in interest rates credited to policyholders.

Policy Acquisition Costs and Other Insurance Expenses. Policy acquisition
costs and other insurance expenses, consisting primarily of allowances and
amortization of deferred policy acquisition costs, were approximately
$105,045,000 for the year ended December 31, 2001. This expense includes a
$24,700,000 charge to write down deferred acquisition costs to a level that can
be supported from our revised view of future surrender rates on our largest
annuity reinsurance contract due to its poor persistency. While management has
made what it believes to be adequate provision for future costs based upon
reasonable assumptions about future investment performance and surrenders, the
provision is an estimate. Actual amounts paid may be significantly higher or
lower than the current reserve. After adjusting for the third quarter charge
policy acquisition costs and other insurance costs were $80,345,000, as compared
with $60,900,000 for the year ended December 31, 2000. Generally, policy
acquisition costs and other insurance expenses fluctuate with business volume
and changes in product mix. The increase in these costs, as adjusted, reflects
the growth and development of our life reinsurance business.
15

Other Operating Expenses. Operating expenses were approximately
$11,552,000 or 3.2% of total revenue for the year ended December 31, 2001, as
compared with $10,411,000 or 3.4% of total revenue for the year ended December
31, 2000. The decrease in the ratio of operating expenses to total revenue is
due to our premium growth. We consider the operating expense level to be low by
industry standards and in line with our plan to be a low cost provider.

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

Net Income. For the year ended December 31, 2000, we had consolidated net
income of $39,987,000, which is $1.57 per common share, or $1.46 per common
share on a fully diluted basis, compared with $1.40 per common share, $1.31 per
common share on a fully diluted basis for the year ended December 31, 1999.

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

For the year ended December 31, 2000 net operating income increased 21%
over the prior year. Net operating income for the year ending December 31, 2000
was $44,804,000, compared with $36,988,000 for the year ended December 31, 1999.
The increase in net operating income was due to the growth and development of
our reinsurance operations and favorable underwriting and investment results.

Net Premiums. Net premium revenue for the year ended December 31, 2000 was
$168,404,000, an increase of 67% over the year ended December 31, 1999. The
majority of premium revenue was derived from traditional ordinary life
reinsurance developed directly and through the use of intermediaries. The growth
reflects the level of new business written and the increase in the face amount
of insurance in force. At December 31, 2000 the total face amount of life
insurance in force was approximately $77.0 billion compared with approximately
$45.4 billion at December 31, 1999, an increase of 70%. New business writings
and premium revenue levels are significantly influenced by the seasonal nature
of the life reinsurance marketplace and by large transactions and therefore can
fluctuate from period to period.

Net Investment Income. Total net investment income for the year ended
December 31, 2000 was $136,648,000, an increase of 61% over the year ended
December 31,1999. The growth in the investment income was primarily due to the
income earned on Funds Withheld under modified coinsurance agreements related to
our Interest Sensitive Contracts Liabilities. The income earned on the Funds
Withheld was approximately $116,522,000 for the year ended December 31, 2000
compared with $64,606,000 for the year ended December 31, 1999. The average
yield rate earned on an annualized basis on the invested assets, excluding Funds
Withheld, was approximately 6.85% for the year ended December 31, 2000 compared
with 6.29% for the year ending December 31, 1999.

Realized Investment Gains (Losses). Realized investment losses were
approximately $(4,817,000) for the year ended December 31, 2000 compared with
realized losses of $(1,285,000) for the year ended December 31, 1999. These
gains and losses result from normal active management of our investment
portfolio intended to improve performance and increase operating income.

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

During the year ended December 31, 2000 we had unrealized gains of
approximately $13,334,000, as compared with unrealized losses of $14,992,000
during the year ended December 31, 1999 which were included in Accumulated Other
Comprehensive Income. The change in unrealized gains and losses is principally
related to movements in the general level of interest rates.

Claims and Policy Benefits. Life Insurance Claims and Policy Benefits for
the year ended December 31, 2000 were $115,953,000 or 77% of net premium as
compared with $79,953,000 or 79% of net premium for the

16

year ended December 31, 1999. Aggregate mortality experience has been favorable,
falling within pricing parameters. Although we expect mortality to be fairly
constant over long periods of time, it will fluctuate from period to period.
Reserves for future policy benefits are in part determined by claims reported
from ceding companies, our aggregate experience and overall mortality trends.

Interest Credited to Interest Sensitive Contract Liabilities. Interest
credited to interest sensitive contract liabilities was approximately
$63,042,000 for the year ended December 31, 2000, as compared with approximately
$22,312,000 for the year ended December 31, 1999. This increase reflects the
level of our Interest Sensitive Contracts Liabilities and is directly related to
income earned on the related Funds Withheld at Interest. The income earned on
Funds Withheld was approximately $116,522,000 for the year ended December 31,
2000, as compared with $64,606,000 for the year ended December 31, 1999.

Policy Acquisition Costs and Other Insurance Expenses. Policy Acquisition
Costs and Other Insurance Expenses, consisting primarily of allowances and
amortization of deferred policy acquisition costs, were approximately
$60,900,000 for the year ended December 31, 2000, as compared with $42,201,000
for the year ended December 31, 1999. Generally, policy acquisition costs and
other insurance expenses fluctuate with business volume and changes in product
mix. The increase in these costs reflects the growth and development of our
reinsurance business.

Other Operating Expenses. Operating expenses were approximately
$10,411,000 or 3.4% of total revenue for the year ended December 31, 2000, as
compared with $7,686,000 or 4.1% of total revenue for the year ended December
31, 1999. The decrease in the ratio of operating expenses to total revenue is
due to the growth and development of our reinsurance operations and our revenue
base. We consider the operating expense level to be low by industry standards
and in line with our plan to be a low cost provider.

FINANCIAL CONDITION

Investments

Cash & Fixed Maturity Investments

Invested assets, including cash and cash equivalents, amounted to
approximately $423,780,000 at December 31, 2001 as compared with approximately
$321,819,000 at December 31, 2000. The change in invested assets during 2001 was
due primarily to the receipt of $137 million from a third party reinsurer that
is used to fund cedents collateral requirements plus unrealized gains during the
period, offset by funds used by the Company's operating activities and dividends
paid to shareholders. At December 31, 2001 unrealized gains total approximately
$6,418,000 as compared to approximately $2,065,000 at December 31, 2000. The
change in unrealized gains is principally related to movement in the general
level of interest rates during 2001.

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

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

At December 31, 2001, fixed maturity investments were 99% investment grade,
as compared with 97% at December 31, 2000. The fair value of such investments
may vary depending on economic and market conditions, the level of interest
rates and the perceived creditworthiness of the issuer. At December 31, 2001 and
2000, the weighted average duration of invested assets was 3.2 years, and the
weighted average investment quality rating was "AA+" and "AA", respectively.

At December 31, 2001, $3,749,000 at fair value, or 1.2% of the invested
assets (0.9% of Stockholders Equity), consisted of below investment grade
securities, as compared with approximately $8,983,000 or 3.4%

17

of invested assets (2.0% of Stockholders Equity) at December 31, 2000. We limit
our exposure to below investment grade securities to 10% of the amount by which
invested assets exceed the related insurance liabilities, as these investments
are subject to a higher degree of credit risk than investment grade securities.
We monitor these securities as well as the creditworthiness of the portfolio as
a whole. When fair market values decline for reasons other than changes in
interest rates or other perceived temporary conditions, the security is written
down to its net realizable value. At December 31, 2001 there were two impaired
securities, which were written down by $600,000. At December 31, 2000 there was
one impaired security, which was written down by $1,000,000.

Our results of operations and our financial condition are significantly
affected by the performance of our investments and by changes in interest rates.
During a period of declining interest rates, if our investments are prematurely
sold, called, prepaid or redeemed, we may be unable to reinvest the proceeds in
securities of equivalent risk with comparable rates of return. During a period
of rising interest rates, the fair value of our invested assets could decline.
In addition, rising interest rates could also cause disintermediation, which in
turn could cause us to sell investments at prices and times when the fair values
of such investments are less than their amortized cost. We believe that our
traditional life insurance liabilities are not highly interest rate sensitive
and, therefore, the effects of fluctuating interest rates on these liability
cash flows are not significant. For interest sensitive liabilities, we are
primarily dependent upon the ceding company to utilize asset/liability matching
or other strategies to minimize the impact of changes in interest rates. If the
ceding company does not appropriately match its asset management strategy to its
obligation to its policyholders we could sustain losses, as happened with our
largest annuity reinsurance contract. We have not engaged in hedging activities
to mitigate the effects of asset/liability mismatches of our cedents, or
interest rate changes on our invested assets and related liabilities, although
we may do so in the future.

The following table summarizes our investment results, excluding interest
earned on funds withheld under modified coinsurance agreements, for the periods
ended December 31, 2001, 2000, and 1999.

INVESTMENT RESULTS

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

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

Our invested assets consist primarily of fixed maturity securities. These
fixed maturity securities are invested primarily in U.S. government and U.S.
corporate obligations.

At December 31, 2001, mortgage backed securities represented approximately
11% of invested assets, as compared with 30% at December 31, 2000. Investors in
these securities are compensated primarily for reinvestment risk rather than
credit quality risk. Investments in mortgage backed securities include
collateralized mortgage obligations ("CMO's") and mortgage backed pass-through
securities. Mortgage backed securities generally are collateralized by mortgages
issued by the Government National Mortgage Association ("GNMA"), the Federal
National Mortgage Association ("FNMA") and the Federal Home Loan Mortgage
Corporation ("FHLMC"), all of which are agencies of the U.S. government. Of
these, only GNMA mortgages are backed by the full faith and credit of the U.S.
government. Credit risk generally is not a

18

consideration when investing in agency mortgage backed securities. Our mortgage
backed securities portfolio had a weighted average investment quality rating of
"AAA" at both December 31, 2001 and 2000.

At December 31, 2001, approximately 2% of our mortgage backed investment
portfolio consisted of planned amortization class ("PAC"), target amortization
class ("TAC") and sequential instruments, as compared with 25% at December 31,
2000. These investments are designed to amortize in a more predictable manner by
shifting the primary risk of prepayment of the underlying collateral to
investors in other tranches ("support classes") of the CMO.

Funds Withheld at Interest -- Interest Sensitive Liabilities Contracts. At
December 31, 2001 and 2000 assets with a carrying value of $1,488,326,000 and
$1,530,110,000, respectively, related to annuity reinsurance agreements were
held by and managed by the ceding companies in segmented portfolios. These
amounts are included in our Balance Sheet as Funds withheld at interest. Under
the terms of the reinsurance agreements, the investment income, which accrues to
us, is based on the performance of the underlying portfolios. Assets in the
underlying portfolios are managed by investment managers appointed by the
cedent. As a result we cannot directly influence the investment strategy or
performance of the portfolio. The liability for the annuity reinsurance is
included on our Balance Sheet as Interest Sensitive Contracts Liabilities, and
includes a provision for minimum interest guarantees expected to be paid in the
future. While management has made what it believes to be adequate provision for
future costs based upon reasonable assumptions about future investment
performance and surrenders, the provision is an estimate. Actual amounts paid
may be significantly higher or lower than the current provision.

LIQUIDITY AND CAPITAL RESOURCES

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

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

This reinsurance agreement does not qualify for reinsurance accounting
under U.S. GAAP. As a result, funds received under this contract are recorded as
a deposit liability. As part of this contract we deposited $41 million with the
reinsurer, which is included in Deposits and other reinsurance receivables. We
receive the benefit of investment income from the funds received and pay the
third party reinsurer certain fees associated with the contract. For the year
2001, the fees were $1.2 million and are included in other insurance expenses.

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

At December 31, 2001 our total capitalization, which consists entirely of
equity, was $404,946,000. We believe this level of capital is sufficient to
support our insurance writings and growth for the near future. However, as a
Bermuda reinsurer we are required to post collateral for the statutory reserves
ceded to us by U.S. based insurers and reinsurers. On March 1, 2002 we filed a
shelf registration statement on Form S-3 to register under the Securities Act of
1933 $200,000,000 of senior debt to be sold in one or more transactions on a
delayed basis. We may issue some or all of this debt in the future. This debt,
if and when issued, would be

19

used to fund collateral requirements of our cedents. In the future, we may issue
additional debt or other forms of capital to assist in meeting the
collateralization needs of our cedents. During 2001 our Board of Directors
approved a share repurchase program of up to $25,000,000 of our common 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 anticipate
utilizing this capital in the future to support our business growth.

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

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

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

ACQUISITION

On June 1, 2000 the Company, through Annuity and Life Re America, completed
the acquisition of Annuity and Life Reassurance America, Inc., formerly Capitol
Bankers Life Insurance Company. Annuity and Life Reassurance America is a life
insurance company domiciled in the United States which is authorized to conduct
its life insurance business in 43 states of the United States, and will focus
its operations on the United States life reinsurance markets. The Company
contributed additional capital to Annuity and Life Reassurance America during
2000 of $19,550,000 to bring the total capital and surplus of Annuity and Life
Reassurance America to $25,000,000. The acquisition price and capital
contribution was funded from available cash balances and proceeds from the sales
of fixed maturity securities held by the Company.

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

The amounts related to the reinsured business referred to above are
included on the Company's Balance Sheet in the assets as Receivable for
Reinsurance Ceded and in the liabilities as Reserves for Future Policy Benefits.
At December 31, 2001 and 2000 these amounts were $97.8 million and $104.5
million, respectively.

The purchase price exceeded the fair value of the net assets acquired (the
capital and surplus of Annuity and Life Reassurance America) by $2,301,000,
which has been allocated to the value of the 43 insurance licenses of Annuity
and Life Reassurance America. This is being amortized over 20 years. See Note
2(k) of the "Notes to Consolidated Financial Statements" for information
regarding SFAS No. 142.

20

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

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

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

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

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

There were no significant changes in our primary market risk exposures or
in how those exposures are managed compared to the year ended December 31, 2000.

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

21

Sensitivity analysis and duration modeling are used to estimate changes in
fair values of fixed maturity 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 the Consolidated Financial Statements. Durations of fixed
maturity 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 maturity investments of approximately $11.5 million based on a 100 basis
point increase in interest rates as of December 31, 2001. Conversely, gains of
similar amounts will be produced with a 100 basis point decrease in interest
rates. Actual results may differ from the hypothetical change in fair values
assumed in this disclosure, especially since the analysis does not and cannot
reflect the results of any actions that would be taken by us to mitigate losses
or to optimize gains in fair values.

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

The annuity product line is generally regarded as market and interest rate
sensitive. Fluctuations in the general level of interest rates may cause
fluctuations in the results of operations. The future earnings and cash flows of
the annuity product line are primarily dependent on earning a spread (the
difference between the interest earned on the supporting asset base and the rate
credited to policyholders) and persistency of the underlying business. All
assets supporting interest sensitive liabilities are managed by the Company's
cedents, or their designated asset managers. If the assets managed by the
cedents do not accumulate at rates sufficient to meet state mandated minimum
guarantees prior to the policyholder surrendering the policy, the Company could
be forced to fund these minimum guarantees resulting in losses to the Company.
If the surrender rates significantly exceed the Company's expectations during a
time period when the assets have not accumulated at a rate sufficient to fund
the minimum interest guarantees, losses to the Company could be significant.

The statements above are forward-looking statements within the meaning of
the Private Securities Litigation Reform Act. See "Forward-Looking Statements"
on page 11.

22

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.

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

FINANCIAL STATEMENTS
Report of Management........................................ 24
Report of Independent Auditors.............................. 25
Consolidated Balance Sheets at December 31, 2001 and 2000... 26
Consolidated Statements of Operations for the years ended
December 31, 2001, 2000 and 1999.......................... 27
Consolidated Statements of Comprehensive Income for the
years ended December 31, 2001, 2000 and 1999.............. 28
Consolidated Statements of Changes in Stockholders Equity
for the years ended December 31, 2001, 2000 and 1999...... 29
Consolidated Statements of Cash Flows for the years ended
December 31, 2001, 2000 and 1999.......................... 30
Notes to Consolidated Financial Statements.................. 31
FINANCIAL STATEMENT SCHEDULE
Schedule II Condensed Financial Information of Registrant... 44

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

23

REPORT OF MANAGEMENT

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

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

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

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

LAWRENCE S. DOYLE
President and
Chief Executive Officer

JOHN F. BURKE
Senior Vice President and
Chief Financial Officer

February 11, 2002

24

REPORT OF INDEPENDENT AUDITORS

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

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

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

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

KPMG
Chartered Accountants
Hamilton, Bermuda
February 11, 2002

25

ANNUITY AND LIFE RE (HOLDINGS), LTD.

CONSOLIDATED BALANCE SHEETS
(U.S. DOLLARS)

See accompanying notes to consolidated financial statements.

26

ANNUITY AND LIFE RE (HOLDINGS), LTD.

CONSOLIDATED STATEMENTS OF OPERATIONS
(U.S. DOLLARS)

See accompanying notes to consolidated financial statements.

27

ANNUITY AND LIFE RE (HOLDINGS), LTD.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME
(U.S. DOLLARS)

See accompanying notes to consolidated financial statements.

28

ANNUITY AND LIFE RE (HOLDINGS), LTD.

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(U.S. DOLLARS)

See accompanying notes to consolidated financial statements.

29

ANNUITY AND LIFE RE (HOLDINGS), LTD.

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

See accompanying notes to consolidated financial statements.

30

ANNUITY AND LIFE RE (HOLDINGS), LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. ORGANIZATION

Annuity and Life Re (Holdings), Ltd. ("Holdings") was incorporated on
December 2, 1997 under the laws of Bermuda. Holdings provides annuity and life
reinsurance to insurers and reinsurers through its wholly-owned subsidiaries:
Annuity and Life Reassurance, Ltd. (Annuity and Life Reassurance), licensed
under the laws of Bermuda as a long term insurer; and Annuity and Life Re
America, Inc. (Annuity and Life Re America), an insurance holding company based
in the United States and Annuity and Life Reassurance America, Inc. ("Annuity
and Life Reassurance America"), 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. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

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

(a) Basis of consolidation

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

(b) Premium income and related expenses

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

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

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

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

31

ANNUITY AND LIFE RE (HOLDINGS), LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

(c) Deferred policy acquisition costs

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

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

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

(d) Insurance licenses, net of amortization

The Company has classified as insurance licenses the cost in excess of fair
value of net assets acquired in a purchase transaction. This cost is being
amortized on a straight-line basis over 20 years (see Note 2(k) below).

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

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

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

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

32

ANNUITY AND LIFE RE (HOLDINGS), LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

balances. Interest credited to policyholder account balances includes any
interest cost associated with minimum guarantees expected to be paid in future
periods.

(f) Investments and Funds withheld at interest

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

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

Funds withheld at interest represents assets held by and managed by ceding
companies in segmented portfolios under annuity reinsurance agreements. Under
the terms of the reinsurance agreements investment income, which accrues to the
Company, is based on the performance of the underlying portfolios. Assets in the
underlying portfolios are managed by investment managers appointed by the
cedent.

(g) Translation of foreign currencies

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

(h) Earnings per common share

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

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

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

(i) Cash and cash equivalents

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

(j) Stock plans

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

33

ANNUITY AND LIFE RE (HOLDINGS), LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

(k) Accounting pronouncements

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

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

3. INVESTMENTS

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

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

34

ANNUITY AND LIFE RE (HOLDINGS), LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

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

- ---------------
(1) Ratings as assigned by Moody's.

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

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

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

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

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

35

ANNUITY AND LIFE RE (HOLDINGS), LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

4. STOCKHOLDERS' EQUITY

Preferred Stock

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

Common Stock

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

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

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

Class A Warrants

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

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

Class B Warrants

In connection with the direct sales of equity securities to certain
"Strategic Investors" in connection with the Company's initial public offering,
the Company issued Class B Warrants that enable the holders to purchase an
aggregate of 397,500 common shares of the Company. The exercise price of the
Warrants, which is subject to adjustment, is $15.00 per share, which was equal
to the price of the common shares in the initial public offering. The Class B
Warrants are all currently exercisable and expire on April 15, 2008. No Class B
Warrants have been exercised at December 31, 2001.

36

ANNUITY AND LIFE RE (HOLDINGS), LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

5. (LOSS) EARNINGS PER SHARE

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

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

6. AGREEMENTS WITH RELATED PARTIES

Inter-Atlantic Capital Partners, Inc.

Certain directors of the Company are also owners, directors, or officers of
Inter-Atlantic Capital Partners, Inc. ("Inter-Atlantic"). In 1998,
Inter-Atlantic agreed to provide financial advisory and other services to the
Company for a term of five years in exchange for four annual payments of
$600,000. Such services include, among other things, assistance in the
development of products, financial planning, management of assets and
liabilities, international marketing efforts and such other services as the
Company may request. In 1999, the Company prepaid this fee at a discount of 10%.
The prepayment is being amortized over the period the services are provided with
the unamortized amount included in other assets.

Shareholders

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

37

ANNUITY AND LIFE RE (HOLDINGS), LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Transactions with management

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

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

7. STOCK OPTION PLANS

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

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

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

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

The Company applies APB Opinion No. 25 and FASB Interpretation No. 44 in
accounting for the Plan. Accordingly, no compensation cost has been recognized
as the intrinsic value of the options was $nil at the measurement date. The net
income and earnings per common share would have been reduced to the pro forma

38

ANNUITY AND LIFE RE (HOLDINGS), LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

amounts indicated below, had compensation cost been determined based on the fair
value of the options at the grant date, consistent with the method of SFAS No.
123, "Accounting for Stock-Based Compensation."

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

8. RETROCESSION AGREEMENTS

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

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

Annuity and Life Reassurance America also purchased reinsurance as
discussed in Note 12.

9. RESERVES FOR FUTURE POLICY BENEFITS, INTEREST SENSITIVE CONTRACT LIABILITIES,
AND CONTINGENCIES

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

During 2001, the Company wrote off $24.7 million of deferred acquisition
costs and established additional reserves of $20.0 million related to the
significant deferred annuity contract mentioned above. These charges

39

ANNUITY AND LIFE RE (HOLDINGS), LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

are the result of excessive surrenders by policyholders coupled with poor
investment performance on the assets managed by the cedent. The total amount of
Funds withheld at interest and the Interest sensitive contracts liability for
this contract are $962 million and $1,007 million, respectively. While
management has made what it believes to be adequate provision for future costs
based upon reasonable assumptions about future investment performance and
surrenders, the provision is an estimate. Actual amounts paid may be
significantly higher or lower than the current reserve. XL Capital, an
affiliated party, has agreed to provide additional protection for up to $10
million against further deterioration in this contract.

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

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

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

10. FAIR VALUE OF FINANCIAL INSTRUMENTS

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

Fixed Income Securities

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

Cash and Cash Equivalents

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

Funds Withheld at Interest and Interest -- Sensitive Contract Liabilities

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

Other items

Fair value disclosures are not required for reinsurance balances
recoverable, deferred policy acquisition costs, or liabilities arising from
insurance contracts. As a result, they have not been determined by the

40

ANNUITY AND LIFE RE (HOLDINGS), LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

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

11. SEGMENTS

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

12. ACQUISITION

On June 1, 2000 the Company, through Annuity and Life Re America, completed
the acquisition of Annuity and Life Reassurance America, Inc., formerly Capitol
Bankers Life Insurance Company. Annuity and Life Reassurance America is a life
insurance company domiciled in the United States, which is authorized to conduct
its life insurance business in 43 states of the United States, and will focus
its operations on the United States life reinsurance markets. The Company
contributed additional capital to Annuity and Life Reassurance America during
the fiscal year of $19,550,000 to bring the total capital and surplus of Annuity
and Life Reassurance America to $25,000,000. The acquisition price and capital
contribution was funded from available cash balances and proceeds from the sales
of fixed interest securities held by the Company.

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

The amounts related to the reinsured business referred to above are
included on the Company's Balance Sheet as Receivable for Reinsurance Ceded and
Reserves for Future Policy Benefits. At December 31, 2001 and 2000, the amounts
included in these accounts were $97,800,000 and $104,500,000, respectively.

The purchase price of $13,200,000 exceeded the fair value of the net assets
acquired (the capital and surplus of Annuity and Life Reassurance America) by
$2,301,000. The excess, which has been allocated to the value of the 43
insurance licenses of Annuity and Life Reassurance America, is being amortized
over 20 years (see Note 2(k) above).

13. DEPOSIT LIABILITY

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

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

41

ANNUITY AND LIFE RE (HOLDINGS), LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

14. TAXATION

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

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

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

15. STATUTORY REQUIREMENTS AND DIVIDEND RESTRICTIONS

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

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

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

42

ANNUITY AND LIFE RE (HOLDINGS), LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

16. UNAUDITED QUARTERLY FINANCIAL DATA

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

43

ANNUITY AND LIFE RE (HOLDINGS), LTD.

CONDENSED FINANCIAL INFORMATION OF REGISTRANT
SCHEDULE II

BALANCE SHEETS
(PARENT COMPANY IN U.S. DOLLARS)

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

44

ANNUITY AND LIFE RE (HOLDINGS), LTD.

CONDENSED FINANCIAL INFORMATION OF REGISTRANT
SCHEDULE II

STATEMENT OF OPERATIONS
(PARENT COMPANY IN U.S. DOLLARS)

45

ANNUITY AND LIFE RE (HOLDINGS), LTD.

CONDENSED FINANCIAL INFORMATION OF REGISTRANT
SCHEDULE II

STATEMENT OF CASH FLOWS
(PARENT COMPANY IN U.S. DOLLARS)

46

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

None.

PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.

The information required by Item 10 is hereby incorporated by reference to
our definitive proxy statement to be filed with the Commission pursuant to
Regulation 14A within 120 days after December 31, 2001.

ITEM 11. EXECUTIVE COMPENSATION.

The information required by Item 11 is hereby incorporated by reference to
our definitive proxy statement to be filed with the Commission pursuant to
Regulation 14A within 120 days after December 31, 2001.

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

The information required by Item 12 is hereby incorporated by reference to
our definitive proxy statement to be filed with the Commission pursuant to
Regulation 14A within 120 days after December 31, 2001.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.

The information required by Item 13 is hereby incorporated by reference to
our definitive proxy statement to be filed with the Commission pursuant to
Regulation 14A within 120 days after December 31, 2001.

47

PART IV

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

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

1. Financial Statements

The audited consolidated financial statements of Annuity and Life Re
(Holdings), Ltd. and the related auditor's report listed in the Index to
Financial Statements and Financial Statement Schedule appearing on page 25.

2. Financial Statement Schedule

The schedule listed in the Index to Financial Statements and Financial
Statement Schedule appearing on pages 44-46.

3. Exhibits

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

*3.1 Memorandum of Association, as amended, of the Company
(Exhibit 3.1 to the Company's Registration Statement on Form
S-1, Registration No. 333-43301, declared effective on April
8, 1998 (the "Registration Statement")).
*3.2 Bye-laws, as amended, of the Company (Exhibit 4 to the
Company's Form 10-Q filed on May 14, 2001).
*4.1 Form of Amended and Restated Class A Warrant (Exhibit 4.2 to
the Registration Statement).
*4.2 Form of Class B Warrant (Exhibit 4.3 to the Registration
Statement).
*+10.1 Employment Agreement, dated as of December 5, 1997, between
Lawrence S. Doyle and the Company (Exhibit 10.1 to the
Registration Statement).
*+10.2 Amendment No. 1, dated as of February 27, 1998, to
Employment Agreement, dated as of December 5, 1997, between
Lawrence S. Doyle and the Company (Exhibit 10.8 to the
Registration Statement).
*+10.3 Employment Agreement, dated as of January 5, 1998, between
Robert P. Mills, Jr. and the Company (Exhibit 10.7 to the
Registration Statement).
*+10.4 Amendment No. 1, dated as of February 27, 1998, between
Robert P. Mills, Jr. and the Company (Exhibit 10.10 to the
Registration Statement).
*+10.5 Employment Agreement, dated as of January 8, 1998, between
Robert J. Reale and the Company (Exhibit 10.6 to the
Registration Statement).
*+10.6 Amendment No. 1, dated as of February 1, 1998, to Employment
Agreement, dated as of January 8, 1998, between Robert J.
Reale and the Company (Exhibit 10.9 to the Registration
Statement).
*+10.7 Employment Agreement, dated as of March 5, 1998, between
Richard Tucker and the Company (Exhibit 10.16 to the
Registration Statement).
*10.8 Agreement, dated as of December 23, 1997, between
Inter-Atlantic Securities Corp. and the Company (Exhibit
10.4 to the Registration Statement).
*+10.9 Initial Stock Option Plan, as amended and restated effective
April 29, 1999 (Exhibit 4 to the Company's Form 10-Q filed
on May 10, 1999).
*10.10 Registration Rights Agreement, dated as of January 9, 1998,
between the Company and the holders of the Class A Warrants
(Exhibit 10.5 to the Registration Statement).
*10.11 Form of Securities Purchase Agreement entered into by The
Prudential Insurance Company of America and the Company,
EXEL Limited and the Company, Risk Capital Reinsurance
Company and the Company, Insurance Partners, L.P. and the
Company and Insurance Partners Offshore (Bermuda), L.P. and
the Company (Exhibit 10.12 to the Registration Statement).
*10.12 Form of Registration Rights Agreement entered into between
The Prudential Insurance Company of America and the Company,
EXEL Limited and the Company, Risk Capital Reinsurance
Company and the Company, Insurance Partners, L.P. and the
Company and Insurance Partners Offshore (Bermuda), L.P. and
the Company (Exhibit 10.13 to the Registration Statement).

48

*10.13 Letter Agreement, dated as of May 1, 2000, between Risk Capital Reinsurance Company, the Company and XL
Capital Ltd (Exhibit 10.13 to the Company's Form 10-K filed on March 15, 2001).
*10.14 Letter Agreement, dated as of December 23, 1997, between Prudential Securities Incorporated and the
Company and related indemnification agreement (Exhibit 10.17 to the Registration Statement).
*10.15 Letter Agreement, dated as of March 19, 1998, among Insurance Partners, L.P., Insurance Partners
Offshore (Bermuda), L.P. and the Company, which has been assigned to Overseas Partners, Ltd. (Exhibit
10.18 to the Registration Statement).
*+10.16 Employment Agreement, dated as of January 1, 1999, among Gary Scofield, Annuity and Life Reassurance,
Ltd. and the Company (Exhibit 10.17 to the Company's Form 10-K filed on March 29, 2000).
*+10.17 Employment Agreement, dated as of July 1, 1999, among Bryan Featherstone, Annuity and Life Re America,
Inc. and the Company (Exhibit 10.18 to the Company's Form 10-K filed on March 29, 2000).
*+10.18 Employment Agreement, dated as of October 24, 2000 between Patricia E. McWeeney and the Company
(Exhibit 10.1 to the Company's Form 10-Q filed on November 14, 2001).
*+10.19 Employment Agreement, dated as of September 17, 2001 between John F. Burke and the Company (Exhibit
10.2 to the Company's Form 10-Q filed on November 14, 2001).
10.20 Letter of Intent with XL Life Ltd, dated as of February 28, 2002, providing $10,000,000 of excess of
loss protection for Transamerica Occidental Life LMIG exposure.
*21.1 Subsidiaries of the Company (Exhibit 21.1 to the Company's Form 10-K filed on March 15, 2001).
23.1 Consent of KPMG (Independent Accountants).

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

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

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

49

SIGNATURES

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

ANNUITY AND LIFE RE (HOLDINGS), LTD.

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

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

51

EXHIBIT INDEX

*3.1 Memorandum of Association, as amended, of the Company
(Exhibit 3.1 to the Company's Registration Statement on Form
S-1, Registration No. 333-43301, declared effective on April
8, 1998 (the "Registration Statement")).
*3.2 Bye-laws, as amended, of the Company (Exhibit 4 to the
Company's Form 10-Q filed on May 14, 2001).
*4.1 Form of Amended and Restated Class A Warrant (Exhibit 4.2 to
the Registration Statement).
*4.2 Form of Class B Warrant (Exhibit 4.3 to the Registration
Statement).
*+10.1 Employment Agreement, dated as of December 5, 1997, between
Lawrence S. Doyle and the Company (Exhibit 10.1 to the
Registration Statement).
*+10.2 Amendment No. 1, dated as of February 27, 1998, to
Employment Agreement, dated as of December 5, 1997, between
Lawrence S. Doyle and the Company (Exhibit 10.8 to the
Registration Statement).
*+10.3 Employment Agreement, dated as of January 5, 1998, between
Robert P. Mills, Jr. and the Company (Exhibit 10.7 to the
Registration Statement).
*+10.4 Amendment No. 1, dated as of February 27, 1998, between
Robert P. Mills, Jr. and the Company (Exhibit 10.10 to the
Registration Statement).
*+10.5 Employment Agreement, dated as of January 8, 1998, between
Robert J. Reale and the Company (Exhibit 10.6 to the
Registration Statement).
*+10.6 Amendment No. 1, dated as of February 1, 1998, to Employment
Agreement, dated as of January 8, 1998, between Robert J.
Reale and the Company (Exhibit 10.9 to the Registration
Statement).
*+10.7 Employment Agreement, dated as of March 5, 1998, between
Richard Tucker and the Company (Exhibit 10.16 to the
Registration Statement).
*10.8 Agreement, dated as of December 23, 1997, between
Inter-Atlantic Securities Corp. and the Company (Exhibit
10.4 to the Registration Statement).
*+10.9 Initial Stock Option Plan, as amended and restated effective
April 29, 1999 (Exhibit 4 to the Company's Form 10-Q filed
on May 10, 1999).
*10.10 Registration Rights Agreement, dated as of January 9, 1998,
between the Company and the holders of the Class A Warrants
(Exhibit 10.5 to the Registration Statement).
*10.11 Form of Securities Purchase Agreement entered into by The
Prudential Insurance Company of America and the Company,
EXEL Limited and the Company, Risk Capital Reinsurance
Company and the Company, Insurance Partners, L.P. and the
Company and Insurance Partners Offshore (Bermuda), L.P. and
the Company (Exhibit 10.12 to the Registration Statement).
*10.12 Form of Registration Rights Agreement entered into between
The Prudential Insurance Company of America and the Company,
EXEL Limited and the Company, Risk Capital Reinsurance
Company and the Company, Insurance Partners, L.P. and the
Company and Insurance Partners Offshore (Bermuda), L.P. and
the Company (Exhibit 10.13 to the Registration Statement).
*10.13 Letter Agreement, dated as of May 1, 2000, between Risk
Capital Reinsurance Company, the Company and XL Capital Ltd
(Exhibit 10.13 to the Company's Form 10-K filed on March 15,
2001).
*10.14 Letter Agreement, dated as of December 23, 1997, between
Prudential Securities Incorporated and the Company and
related indemnification agreement (Exhibit 10.17 to the
Registration Statement).
*10.15 Letter Agreement, dated as of March 19, 1998, among
Insurance Partners, L.P., Insurance Partners Offshore
(Bermuda), L.P. and the Company, which has been assigned to
Overseas Partners, Ltd. (Exhibit 10.18 to the Registration
Statement).
*+10.16 Employment Agreement, dated as of January 1, 1999, among
Gary Scofield, Annuity and Life Reassurance, Ltd. and the
Company (Exhibit 10.17 to the Company's Form 10-K filed on
March 29, 2000).
*+10.17 Employment Agreement, dated as of July 1, 1999, among Bryan
Featherstone, Annuity and Life Re America, Inc. and the
Company (Exhibit 10.18 to the Company's Form 10-K filed on
March 29, 2000).
*+10.18 Employment Agreement, dated as of October 24, 2000 between
Patricia E. McWeeney and the Company (Exhibit 10.1 to the
Company's Form 10-Q filed on November 14, 2001).
*+10.19 Employment Agreement, dated as of September 17, 2001 between
John F. Burke and the Company (Exhibit 10.2 to the Company's
Form 10-Q filed on November 14, 2001).

10.20 Letter of Intent with XL Life Ltd, dated as of February 28,
2002, providing $10,000,000 of excess of loss protection for
Transamerica Occidental Life LMIG exposure.
*21.1 Subsidiaries of the Company (Exhibit 21.1 to the Company's
Form 10-K filed on March 15, 2001).
23.1 Consent of KPMG (Independent Accountants).