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UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Form 10-K

Commission file number 0-23637

Global Preferred Holdings, Inc.

6455 East Johns Crossing, Suite 402

Securities registered under Section 12(b) of the Exchange Act:

Securities registered under Section 12(g) of the Exchange Act:

Common Stock, Par Value $.001

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

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

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

     The aggregate market value of the voting common stock, held by non-affiliates of the registrant as of June 30, 2003, was approximately $23,941,438 computed on the basis of the last price at which the common equity was sold ($10.00 per share).

     At March 15, 2004, there were 4,141,684 shares of common stock outstanding.

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**	Portions of the definitive proxy statement for the annual meeting of stockholders, which the registrant intends to file no later than 120 days after December 31, 2003, are incorporated by reference in Part III.

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PART I

Overview

      Global Preferred Holdings, Inc. was incorporated in Delaware in 1995 as a holding company and owns all of the outstanding capital stock of Global Preferred Re Limited, Global Preferred Solutions, Inc., Global Preferred Resources, Inc. and Preferred Advantage Insurance Services, Inc. (“Preferred Advantage”). Global Preferred Re Limited is a Bermuda company registered as a long-term insurer under the Bermuda Insurance Act 1978 (“Global Preferred Re”) and was formed during 1995. Global Preferred Solutions, Global Preferred Resources and Preferred Advantage were formed during 2003. References in this report to “Global Preferred,” “we,” “us,” “our” and “our company” refer to Global Preferred Holdings, Inc. and its subsidiaries unless the context otherwise requires or is expressly stated.

      Global Preferred was formed principally to provide an opportunity for the independent agents associated with an independent marketing organization to participate indirectly in the reinsurance of the policies they sold. An independent marketing organization (“IMO”) is an organization of independent agents that contracts with one or more insurance companies to distribute and market securities and insurance products. These organizations include: insurance agencies, insurance brokers, broker-dealers, banks, savings and loans and any other group or institution that markets life insurance and annuities.

      Global Preferred, through its subsidiaries, provides reinsurance solutions for the life insurance and annuity industry. Through our subsidiaries, we provide:

	•	A reinsurance development program for IMOs utilizing proprietary strategies that permits the members of the IMO to share in the economics of the business reinsured, thus aligning the long-term interests of the life insurance companies with the interests of the marketing organizations;
	•	Life insurance management and actuarial advisory services to IMOs and life insurers to aid clients in their assessment of the strategic and structural benefits of establishing a profit sharing program through their distributor-insurer relationships, such as producer-owned reinsurance;
	•	A management support structure to leverage our core competencies and provide economies of scale to IMOs and insurance companies who already have formed, or are considering forming, a producer-owned reinsurance enterprise; and
	•	A managing general agency structure that facilitates product distribution relationships between IMOs and life insurers, primarily as a value added service to our clients.

      Both the IMOs and insurers benefit from mutually rewarding relationships based on parallel interests, a dedication to improving the quality of business written, and a focus on managing insurance and distribution risk for long-term economic rewards. Through these collaborative relationships:

	•	IMOs can share in the profits of the business they sell, enhance their recruiting and retention programs, increase their role in product development and better assess the quality of business they write;
	•	Insurance companies can benefit from secure, stable growth in distribution, increased attention to the quality of business written, lower marketing costs due to continuity in distribution and renewed focus on long-term goals; and
	•	Global Preferred can share in the economic benefits derived from fee income for managing the reinsurance risk and administering the reinsurance structure, and also from our participation in a portion of the reinsurance of the products sold by the IMOs.

      Our core business consists of providing reinsurance on business that has resulted from a relationship with the independent agents of an IMO member of the AEGON Group. Although our reinsurance business is directed to us through these independent agent relationships, the life insurance and annuity

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	•	Western Reserve Life Assurance Co. of Ohio, a subsidiary of AEGON USA, Inc. (“Western Reserve”);
	•	American Skandia Life Assurance Corporation, a subsidiary of Prudential Financial, Inc. (“American Skandia”);
	•	Pacific Life Insurance Company (“Pacific Life”); and
	•	Federal Kemper Life Assurance Company, a subsidiary of Bank One Corporation (“Kemper”).

      Currently, our largest reinsurance relationship is with Western Reserve, which accounted for 92% of our reinsurance premiums and reinsured policy revenues as of December 31, 2003.

      When we reinsure a policy for a life insurance company, we continue to reinsure that policy for as long as the policy remains in effect. Although the life insurance company may have the right to cancel the reinsurance on one or more policies, this right can generally occur only upon certain defaults or after a period of 10 years or longer, depending on the particular reinsurance agreement. By maintaining a continued financial interest in these policies, we share the ongoing revenue streams associated with the policies. Additionally, as we reinsure new policies, we expand the base of policies in which we maintain an economic interest.

      For the year ended December 31, 2003, we earned net income of $1.9 million on revenues of $30.7 million. Our total assets and stockholders’ equity at December 31, 2003 was $79.3 million and $45.3 million, respectively. As of December 31, 2003, we reinsured over 239,000 life insurance policies and riders with an aggregate face value of over $7.6 billion and over 48,000 annuity policies with aggregate contract benefits of over $250 million.

New Initiatives

      During the first quarter of 2003, Global Preferred formed two wholly owned subsidiaries, Global Preferred Solutions, Inc. and Global Preferred Resources, Inc. Global Preferred Solutions provides actuarial and management advisory services to marketing organizations and life insurers. Global Preferred Solutions’ principal focus is to evaluate the strategic and structural benefits of establishing a profit sharing program such as producer-owned reinsurance. Global Preferred Solutions also offers consulting services such as distribution effectiveness, product design and development, insurance company due diligence, and capacity utilization.

      Global Preferred Resources offers its management support structure to marketing organizations, banks, broker/ dealers, and insurance companies who already have formed, or are considering the formation of, a producer-owned reinsurance enterprise. The objective of Global Preferred Resources is to leverage the core competencies and economies of scale of Global Preferred Holdings and enable companies to bring best practices and independent objectivity to their reinsurance enterprise. Global Preferred Resources’ services include operations management, financial reporting, accounting, claims management, reinsurance administration, and actuarial services.

      In late 2003, Global Preferred formed Preferred Advantage, which operates in the capacity of a managing general agency that facilitates product distribution relationships between IMOs and life insurance companies. Through Preferred Advantage, Global Preferred is positioned to introduce new products to IMOs and present new distribution to insurers.

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Life Insurance Overview

      Life insurance products typically fall within a spectrum ranging from insurance protection products that pay a sum of money upon the death of the insured to asset accumulation products that offer the insured a tax-advantaged investment vehicle for long-term savings and retirement income. At the insurance protection end of the spectrum is term life insurance. Term life insurance is often renewable on a yearly basis and pays a sum of money upon the death of the insured. In general, as you move along the insurance product spectrum, the investment component becomes increasingly more meaningful, with the end point being a variable annuity product, which is an asset accumulation product. Variable annuities provide the policyholder the opportunity to vary benefit payments depending on the investment results of the assets held in the account.

      We currently reinsure two types of insurance products: variable universal life insurance and variable annuities. We have the capability, and it is our intent, to expand the scope of our reinsurance to include other life insurance products, such as term life, whole life, universal life and fixed annuities.

      Variable Universal Life. Variable universal life is an investment-oriented insurance product that combines an investment product with a death benefit. This product enables the policyholder to vary the timing and amount of premium payments, the level of death benefit protection, and the investment allocation of policy funds. Premiums paid by the policyholder, which comprise a separate pool of assets, are placed in the insurance company’s fixed account or separate accounts. For the funds in the separate accounts, the policyholder may choose among alternative investment vehicles, usually including stock funds, corporate or government bond funds, and money-market accounts. The death benefits and cash values in variable universal life policies vary to reflect the investment experience of the policy’s fixed or separate accounts. The policy may have a guaranteed minimum death benefit while cash values vary with the investment performance of the fixed or separate account.

      Variable Annuities. Variable annuity policies provide for flexible premium payments and guarantee that the policyholder will receive periodic benefit payments beginning on a specified date. Prior to the specified date, premium payments made and resulting income earned accumulate on a tax-deferred basis. Similar to variable universal life, variable annuity policyholders may allocate their account balances among a variety of investment vehicles. Accordingly, the resulting benefit payments to the annuity policyholder will vary depending on the performance of the invested assets. Variable annuity policies may provide a guaranteed minimum death benefit prior to the commencement of annuity benefit payments.

Reinsurance Overview

      Life insurance companies spread the risks they assume by purchasing insurance, known as reinsurance, from other insurers, known as reinsurers. A reinsurer agrees to indemnify another insurance company, commonly referred to as the ceding life company, for all or a portion of the insurance risks underwritten by the ceding life company under one or more of its own insurance polices. According to Standard & Poor’s, the percentage of new life insurance business written in the United States that is reinsured has risen from 34% in 1990 to almost 70% in 2002. During 2002, the American Council of Life Insurers reported that purchases of individual life insurance totaled $1.7 trillion of face amount.

      Ceding life companies receive a number of direct benefits from reinsurance, including:

	•	Reduced net liability on individual risks;
	•	Catastrophe protection from large events or an aggregation of multiple small claims;
	•	Reduced fluctuations in profit and loss margins that are inherent to the insurance industry;
	•	Assistance in maintaining acceptable leverage ratios; and
	•	Additional underwriting capacity by permitting them to assume larger risks and underwrite a greater number of policies without being required to increase their capital and surplus.

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      In addition to the direct benefits of reinsurance, a ceding life company that reinsures through an organization that has a relationship with the distribution channel that sells the product that is reinsured may receive a number of indirect benefits that more closely align their economic interests with those of the distribution channel. These indirect benefits may include higher quality, more profitable business, longer-term relationships, and higher sales volumes.

      In exchange for assuming a portion of the risk associated with a reinsured policy, the reinsurer receives a portion of the revenue stream associated with the policy so long as the reinsurance remains in effect.

      Reinsurance can be written on either a proportional, also known as quota share or pro rata, basis or a non-proportional, referred to as excess share or excess of loss, basis. Under quota share reinsurance, the reinsurer indemnifies the ceding life company against a predetermined percentage or share of the benefits paid by the ceding life company under policies it has issued. In reinsurance written on an excess share basis, the reinsurer indemnifies the ceding life company against that portion of benefits paid on the original policy in excess of a specified dollar amount.

Types of Reinsurance

      We currently write three types of reinsurance on a quota share basis: renewable term, coinsurance and modified coinsurance. For additional information pertaining to the types of reinsurance we write, refer to “Item. 7 Management’s Discussion and Analysis of Financial Condition and Results of Operations — Types of Reinsurance.”

Industry Trends

      We believe that over the last few decades the production and distribution of life insurance has experienced several fundamental trends.

	•	Product Proliferation. The life insurance market has evolved from one offering a handful of industry-standardized products to one with products that are highly differentiated across the industry and even within a particular company. This has been driven primarily by the market’s demand for more complex, investment-oriented products, as well as technological improvements that have enabled the support and administration of such products.
	•	Demutualization. A number of large mutual life insurance companies have converted into publicly traded stock companies. We believe that this conversion has caused those companies to focus more on maximizing product profitability and stockholder value.
	•	Consolidation among Life Insurance Companies. Industry pressures on profitability and the desire to achieve economies of scale have driven consolidation of life insurance companies. Although we believe that larger, stronger insurance companies have a more focused approach to distribution channels, it has also created a greater degree of competition among fewer insurers for access to those distribution channels. This increased competition has pressured insurance companies to increase agent commissions, thereby lowering their profit margins, and increasing the insurers’ focus on securing stable, reliable access to distribution channels.

	•	Diversification of Distribution Channels. Historically, most life insurers distributed their products through their own captive agency sales force. Although this traditional distribution channel is still utilized, insurers are now increasingly selling their products through IMOs (including independent agents, brokerage firms, banks and other alternative distribution channels), enabling the insurers to focus their resources on their principal expertise: product development, underwriting, investment

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		management and policy administration. As a result, insurers increasingly rely on IMOs for agent recruitment, training and sales support.
	•	Increasingly Complex Regulatory Environment. Regulation of insurance sales has become more extensive as products have become more complicated and the distribution systems have become more diverse. As a result, the cost of compliance with such regulations has risen dramatically and has made it more difficult for IMOs to manage a diverse portfolio of products.
	•	Consolidation among Distribution Channels and the Emergence of National Distribution Franchises. In order to achieve economies of scale and increased bargaining power, a number of IMOs have grown and acquired other, smaller IMOs.

      We believe that these trends have led to a misalignment of interests between the IMOs that distribute the products and the life insurance companies that create those products. The separation of life insurance companies from distribution channels, followed by the growing strength of those distribution channels, creates an environment where the distributors control access to the life insurance consumers. The independent distributors’ ability to select the products to sell to the public has given them significantly greater influence over product development. Often, product selection decisions are driven by a desire for immediate commissions rather than on the value provided by long-term relationships focused on writing persistent, high quality business. Additionally, this short-term focus has inhibited the product development process, as life insurance companies are reluctant to invest in the development of products for distribution relationships that may not be long lasting. We believe that these trends have created an environment in which life insurance companies seek more stable and reliable distribution networks in which distributors have long-term incentives to write persistent, high quality business and the insurance companies have less pressure to pay higher commissions to the distributors solely to gain and maintain access to the consumers.

The Global Preferred Value Proposition

      We strive to align the interests between life insurance distributors and life insurance companies by developing long-term, collaborative reinsurance relationships. The foundation for these relationships is our ability to provide IMOs meaningful financial incentives through profit-sharing structures, such as producer-owned reinsurance.

	•	Participates in Benefits from Reinsurance. Through the financial incentives we provide, distributors receive financial benefits in addition to traditional commissions. Alternatively, we provide focused advisory services to IMOs interested in establishing their own reinsurance structure.
	•	Increases in Net Operating Margins. Similarly, to the extent that the receipt of financial incentives results in a recognizable item for income statement purposes, distributors will be able to substantially increase their net operating margins without incurring additional costs.
	•	Enhances Ability to Assess Quality of Business. As the overall economic package to the distributor is increasingly influenced by the long-term performance of the business they sell, distributors will be driven to gain more information regarding the drivers of profitability and they will seek to enhance the quality of business they produce.
	•	Increases Involvement in Product Development. As distributors become increasingly focused on long-term product success, they will want to become more involved in product development decisions to improve sales volume and profitability within the products they sell.

	•	Stabilizes Product Distribution. Reinsurance-driven partnerships with distribution channels interested in performance-based incentives should result in more stable relationships with the channels.

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		As the financial benefits of a profit-sharing program are realized over a number of years, a long-term relationship between the distribution channel and the insurer develops.
	•	Motivates Distributor to Focus on Quality of Business. As distributors’ economic interests become more aligned with those of the insurers whose policies they sell, they will become more focused on the quality of that business.
	•	Helps Alleviate Downward Margin Pressure. By complementing commission dollars with the other financial incentives we provide, distributors should be less inclined to seek continual commission increases from insurers, resulting in measurable improvements in the insurers’ margins. Further, insurers should realize expense savings otherwise expended to maintain stability and growth in sales. As insurers recognize the long-term benefits we are creating for them with the distribution channels and improved margins, those insurers will be more likely to choose us for reinsurance to help assure continued long-term distribution relationships.
	•	Focuses Distribution System on Specific Products. Since the financial incentives paid by us will be linked to the sale of specific products, distributors will place an emphasis on selling those products in order to receive the additional financial benefits.

      In addition to collaborative reinsurance relationships, through our subsidiaries we offer life insurance management and actuarial advisory services, and administrative services to both IMOs and insurers engaged in reinsurance or related activities. Our independence and objectivity, coupled with depth of experience and expertise associated with distribution systems and insurers, offers value added business solutions from a single source entity that can be essential in today’s environment. By providing these benefits to both the IMO and the insurer, we are able to develop long-term relationships with both parties, thereby contributing to our growth opportunities.

Growth Strategy

      Our objectives are to build strong financial performance, loyal independent marketing organization relationships, and stockholder value. We aim to achieve these objectives through the following growth strategies:

	•	Broadening Existing Relationships. We will seek to grow our business by (1) broadening the pool of products that we reinsure for the ceding life companies with which we have existing reinsurance arrangements and (2) establishing new reinsurance arrangements with other life insurance companies that sell products through our existing IMO relationships.
	•	Forming New Relationships with Other IMOs and Ceding Life Companies. We intend to form new relationships with other IMOs and ceding life companies by: (1) marketing directly to IMOs and life insurance companies; (2) leveraging our existing IMO relationship to gain access to other ceding life companies and IMOs; and (3) utilizing our relationships with our ceding life companies to establish relationships with additional IMOs.
	•	Continuing to Expand Reinsurance Coverage of Current Business and New Business Under Existing Agreements. We have contractual rights under our existing agreements with Western Reserve to: (1) expand the scope of our reinsurance coverage on certain existing policies and (2) subject to certain minimum sales volume thresholds, increase our reinsurance participation of new policies and expand our reinsurance to include new products offered by Western Reserve that are sold through a leading IMO of the AEGON Group.

Distribution Relationships and Sales Strategies

      Our strategy is to generate reinsurance business through strong, incentive-based relationships with IMOs that have the desire and ability to establish long-term reinsurance relationships with the life insurance companies whose products they sell. Further, through our new subsidiaries, we offer advisory and

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      We believe that IMOs that develop long-term relationships have a greater incentive to place profitable and persistent business with those life insurers that reinsure through their reinsurance partner. This three-party relationship creates positive economic opportunities for each party, as the IMO may benefit above and beyond commissions, and we and the life insurance company benefit through increased sales and incremental profitability of the business.

      All of the policies we currently reinsure have resulted from the marketing efforts of the independent agents who have been associated with World Financial Group, Inc., a subsidiary of the AEGON Group, and its predecessor, World Marketing Alliance, Inc. (“WMA Agency”). Our relationship with World Financial Group was formed in June 2001, when certain assets of WMA Agency were sold to World Financial Group. As a result of the asset acquisition, substantially all of the agents of WMA Agency became associated with World Financial Group. Our relationship with WMA Agency dates back to our founding in 1995, when we were principally formed to provide an opportunity for its agents to participate indirectly in the reinsurance of the business they produced. Many of those individual agents purchased an equity ownership in our company through a private sale of common stock in 1995 and a subsequent sale of preferred stock in 2000. Many of these agents still own a significant portion of the outstanding common stock of Global Preferred.

Reinsurance Relationships

      We currently provide reinsurance for variable universal life and variable annuity policies issued by four large life insurance companies. Our reinsurance agreements with these ceding life companies provide for our assumption of a portion of defined risks associated with specified products sold by agents of the IMO with which we have a relationship. Reinsurance under these agreements is automatic, meaning we are required to accept the business ceded to us so long as the ceding life companies satisfy the terms of the reinsurance agreements.

      The following table indicates, by ceding life company, the types of policies we are currently reinsuring and the type of reinsurance applicable to each.

      We have four separate reinsurance agreements with Western Reserve that cover variable universal life insurance and variable annuity policies issued by Western Reserve on or after January 1, 1992 which are sold by the agents of World Financial Group and its predecessor. These agreements were entered into on July 1, 1996, January 1, 1998, April 1, 1998, and October 1, 1999, respectively. The agreement with American Skandia began on January 1, 1997 and covers policies on an American Skandia variable annuity product issued between January 1, 1997 and December 31, 2002 sold by those same agents. The Kemper agreement was effective September 1, 1996 and covers all policies on a Kemper variable universal life product issued between September 1, 1996 and March 31, 2001 sold by those agents. Our agreement with

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      Effective May 29, 2003, Kemper Investors Life Insurance Company (“Kemper Investors”), Federal Kemper Life Assurance Company (“Federal Kemper”) and Global Preferred Re Limited entered into a Novation Agreement, whereby Federal Kemper became a party to our Kemper reinsurance agreement replacing Kemper Investors. The Novation Agreement substitutes Federal Kemper for Kemper Investors, binds Federal Kemper by all of the terms and conditions, allows Federal Kemper enjoy all of Kemper Investors’ rights and instructs Federal Kemper to perform all of Kemper Investors’ duties, obligations and liabilities under the above referenced Kemper agreement. Concurrent with the novation, Federal Kemper was acquired by, and became a business unit of, Bank One Corporation.

      We believe that the terms of our reinsurance arrangements are favorable for our industry and that we were able to obtain these terms in part because of our strong relationship with the agents associated with World Financial Group. Our right to reinsure new business under our reinsurance agreements generally extends for an initial term of 3 to 5 years, with automatic renewals and one-year notices of termination following the initial term. Termination of our right to reinsure new business does not, however, affect our right to continue to reinsure the policies reinsured at the time of termination. Under our agreements, we have the right to continue to reinsure a policy for as long as it remains in effect or until the ceding life company otherwise recaptures it. A ceding life company may have the right to recapture a reinsured policy only upon certain defaults or after a period of 10 years or longer, depending on the terms of the relevant reinsurance agreement.

      Following World Financial Group’s purchase of certain assets of WMA Agency in June 2001, we entered into a First Right Agreement with Western Reserve that provides us a first right to reinsure certain new products issued by Western Reserve or its U.S. affiliates that are sold by agents associated with World Financial Group. Pursuant to this agreement, we possess the following contractual rights to:

	•	Commence reinsurance of Freedom Elite Builder variable universal life insurance policies and riders issued from January 1, 2002 through December 31, 2002 up to 20% on a coinsurance and modified coinsurance basis;
	•	Commence reinsurance of any single life variable universal life insurance policies and riders issued from January 1, 2003 through March 31, 2005 up to 20% on a coinsurance and modified coinsurance basis. This contractual right is subject to certain premium production requirements;
	•	Prospectively reinsure all new single life variable universal life insurance policies up to 20% on a monthly renewable term basis at 105% of premium rates otherwise available from certain commercial reinsurers. This right extends through March 31, 2006 and is subject to certain premium production requirements; and
	•	Commence or increase reinsurance on certain variable annuity policies issued from January 1, 2003 through December 31, 2004 up to 40% on a coinsurance and modified coinsurance basis, subject to certain premium production requirements.

      These rights automatically extend for one-year renewal periods unless either party gives notice of termination 180 days prior to the expiration of the applicable initial or renewal term. Certain of these rights would have expired at December 31, 2003 and thereafter, but have been indefinitely extended to a date 90 days following receipt of written notice by either party. For the coinsurance and modified coinsurance of variable universal life and variable annuity products, rights under the First Right Agreement are subject to minimum sales volume thresholds. Western Reserve has indicated to us, through informal reports, that total premium production requirements were not met for the reinsurance of variable universal life policies issued in 2003 and 2004 and for variable annuity policies issued in 2004.

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      Global Preferred’s decision to reinsure these products is based on a number of relevant factors, including the attractiveness of the reinsurance rates prescribed by the agreement, the volume of business and our available capital. So far, we have chosen not to commence reinsurance of this business because (a) deferral of the election will maximize our return on such business reinsured, (b) continued increases in our capital may result in opportunities of securing additional financing at a favorable cost, and (c) deferral allows us to maintain flexibility to invest in new business initiatives for diversification and future growth.

      Global Preferred entered into a Directed Reinsurance Agreement with World Financial Group in July 2001 that extends through June 8, 2008, which requires World Financial Group to use its commercially reasonable best efforts to help us attain the opportunity to reinsure all insurance products sold by its agents for insurance companies with which it has selling agreements other than Western Reserve and Western Reserve’s affiliates.

      We intend to enter into reinsurance agreements with other insurance companies from time to time and such decisions will be based on a number of relevant factors, including the attractiveness of the reinsurance rates prescribed by the agreement, the volume of business, our relationship with the insurance company and/or the IMO, and our available capital capacity. We intend to enter into agreements with other IMOs similar to our directed reinsurance agreement with World Financial Group.

Investments

      Our investments are selected with the objective of achieving favorable investment returns consistent with appropriate credit, diversification, tax and regulatory considerations, while providing sufficient liquidity to enable us to meet our obligations as a reinsurance company on a timely basis. We have developed specific investment guidelines that stress diversification of risk, conservation of principal, and liquidity. Our investments, however, will be subject to market risks and fluctuations, as well as to the risks inherent in particular securities. Our board of directors has established an Investment Committee to periodically review the guidelines and investment portfolio and to make recommendations to the board of directors regarding any changes. The board of directors reviews the guidelines annually. For additional information pertaining to our investment portfolio, refer to “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations — Investments.”

      We utilize an independent investment manager to invest our assets in accordance with our investment guidelines. Conning Asset Management Inc., a subsidiary of Swiss Reinsurance Company, has been our investment manager since June 1998. The Investment Committee of the board of directors periodically reviews the performance of, and the fees paid to, Conning. We are not aware of any affiliation by us with Conning other than through our pool retrocession agreement with Swiss Re Life & Health America, Inc. The fees paid to Conning for services rendered during 2003 totaled $63,747.

Underwriting and Policy Administration

      As an automatic reinsurer, we rely upon the underwriting of the ceding life companies on policies we reinsure. We review and monitor the underwriting standards and procedures of the ceding life companies, including rules for policy continuations, changes, re-entries, reinstatements, and conversions.

      The ceding life companies administer policies we reinsure and provide us with all information necessary for processing the reinsurance. We have conducted only a limited review of the administrative practices of our ceding life companies. Therefore, we may not have sufficient information to properly evaluate the administration of the business we reinsure or the accuracy of the information provided by the ceding life companies.

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      Our reinsurance agreements give us the right to periodically audit the books and records of the ceding life companies to ensure that all business is being properly ceded and administered. Management also communicates frequently with the ceding life companies regarding the administration of the business, business policies and practices, underwriting procedures, quality of business considerations, and reinsured policy experience.

Retention

      Our profitability depends, in part, on the volume and amount of death claims incurred. While death claims are reasonably predictable over a period of many years, claims become less predictable over shorter periods and are subject to fluctuation from period to period. Actual mortality experience in a particular period may be greater than expected mortality experience and, consequently, may adversely affect our operating results for such period.

      As a partial hedge against the unpredictability of claims experience, we have entered into a pool retrocession agreement covering certain life insurance policies we reinsure. Under the pool retrocession agreement, multiple reinsurers participate in the risks ceded by us. Standard mortality risks in excess of our life insurance retention limit of $100,000 per life are retroceded to pool participants, which include: ERC Life Reinsurance Corporation, Swiss Re Life & Health America, Inc., The Lincoln National Life Insurance Company, and Transamerica Occidental Life Insurance Company.

      If equity markets decline sufficiently, we may incur a claim expense on certain annuity policies in excess of our life insurance retention limit of $100,000 per life. Currently, eight annuity policies, or 0.02%, of our annuity policies in force exceed our life insurance retention limit by an aggregate exposure of approximately $264,000 with an average excess exposure of approximately $33,000 per life. Increases in the equity market may result in fewer annuity policies exceeding our life insurance retention limit while decreases in the equity market may result in more annuity policies exceeding our life insurance retention limit.

Regulation of Global Preferred Re

      The Insurance Act 1978 and related regulations of Bermuda (the “Insurance Act”), which regulates the insurance business of Global Preferred Re, provides that no person shall carry on any insurance business in or from within Bermuda unless registered as an insurer under the Insurance Act by the Bermuda Monetary Authority (the “Authority”). Under the Insurance Act, insurance business includes reinsurance business.

      The Insurance Act imposes solvency and liquidity standards and auditing and reporting requirements and grants to the Authority powers to:

	•	grant and revoke registration;
	•	require statutory financial statements;
	•	limit the amount of dividends and other payments;
	•	regulate transfer of business and winding-up; and
	•	supervise, investigate (as well as assist on investigations by certain foreign regulatory authorities), requisition information and intervene in the affairs of Bermuda insurance companies (including limitations on new business and regulating investments).

      The Authority may appoint an inspector with extensive powers to investigate the affairs of an insurer if the Authority believes that an investigation is required in the interest of the insurer’s policyholders or persons who may become policyholders. Further, Global Preferred Re, as a long-term insurer registered under the Insurance Act, may only be wound-up or liquidated by order of the applicable Bermuda court.

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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, both of which, in the case of Global Preferred Re, are required to be filed annually with the Authority. 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. Global Preferred Re’s independent auditor is Deloitte & Touche.

      Statutory Financial Statements. An insurer must prepare annual statutory financial statements. The Insurance Act prescribes rules for the preparation and substance of such statutory financial statements, which include, in statutory form, a balance sheet, an 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. Global Preferred Re, as a long-term insurer, is required to submit to the Authority the annual statutory financial statements as part of its annual statutory financial return.

      Minimum Solvency Margin; Restrictions on Dividends. The Insurance Act also regulates the payment of dividends and the minimum solvency margin. For additional information, refer to Note 9 to the Consolidated Financial Statements.

      Principal Representative. 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, Global Preferred Re’s principal representative is International Advisory Services, Ltd. (“IAS”) and its principal office is located at 44 Church Street, 3rd Floor, Hamilton HM 12, Bermuda. Without a reason acceptable to the Authority, Global Preferred Re 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 IAS, as Global Preferred Re’s principal representative, within 30 days of reaching the view that there is a likelihood of it 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.

      In general, reinsurers domiciled outside the United States (referred to as “alien reinsurers”) are not subject to substantial direct regulation in the United States. The insurance laws of each state of the United States generally do not regulate the sale of reinsurance within their jurisdictions by non-U.S. insurers. However, alien reinsurers, such as Global Preferred Re, that provide reinsurance to insurance companies domiciled or licensed in United States jurisdictions are indirectly regulated by state “credit for reinsurance” laws. These laws operate to deny statutory financial statement credit to ceding insurers unless the unauthorized alien reinsurer posts acceptable security for ceded liabilities and agrees to certain contract provisions.

      The state insurance laws in the United States restricting the investments of insurance companies are not applicable to Global Preferred Re. Unlike insurance regulations in the United States, Bermuda law does not limit or regulate investments of Global Preferred Re as a long-term insurer provided that such investments are made for its potential benefit and the minimum solvency ratios prescribed under the Insurance Act are not breached.

Competition

      Reinsurance and insurance companies compete based on many factors, including:

	•	Premium charges;
	•	Ability to structure innovative terms and conditions in product offerings;
	•	The general reputation and perceived financial strength of the reinsurer or insurer;
	•	Relationships with reinsurance and insurance intermediaries;

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	•	Ratings assigned by independent rating agencies;
	•	Speed of claims payment and administrative activities; and
	•	Experience in the particular risk to be underwritten.

      While we compete with numerous national and international reinsurance companies, primary insurance companies, underwriting syndicates and other financial services providers, many of which are well established, have significant operating histories and substantially greater underwriting, marketing and administrative resources than we do, we believe that our focus on building relationships with IMOs can be a distinguishing feature.

      Distinguishing us from other companies in our industry, our growth strategy includes the expansion of our relationships with IMOs through the formation of reinsurance structures specific to their business or through the use of financial incentives, which may include stock, warrants and other forms of equity in our company. We believe our core strengths and expertise will result in:

	•	Fee income associated with administrative services and from actuarial and management advisory services;
	•	Reinsurance revenues resulting from favorable agreements with IMO reinsurance structures; and
	•	Reinsurance revenues resulting from favorable agreements with ceding life companies, benefiting IMOs that are financially motivated to influence ceding company relationships with us.

      Our ability to compete with other potential reinsurers in this market will depend upon our ability to successfully develop and maintain strong relationships with IMOs. In addition to our continuing focus on our current independent agent relationships, we commenced implementing marketing programs in late 2002 to develop new IMO relationships.

      Direct insurance companies who are licensed to underwrite insurance are also licensed to underwrite reinsurance, making commercial access into the reinsurance business relatively uncomplicated. In addition, over the last several years, capital markets participants, including exchanges and financial intermediaries, have developed financial products intended to compete with traditional reinsurance. We are unable to predict the extent to which new, proposed or potential initiatives may affect the demand for our products. Barriers to entry to the reinsurance industry for non-insurers are chiefly the time, capital, and talent necessary to attract, underwrite, and manage the business.

      We cannot assure you that we will be able to compete successfully, and the inability to do so could have a material adverse effect upon our ability to implement our strategies.

Employees

      As of December 31, 2003, we had ten full-time employees. None of our employees are covered by a collective bargaining agreement. We consider our relations with our employees to be good.

      We believe our future success will depend in large part on our ability to recruit and retain qualified employees experienced in insurance and underwriting. The competition for such personnel is intense, and there can be no assurance that we will be successful in retaining or recruiting key personnel.

      In October 2002, we entered into a lease agreement for office space in Duluth, Georgia. The initial lease term, as amended, is twenty-four months, with the option to extend the term an additional thirty-nine months, expiring in January 2008. Payments under this lease are $122,177 annually through October 2004. The lease payments are subject to an annual increase of approximately 3%. We do not own or lease any other properties.

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      We are not a party to any material legal proceedings.

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

PART II

      No public trading market existed for our common stock during 2003.

      At March 15, 2004, we had 4,141,684 shares of common stock outstanding and approximately 850 stockholders.

      We have not declared or paid any cash dividends on our common stock during 2002 or 2003 and our board of directors does not anticipate declaring or paying any cash dividends in the foreseeable future. We anticipate that all of our earnings and other cash resources, if any, will be retained for the purpose of financing Global Preferred Re’s reinsurance business and will be available for other strategic opportunities that may develop. Future dividend policy will be subject to the discretion of our board of directors, and will be contingent upon our results of operations, financial position and capital requirements, general business conditions, restrictions imposed by financing arrangements, if any, legal and regulatory restrictions on the payment of dividends and other factors that our board of directors deems relevant.

      As a holding company with no direct operations, the payment of dividends by us in the future will be largely dependent on our receipt of dividends from Global Preferred Re. For a discussion of restrictions on the payment of dividends by Global Preferred Re, refer to Note 9 to the Consolidated Financial Statements.

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      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” including elsewhere herein.

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      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.

Overview

      Global Preferred provides reinsurance solutions for the life insurance and annuity industry. Our principal business objective is to align the long-term interests between independent marketing organizations and life insurance companies. Through these collaborative relationships, we believe both the IMOs and insurers benefit from mutually rewarding relationships based on parallel interests, a dedication to quality business, and a focus on managing insurance and distribution risk for long-term economic rewards.

      Although our reinsurance business is directed to us through these independent agent relationships, the life insurance and annuity policies that we currently reinsure are underwritten and issued by various ceding life companies. In the insurance industry, the term “ceding” refers to the use of reinsurance to transfer from one insurance company to another some or all of the risks associated with one or more insurance policies. We often refer to a life insurance company that reinsures life insurance and annuity policies through us as a “ceding life company.” The strength of our current reinsurance business is based on our historical relationship with the independent agents of World Financial Group, which is an indirect subsidiary of AEGON USA, Inc. and an IMO that markets the products we currently reinsure.

      Under a reinsurance agreement, the economic consequences of certain insurance risks are transferred from the ceding life company to the reinsurer. Depending upon the type of reinsurance agreement, these risks may include mortality, persistency, investment and expense. Key considerations in evaluating the risks include:

	•	industry experience;
	•	the ceding life company’s pricing and assumptions;
	•	the type of product;
	•	the ceding life company’s underwriting practices and procedures;
	•	the type of distribution system;
	•	the ceding life company’s recent experience; and
	•	the market for the product.

      The ceding life companies retain responsibility for the payment of all claims, surrender values, commissions, and expenses involved in issuing and maintaining the policies we reinsure. In addition, the ceding life companies administer the reinsurance contracts and, on a monthly and quarterly basis, provide

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Types of Reinsurance

      We currently write three types of reinsurance on a quota share basis: renewable term, coinsurance and modified coinsurance.

      Renewable Term. Renewable term, also referred to as risk premium reinsurance, which includes monthly renewable term and yearly renewable term, is a plan of reinsurance in which the premium rates are not directly related to the premium rates on the original plan of insurance. Under renewable term reinsurance, the ceding life company reinsures a portion of the mortality risk with us. The amount reinsured in any one period is not based on the face amount of the policy, but rather on the portion of the net amount at risk we reinsure. The net amount at risk is typically defined as the difference between the death benefit and the cash value of a policy. The ceding life company establishes the policy reserves, which are reduced for the mortality risk reinsured with us, and pays all policy benefits, commissions and expenses involved in issuing and maintaining the business. Correspondingly, we establish reserves specific to the mortality risk reinsured.

      Under renewable term reinsurance, we may also be subject to the effects of persistency risk. Persistency risk is the risk that a policyholder either stops paying premiums, which would cause the policy to lapse, or chooses to surrender the policy for the cash surrender value. The effect of persistency risk on us is that possible future revenue will be reduced, potentially reducing profits.

      Coinsurance. Under a coinsurance arrangement, the insured risks are ceded to us on essentially the same basis as underwritten by the ceding life company. The ceded risks include mortality, persistency, investment, and expense. We share the risks pro rata with the ceding life company. We receive a proportionate share of gross premiums from the ceding life company and provide contractual expense allowances to the ceding life company to pay for the expenses associated with the reinsured policies. Expenses include commissions and costs associated with underwriting, marketing, policy issue, and maintenance. We also pay our proportionate share of death benefits and other policy benefits to the ceding life company. The reserves on the ceded portion of the policy are held by us and are our obligations. Correspondingly, we invest the assets related to the reserves and receive investment income from those assets.

      Modified Coinsurance. Modified coinsurance is similar to coinsurance except the ceding life company does not transfer the reserves or the invested assets related to the reserves. Modified coinsurance is used primarily for products that develop cash values and allows the ceding life company to retain the associated assets for investment purposes.

Critical Accounting Policies and Estimates

      The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions regarding uncertainties that affect certain amounts in the consolidated financial statements and related footnotes. Accounts that we deem to be sensitive to changes in estimates include deferred acquisition costs and future policy benefits. In all instances, actual results could differ from estimates. A summary of significant accounting policies is included in Note 2 to the Consolidated Financial Statements.

      Reinsurance Revenues. For renewable term reinsurance, we record as “premiums” the amount of reinsurance premiums we receive over the payment periods of the reinsured policies. For policies reinsured on a coinsurance or modified coinsurance basis, we record as “reinsured policy revenues” our proportionate share of the gross revenues received by the ceding life company over the payment periods of the reinsured

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      Upon election to convert certain reinsured policies from a renewable term basis to a coinsurance or modified coinsurance basis, the associated premium revenues for those policies will discontinue, and our proportionate share of the associated mortality and expense charges, asset based allowances and deferred sales charges will be recorded as reinsured policy revenues.

      Reinsurance Expenses. Regardless of the type of reinsurance, our related expenses may include: (1) benefits, claims and settlement expenses, which represent our share of the payments made under the reinsured policies during the period, the change in claims in course of settlement, and the change in claims incurred but not reported; (2) expense allowances paid to the ceding life company for expenses associated with the reinsured policies, including commissions and costs associated with underwriting, marketing, policy issue and maintenance; and (3) amortization of deferred acquisition costs, which are discussed in more detail below.

      Net Income. Our profitability, in part, depends on the volume of policies reinsured and experience of the reinsured policies. Factors that affect the experience of the business include reinsured policy persistency, death claims, and investment performance of the separate account balances. While death claims are reasonably predictable over a period of years, claims become less predictable over shorter periods, and are subject to fluctuation from quarter to quarter and year to year. Similarly, separate account investment returns, upon which a significant portion of our revenues depend, may have relatively stable returns over a period of years but can be volatile over shorter periods. A considerable amount of separate account balances is invested in equities; therefore, prolonged deterioration in the equity markets will result in a decrease in our current and future income.

      Deferred Acquisition Costs. We capitalize and defer costs that vary with and are primarily related to the acquisition of the reinsured policies. These expenses are deferred to the extent that such costs are deemed recoverable from future policy revenues and are recorded as deferred acquisition costs on the balance sheet. Such costs include reinsurance expense allowances paid to ceding life companies, and may include other underwriting costs such as actuarial, legal and accounting fees.

      Deferred acquisition costs are amortized over the lives of the underlying policies, in conformity with the terms of the reinsurance agreement. Under the renewable term agreements, deferred acquisition costs are amortized in proportion to the premium revenue related to the mortality risk reinsured. Such premium revenue is estimated using the same assumptions used for computing liabilities for future policy benefits. Such assumptions include estimates of expected investment yields, mortality, persistency and expenses applicable at the time the policies are reinsured. Original assumptions on renewable term business continue to be used in subsequent accounting periods to determine changes in the deferred acquisition costs unless a premium deficiency exists. Under the renewable term agreements, the amortization is in proportion to the ratio of premiums collected during the then current period to total anticipated premiums and is adjusted to reflect actual persistency of the insurance in force.

      Under the coinsurance and modified coinsurance agreements, the amortization of the deferred acquisition costs is in proportion to the ratio of gross profits recognized during the then current period to total anticipated future gross profits. During each accounting period, assumptions used in calculating the amortization of the deferred acquisition expense reflect actual experience for the then current accounting period. We also review, on a periodic basis, our evolving experience with regard to our assumptions concerning future experience as to mortality, persistency, investment yields, and expenses in determining our estimate of anticipated future gross profits. This periodic review is commonly referred to as “unlocking.” Our normal period of observation is from October 1 of the previous calendar year through September 30 of the current calendar year. If we believe variances from expected assumptions are permanent, we will change the assumptions we use with regard to future experience. Upon adoption of any

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      A material component of variable life and annuity product revenues is derived from the asset-based fees that have been assessed against the policy account balances, of which a considerable portion is invested in the equity markets. The volatility of equity market returns over the short-term can be significant without materially impacting long-term equity market returns. Historical equity market performance shows equity market volatility is much higher over short term horizons as compared to long-term horizons. The short-term volatility of the policy fund value would result in a proportional adjustment to all future expected gross profits if no other adjustments were made to account for the differences between long-term and short-term volatility. We utilize a “credibility approach” to account for the differences between long-term and short-term volatility. Under this approach, the estimates of future expected gross profits are revised to recognize the effects short-term volatility and market yields have upon long-term yield expectations. We review our approach annually to determine if additional adjustments to amortization are necessary as a result of prolonged and/or severe negative or positive equity market performance. In such instances, the equity market performance must be sufficiently high or low to justify a belief that the effect of current market conditions on future expected gross profits should be more permanently reflected.

      In addition, certain variable annuity policies we reinsure include a death benefit typically equal to a return of premium or the highest level the fund values had accumulated over certain prescribed periods under the annuity policy. Upon the death of an annuity policyholder, we will incur a claims expense equal to the excess, if any, of the amount guaranteed under this provision over the then current policy fund value. This expense increases when equity markets decline and decreases as equity markets increase. We utilize an implicit approach to account for the expense associated with these guaranteed minimum death benefits. Under this approach, future expected gross profits are decreased to account for future expected claims expenses. The short-term volatility of the policy fund value will result in significant volatility in the expected claims expense if no recognition is made to acknowledge differences between long-term yields and short-term volatility. Our implicit approach recognizes the effect of long-term versus short-term volatility when accounting for guaranteed minimum death benefits. In conjunction with the implementation of Statement of Position (“SOP”) 03-1, (refer to Note 2 to the Consolidated Financial Statements), we will be converting from an implicit approach to an explicit approach in first quarter 2004. We do not expect these changes to have a material impact on our financial statements.

      Future Policy Benefits. Liabilities for future benefits on life insurance policies are established in an amount we estimate is adequate to meet the estimated future obligations on the policies in effect. Policy reserves are included in “future policy benefits” on the consolidated balance sheet.

      Liabilities for future policy benefits under the renewable term agreements include provisions for claims in the course of settlement, claims incurred but not reported, and expected future claims. The liability is estimated using assumptions such as estimates of expected investment yields, mortality, persistency and expenses applicable at the time the reinsurance contracts are executed.

      Liabilities for future policy benefits under coinsurance and modified coinsurance agreements equal reinsured policy account balances on the underlying life insurance and annuity policies. With regard to the separate account benefits reinsured on a modified coinsurance basis, we record the liabilities as an offset to related assets as our intentions and rights under the agreements with the ceding life companies meet the appropriate conditions governing rights of setoff. The nature of separate account benefits under variable life insurance or variable annuity policies do not permit us to reinsure those benefits on a coinsurance basis. We currently reinsure the fixed account portion of life insurance and annuity policies only on a coinsurance basis and, accordingly, the liabilities for that portion of the reinsurance are recorded as future policy benefits.

      Liabilities for future policy benefits reflected in the consolidated financial statements are based on information provided to us by the ceding life companies. Reserves established by us with respect to

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Fair Value Disclosure

      Investments. We classify all fixed maturity securities and equity securities, with readily determinable fair values, as “available for sale.” Such securities are reported at fair value. Fixed maturity securities available for sale are so classified based upon the possibility that such securities could be sold prior to maturity if that action enables us to execute our investment philosophy and appropriately match investment results to operating and liquidity needs. Equity securities are classified as available for sale because we do not intend to actively trade such securities. Unrealized gains and losses on marketable equity securities and fixed maturity securities available for sale, less applicable deferred income taxes, are reported as a separate component of “accumulated other comprehensive income” within stockholders’ equity.

      Investment income is recognized as it accrues or becomes legally due. Realized gains or losses on sales of investments are included in income, as are write-downs of securities where declines in value are deemed to be other than temporary. The cost of investment securities sold is determined based upon the specific identification method.

      Other Financial Assets and Liabilities. The carrying value of cash and cash equivalents, reinsurance receivables and payables, short-term debt, accrued expenses and accounts payable approximate their fair values due to the short-term nature of these accounts. The carrying value of future policy benefits approximates its fair value as credited interest approximates current market rates.

Our Current Reinsurance Agreements

      The life insurance and annuity policies that we have reinsured to date are underwritten and issued by Western Reserve, American Skandia, Kemper, and Pacific Life. The following table indicates the percentage of our reinsurance revenues derived from our ceding life companies:

(1)	This agreement was effective as of January 1, 2001.
(2)	Less than 1%.

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      The following table indicates, by ceding life company: (1) the names and types of insurance products we currently reinsure; (2) the type of reinsurance agreement applicable to each; (3) policy issue dates reinsured under each agreement; and (4) the commencement date of the reinsurance.

(1)	“VUL” means variable universal life product. “VA” means variable annuity product.
(2)	“MRT” means monthly renewable term. “YRT” means yearly renewable term. “Co/ Modco” means coinsurance and modified coinsurance.

      Under our reinsurance agreements with the ceding life companies, we currently reinsure variable life insurance and variable annuity policies on either a renewable term basis or a coinsurance and modified coinsurance basis. The policies we reinsure on a renewable term basis represented 58% of our reinsurance revenues for the year ended December 31, 2003. The policies we reinsure on a coinsurance and modified coinsurance basis represented 42% of our reinsurance revenues for the same period. Of the 42%, 25% relates to variable life insurance policies and 17% relates to variable annuity policies.

      Following World Financial Group’s purchase of certain assets of WMA Agency in June 2001, we entered into certain agreements with Western Reserve that provides us a first right to reinsure certain new products issued by Western Reserve or its U.S. affiliates that are sold by agents associated with World Financial Group. Concurrently, we entered into a best efforts agreement with World Financial Group in July 2001 to help us attain the opportunity to reinsure all insurance products sold by its agents for insurance companies other than Western Reserve and Western Reserve’s affiliates. Refer to Note 5 to the Consolidated Financial Statements for further discussion.

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Results of Operations

      The following table sets forth certain operating data as a percentage of total revenue for the periods indicated:

      Premiums. Premiums decreased $584,000, or 3%, from $18.0 million for the year ended December 31, 2002 to $17.4 million for the same period in 2003. The majority of the premium decrease was due to the decreasing business in force under our renewable term agreements, which is partially offset by an increase in the average premium per policy. Policies in force are decreasing because the number of policy surrenders and lapses currently exceeds the number of new policies reinsured. Average premiums per policy increase as the insured grows older.

      Reinsured Policy Revenues. Reinsured policy revenues decreased $1.1 million, or 8%, from $13.9 million for the year ended December 31, 2002 to $12.8 million for the same period in 2003. This decrease was primarily attributable to a decline in mortality and expense charges and asset-based allowances resulting from a decline in average account balances in 2003 as compared to the same periods in 2002 and the effect of policy surrender activity for our variable annuity business.

      Net Investment Income and Net Realized Gain on Investments. Net investment income decreased $335,000, or 45%, from $742,000 for the year ended December 31, 2002 to $407,000 for the same period in 2003, primarily due to the decreased size of our fixed maturity securities portfolio during 2003 as compared to 2002. The decrease in our fixed maturity securities portfolio resulted from the sale of

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Investment Purchases and Sales

      Net realized gain on investments decreased $406,000, from $428,000 for the year ended December 31, 2002 to $21,000 for the same period in 2003. The decrease was due to the sale of $9.9 million of fixed maturity securities in 2002 as compared to sales of only $421,000 of securities in 2003. Net realized gains are caused by a decline in market yields, which resulted in an increase in the fair value of the fixed maturity securities in our portfolio.

      Benefits, Claims and Settlement Expenses. Benefits, claims, and settlement expenses increased $840,000, or 10%, from $8.4 million for the year ended December 31, 2002 to $9.3 million for the same period in 2003. The increase was primarily associated with a lower incidence of life insurance death claims in 2002 compared to the incidence of death claims in 2003, an increase in the average death claim size, and the increasing age of the policies reinsured, partially offset by a decline in the aggregate face value of insurance. The aggregate face value of insurance underlying the polices we reinsured at December 31, 2002 was $8.5 billion compared to $7.6 billion at December 31, 2003.

      Change in Future Policy Benefits. Change in future policy benefits decreased $471,000, or 31%, from $1.5 million for the year ended December 31, 2002 to $1.1 million for the same period in 2003. The decrease resulted from the aging of the policies and the decrease in business in force reinsured on a monthly renewable term basis.

      Reinsurance Expense Allowances, Net. Net reinsurance expense allowances decreased $382,000, or 4%, from $8.5 million for the year ended December 31, 2002 to $8.1 million for the same period in 2003. These amounts reflect the decrease in business in force due to policy lapse and surrender activity. The decrease was also due to lower average account balances in 2003 as compared to the same periods in 2002 because of equity market performance.

      Amortization of Deferred Acquisition Costs. Amortization of deferred acquisition costs decreased $1.5 million, or 21%, from $7.0 million for the year ended December 31, 2002 to $5.5 million for the same period in 2003. The decrease in amortization primarily resulted from additional amortization in 2002 due to the then higher than expected surrender experience, including “unlocking” our near term surrender assumptions to reflect the increase in our surrender experience (akin to industry-wide surrender experience).

      Under current assumptions, and all else being equal, we do not expect that there would be increased amortization in 2004 from “unlocking” due to lower than expected equity market performance unless separate account fund yields were to decline by 20% or more in 2004.

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      Operating Expenses. Operating expenses increased $267,000, or 9%, from $3.1 million for the year ended December 31, 2002 to $3.4 million for the same period in 2003. These expenses include salaries and benefits, professional fees for legal, actuarial and accounting fees and other operating expenses. The majority of the increase was attributable to an increase of $572,000 resulting from directors’ and officers’ insurance premiums, office operating expenses, professional fees, marketing expenses, taxes and licenses, and shareholder communications. These increases were partially offset by a $301,000 decrease in salaries, bonuses and recruiting expenses due to the reductions in staffing and employee bonuses.

      Costs of Withdrawn Offering. During October 2002, we withdrew the registration statement for our proposed initial public offering of 9.5 million shares of common stock. Offering costs related to our withdrawn offering were $1.7 million for the year ended December 31, 2002. These costs, which consisted primarily of legal, printing, accounting, and actuarial fees, were expensed during the quarter ended September 30, 2002. We did not incur any similar expenses in 2003.

      Interest Expense. Interest expense decreased $5,000, or 1%, from $380,000, for the year ended December 31, 2002 to $375,000 for the comparable period in 2003. The decrease was due to the interest associated with the $7.2 million settlement paid to Western Reserve on April 2, 2002 to fund the reinsurance amendments that were effective January 1, 2002.

      Income Taxes. Due to higher levels of income before income taxes, income taxes increased $209,000, or 26%, from $789,000 for the year ended December 31, 2002 to $998,000 for the same period in 2003. Income before income taxes is comprised of income subject to taxes that is recognized and due in the current period and income subject to taxes that is recognized during the current period but is due in future periods. The “small life insurance company deduction” available under Section 806 of the Internal Revenue Code for qualifying life insurance companies can reduce the effective federal income tax rate from 34% to less than 20% depending upon the amount of current taxable income. For the years ended December 31, 2002 and 2003, we had no current taxable income and, as a result, we were unable to take advantage of any of the small life insurance company deduction. For 2003, however, we were subject to alternative minimum tax. Our effective tax rate was 34% in both 2002 and 2003.

      In accordance with Statements of Financial Accounting Standards (“SFAS”) No. 109, Accounting for Income Taxes, we have $2.4 million of net operating loss carryforwards, which begin to expire in 2018. These net operating loss carryforwards at a 34% effective tax rate are included as an offset to the deferred tax liability. It is our belief that it is more likely than not that the deferred tax assets will be realized as an offset against future taxable income, however, if we do not have sufficient taxable income in the future to utilize this asset, a write-off may result, thereby reducing our net income.

      Premiums. Premiums decreased $1.2 million, or 6%, from $19.2 million for the year ended December 31, 2001 to $18.0 million for the comparable period in 2002. The majority of this decrease was due to the conversion of all Western Reserve Financial Freedom Builder variable universal life policies and riders, issued from April 1, 2001 through December 31, 2001, which had been reinsured by us on a monthly renewable term basis, to a coinsurance and modified coinsurance basis, effective January 1, 2002.

      Reinsured Policy Revenues. Reinsured policy revenues increased $2.7 million, or 24%, from $11.2 million for the year ended December 31, 2001 to $13.9 million for the same period in 2002. This increase was due to: (1) the conversion of certain Financial Freedom Builder variable universal life policies and riders, as described above; (2) the reinsurance, at a quota share rate of 20%, of the Western Reserve Freedom Elite Builder variable universal life policies sold by the agents associated with World Financial Group and issued from July 1, 2001 through December 31, 2001; (3) the increase in our reinsurance on a coinsurance and modified coinsurance basis, from a 10% quota share rate to a 14% quota share rate, of all Western Reserve variable annuity policies sold by those agents and issued from January 1, 1999 through December 31, 2001; and (4) an increase in revenues from surrender charges in

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      Net Investment Income and Net Realized Gain on Investments. Net investment income decreased $69,000, or 8%, from $811,000 for the year ended December 31, 2001 to $742,000 for the same period in 2002, primarily due to the decreased size of our investment portfolio. The decrease in our investment portfolio resulted from the $7.2 million reinsurance expense allowance payment to Western Reserve in April 2002, relating to the amendments of our reinsurance agreements effective January 1, 2002, and a greater portion of our assets being invested in cash and cash equivalents in 2002. Net realized gain on investments increased $383,000, from $45,000 for the year ended December 31, 2001 to $428,000 for the same period in 2002. The increase was due to the sale of fixed maturity securities during fourth quarter 2002. We sold $9.9 million of securities in 2002 compared to $1.7 million of securities in 2001. These gains were caused by a decline in market yields, which resulted in an increase in the fair value of the fixed maturity securities in our portfolio.

      Benefits, Claims and Settlement Expenses. Benefits, claims, and settlement expenses increased $2.1 million, or 33%, from $6.3 million for the year ended December 31, 2001 to $8.4 million for the same period in 2002. The increase was primarily associated with a lower incidence of life insurance death claims in 2001 compared to the incidence of death claims in 2002, the increasing age of the policies reinsured and an increase in variable annuity death claims. The aggregate face value of insurance underlying the polices we reinsured at December 31, 2001 was $9.1 billion compared to $8.5 billion at December 31, 2002.

      Change in Future Policy Benefits. Change in future policy benefits decreased $886,000, or 37%, from $2.4 million for the year ended December 31, 2001 to $1.5 million for the same period in 2002. The majority of this decrease was due to the conversion of all Western Reserve Financial Freedom Builder variable universal life policies and riders, issued from April 1, 2001 through December 31, 2001, which had been reinsured by us on a monthly renewable term basis, to a coinsurance and modified coinsurance basis, effective January 1, 2002.

      Reinsurance Expense Allowances, Net. Net reinsurance expense allowances increased $17,000, or less than 1%, for the year ended December 31, 2001 compared to the same period in 2002. These amounts are reflective of the increase in business in force primarily attributable to the amendments to our reinsurance agreements effective January 1, 2002, offset by the decrease in business in force due to lapse and surrender activity.

      Amortization of Deferred Acquisition Costs. Amortization of deferred acquisition costs increased $3.1 million, or 79%, from $3.9 million for the year ended December 31, 2001 to $7.0 million for the same period in 2002. Higher than expected surrender experience, including “unlocking” our near term surrender assumptions to reflect the increase in our surrender experience (akin to industry-wide surrender experience), and lower than expected equity market performance of the separate account balances contributed to $2.8 million of the increase in amortization for the year ended December 31, 2002, as compared to the same period in 2001. In addition, amortization increased due to new business reinsured, including the amendments to our reinsurance agreements with Western Reserve effective January 1, 2002.

      Under current assumptions, and all else being equal, if separate account fund yields exceed 5% for 2003, we do not expect that there would be increased amortization in 2003 from “unlocking” due to lower than expected equity market performance. If separate account fund yields are 0% for 2003 we would expect additional amortization of approximately $500,000 for 2003 from “unlocking” due to lower than expected equity market performance.

      Operating Expenses. Operating expenses increased $1.1 million, or 60%, from $2.0 million for the year ended December 31, 2001 to $3.1 million for the same period in 2002. These expenses include salaries and benefits, professional fees for legal, actuarial and accounting expenses and other operating

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      Interest Expense. Interest expense increased $2,000, or less than 1%, from $378,000, for the year ended December 31, 2001 to $380,000 for the comparable period in 2002. The increase was due to the interest associated with the $7.2 million settlement paid to Western Reserve on April 2, 2002 to fund the reinsurance amendments that were effective January 1, 2002.

      Costs of Withdrawn Offering. During October 2002, we withdrew the registration statement for our proposed initial public offering of 9.5 million shares of common stock. Offering costs related to our withdrawn offering were $1.7 million for the year ended December 31, 2002. These costs, which consisted primarily of legal, printing, accounting, and actuarial fees, were expensed during the quarter ended September 30, 2002. We did not incur any similar expenses in 2001.

      Income Taxes. Due to lower levels of income before income taxes, income taxes decreased $1.6 million, or 67%, from $2.4 million for the year ended December 31, 2001 to $789,000 for the same period in 2002. Income before income taxes is comprised of income subject to taxes that is recognized and due in the current period and income subject to taxes that is recognized during the current period but is due in future periods. The “small life insurance company deduction” available under Section 806 of the Internal Revenue Code for qualifying life insurance companies can reduce the effective federal income tax rate from 34% to less than 20% depending upon the amount of current taxable income. For the year ended December 31, 2002, we had no current taxable income and, as a result, we were unable to take advantage of any of the small life insurance company deduction. During 2001 our effective tax rate was 30%, as compared to 34% in 2002.

      In accordance with SFAS No. 109, Accounting for Income Taxes, we have $8.4 million of net operating loss carryforwards, which begin to expire in 2018. These net operating loss carryforwards at a 34% effective tax rate are included as an offset to the deferred tax liability. It is our belief that it is more likely than not that the deferred tax assets will be realized as an offset against future taxable income, however, if we do not have sufficient taxable income in the future to utilize this asset, a write-off may result thereby reducing our net income.

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Quarterly Results of Operations

      The following table presents certain unaudited quarterly consolidated statements of income data for the eight-quarter period ended December 31, 2003, as well as the percentage of total revenue represented by each item. The information has been derived from the unaudited consolidated financial statements. The unaudited consolidated financial statements have been prepared on substantially the same basis as the audited consolidated financial statements contained herein and all adjustments, consisting only of normal recurring adjustments, which we consider to be necessary to present fairly this information when read in conjunction with the consolidated financial statements and notes thereto appearing elsewhere herein. The results of operations for any quarter are not necessarily indicative of the results to be expected for any future period.