**UNITEDSTATESSECURITIES AND EXCHANGE COMMISSION**

**WASHINGTON,D.C. 20549**

 

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**FORM 10-Q/A**

**(Amendment No. 1)**

 

| **ý** | **QUARTERLY REPORT PURSUANT TO  SECTION 13 OR 15(d) OF  THE SECURITIES EXCHANGE ACT OF 1934** |
|------------|-----------------------------------------------------------------------------------------------|

 

**OR**

 

| **o** | **TRANSITION REPORT PURSUANT TO  SECTION 13 OR 15(d) OF  THE SECURITIES EXCHANGE ACT OF 1934** |
|-------|------------------------------------------------------------------------------------------------|

 

**For thequarterly period ended June 30th, 2002**

** **

**CommissionFile Number 000-23481**

 

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**ESG RELIMITED**

(Exact name ofregistrant as specified in its charter)

 

| **Bermuda**                                                      |   | **Not Applicable**                    |
|------------------------------------------------------------------|--------|---------------------------------------|
| (State or other  jurisdiction of Incorporation of  organization) |   | (I.R.S. Employer  Identification No.) |
|                                                             |   |                                  |
| **16 Church Street**                                             |
| **Hamilton HM11, Bermuda**                                       |
| (Address of  executive offices, zip code)                        |
|                                                             |   |                                  |
| **(441) 295-2185**                                               |
| (Registrant’s  telephone number, including area code)       |

 

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Indicate by check mark whether the Registrant (1) hasfiled all reports required to be filed by Section 13 or 15(d) of the SecuritiesExchange Act of 1934 during the preceding 12 months (or for such shorter periodthat the Registrant was required to file such reports), and (2) has beensubject to such filing requirements for the past 90 days. Yes:  ýNo  o

 

The number of the Registrant’s common shares (parvalue $1.00 per share) outstanding as of August 9, 2002 was 11,902,511.

 

 

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**EXPLANATORY STATEMENT:**

 

**We are filing this Form 10-Q/A (Amendment No. 1) to restatein their entirety Items 1 and 2 of Part 1 of our quarterly report of Form 10-Qfor the quarter ended June 30, 2002. For completeness purposes, the full Form 10-Q is filed herein, however,no other parts have been amended.**

 

**As previously disclosed, Deloitte & Touche resigned asindependent auditors effective November 22, 2002 and subsequently withdrew itsaudit report related to the year ended December 31, 2001 and review reports forthe quarters ended September 30, 2001, March 31, 2002 and June 30, 2002.  We subsequently retained BDO Internationalas our new auditors.**

 

**We have restated our financial statements for the three andsix months ended June 30, 2002 and our financial statements for the year endedDecember 31, 2001 to reflect the correct accounting treatment of theco-reinsurance contract with ACE INA Overseas Insurance Company Ltd(“ACE”).  We have also restated ourfinancial statements for the years ended December 31, 2001, 2000 and 1999 andour financial statements for the three and nine months ended September 30, 2002to correct an error in our Foreign Currency Translation Account.  For further discussion of theserestatements, please refer to Managements Discussion and Analysis of FinancialCondition and Results of Operations and Notes 6 and 7 of the CondensedConsolidated Financial Statements.**

 

**Unless otherwise noted, all of the information in this Form10-Q/A is as of June 30, 2002 and does not reflect any subsequent informationon events other than this restatement.**

 

**For a discussion of our recent deregistration of our commonstock under the Securities Exchange Act of 1934, and the related delisting ofour common stock by The Nasdaq Stock Market, see “Management’s Discussion andAnalysis of Financial Condition and Results of Operations – RecentDevelopments”.**

 

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**TABLE OFCONTENTS**

 
| **ITEM**    |                                                                                        |
|-------------|---------------------------------------------------------------------------------------------|
|        |                                                                                        |
| **PART I**  |
|        |                                                                                        |
| Item  1.    | Financial  Statements and Supplementary Data                                                | 4 |
| Item  2.    | Management’s  Discussion and Analysis of Financial Condition and Results of Operations | 16 |
| Item  3.    | Quantitative  and Qualitative Disclosures about Market Risk                                 | 33 |
|        |                                                                                        |
| **PART II** |
|        |                                                                                        |
| Item 1.     | Legal Proceedings                                                                           | 34 |
| Item 2.     | Changes in Securities and Use of Proceeds                                                   | 34 |
| Item 3.     | Defaults Upon Senior Securities                                                             | 34 |
| Item 4.     | Submission of Matters to a Vote of Security  Holders                                        | 34 |
| Item 5.     | Other Information                                                                           | 34 |
| Item 6.     | Exhibits and Reports on Form 8-K                                                            | 34 |

 

Unless the context requires otherwise, references inthis Form 10-Q to “ESG,” “we,” “us,” “our” and “ours” mean ESG Re Limited andthe subsidiaries through which it operates.

 

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# **PART I****– FINANCIAL INFORMATION**

#  

# **ITEM1. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA**

#  

# **ESGRE LIMITED**

# **CondensedConsolidated Balance Sheets (as restated)**

# **(U.S.dollars in thousands except share and per share data)**

#  

|                                                                                                                                                                                                       |   | **June 30,  2002** |    | **December  31,  2001** |       |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|--------------------|---------|-------------------------|------------|
|                                                                                                                                                                                                       |   | **(Unaudited)**    |    |                    |       |
| ASSETS                                                                                                                                                                                                     |   |               |    |                    |       |
| Investments  available for sale, at fair value (cost: $110,903 and $146,369)                                                                                                                               |   | $                  | 112,000 |                    | $          | 144,844 |   |
| Cash  and cash equivalents                                                                                                                                                                                 |   | 6,244              |    | 3,915                   |       |
| Other  investments                                                                                                                                                                                         |   | 6,660              |    | 6,172                   |       |
| Total  investments and cash                                                                                                                                                                                |   | 124,904            |    | 154,931                 | ** ** |
| Accrued  investment income                                                                                                                                                                                 |   | 1,591              |    | 2,028                   |       |
| Management  fees receivable                                                                                                                                                                                |   | 947                |    | 296                     |       |
| Reinsurance  balances receivable                                                                                                                                                                           |   | 187,791            |    | 190,526                 |       |
| Reinsurance  recoverable on incurred losses                                                                                                                                                                |   | 43,824             |    | 28,630                  |       |
| Funds  retained by ceding companies                                                                                                                                                                        |   | 26,081             |    | 24,629                  |       |
| Prepaid  reinsurance premiums                                                                                                                                                                              |   | 1,397              |    | 1,523                   |       |
| Deferred  acquisition costs                                                                                                                                                                                |   | 36,348             |    | 38,886                  |       |
| Receivable  for securities sold                                                                                                                                                                            |   | 388                |    | 2,318                   |       |
| Deferred  tax asset                                                                                                                                                                                        |   | 1,368              |    | 1,339                   |       |
| Other  assets                                                                                                                                                                                              |   | 7,912              |    | 7,277                   |       |
| Cash  and cash equivalents held in a fiduciary capacity                                                                                                                                                    |   | 206                |    | 1,724                   |       |
|                                                                                                                                                                                                       |   |               |    |                    |       |
| TOTAL ASSETS                                                                                                                                                                                               |   | $                  | 432,757 |                    | $          | 454,107 |   |
|                                                                                                                                                                                                       |   |               |    |                    |       |
| LIABILITIES                                                                                                                                                                                                |   |               |    |                    |       |
| Unpaid  losses and loss expenses                                                                                                                                                                           |   | $                  | 172,854 |                    | $          | 148,905 |   |
| Unearned  premiums                                                                                                                                                                                         |   | 82,828             |    | 100,718                 |       |
| Acquisition  costs payable                                                                                                                                                                                 |   | 39,620             |    | 42,843                  |       |
| Reinsurance  balances payable                                                                                                                                                                              |   | 54,975             |    | 51,927                  |       |
| Accrued  expenses, accounts payable, and other liabilities ($54 and $85 due to related  parties)                                                                                                           |   | 10,437             |    | 12,920                  |       |
| Fiduciary  liabilities                                                                                                                                                                                     |   | 206                |    | 1,724                   |       |
| Total  liabilities                                                                                                                                                                                         |   | 360,920            |    | 359,037                 |       |
|                                                                                                                                                                                                       |   |               |    |                    |       |
| SHAREHOLDERS’ EQUITY                                                                                                                                                                                  |   |               |    |                    |       |
| Preference  shares, 50,000,000 shares authorized; no shares issued and outstanding as of  June 30, 2002 and December 31, 2001                                                                              |   | —             |    | —                  |       |
| Class  B common shares, 100,000,000 shares authorized; no shares issued and  outstanding as of June 30, 2002 and December 31, 2001                                                                         |   | —             |    | —                  |       |
| Common  shares, par value $1 per share; 100,000,000 shares authorized; 11,884,173  shares issued and outstanding as of June 30, 2002 and 11,831,063 shares  issued and outstanding as of December 31, 2001 |   | 11,884             |    | 11,831                  |       |
| Additional  paid-in capital                                                                                                                                                                                |   | 208,271            |    | 208,221                 |       |
| Unearned  compensation                                                                                                                                                                                     |   | (261               | )       | (333                    | )          |
| Accumulated  other comprehensive income:                                                                                                                                                                   |   |               |    |                    |       |
| Foreign  currency translation adjustments, net of tax (as restated)                                                                                                                                        |   | (1,460             | )       | (201                    | )          |
| Unrealized  gains/(losses) on securities, net of tax                                                                                                                                                       |   | 1,097              |    | (1,525                  | )          |
| Accumulated  other comprehensive income                                                                                                                                                                    |   | (363               | )       | (1,726                  | )          |
| Retained  (deficit)                                                                                                                                                                                        |   | (147,694           | )       | (122,923                | )          |
| Total  shareholders’ equity                                                                                                                                                                           |   | 71,837             |    | 95,070                  |       |
|                                                                                                                                                                                                       |   |               |    |                    |       |
| TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY                                                                                                                                                            |   | $                  | 432,757 |                    | $          | 454,107 |   |

#####  

##### The accompanying notes are an integral part of the consolidatedfinancial statements.

#####  

##### 4

##### 

#####  

# **ESG RE LIMITED**

# **Condensed Consolidated Statements ofOperations**

# **(U.S. dollars in thousands exceptshare and per share data)**

# **(Unaudited)**

#  

|                                            |   | **Three  Months Ended** |    | **Six Months  Ended** |       |
|-------------------------------------------------|--------|-------------------------|---------|-----------------------|------------|
|                                            |   | **June 30,  2002**      |    | **June 30,  2001**    | ** ** | **June 30,  2002** | ** ** | **June 30,  2001** | ** ** |
|                                            |   | **(as  restated)**      |    |                  |       | **(as  restated)** | ** ** |   | ** ** |
| REVENUES                                        |   |                    |    |                  |       |   |   |   |   |
| Net  premiums written                           |   | $                       | 22,072  |                  | $          | 29,672 |   | $ | 47,979 |   | $ | 66,865 |   |
| Change  in unearned premiums                    |   | 5,595                   |    | 10,810                |       | 18,627 |   | 13,926 |   |
|                                            |   |                    |    |                  |       |   |   |   |   |
| Net  premiums earned                            |   | 27,667                  |    | 40,482                |       | 66,606 |   | 80,791 |   |
| Management  fee revenue                         |   | 672                     |    | 190                   |       | 1,179 |   | 420 |   |
| Net  investment income                          |   | 2,114                   |    | 3,326                 |       | 3,962 |   | 6,734 |   |
| Loss  on equity investments                     |   | —                  |    | —                |       | — |   | (27 | ) |
| Net  realized investment losses                 |   | (538                    | )       | (3,481                | )          | (1,615 | ) | (2,733 | ) |
|                                            |   | 29,915                  |    | 40,517                |       | 70,132 |   | 85,185 |   |
| EXPENSES                                        |   |                    |    |                  |       |   |   |   |   |
| Losses  and loss expenses                       |   | 32,188                  |    | 26,238                |       | 57,474 |   | 56,222 |   |
| Acquisition  costs                              |   | 6,443                   |    | 13,070                |       | 19,657 |   | 25,003 |   |
| Administrative  expenses                        |   | 10,525                  |    | 7,124                 |       | 17,772 |   | 13,818 |   |
|                                            |   | 49,156                  |    | 46,432                |       | 94,903 |   | 95,043 |   |
| (LOSS)  FROM CONTINUING OPERATIONS BEFORE TAXES |   | (19,241                 | )       | (5,915                | )          | (24,771 | ) | (9,858 | ) |
| Income  tax expense                             |   | —                  |    | —                |       | — |   | — |   |
|                                            |   |                    |    |                  |       |   |   |   |   |
| NET  (LOSS)                                     |   | $                       | (19,241 | )                     | $          | (5,915 | ) | $ | (24,771 | ) | $ | (9,858 | ) |
| PER  SHARE DATA                                 |   |                    |    |                  |       |   |   |   |   |
| Basic  net (loss) per share                     |   | $                       | (1.62   | )                     | $          | (0.50 | ) | $ | (2.09 | ) | $ | (0.84 | ) |
| Diluted  net (loss)                             |   | (1.62                   | )       | (0.50                 | )          | (2.09 | ) | (0.84 | ) |
| WEIGHTED  AVERAGE SHARES OUTSTANDING            |   |                    |    |                  |       |   |   |   |   |
| Basic                                           |   | 11,841,685              |    | 11,787,725            |       | 11,833,804 |   | 11,785,000 |   |
| Diluted                                         |   | 11,841,685              |    | 11,787,725            |       | 11,833,804 |   | 11,785,000 |   |
| Dividends  declared per share                   |   | —                  |    | —                |       | — |   | — |   |

 

The accompanying notesare an integral part of the consolidated financial statements.

 

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# **ESG RE LIMITED**

# **Condensed Consolidated Statements ofCash Flows**

**(U.S. dollars in thousands)**

**(Unaudited)**

 
|                                                                        |   | **Six Months  Ended** |       |
|-----------------------------------------------------------------------------|--------|-----------------------|------------|
|                                                                        |   | **June 30,  2002**    |       | **June 30,  2001** | ** ** |
|                                                                        |   | **(as  restated)**    | ** ** |   | ** ** |
| CASH  FLOWS FROM OPERATING ACTIVITIES                                       |   |                  |       |   |   |
| Net  cash used in operating activities                                      |   | $                     | (31,693    | ) | $ | (14,460 | ) |
|                                                                        |   |                  |       |   |   |
| CASH  FLOWS FROM INVESTING ACTIVITIES                                       |   |                  |       |   |   |
| Cost  of fixed maturity investments acquired – available for sale      |   | (119,210              | )          | (151,764 | ) |
| Proceeds  from sale of fixed maturity investments – available for sale |   | 155,559               |       | 158,530 |   |
| Funding  of other investments                                               |   | (328                  | )          | (854 | ) |
| Purchases  of fixed assets                                                  |   | (1,999                | )          | (758 | ) |
| Net  cash provided by investing activities                                  |   | 34,022                |       | 5,154 |   |
|                                                                        |   |                  |       |   |   |
| CASH  FLOWS FROM FINANCING ACTIVITIES                                       |   |                  |       |   |   |
| Grant/(repurchase)  of common shares                                        |   | —                |       | (58 | ) |
| Net  cash used in financing activities                                      |   | —                |       | (58 | ) |
|                                                                        |   |                  |       |   |   |
| Net  increase/(decrease) in cash                                            |   | 2,329                 |       | (9,364 | ) |
| Cash  and cash equivalents at January 1                                     |   | 3,915                 |       | 26,032 |   |
|                                                                        |   |                  |       |   |   |
| Cash  and cash equivalents at June 30                                       |   | $                     | 6,244      |   | $ | 16,668 |   |
|                                                                        |   |                  |       |   |   |
| SUPPLEMENTAL  CASH FLOW INFORMATION NON-CASH FINANCING TRANSACTION:         |   |                  |       |   |   |
| Issuance  of common shares                                                  |   | $                     | 53         |   | $ | 11 |   |

 

The accompanying notesare an integral part of the consolidated financial statements.

 

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#### **ESGRE LIMITED**

#### **CondensedConsolidated Statements of Comprehensive Income**

**(U.S. dollars in thousands)**

**(Unaudited)**

 
|                                                 |   | **Three  Months Ended** |    | **Six Months  Ended** |       |
|------------------------------------------------------|--------|-------------------------|---------|-----------------------|------------|
|                                                 |   | **June 30,  2002**      |    | **June 30,  2001**    | ** ** | **June 30,  2002** | ** ** | **June 30,  2001** | ** ** |
|                                                 |   | **(as  restated)**      |    |                  | ** ** | **(as restated)** | ** ** |   | ** ** |
|                                                 |   |                    |    |                  |       |   |   |   |   |
| Net  loss                                            |   | $                       | (19,241 | )                     | $          | (5,915 | ) | $ | (24,771 | ) | $ | (9,858 | ) |
| Other  comprehensive income, net of tax:             |   |                    |    |                  |       |   |   |   |   |
| Foreign  currency translation adjustments            |   | (1,517                  | )       | 23                    |       | (1,259 | ) | 333 |   |
| Net  unrealized holding gains/(losses) on securities |   | 2,636                   |    | (2,095                | )          | 2,622 |   | 1,403 |   |
| Other  comprehensive income/(loss)                   |   | 1,119                   |    | (2,072                | )          | 1,363 |   | 1,736 |   |
|                                                 |   |                    |    |                  |       |   |   |   |   |
| Comprehensive  loss                                  |   | $                       | (18,122 | )                     | $          | (7,987 | ) | $ | (23,408 | ) | $ | (8,122 | ) |

 

The accompanying notesare an integral part of the consolidated financial statements.

 

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# **NOTES TO THE UNAUDITED CONDENSEDCONSOLIDATED FINANCIAL STATEMENTS**

#  

**1.  BASIS OFPRESENTATION**

 

The accompanyingunaudited condensed consolidated financial statements of ESG Re Limited havebeen prepared in accordance with generally accepted accounting principles inthe United States of America (“U.S. GAAP”) except pursuant to the rules andregulations of the Securities and Exchange Commission which do not include allof the information and footnotes required by generally accepted accountingprinciples for complete financial statements. In the opinion of management, these unaudited condensed consolidatedfinancial statements reflect all adjustments considered necessary for a fairpresentation of financial position, results of operations and comprehensiveincome as of and for the periods presented. The results of operations for any interim period are not necessarilyindicative of the results for a full year. These unaudited condensed consolidated financial statements should beread in conjunction with the audited consolidated financial statements for theyear ended December 31, 2001, and related notes thereto, included in our 2001Annual Report on Form 10-K/A (Amendment No. 4) filed with the Securities andExchange Commission on May 30, 2003.

 

**2.  SUMMARY OFSIGNIFICANT ACCOUNTING POLICIES**

 

Our condensedconsolidated financial statements have been prepared in accordance with U.SGAAP.  Our significant accountingpolicies include the following:

 

(A)                              PREMIUMREVENUES

 

We estimate andrecognize premiums written at the inception of the reinsurance contract basedupon information received from intermediaries and ceding companies.  We compare estimated written premiums toactual premiums as reported by ceding companies on a periodic basis.  The timeliness and frequency of cedingcompany reports vary considerably by ceding company, line of business andgeographic area, therefore the actual ultimate premium written may not be knownwith certainty for prolonged periods, following the expiration of thereinsurance contract.  Differencesbetween such estimates and actual amounts as reported by ceding companies arerecorded in the period in which the actual amounts are determined.

 

The reinsurancecontracts which we enter are primarily of short duration.  For retroactive contracts the amount bywhich the amount paid for reinsurance coverage exceeds the recorded liabilitiesis charged to earnings.  If theliabilities exceed the amount paid the excess is deferred and amortized intoincome over the remaining settlement period. Premiums written are recognized as earned over the coverage period inproportion to the amount of protection provided.  Unearned premium reserves are established to cover the unexpiredcontract period.

 

(B)                                RESERVEFOR LOSSES AND LOSS EXPENSES

 

The reserve forunpaid losses and loss adjustment expenses includes an estimate of reportedcase reserves and an estimate for losses incurred but not reported.  Case reserves are estimated based on cedingcompany reports and other data considered relevant to the estimationprocess.  We have some specifichistorical experience on a significant number of our programs on which to baseour estimate of losses incurred but not reported.  There is a reliance on the expectations of ceding companies aboutultimate loss ratios at the inception of the contracts, supplemented byindustry experience, which increases the uncertainty involved in the lossestimation process.  The reserves asestablished by management are reviewed quarterly and adjustments are made inthe periods in which they become known. Although management believes that an adequate provision has been madefor the liability for losses and loss expenses based on all availableinformation, there can be no assurance that the ultimate losses will not differsignificantly from the amounts provided.

 

(C)                                INVESTMENTS

 

Fixed maturitysecurities are classified as available for sale and are reported at estimatedfair value.  Investments that areavailable for sale are expected to be held for an indefinite period but may besold depending on interest rates and other considerations.  Other investments over which we exercisesignificant influence are accounted for under the equity method.  Otherwise these investments are accountedfor at cost.  Unrealized investmentgains and losses on investments available for sale, net of applicable deferredincome tax, are reported as a separate component of “accumulated other comprehensiveincome”.  Realized gains or losses onsale of investments are determined on the basis of average cost.  The costs of investments available for saleand other investments are adjusted for impairments in value that are consideredto be other than temporary.

 

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(D)                               DEFERREDACQUISITION COSTS

 

We defer costs relatingto the production of new business, primarily commissions and telemarketingcosts in respect of our Direct business, and include them in the deferredacquisition cost asset to the extent that they are recoverable from futurerelated policy revenues.  We amortizethe deferred acquisition costs in respect of commissions over the periods inwhich the related premiums are earned. We amortize the deferred acquisition costs in relation to telemarketingover the expected life of the policies. We review our deferred costs todetermine if they are recoverable from future income, including investmentincome, and, if they are not, we charge them as an expense.

 

(E)                                 REINSURANCEPREMIUMS CEDED

 

Reinsurancepremiums ceded are reported as prepaid reinsurance premiums and amortized overthe respective contract or policy periods in proportion to the amount ofinsurance protection provided. Commissions on reinsurance ceded are deferred over the terms of thecontracts of reinsurance to which they relate and amortized in proportion tothe amount of insurance protection provided.

 

(F)                                 FOREIGNCURRENCY TRANSLATION

 

Our functional andreporting currency is the U.S. dollar. Foreign currency receivables or payables that are denominated in acurrency other than U.S. dollars are translated into U.S. dollars at the ratesof exchange in effect at the balance sheet date.  Revenues and expenses are translated into U.S. dollars usingweighted average exchange rates for the period.  The resulting exchange gains or losses are included in theresults of operations.  Exchange gainsand losses related to the translation of investments available for sale areincluded in the net unrealized appreciation (depreciation) of investments, netof deferred income taxes, as a separate component of “accumulated othercomprehensive income.”  Assets andliabilities related to foreign operations are translated into U.S. dollars atthe exchange rate in effect at the balance sheet date; revenues and expensesare translated into U.S. dollars using weighted average exchange rates for theperiod.  Gains and losses resulting fromtranslating foreign currency financial statements, net of deferred income taxes,are excluded from income and included as a separate component of “accumulatedother comprehensive income.”

 

(G)                                USEOF ESTIMATES

 

The preparation offinancial statements in accordance with U.S. GAAP requires management to makeestimates and assumptions that affect the reported amounts of assets andliabilities and disclosure of contingent assets and liabilities at the date ofthe financial statements and the reported amounts of revenues and expensesduring the reporting period as well as the disclosure of such amounts.  Actual results, particularly for premiumswritten, premiums earned and loss reserves could materially differ from thoseestimates and assumptions.

 

(H)                               FAIRVALUE OF FINANCIAL INSTRUMENTS

 

The carrying valueof our investments approximates their fair value and is based on quoted marketprices.  Due to the uncertainty withrespect to both the timing and amount of the proceeds to be realized from ourother investments, it is not practicable to determine the fair value of theseother investments.  The carrying valuesof other financial instruments, including cash and cash equivalents, accruedinvestment income, and other receivables and payables approximate theirestimated fair value due to the short term nature of the balances.

 

**3.  ACCOUNTINGPRONOUNCEMENTS**

 

In June 2001, the FASBissued Statement of Financial Accounting Standard (SFAS) No. 141, *Business Combinations*.  SFAS No. 141 requires that all businesscombinations initiated after June 30, 2002 be accounted for under the purchasemethod and addresses the initial recognition and measurement of goodwill andother intangible assets acquired in a business combination.  The adoption of SFAS No. 141 did not have animpact on our financial position, results of operations, or cash flows.

 

In June 2001, FASB issuedStatement of Financial Accounting Standard (SFAS) No. 142, *Goodwill and Other Intangible Assets*.  SFAS No. 142 addresses the initialrecognition and measurement of intangible assets acquired outside of a businesscombination and the accounting for goodwill and other intangible assetssubsequent to their acquisition.  SFASNo. 142 provides that intangible assets with finite useful lives be amortizedand that goodwill and intangible assets with indefinite lives not be amortized,but rather be tested at least annually for

 

9

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impairment. The adoption of SFAS No. 142 did not have an impact on our financialposition, results of operations, or cash flows.

 

In October 2001, the FASBissued SFAS No. 144, *Accounting for theImpairment or Disposal of**Long-LivedAssets* (SFAS No. 144).  SFASNo. 144 supersedes SFAS No. 121, *Accountingfor the**Impairment of Long-LivedAssets and for Long-Lived Assets to be Disposed of*, and someprovisions of Accounting Principles Board Opinion 30.  SFAS No. 144 sets new criteria for determining when an asset canbe classified as held-for-sale as well as modifying the financial statementpresentation requirements of operating losses from discontinuedoperations.  SFAS No. 144 is effectivefor fiscal years beginning after December 15, 2001.  The adoption of SFAS No. 144 did not have an impact on ourfinancial position, results of operations, or cash flows.

 

In July 30, 2002, theFASB issued SFAS No. 146, *Accounting for costs associated with exit or disposalactivities* (SFAS 146).  Thisstatement requires costs associated with exit or disposal activities to berecognized when the costs are incurred, rather than at a date of commitment toan exit or disposal plan.  SFAS 146 iseffective for disposal activities initiated after December 31, 2002.

 

**4.  COMMITMENTS ANDCONTINGENCIES**

 

*(A)*      *EMPLOYMENT CONTRACTS AND LEASECOMMITMENTS AND OTHER COMMITMENTS*

We have employment contracts with several employees for original termsof one to five years which have total minimum commitments of $0.3 million as atJune 30, 2002 and total minimum commitments of $0.6 million as at December 31,2001, excluding any performance bonuses that are determined by our Board ofDirectors.  The contracts includevarious non-compete clauses following termination of employment.

 

ESG and its subsidiarieshave various obligations under operating leases.  The future minimum commitments at June 30, 2002 under operatingleases, other commitments (4Sigma) and employment contracts are as follows:

 
| **U.S. dollars in thousands** |   | **Employment  Commitments** |   | **Lease  & Other  Commitments** |   | **Total** |   |
|-------------------------------|--------|-----------------------------|--------|-------------------------------------|--------|-----------|--------|
| Years  Ending December 31,    |   |                        |   |                                |   |      |   |
| 2002                          |   | 237                         |   | 1,124                               |   | 1,361     |   |
| 2003                          |   | 71                          |   | 789                                 |   | 860       |   |
| 2004                          |   | —                      |   | 569                                 |   | 569       |   |
| 2005                          |   | —                      |   | 289                                 |   | 289       |   |
| 2006                          |   | —                      |   | 202                                 |   | 202       |   |
| Over  five years              |   | —                      |   | 936                                 |   | 936       |   |
| Total                         |   | 308                         |   | 3,909                               |   | 4,217     |   |

 

In November 2001, we committed to make an additional capital injectionin 4Sigma of $1.8 million, in increments of $100,000 as funds are needed by4Sigma, in exchange for 1.8 million shares of Series E preferred stock.  As of June 30, 2002 we had invested $1.1million of this commitment.

 

*(B)*      *LETTERS OF CREDIT*

As of June 30, 2002,Secured Letters of Credit and Trust Accounts in the aggregate amount of $86.3million have been issued in favor of ceding companies with $24.8 millionrelated to Letters of Credit issued and $61.5 million related to Trust Accountsin force.  The Letters of Credit andTrust Accounts are secured by a lien on the Company’s fixed maturitiesinvestment portfolio, equal to 120% of the amount of the outstanding Letters ofCredit, and 102% of the amount of the outstanding Trust Accounts.  As of December 31, 2001, Secured Letters ofCredit and Trust Accounts in the amount of $91.0 million were issued in favorof ceding companies.

 

*(C)*     *PENSION OBLIGATIONS*

A subsidiary company isobligated to make contributions to defined contribution pension plans foremployees.  As of June 30, 2002 andDecember 31, 2001, there were outstanding liabilities for pension contributionsof $332 thousand and $294 thousand respectively.

 

*(D)*     *COMMITMENTS & CONTINGENCIES*

 

LITIGATION

We and our subsidiaries, in common with the insurance industry ingeneral, are subject to litigation, including claims for punitive damages, inthe normal course of business.  We donot believe that such litigation will have a material adverse effect on ourfinancial condition, future operating results, or liquidity.

 

10

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In February 2000, Odyssey Re (Sphere Drake) instituted an action inEngland against a broker, Stirling Cooke Brown and others, alleging fraud andconspiracy on the reinsurance placement of 1997 and 1998 Personal Accident andWorkers Compensation “carve out” business with Odyssey Re (Sphere Drake).  During 1998, ESG accepted a 25% quota sharereinsurance treaty with Odyssey Re (Sphere Drake).  This treaty terminated as of December 31, 1998, but we renewedour participation for 1999 directly with the underwriting agent involved in the1998 year.  In December 1999, we gavenotice to rescind our contract with Odyssey Re (UK) for misrepresentation andfailure to disclose material facts.  OnNovember 29, 2000, we filed suit in the High Court to seek a judicialconfirmation of our rescission.  OnFebruary 5, 2001, Odyssey Re (Sphere Drake) filed a response.  In December 2002, Odyssey Re (Sphere Drake)accepted our rescission of this treaty in return for a contribution to itslegal fees.

 

We have also given notice we intend to rescind the 1999 account.  This matter is in discovery and is now set forarbitration in late 2003.  We believethe outcome of the pending litigation between Odyssey Re (Sphere Drake) andStirling Cooke Brown and others will have an impact on this arbitration.

 

**5.  RELATED PARTIES**

 

Included in netinvestment income for the three months ended June 30, 2002 and 2001 are $57thousand and $66 thousand respectively, in fees charged by Head AssetManagement.  For the three months andsix months ended June 30, 2001 these fees amounted to $88 thousand and $129thousand respectively.

 

**6.  RESTATEMENT OFFINANCIAL STATEMENTS – Foreign Currency Translation**

 

Duringthe second quarter of 2002, we determined that foreign currency translationadjustments, included in other comprehensive income and other expenses, hadbeen misstated by $3,992 thousand due to an error in the system thatconsolidates the financial results of our subsidiaries.  At the same time we were unable to determinethe periods in which the original errors occurred and therefore to correct thiserror, we restated our financial statements for the year ended December 31,2001 in order to reflect a fourth quarter adjustment to foreign currencytranslation adjustments, and in accumulated other comprehensive income, otherexpenses, and consolidates statements of changes in shareholders’ equity of$3,992 thousand.  The restated accountswere filed in our 10-K/A (Amendment No. 3) filing of August 22, 2002 which hasbeen further amended in our Form 10K/A (Amendment No. 4) filing of May 30, 2003.

 

Followingfurther investigation we have subsequently determined that the error of $3,992thousand occurred in the following years:

 
|   |   | **U.S. dollars in thousands** |   |
|--------|--------|-------------------------------|--------|
|   |   |                          |   |
| 1999   |   | $                             | 488    |   |
| 2000   |   | 4,071                         |   |
| 2001   |   | (567                          | )      |
| Total  |   | $                             | 3,992  |   |

 

We have further restated our financialstatements for the fiscal years ended December 31, 2001, 2000 and 1999 in orderto reflect the correct foreign currency translation adjustments included inaccumulated other comprehensive income, other expenses, and consolidatedstatements of changes in shareholders’ equity. The restatement has had no impact on our consolidated statement ofoperations for the three and six months ended June 30, 2002 and 2001 nor on ourBalance Sheets as at June 30, 2002 and December 31, 2001.

 

The foreign currency translation accountincludes adjustments arising from the process of translating the financialstatements of non U.S. dollar subsidiaries into U.S. dollars.  Assets and liabilities of these subsidiariesare translated into U.S. dollars at the exchange rate in effect at the balancesheet date.  Revenues and expenses(“statement of operations”) for these subsidiaries are translated into U.S.dollars using weighted average exchange rates for the period.  Retained earnings, share capital andinvestments in subsidiaries are translated at historic rates.  Translation adjustments arising are includedin the equity section of the balance sheet.

 

11

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**7.   RESTATEMENT OFFINANCIAL STATEMENTS – Co-Reinsurance Agreements with ACE INA OverseasInsurance Company Ltd (“ACE”).**

 

We signed a co-reinsurance contract with ACE inNovember 2001 that became effective retroactively as of January 1, 2001.  Under SFAS 113, the premiums written duringthe retroactive period were deemed to be written on our own account with theco-reinsurance to ACE treated as a retroactive retrocession arrangement.  However, we did not show premiums earned,losses and loss adjustment expenses and acquisition costs in our reportedrevenues and expenses, in respect of the retroactive period, in the third andfourth quarters of 2001 and the first and second quarters of 2002.  During the quarter ended September 30, 2002,we realized this error in our treatment of the ACE contract and restated ourfigures for the correct accounting treatment of this contract.  In accordance with SFAS 113, we did notrecognize any of the profits of the ACE share of the reinsurance contract inour statement of operations and hence, there was no impact on our reported netincome or net loss in any affected period. The following table shows the impact that the correct accounting forthis contract had on our consolidated balance sheets as of June 30, 2002 andDecember 31, 2001.

 
|                             |   | **June 30,  2002**             |       | **December  31, 2001**       |       |
|----------------------------------|--------|--------------------------------|------------|------------------------------|------------|
|                             |   | **As  Restated**               |       | **As  previously  Reported** | ** ** | **As Restated** | ** ** | **As  previously  Reported** | ** ** |
|                             |   | **U.S.  dollars in thousands** | ** ** |
| Deferred  Acquisition Costs      |   | 36,348                         |       | 39,845                       |       | 38,886 |   | 40,308 |   |
| Unpaid  loss & loss Expenses |   | 172,854                        |       | 165,857                      |       | 148,905 |   | 146,383 |   |
| Unearned  Premiums               |   | 82,828                         |       | 93,161                       |       | 100,718 |   | 104,395 |   |
| Acquisition  Costs Payable       |   | 39,620                         |       | 39,781                       |       | 42,843 |   | 43,110 |   |
| Shareholders  Equity             |   | 71,837                         |       | 71,837                       |       | 95,070 |   | 95,070 |   |

 

The following statement shows the impact that thecorrect accounting for this contract had on our consolidated statement ofoperations for the three and six months ended June 30, 2002.  It had no impact on the consolidatedstatement of operations for the three and six months ended June 30, 2001.

 
|                      |   | **Three  months ended  June 30, 2002** |       | **Six months  ended  June 30, 2002** |       |
|---------------------------|--------|----------------------------------------|------------|--------------------------------------|------------|
|                      |   | **As  Restated**                       |       | **As previously  Reported**          | ** ** | **As  Restated** | ** ** | **As  previously  Reported** | ** ** |
|                      |   | **U.S.  dollars in thousands**         | ** ** |
| Net  premiums earned      |   | 27,667                                 |       | 24,178                               |       | 66,606 |   | 59,950 |   |
| Loss  & loss Expenses |   | 32,188                                 |       | 29,842                               |       | 57,474 |   | 52,999 |   |
| Acquisition  Costs        |   | 6,443                                  |       | 5,300                                |       | 19,657 |   | 17,476 |   |
| Net  Loss                 |   | (19,241                                | )          | (19,241                              | )          | (24,771 | ) | (24,771 | ) |

 

**8.   SEGMENT INFORMATION**

 

Weoperate two complementary business segments, ESG Reinsurance and ESGDirect.  Our larger segment ESGReinsurance, provides medical, personal accident, credit life, disability andspecial risks reinsurance to selected insurers and reinsurers.  Our smaller but growing segment ESG Directprovides direct marketing services, expertise in the development of reinsuranceand insurance products and supporting technology to financial institutions inAsia, Europe and Australia.  We do notmaintain separate balance sheet data for our operating segments.  Accordingly, we do not review and evaluatethe financial results of the operating segments based upon balance sheet data.

 

Underwriting results forthe three and six months ended June 30, 2002 and 2001, by line of business andin total, for the ESG Reinsurance segment were as follows:

 
| **Three months ended  June 30, 2002** |   | **Medical**                    |       | **Accident** |   | **Credit** |   | **Life** |   | **Other** |   | **Total** |   |
|---------------------------------------|--------|--------------------------------|------------|--------------|--------|------------|--------|----------|--------|-----------|--------|-----------|--------|
|                                  |   | **U.S.  dollars in thousands** | ** ** |
| Gross  premiums written               |   | 20,483                         |       | 2,824        |   | —     |   | 17       |   | (1,425    | )      | 21,899    |   |
| Net  premiums written                 |   | 14,406                         |       | 2,894        |   | (36        | )      | (73      | )      | (1,524    | )      | 15,667    |   |
| Net  premiums earned                  |   | 21,232                         |       | 2,364        |   | 56         |   | (367     | )      | (1,319    | )      | 21,966    |   |
| Losses  and loss expenses             |   | 17,097                         |       | 15,671       |   | 237        |   | 167      |   | (853      | )      | 32,319    |   |
| Acquisition  costs                    |   | 3,361                          |       | 259          |   | 5          |   | (81      | )      | (463      | )      | 3,081     |   |
| Operating  costs                      |   | 6,472                          |       | 2,103        |   | 38         |   | 81       |   | 139       |   | 8,833     |   |
| Net  underwriting income/(loss)       |   | (5,698                         | )          | (15,669      | )      | (224       | )      | (534     | )      | (142      | )      | (22,267   | )      |

 

12

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| **Six months ended  June 30, 2002** |   | **Medical**                    |       | **Accident** |   | **Credit** |   | **Life** |   | **Other** |   | **Total** |   |
|-------------------------------------|--------|--------------------------------|------------|--------------|--------|------------|--------|----------|--------|-----------|--------|-----------|--------|
|                                |   | **U.S.  dollars in thousands** | ** ** |
| Gross  premiums written             |   | 35,077                         |       | 12,099       |   | (230       | )      | 279      |   | (1,121    | )      | 46,104    |   |
| Net  premiums written               |   | 25,678                         |       | 10,796       |   | (264       | )      | 217      |   | (505      | )      | 35,922    |   |
| Net  premiums earned                |   | 49,153                         |       | 7,038        |   | 184        |   | (486     | )      | (187      | )      | 55,702    |   |
| Losses  and loss expenses           |   | 38,596                         |       | 18,508       |   | 282        |   | 390      |   | (672      | )      | 57,104    |   |
| Acquisition  costs                  |   | 11,248                         |       | 1,805        |   | 53         |   | 105      |   | (103      | )      | 13,108    |   |
| Operating  costs                    |   | 10,211                         |       | 2,816        |   | 58         |   | 101      |   | 312       |   | 13,498    |   |
| Net  underwriting income/(loss)     |   | (10,902                        | )          | (16,091      | )      | (209       | )      | (1,082   | )      | 276       |   | (28,008   | )      |

 
| **Three months ended  June 30, 2001** |   | **Medical**                    |       | **Accident** |   | **Credit** |   | **Life** |   | **Other** |   | **Total** |   |
|---------------------------------------|--------|--------------------------------|------------|--------------|--------|------------|--------|----------|--------|-----------|--------|-----------|--------|
|                                  |   | **U.S.  dollars in thousands** | ** ** |
| Gross  premiums written               |   | 30,076                         |       | 3,153        |   | (1,989     | )      | (215     | )      | 1,717     |   | 32,742    |   |
| Net  premiums written                 |   | 28,267                         |       | 3,792        |   | (1,900     | )      | (1,162   | )      | 1,667     |   | 30,664    |   |
| Net  premiums earned                  |   | 31,412                         |       | 6,655        |   | (1,264     | )      | (1,202   | )      | 1,646     |   | 37,247    |   |
| Losses  and loss expenses             |   | 22,416                         |       | 5,255        |   | (1,780     | )      | (1,045   | )      | 1,743     |   | 26,589    |   |
| Acquisition  costs                    |   | 10,668                         |       | 417          |   | 177        |   | (336     | )      | (250      | )      | 10,676    |   |
| Operating  costs                      |   | 5,467                          |       | 564          |   | (532       | )      | (209     | )      | 286       |   | 5,576     |   |
| Net  underwriting income/(loss)       |   | (7,139                         | )          | 419          |   | 871        |   | 388      |   | (133      | )      | (5,594    | )      |

 
| **Six months ended  June 30, 2001** |   | **Medical**                    |       | **Accident** |   | **Credit** |   | **Life** |   | **Other** |   | **Total** |   |
|-------------------------------------|--------|--------------------------------|------------|--------------|--------|------------|--------|----------|--------|-----------|--------|-----------|--------|
|                                |   | **U.S.  dollars in thousands** | ** ** |
| Gross  premiums written             |   | 46,053                         |       | 10,556       |   | (3,147     | )      | (1,392   | )      | 1,957     |   | 54,027    |   |
| Net  premiums written               |   | 41,437                         |       | 7,891        |   | (2,923     | )      | (2,285   | )      | 1,797     |   | 45,917    |   |
| Net  premiums earned                |   | 44,663                         |       | 26,966       |   | (1,459     | )      | (515     | )      | 1,897     |   | 71,552    |   |
| Losses  and loss expenses           |   | 33,634                         |       | 22,829       |   | (1,897     | )      | (1,376   | )      | 1,163     |   | 54,353    |   |
| Acquisition  costs                  |   | 14,176                         |       | 6,429        |   | 82         |   | 106      |   | (417      | )      | 20,376    |   |
| Operating  costs                    |   | 7,634                          |       | 2,724        |   | (553       | )      | (97      | )      | 327       |   | 10,035    |   |
| Net  underwriting income/(loss)     |   | (10,781                        | )          | (5,016       | )      | 909        |   | 852      |   | 824       |   | (13,212   | )      |

 

Underwritingresults for the three and six months ended June 20, 2002 and 2001, by line ofbusiness and in total, for the ESG Direct segment were as follows:

 
| **Three months ended  June 30, 2002** |   | **Accident**                   |   | **Credit** |   | **Total** |   |
|---------------------------------------|--------|--------------------------------|--------|------------|--------|-----------|--------|
|                                  |   | **U.S.  dollars in thousands** |   |
| Gross  premiums written               |   | 5,225                          |   | 1,180      |   | 6,405     |   |
| Net  premiums written                 |   | 5,225                          |   | 1,180      |   | 6,405     |   |
| Net  premiums earned                  |   | 5,263                          |   | 438        |   | 5,701     |   |
| Losses  and loss expenses             |   | (464                           | )      | 333        |   | (131      | )      |
| Acquisition  costs                    |   | 3,427                          |   | (65        | )      | 3,362     |   |
| Operating  costs                      |   | 763                            |   | 818        |   | 1,581     |   |
| Net  underwriting income/(loss)       |   | 1,537                          |   | (648       | )      | 889       |   |

 

13

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| **Six months ended  June 30, 2002** |   | **Accident**                   | ** ** | **Credit** | ** ** | **Total** | ** ** |
|-------------------------------------|--------|--------------------------------|------------|------------|------------|-----------|------------|
|                                |   | **U.S.  dollars in thousands** | ** ** |
| Gross  premiums written             |   | 10,033                         |       | 2,024      |       | 12,057    |       |
| Net  premiums written               |   | 10,033                         |       | 2,024      |       | 12,057    |       |
| Net  premiums earned                |   | 10,093                         |       | 811        |       | 10,904    |       |
| Losses  and loss expenses           |   | (9                             | )          | 379        |       | 370       |       |
| Acquisition  costs                  |   | 6,413                          |       | 136        |       | 6,549     |       |
| Operating  costs                    |   | 2,511                          |       | 1,552      |       | 4,063     |       |
| Net  underwriting income/(loss)     |   | 1,178                          |       | (1,256     | )          | (78       | )          |

 
| **Three months ended  June 30, 2001** |   | **Accident**                   | ** ** | **Credit** | ** ** | **Total** | ** ** |
|---------------------------------------|--------|--------------------------------|------------|------------|------------|-----------|------------|
|                                  |   | **U.S.  dollars in thousands** | ** ** |
| Gross  premiums written               |   | 2,638                          |       | (3,631     | )          | (993      | )          |
| Net  premiums written                 |   | 2,638                          |       | (3,631     | )          | (993      | )          |
| Net  premiums earned                  |   | 2,709                          |       | 526        |       | 3,235     |       |
| Losses  and loss expenses             |   | (516                           | )          | 165        |       | (351      | )          |
| Acquisition  costs                    |   | 2,454                          |       | (60        | )          | 2,394     |       |
| Operating  costs                      |   | 1,066                          |       | 403        |       | 1,469     |       |
| Net  underwriting (loss)/income       |   | (295                           | )          | 18         |       | (277      | )          |

 
| **Six months ended  June 30, 2001** |   | **Accident**                   | ** ** | **Credit** | ** ** | **Total** | ** ** |
|-------------------------------------|--------|--------------------------------|------------|------------|------------|-----------|------------|
|                                |   | **U.S.  dollars in thousands** | ** ** |
| Gross  premiums written             |   | 8,577                          |       | 12,370     |       | 20,947    |       |
| Net  premiums written               |   | 8,577                          |       | 12,370     |       | 20,947    |       |
| Net  premiums earned                |   | 8,543                          |       | 696        |       | 9,239     |       |
| Losses  and loss expenses           |   | 1,671                          |       | 199        |       | 1,870     |       |
| Acquisition  costs                  |   | 4,682                          |       | (54        | )          | 4,628     |       |
| Operating  costs                    |   | 3,182                          |       | 420        |       | 3,602     |       |
| Net  underwriting (loss)/income     |   | (992                           | )          | 131        |       | (861      | )          |

 

14

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**INDEPENDENTACCOUNTANTS’ REVIEW REPORT**

 

**Report of Independent Accountants**

 

To the Board of Directorsand Shareholders

ESG Re Limited

 

We have reviewed thecondensed consolidated balance sheet of ESG Re Limited and subsidiaries as ofJune 30, 2002, and the related condensed consolidated statements of operationsand comprehensive income/loss for the three-month and six-month periods endedJune 30, 2002 and 2001, and cash flows for the six-month periods ended June 30,2002 and 2001 included in the accompanying Securities and Exchange CommissionForm 10-Q (Amendment No. 1) for the period ended June 30, 2002. These financialstatements are the responsibility of the Company’s management.

 

We conducted our reviewin accordance with standards established by the American Institute of CertifiedPublic Accountants. A review of interim financial information consistsprincipally of applying analytical procedures to financial data, and makinginquiries of persons responsible for financial and accounting matters. It issubstantially less in scope than an audit conducted in accordance withgenerally accepted auditing standards, the objective of which is the expressionof an opinion regarding the financial statements taken as a whole. Accordingly,we do not express such an opinion.

 

Based on our reviews, weare not aware of any material modifications that should be made to thecondensed consolidated financial statements referred to above for them to be inconformity with accounting principles generally accepted in the United Statesof America.

 

We have previouslyaudited, in accordance with auditing standards generally accepted in the UnitedStates of America, the consolidated restated balance sheet as of December 31,2001, and the related restated consolidated statements of operations,comprehensive income/loss, shareholders’ equity, and cash flows for the year then ended (notpresented herein); and in our report dated March 31, 2003, we expressed anunqualified opinion on those consolidated financial statements. In our opinion,the information set forth in the accompanying condensed consolidated balancesheet as of December 31, 2001 is fairly stated in all material respects inrelation to the consolidated balance sheet from which it has been derived,after giving effect to the restatement discussed in the following paragraph.

 

The condensedconsolidated balance sheets as of June 30, 2002 and December 31, 2001 and thecondensed consolidated statements of operations and comprehensive income/lossfor the three-month and six-month periods ended June 30, 2002 and 2001 and cashflows for the six-month periods ended June 30, 2002 and 2001 have beenrestated.  The effects of therestatements are set out in Notes 6 and 7 to the unaudited condensedconsolidated financial statements.

 

 

BDO International

 

Dublin Ireland

 

Date: May 30, 2003

 

15

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**ITEM2.   MANAGEMENT DISCUSSION AND ANALYSISOF FINANCIAL CONDITION AND RESULTS OF****OPERATIONS.**

 

*The following discussion and analysis addresses thefinancial condition of ESG as of June 30, 2002 compared with December 31, 2001and our results of operation for the three months and six months ended June 30,2002, compared with the same period last year. You should read this discussion and analysis with our unauditedcondensed consolidated financial statements and related notes included in Item1 of this Form 10-Q,  and our auditedfinancial statements and related notes contained in our 2001 Annual Report onForm 10-K/A (Amendment No. 4).  Ourindependent accountants have reviewed our unaudited condensed consolidatedfinancial statements for the three months and six months ended June 30, 2001and 2002 in accordance with standards established by the American Institute ofCertified Public Accountants.   Theresults of our operations for the period ended June 30, 2002 are notnecessarily indicative of our results for the full year.*

 

*Certain statements and information included in this Form10-Q constitute “forward-looking statements” within the meaning of the PrivateLitigation Reform Act of 1995.  Thesestatements express our intentions, strategies, or predictions for thefuture.   Actual results may differ fromESG’s predictions.   For moreinformation regarding forward-looking statements, please see “CautionaryStatement Regarding Forward-Looking Statements,” below.*

 

**RecentDevelopments**

 

*Market Information*

 

From December 12, 1997 toNovember 20, 2002, our common stock was traded on NASDAQ under the symbolESREF.  On November 20, 2002, thetrading symbol was changed to ESREE to reflect the unfiled status of ourQuarterly Report on Form 10-Q for the quarter ended September 30, 2002.

 

On November 25, 2002, wereceived a Nasdaq Staff Determination letter indicating that, as a result ofour failure to timely file its Report on Form 10-Q for the period endedSeptember 30, 2002, our securities would be delisted from the Nasdaq StockMarket, effective at the opening of business on December 3, 2002.  We requested an oral hearing before a NasdaqListing Qualifications Panel (the “Panel”) to review the Staff Determination,which request stayed the delisting of our securities.  Thereafter, on December 17, 2002, we were notified that we failedto maintain a closing bid price of at least $1.00 per share for 30 consecutivetrading days, and that we should discuss our plan to remedy that additionaldeficiency at the hearing.  The hearingwas held on December 20, 2002.  Byletter dated January 31, 2003, we were was advised that the Panel haddetermined that our securities would be delisted from The Nasdaq Stock Marketeffective with the opening of business on Tuesday, February 4, 2003.  The reason given for the decision was thefailure to timely file our quarterly report on Form 10-Q for the quarter endedSeptember 30, 2002.  In addition, thePanel cited as a reason for its delisting decision, our failure to file any ofthe amendments to previously filed reports under the Securities Exchange Act of1934, as amended, for any of the anticipated restatements of certaininformation in our financial statements. Nasdaq’s delisting decision will not be appealed.

 

On March 17, 2003 wefiled with the SEC our certification on Form 15 to deregister our common stockunder the Securities Exchange Act of 1934, as amended (“the Exchange Act”).Upon filing, our obligations to file reports Form 10-K, Form 10-Q and otherperiodic reports that were not yet due were immediately suspended.  Our certification to deregister is expectedto become final within 90 days of filing. If the SEC determines to deny our certification within such 90 dayperiod, we would have 60 days to bring all periodic reports due current.

 

We intend to continue tomake available to our shareholders quarterly and annual financial informationin substantially the same form as presently made available.  We also intend to generally comply with thecorporate governance regulations and guidelines that would be applicable if ourcommon stock was still registered under the Exchange Act and listed on Nasdaq.

 

The Company’s securitiesare being quoted through the Pink Sheets stock quotation service.  We anticipate (although there is noassurance), that Carr Securities Corp., Port Washington, NY, and Morgan Keegan& Co., Inc., Birmingham, AL, will continue to quote our common stock.  There is no assurance that a trading marketwill develop.

 

*LegalProceedings*

 

We and our subsidiaries, in common with the insurance industry ingeneral, are subject to litigation, including claims for punitive damages, inthe normal course of business.  We donot believe that such litigation will have a material adverse effect on ourfinancial condition, future operating results, or liquidity.

 

16

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In February 2000, Odyssey Re (Sphere Drake) instituted an action inEngland against a broker, Stirling Cooke Brown and others, alleging fraud andconspiracy on the reinsurance placement of 1997 and 1998 Personal Accident andWorkers Compensation “carve out” business with Odyssey Re (Sphere Drake).  During 1998, ESG accepted a 25% quota sharereinsurance treaty with Odyssey Re (Sphere Drake).  This treaty terminated as of December 31, 1998, but we renewedour participation for 1999 directly with the underwriting agent involved in the1998 year.  In December 1999, we gavenotice to rescind our contract with Odyssey Re (UK) for misrepresentation andfailure to disclose material facts.  OnNovember 29, 2000, we filed suit in the High Court to seek a judicialconfirmation of our rescission.  OnFebruary 5, 2001, Odyssey Re (Sphere Drake) filed a response.  In December 2002, Odyssey Re (Sphere Drake)accepted our rescission of this treaty in return for a contribution to itslegal fees.

 

We have also given notice we intend to rescind the 1999 account.  This matter is in discovery and is now setfor arbitration in late 2003.  Webelieve the outcome of the pending litigation between Odyssey Re (Sphere Drake)and Stirling Cooke Brown and others will have an impact on this arbitration.

 

**Restatement of Financial Statements**

 

*Foreign Currency Translation*

 

Duringthe second quarter of 2002, we determined that foreign currency translationadjustments, included in other comprehensive income and other expenses, hadbeen misstated by $3,992 thousand due to an error in the system thatconsolidates the financial results of our subsidiaries.  At the same time we were unable to determinethe periods in which the original errors occurred and therefore to correct thiserror, we restated our financial statements for the year ended December 31,2001 in order to reflect a fourth quarter adjustment to foreign currencytranslation adjustments, and in accumulated other comprehensive income, otherexpenses, and consolidates statements of changes in shareholders’ equity of$3,992 thousand.  The restated accountswere filed in our 10-K/A (Amendment No. 3) filing of August 22, 2002 which hasbeen further amended in our 10-K/A (Amendment No. 4) filing of May 30, 2003.

 

Followingfurther investigation we have subsequently determined that the error of $3,992thousand occurred in the following years:

 
|   |   | **U.S. dollars in thousands** |   |
|--------|--------|-------------------------------|--------|
|   |   |                          |   |
| 1999   |   | $                             | 488    |   |
| 2000   |   | 4,071                         |   |
| 2001   |   | (567                          | )      |
| Total  |   | $                             | 3,992  |   |

 

Wehave further restated our financial statements for the fiscal years endedDecember 31, 2001, 2000 and 1999 in order to reflect the correct foreign currencytranslation adjustments included in accumulated other comprehensive income,other expenses, and consolidated statements of changes in shareholders’equity.  The restatement has had noimpact on our consolidated statement of operations for the three months endedMarch 31, 2002 and 2001 nor on our Balance Sheets as at March 31, 2002 andDecember 31, 2001.

 

Theforeign currency translation account includes adjustments arising from theprocess of translating the financial statements of non U.S. dollar subsidiariesinto U.S. dollars.  Assets andliabilities of these subsidiaries are translated into U.S. dollars at theexchange rate in effect at the balance sheet date.  Revenues and expenses (“statement of operations”) for thesesubsidiaries are translated into U.S. dollars using weighted average exchangerates for the period.  Retainedearnings, share capital and investments in subsidiaries are translated athistoric rates.  Translation adjustmentsarising are included in the equity section of the balance sheet.

 

*Co-Reinsurance Agreements with ACE INA Overseas InsuranceCompany Ltd (“ACE”).*

 

We signed a co-reinsurance contract with ACE inNovember 2001 that became effective retroactively as of January 1, 2001.  Under SFAS 113, the premiums written duringthe retroactive period were deemed to be written on our own account with theco-reinsurance to ACE treated as a retroactive retrocession arrangement.  However, we did not show premiums earned,losses and loss adjustment expenses and acquisition costs in our reportedrevenues and expenses, in respect of the retroactive period, in the third andfourth quarters of 2001 and the first and second quarters of 2002.  During the quarter ended September 30, 2002,we realized this error in our treatment of the ACE contract

 

17

----

 

and restated our figures for the correct accounting treatment of thiscontract.  In accordance with SFAS 113,we did not recognize any of the profits of the ACE share of the reinsurancecontract in our statement of operations and hence, there was no impact on ourreported net income or net loss in any affected period.  The following table shows the impact thatthe correct accounting for this contract had on our consolidated balance sheetsas of June 30, 2002 and December 31, 2001:

 
|                             |   | **June 30,  2002**             |       | **December  31, 2001**       |       |
|----------------------------------|--------|--------------------------------|------------|------------------------------|------------|
|                             |   | **As  Restated**               |       | **As  previously  Reported** | ** ** | **As  Restated** | ** ** | **As  previously  Reported** | ** ** |
|                             |   | **U.S.  dollars in thousands** | ** ** |
| Deferred  Acquisition Costs      |   | 36,348                         |       | 39,845                       |       | 38,886 |   | 40,308 |   |
| Unpaid  loss & loss Expenses |   | 172,854                        |       | 165,857                      |       | 148,905 |   | 146,383 |   |
| Unearned  Premiums               |   | 82,828                         |       | 93,161                       |       | 100,718 |   | 104,395 |   |
| Acquisition  Costs Payable       |   | 39,620                         |       | 39,781                       |       | 42,843 |   | 43,110 |   |
| Shareholders  Equity             |   | 71,837                         |       | 71,837                       |       | 95,070 |   | 95,070 |   |

 

The following statement shows the impact that thecorrect accounting for this contract had on our consolidated statement ofoperations for the three and six months ended June 30, 2002.  It had no impact on the consolidated statementof operations for the three and six months ended June 30, 2001.

 
|                      |   | **Three  months ended  June 30, 2002** |       | **Six months  ended  June 30, 2002** |       |
|---------------------------|--------|----------------------------------------|------------|--------------------------------------|------------|
|                      |   | **As  Restated**                       |       | **As  previously  Reported**         | ** ** | **As  Restated** | ** ** | **As  previously  Reported** | ** ** |
|                      |   | **U.S.  dollars in thousands**         | ** ** |
| Net  premiums earned      |   | 27,667                                 |       | 24,178                               |       | 66,606 |   | 59,950 |   |
| Loss  & loss Expenses |   | 32,188                                 |       | 29,842                               |       | 57,474 |   | 52,999 |   |
| Acquisition  Costs        |   | 6,443                                  |       | 5,300                                |       | 19,657 |   | 17,476 |   |
| Net  Loss                 |   | (19,241                                | )          | (19,241                              | )          | (24,771 | ) | (24,771 | ) |

 

**Principal Activities and Sources of Revenue**

 

Our principal activities include providing accident,health, credit, life, and special risk reinsurance and related productmarketing and development services.  Wealso manage premiums on behalf of co-reinsurers on North American businesswritten in 2001 and 2002.  We report theresults of our business activities under two segments: ESG Reinsurance and ESGDirect.  We evaluate the results ofthese segments based on business writings out of each of our producingoffices.  ESG Reinsurance providestraditional reinsurance products, primarily in the U.S. medical insurancemarket, and ESG Direct provides direct marketing services, bancassuranceservices, and supporting technologies, as well as targeted reinsurance productsfor credit life and other special risks.

 

We derive our revenues principally from:

 

•                  premiums for reinsurance products,

•                  fees for direct marketing services,

•                  management fees, and

•                  investment income.

 

**Resultsof Operations**

 

**Total Revenues**

 

Our total revenues for the three and six months endedJune 30, 2002 were $29.9 million and $70.1 million respectively, compared withtotal revenues of $40.5 million and $85.2 million for the three and six monthsended June 30, 2001 respectively.

 

18

----

 

Our net loss for thethree and six months ended June 30, 2002 was $19.2 million and $24.8 millionrespectively, compared to a net loss of $5.9 million and $9.9 million for thethree and six months ended June 30, 2001. Net loss per share for the three and six months ended June 30, 2002 was$1.62 and $2.09 respectively,   comparedwith a net loss per share of $0.50 and $0.84 for the three and six months endedJune 30, 2001.  Key elements of thequarter’s results were (i) an underwriting result of $(11.0) million, which wassignificantly below our expectations, due to losses suffered primarily on theNorwegian Occupational Injury business of $13.5 million, on contracts writtenin 1998, 1999 and 2000 and (ii) unrealized foreign exchange losses of $2.4million, primarily relating to adverse movement in the Norwegian Kroner(NOK)/US Dollar (USD) exchange rate, exacerbated by the NOK reservestrengthening in the quarter.

 

**NetUnderwriting Income**

 

For the three andsix months ended June 30, 2002, we managed, on our own behalf and on behalf ofour co-reinsurers, total premiums of $42.6 million and $63.9 millionrespectively, of which we placed $14.3 million and $5.8 million withco-reinsurers and retroceded $6.2 million and $10.2 million, resulting in netpremiums written of $22.1 million and $48.0 million respectively.

 

For the three andsix months ended June 30, 2001, we managed, on our own behalf and on behalf ofour co-reinsurers, total premiums of $33.4 million and $ 78.7 million, of whichwe placed $1.7 million and $3.8 million with co-reinsurers and retroceded $2.0million and $8.1 million, resulting in net premiums written of $29.7 millionand $66.8 respectively.

 

 The 27.5% increase in total managed premiumsand 25.6% decrease in net premiums written during the three months ended June30, 2002, as compared to the similar period in 2001, is primarily a function ofthe 50% ACE co-reinsurance arrangement in-force on North Americanbusiness.  This contract came intoeffect in January 2001.

 

Of $22.1 millionnet premiums written in the three months ended June 30, 2002, $15.7 million wasattributable to the ESG Reinsurance segment, and $6.4 million was attributableto the ESG Direct segment.  For thethree months ended June 30, 2002 total premiums managed was $42.6 million, ofwhich $36.2 million was attributable to the ESG Reinsurance segment, and $6.4million was attributable to the ESG Direct segment.

 

With respect tothe ESG Reinsurance segment, $3.2 million of the $6.2 million premiumretroceded in the three months ended June 30, 2002 relates to one contract, onthe North American business.

 

Gross and netpremiums written and net premiums earned for the three and six months endedJune 30, 2002 and 2001 were as follows:

 
|                              |   | **Three  Months Ended**      |       |
|-----------------------------------|--------|------------------------------|------------|
| **ESG Reinsurance**               |   | **June 20,  2002**           | ** ** | **June 30,  2001** | ** ** |
|                              |   | **U.S. dollars in millions** | ** ** |
| Total  premiums managed           |   | 36.2                         |       | 34.4 |   |
| Amount  placed with co-reinsurers |   | 14.3                         |       | 1.7 |   |
| Gross  premiums written           |   | 21.9                         |       | 32.7 |   |
| Retroceded                        |   | 6.2                          |       | 2.0 |   |
| Net  premiums written             |   | 15.7                         |       | 30.7 |   |
|                              |   |                         |       |   |   |
| Net  premiums earned              |   | 22.0                         |       | 37.2 |   |

 
|                              |   | **Six Months  Ended**        | ** ** |
|-----------------------------------|--------|------------------------------|------------|
| **ESG  Reinsurance**              |   | **June 20,  2002**           | ** ** | **June 30,  2001** | ** ** |
|                              |   | **U.S. dollars in millions** | ** ** |
| Total  premiums managed           |   | 51.9                         |       | 57.8 |   |
| Amount  placed with co-reinsurers |   | 5.8                          |       | 3.8 |   |
| Gross  premiums written           |   | 46.1                         |       | 54.0 |   |
| Retroceded                        |   | 10.2                         |       | 8.1 |   |
| Net  premiums written             |   | 35.9                         |       | 45.9 |   |
|                              |   |                         |       |   |   |
| Net  premiums earned              |   | 55.7                         |       | 71.5 |   |

 

19

----

 
|                              |   | **Three  Months Ended**      | ** ** |
|-----------------------------------|--------|------------------------------|------------|
| **ESG Direct**                    |   | **June 20,  2002**           | ** ** | **June 20,  2001** | ** ** |
|                              |   | **U.S. dollars in millions** | ** ** |
| Total  premiums managed           |   | 6.4                          |       | (1.0 | ) |
| Amount  placed with co-reinsurers |   | —                       |       | — |   |
| Gross  premiums written           |   | 6.4                          |       | (1.0 | ) |
| Retroceded                        |   | —                       |       | — |   |
| Net  premiums written             |   | 6.4                          |       | (1.0 | ) |
|                              |   |                         |       |   |   |
| Net  premiums earned              |   | 5.7                          |       | 3.2 |   |

 
|                              |   | **Six Months  Ended**        | ** ** |
|-----------------------------------|--------|------------------------------|------------|
| **ESG Direct**                    |   | **June 20,  2002**           | ** ** | **June 20,  2001** | ** ** |
|                              |   | **U.S. dollars in millions** | ** ** |
| Total  premiums managed           |   | 12.0                         |       | 20.9 |   |
| Amount  placed with co-reinsurers |   | —                       |       | — |   |
| Gross  premiums written           |   | 12.0                         |       | 20.9 |   |
| Retroceded                        |   | —                       |       | — |   |
| Net  premiums written             |   | 12.0                         |       | 20.9 |   |
|                              |   |                         |       |   |   |
| Net  premiums earned              |   | 10.9                         |       | 9.2 |   |

 

Total premiumsthat we manage on our behalf and on behalf of our co-reinsurers for the threeand six months ended June 30, 2002, consisted of (i) new business amounting to$15.9 million (37.3%) and $12.1 million (18.9%) respectively, and (ii) renewalbusiness amounting to $26.7 million (62.7%) and $51.8 million (81.1%)respectively.

 

**UnderwritingResults**

 

Underwriting results for the three and six monthsended June 30, 2002 and 2001, by line of business and in total, for the ESGReinsurance segment were as follows:

 
| **Three months ended  June 30, 2002** |   | **Medical**                    |   | **Accident** |   | **Credit** |   | **Life** |   | **Other** |   | **Total** |   |
|---------------------------------------|--------|--------------------------------|--------|--------------|--------|------------|--------|----------|--------|-----------|--------|-----------|--------|
|                                  |   | **U.S.  dollars in thousands** |   |
| Gross  premiums written               |   | 20,483                         |   | 2,824        |   | —     |   | 17       |   | (1,425    | )      | 21,899    |   |
| Net  premiums written                 |   | 14,406                         |   | 2,894        |   | (36        | )      | (73      | )      | (1,524    | )      | 15,667    |   |
| Net  premiums earned                  |   | 21,232                         |   | 2,364        |   | 56         |   | (367     | )      | (1,319    | )      | 21,966    |   |
| Losses  and loss expenses             |   | 17,097                         |   | 15,671       |   | 237        |   | 167      |   | (853      | )      | 32,319    |   |
| Acquisition  costs                    |   | 3,361                          |   | 259          |   | 5          |   | (81      | )      | (463      | )      | 3,081     |   |
| Operating  costs                      |   | 6,472                          |   | 2,103        |   | 38         |   | 81       |   | 139       |   | 8,833     |   |
| Net  underwriting income/(loss)       |   | (5,698                         | )      | (15,669      | )      | (224       | )      | (534     | )      | (142      | )      | (22,267   | )      |

 
| **Six months ended  June 30, 2002** |   | **Medical**                    | ** ** | **Accident** | ** ** | **Credit** | ** ** | **Life** | ** ** | **Other** | ** ** | **Total** | ** ** |
|-------------------------------------|--------|--------------------------------|------------|--------------|------------|------------|------------|----------|------------|-----------|------------|-----------|------------|
|                                |   | **U.S.  dollars in thousands** | ** ** |
| Gross  premiums written             |   | 35,077                         |       | 12,099       |       | (230       | )          | 279      |       | (1,121    | )          | 46,104    |       |
| Net  premiums written               |   | 25,678                         |       | 10,796       |       | (264       | )          | 217      |       | (505      | )          | 35,922    |       |
| Net  premiums earned                |   | 49,153                         |       | 7,038        |       | 184        |       | (486     | )          | (187      | )          | 55,702    |       |
| Losses  and loss expenses           |   | 38,596                         |       | 18,508       |       | 282        |       | 390      |       | (672      | )          | 57,104    |       |
| Acquisition  costs                  |   | 11,248                         |       | 1,805        |       | 53         |       | 105      |       | (103      | )          | 13,108    |       |
| Operating  costs                    |   | 10,211                         |       | 2,816        |       | 58         |       | 101      |       | 312       |       | 13,498    |       |
| Net  underwriting income/(loss)     |   | (10,902                        | )          | (16,091      | )          | (209       | )          | (1,082   | )          | 276       |       | (28,008   | )          |

 

20

----

 
| **Three months ended  June 30, 2001** |   | **Medical**                    | ** ** | **Accident** | ** ** | **Credit** | ** ** | **Life** | ** ** | **Other** | ** ** | **Total** | ** ** |
|---------------------------------------|--------|--------------------------------|------------|--------------|------------|------------|------------|----------|------------|-----------|------------|-----------|------------|
|                                  |   | **U.S.  dollars in thousands** | ** ** |
| Gross  premiums written               |   | 30,076                         |       | 3,153        |       | (1,989     | )          | (215     | )          | 1,717     |       | 32,742    |       |
| Net  premiums written                 |   | 28,267                         |       | 3,792        |       | (1,900     | )          | (1,162   | )          | 1,667     |       | 30,664    |       |
| Net  premiums earned                  |   | 31,412                         |       | 6,655        |       | (1,264     | )          | (1,202   | )          | 1,646     |       | 37,247    |       |
| Losses  and loss expenses             |   | 22,416                         |       | 5,255        |       | (1,780     | )          | (1,045   | )          | 1,743     |       | 26,589    |       |
| Acquisition  costs                    |   | 10,668                         |       | 417          |       | 177        |       | (336     | )          | (250      | )          | 10,676    |       |
| Operating  costs                      |   | 5,467                          |       | 564          |       | (532       | )          | (209     | )          | 286       |       | 5,576     |       |
| Net  underwriting income/(loss)       |   | (7,139                         | )          | 419          |       | 871        |       | 388      |       | (133      | )          | (5,594    | )          |

 
| **Six months ended  June 30, 2001** |   | **Medical**                    | ** ** | **Accident** | ** ** | **Credit** | ** ** | **Life** | ** ** | **Other** | ** ** | **Total** | ** ** |
|-------------------------------------|--------|--------------------------------|------------|--------------|------------|------------|------------|----------|------------|-----------|------------|-----------|------------|
|                                |   | **U.S.  dollars in thousands** | ** ** |
| Gross  premiums written             |   | 46,053                         |       | 10,556       |       | (3,147     | )          | (1,392   | )          | 1,957     |       | 54,027    |       |
| Net  premiums written               |   | 41,437                         |       | 7,891        |       | (2,923     | )          | (2,285   | )          | 1,797     |       | 45,917    |       |
| Net  premiums earned                |   | 44,663                         |       | 26,966       |       | (1,459     | )          | (515     | )          | 1,897     |       | 71,552    |       |
| Losses  and loss expenses           |   | 33,634                         |       | 22,829       |       | (1,897     | )          | (1,376   | )          | 1,163     |       | 54,353    |       |
| Acquisition  costs                  |   | 14,176                         |       | 6,429        |       | 82         |       | 106      |       | (417      | )          | 20,376    |       |
| Operating  costs                    |   | 7,634                          |       | 2,724        |       | (553       | )          | (97      | )          | 327       |       | 10,035    |       |
| Net  underwriting income/(loss)     |   | (10,781                        | )          | (5,016       | )          | 909        |       | 852      |       | 824       |       | (13,212   | )          |

 

The operatingratios for the three and six months ended June 30, 2002 and 2001, by line ofbusiness and in total, for the ESG Reinsurance segment were as follows:

 
| **Three months ended  June 30, 2002** |   | **Medical** |       | **Accident** |       | **Credit** |       | **Life** |       | **Other** |       | **Total** |       |
|---------------------------------------|--------|-------------|------------|--------------|------------|------------|------------|----------|------------|-----------|------------|-----------|------------|
|                                  |   |        | ** ** |         | ** ** |       | ** ** |     | ** ** |      | ** ** |      | ** ** |
| Loss  ratio                           |   | 80.5        | %          | 662.9        | %          | 423.2      | %          | n/m      |       | 64.7      | %          | 147.1     | %          |
| Acquisition  expense ratio            |   | 15.8        | %          | 11.0         | %          | 8.9        | %          | n/m      |       | 35.1      | %          | 14.0      | %          |
| Loss  and acquisition expense ratio   |   | 96.3        | %          | 673.9        | %          | 432.1      | %          | n/m      |       | 99.8      | %          | 161.1     | %          |
| Operating  expense ratio              |   |        |       |         |       |       |       |     |       |      |       | 40.2      | %          |
| Combined  ratio                       |   |        |       |         |       |       |       |     |       |      |       | 201.3     | %          |

 
| **Six months ended  June 30, 2002** |   | **Medical** |       | **Accident** |       | **Credit** |       | **Life** |       | **Other** |       | **Total** |       |
|-------------------------------------|--------|-------------|------------|--------------|------------|------------|------------|----------|------------|-----------|------------|-----------|------------|
|                                |   |        | ** ** |         | ** ** |       | ** ** |     | ** ** |      | ** ** |      | ** ** |
| Loss  ratio                         |   | 78.5        | %          | 263.0        | %          | 153.3      | %          | n/m      |       | 359.4     | %          | 102.5     | %          |
| Acquisition  expense ratio          |   | 22.9        | %          | 25.6         | %          | 28.8       | %          | n/m      |       | 55.1      | %          | 23.5      | %          |
| Loss  and acquisition expense ratio |   | 101.4       | %          | 288.6        | %          | 182.1      | %          | n/m      |       | 414.5     | %          | 126.0     | %          |
| Operating  expense ratio            |   |        |       |         |       |       |       |     |       |      |       | 24.2      | %          |
| Combined  ratio                     |   |        |       |         |       |       |       |     |       |      |       | 150.2     | %          |

 

The reduction in theacquisition expense ratio in the second quarter, primarily relates to theimpact of:
| (i)   |   | Premium write-downs on  business in Latin America, in the 2000 underwriting year, which carries a  significantly higher acquisition expense ratio, than that of new business and  renewals in 2001 and 2002, |
|-------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| (ii)  |   | $2.8 million  write-downs of high acquisition cost (25%) business in Western Europe, and                                                                                                                     |
| (iii) |   | Adjustments to some  accounts, where final premium has come in but costs have been lower than  expected.                                                                                                     |

 
| **Three months ended  June 30, 2001** |   | **Medical** |       | **Accident** |       | **Credit** |       | **Life** |       | **Other** |       | **Total** |       |
|---------------------------------------|--------|-------------|------------|--------------|------------|------------|------------|----------|------------|-----------|------------|-----------|------------|
|                                  |   |        | ** ** |         | ** ** |       | ** ** |     | ** ** |      | ** ** |      | ** ** |
| Loss  ratio                           |   | 71.4        | %          | 79.0         | %          | 140.8      | %          | 86.9     | %          | 105.9     | %          | 71.4      | %          |
| Acquisition  expense ratio            |   | 34.0        | %          | 6.3          | %          | (14.0      | )%         | 27.9     | %          | (15.2     | )%         | 28.7      | %          |
| Loss  and acquisition expense ratio   |   | 105.4       | %          | 85.3         | %          | 126.8      | %          | 114.8    | %          | 90.7      | %          | 100.1     | %          |
| Operating  expense ratio              |   |        |       |         |       |       |       |     |       |      |       | 15.0      | %          |
| Combined  ratio                       |   |        |       |         |       |       |       |     |       |      |       | 115.1     | %          |

 

21

----

 
| **Six months ended  June 30, 2001** |   | **Medical** |       | **Accident** |       | **Credit** |       | **Life** |       | **Other** |       | **Total** |       |
|-------------------------------------|--------|-------------|------------|--------------|------------|------------|------------|----------|------------|-----------|------------|-----------|------------|
|                                |   |        | ** ** |         | ** ** |       | ** ** |     | ** ** |      | ** ** |      | ** ** |
| Loss  ratio                         |   | 75.3        | %          | 84.7         | %          | 130.0      | %          | 267.2    | %          | 61.3      | %          | 76.0      | %          |
| Acquisition  expense ratio          |   | 31.7        | %          | 23.8         | %          | (5.6       | )%         | (20.6    | )%         | (22.0     | )%         | 28.5      | %          |
| Loss  and acquisition expense ratio |   | 107.0       | %          | 108.5        | %          | 124.4      | %          | 246.6    | %          | 39.3      | %          | 104.5     | %          |
| Operating  expense ratio            |   |        |       |         |       |       |       |     |       |      |       | 14.0      | %          |
| Combined  ratio                     |   |        |       |         |       |       |       |     |       |      |       | 118.5     | %          |

 

We calculated theoperating expenses ratios for the three months ended June 30, 2002 and June 30,2001 by expressing total administrative expenses net of corporate officeexpense, as a percentage of net premiums earned.  For a more detailed discussion of operating expenses, refer tocommentary on “Administrative Expenses”.

 

The key elementsin the performance of the Reinsurance segment for the quarter were (i) lossesof $13.5 million on Norwegian Occupational Injury business, written in 1998,1999 and 2000, and (ii) the increase in operating expenses.

 

Underwritingresults for the three and six months ended June 30, 2002 and 2001, by line ofbusiness and in total, for the ESG Direct segment were as follows:

 
| **Three months ended  June 30, 2002** |   | **Accident**                   |   | **Credit** |   | **Total** |   |
|---------------------------------------|--------|--------------------------------|--------|------------|--------|-----------|--------|
|                                  |   | **U.S.  dollars in thousands** |   |
| Gross  premiums written               |   | 5,225                          |   | 1,180      |   | 6,405     |   |
| Net  premiums written                 |   | 5,225                          |   | 1,180      |   | 6,405     |   |
| Net  premiums earned                  |   | 5,263                          |   | 438        |   | 5,701     |   |
| Losses  and loss expenses             |   | (464                           | )      | 333        |   | (131      | )      |
| Acquisition  costs                    |   | 3,427                          |   | (65        | )      | 3,362     |   |
| Operating  costs                      |   | 763                            |   | 818        |   | 1,581     |   |
| Net  underwriting income/(loss)       |   | 1,537                          |   | (648       | )      | 889       |   |

 
| **Six months ended  June 30, 2002** |   | **Accident**                   | ** ** | **Credit** | ** ** | **Total** | ** ** |
|-------------------------------------|--------|--------------------------------|------------|------------|------------|-----------|------------|
|                                |   | **U.S.  dollars in thousands** | ** ** |
| Gross  premiums written             |   | 10,033                         |       | 2,024      |       | 12,057    |       |
| Net  premiums written               |   | 10,033                         |       | 2,024      |       | 12,057    |       |
| Net  premiums earned                |   | 10,093                         |       | 811        |       | 10,904    |       |
| Losses  and loss expenses           |   | (9                             | )          | 379        |       | 370       |       |
| Acquisition  costs                  |   | 6,413                          |       | 136        |       | 6,549     |       |
| Operating  costs                    |   | 2,511                          |       | 1,552      |       | 4,063     |       |
| Net  underwriting income/(loss)     |   | 1,178                          |       | (1,256     | )          | (78       | )          |

 

The loss and lossexpenses in the quarter and in the six months ended June 30, 2002, results fromthe Company’s actual claim experience being better than originalestimates.  Estimates continue to berevised as the portfolio develops.

 
| **Three months ended  June 30, 2001** |   | **Accident**                   |   | **Credit** |   | **Total** |   |
|---------------------------------------|--------|--------------------------------|--------|------------|--------|-----------|--------|
|                                  |   | **U.S.  dollars in thousands** |   |
| Gross  premiums written               |   | 2,638                          |   | (3,631     | )      | (993      | )      |
| Net  premiums written                 |   | 2,638                          |   | (3,631     | )      | (993      | )      |
| Net  premiums earned                  |   | 2,709                          |   | 526        |   | 3,235     |   |
| Losses  and loss expenses             |   | (516                           | )      | 165        |   | (351      | )      |
| Acquisition  costs                    |   | 2,454                          |   | (60        | )      | 2,394     |   |
| Operating  costs                      |   | 1,066                          |   | 403        |   | 1,469     |   |
| Net  underwriting (loss)/income       |   | (295                           | )      | 18         |   | (277      | )      |

 

22

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| **Six months ended  June 30, 2001** |   | **Accident**                   |   | **Credit** |   | **Total** |   |
|-------------------------------------|--------|--------------------------------|--------|------------|--------|-----------|--------|
|                                |   | **U.S.  dollars in thousands** |   |
| Gross  premiums written             |   | 8,577                          |   | 12,370     |   | 20,947    |   |
| Net  premiums written               |   | 8,577                          |   | 12,370     |   | 20,947    |   |
| Net  premiums earned                |   | 8,543                          |   | 696        |   | 9,239     |   |
| Losses  and loss expenses           |   | 1,671                          |   | 199        |   | 1,870     |   |
| Acquisition  costs                  |   | 4,682                          |   | (54        | )      | 4,628     |   |
| Operating  costs                    |   | 3,182                          |   | 420        |   | 3,602     |   |
| Net  underwriting (loss)/income     |   | (992                           | )      | 131        |   | (861      | )      |

 

The operatingratios for the three and six months ended June 30, 2002 and 2001, by line ofbusiness and in total, for the ESG Direct segment were as follows:

 
| **Three Months Ended June 30, 2002** |   | **Accident** |   | **Credit** |   | **Total** |   |
|--------------------------------------|--------|--------------|--------|------------|--------|-----------|--------|
| Loss  ratio                          |   | (8.8         | )%     | 76.1       | %      | (2.3      | )%     |
| Acquisition  expense ratio           |   | 65.1         | %      | (15.1      | )%     | 59.0      | %      |
| Loss  and acquisition expense ratio  |   | 56.3         | %      | 61.0       | %      | 56.7      | %      |
| Operating  expense ratio             |   |         |   |       |   | 27.7      | %      |
| Combined  ratio                      |   |         |   |       |   | 84.4      | %      |

 
| **Six Months Ended June 30, 2002**  |   | **Accident** | ** ** | **Credit** | ** ** | **Total** | ** ** |
|-------------------------------------|--------|--------------|------------|------------|------------|-----------|------------|
| Loss  ratio                         |   | (0.1         | )%         | 46.8       | %          | 3.4       | %          |
| Acquisition  expense ratio          |   | 63.5         | %          | 16.8       | %          | 60.1      | %          |
| Loss  and acquisition expense ratio |   | 63.4         | %          | 63.6       | %          | 63.5      | %          |
| Operating  expense ratio            |   |         |       |       |       | 37.3      | %          |
| Combined  ratio                     |   |         |       |       |       | 100.8     | %          |

 
| **Three Months Ended June 30, 2001** |   | **Accident** | ** ** | **Credit** | ** ** | **Total** | ** ** |
|--------------------------------------|--------|--------------|------------|------------|------------|-----------|------------|
| Loss  ratio                          |   | (19.0        | )%         | 31.4       | %          | (10.8     | )%         |
| Acquisition  expense ratio           |   | 90.6         | %          | (11.4      | )%         | 74.0      | %          |
| Loss  and acquisition expense ratio  |   | 71.6         | %          | 20.0       | %          | 63.2      | %          |
| Operating  expense ratio             |   |         |       |       |       | 45.4      | %          |
| Combined  ratio                      |   |         |       |       |       | 108.6     | %          |

 
| **Six Months Ended June 30, 2001**  |   | **Accident** | ** ** | **Credit** | ** ** | **Total** | ** ** |
|-------------------------------------|--------|--------------|------------|------------|------------|-----------|------------|
| Loss  ratio                         |   | 19.6         | %          | 28.6       | %          | 20.2      | %          |
| Acquisition  expense ratio          |   | 54.8         | %          | (7.8       | )%         | 50.1      | %          |
| Loss  and acquisition expense ratio |   | 74.4         | %          | 20.8       | %          | 70.3      | %          |
| Operating  expense ratio            |   |         |       |       |       | 39.0      | %          |
| Combined  ratio                     |   |         |       |       |       | 109.3     | %          |

 

The loss ratio in thequarter and in the six months ended June 30, 2002, results from the Company’sactual claim experience being better than original estimates.

 

**Geographic Spread**

 

The distributionof gross written premiums for the three and six months ended June 30, 2002 and2001, is as follows:

 

23

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| **Three months ended June 30** |   | **2002** |   | **2001** |   |
|--------------------------------|--------|----------|--------|----------|--------|
| **ESG  Reinsurance**           |   |     |   |     |   |
|                           |   |     |   |     |   |
| Western  Europe                |   | (25.3    | )%     | 2.5      | %      |
| North  America                 |   | 107.9    | %      | 75.3     | %      |
| Latin  America                 |   | 6.2      | %      | 25.1     | %      |
| Asia                           |   | 0.6      | %      | (3.7     | )%     |
| Other                          |   | 10.6     | %      | 0.8      | %      |
| Total                          |   | 100.0    | %      | 100.0    | %      |

 

‘Other’ relates tobusiness originating in Eastern Europe (4.8%) and risks originating in theMiddle East (5.8%)

 
| **Three months ended June 30** |   | **2002** |   | **2001** |   |
|--------------------------------|--------|----------|--------|----------|--------|
| **ESG  Direct**                |   |     |   |     |   |
|                           |   |     |   |     |   |
| Western  Europe                |   | 18.4     | %      | 365.7    | %      |
| Asia                           |   | 81.6     | %      | (265.7   | )%     |
| Total                          |   | 100.0    | %      | 100.0    | %      |

 
| **Six months ended June 30** |   | **2002** |   | **2001** |   |
|------------------------------|--------|----------|--------|----------|--------|
| **ESG  Reinsurance**         |   |     |   |     |   |
|                         |   |     |   |     |   |
| Western  Europe              |   | (2.9     | )%     | 15.4     | %      |
| North  America               |   | 84.0     | %      | 67.6     | %      |
| Latin  America               |   | 12.1     | %      | 19.3     | %      |
| Asia                         |   | 0.3      | %      | (3.7     | )%     |
| Other                        |   | 6.5      | %      | 1.4      | %      |
| Total                        |   | 100.0    | %      | 100.0    | %      |

 
| **Six months ended June 30** |   | **2002** |   | **2001** |   |
|------------------------------|--------|----------|--------|----------|--------|
| **ESG  Direct**              |   |     |   |     |   |
|                         |   |     |   |     |   |
| Western  Europe              |   | 16.8     | %      | 59.1     | %      |
| Asia                         |   | 83.2     | %      | 40.9     | %      |
| Total                        |   | 100.0    | %      | 100.0    | %      |

 

In respect of theESG Reinsurance segment, large premium write-downs in the three months endedJune 30, 2002, on business in Western Europe, gives rise to the negativepercentage.

With respect tothe ESG Direct segment, the percentage in the three months ended June 30, 2001,was affected by write-downs of estimated premiums on the Bancassurance businessin Western Europe.

 

**Product Mix**

 

The distributionof gross premiums written by line of business for the three and six monthsended June 30, 2002 and 2001 is as follows:

 
| **Three months ended June 30,** |   | **2002** |   | **2001** |   |
|---------------------------------|--------|----------|--------|----------|--------|
| **ESG  Reinsurance**            |   |     |   |     |   |
|                            |   |     |   |     |   |
| Medical                         |   | 93.5     | %      | 91.9     | %      |
| Personal  Accident              |   | 12.9     | %      | 9.6      | %      |
| Credit                          |   | 0.0      | %      | (6.0     | )%     |
| Life                            |   | 0.1      | %      | (0.7     | )%     |
| Other                           |   | (6.5     | )%     | 5.2      | %      |
| Total                           |   | 100.0    | %      | 100.0    | %      |

 

24

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| **Three months ended June 30,** |   | **2002** |   | **2001** |   |
|---------------------------------|--------|----------|--------|----------|--------|
| **ESG  Direct**                 |   |     |   |     |   |
|                            |   |     |   |     |   |
| Personal  Accident              |   | 81.6     | %      | (265.7   | )%     |
| Credit                          |   | 18.4     | %      | 365.7    | %      |
| Total                           |   | 100.0    | %      | 100.0    | %      |

 
| **Six months ended June 30,** |   | **2002** |   | **2001** |   |
|-------------------------------|--------|----------|--------|----------|--------|
| **ESG  Reinsurance**          |   |     |   |     |   |
|                          |   |     |   |     |   |
| Medical                       |   | 76.1     | %      | 85.2     | %      |
| Personal  Accident            |   | 26.2     | %      | 19.5     | %      |
| Credit                        |   | (0.5     | )%     | (5.8     | )%     |
| Life                          |   | 0.6      | %      | (2.6     | )%     |
| Other                         |   | (2.4     | )%     | 3.7      | %      |
| Total                         |   | 100.0    | %      | 100.0    | %      |

 
| **Six months ended June 30,** |   | **2002** | ** ** | **2001** | ** ** |
|-------------------------------|--------|----------|------------|----------|------------|
| **ESG  Direct**               |   |     |       |     |       |
|                          |   |     |       |     |       |
| Personal  Accident            |   | 83.2     | %          | 40.9     | %          |
| Credit                        |   | 16.8     | %          | 59.1     | %          |
| Total                         |   | 100.0    | %          | 100.0    | %          |

 

In respect of theDirect segment, the significant change in the geographic and product splitrelates to the increase in premium on the Bancassurance credit line ofbusiness, in Western Europe.  The changein the basis of estimation used to recognize the premium on Bancassurancebusiness gives rise to a disproportionate split between Western Europe andAsia, on a geographic spread basis, and Credit and Personal Accident, on aproduct mix basis.  This change does nothave a material impact on the reported result for the quarter.

 

Initial estimatesof gross written premium on the Bancassurance business were revised from $16.6million in the first quarter 2001 to $6.7 million annualized premium, by thefourth quarter 2001.  During the threemonths ended June 30, 2001, the reduction in gross written premium for thisbusiness amounted to $3.6 million.

 

**Management Fee Revenue**

 

For the three andsix months ended June 30, 2002, we earned $0.7 million and $1.2 millionrespectively in management fee revenue. We earned $0.2 million and $0.4 million for the comparable periods in2001.  The majority of management feerevenue in 2002 and 2001 consists of fees earned on those premiums managed onbehalf of our co-reinsurers.  Managementfees increased in the second quarter of 2002, primarily due to the recognitionof fees earned on our North American business, co-reinsured.

 

**Net Investment Income**

 

As at June 30, 2002, ourcash and invested assets totaled $124.9 million, compared with cash andinvested assets of $154.9 million as at December 31, 2001.  This decrease in our cash and investedassets is primarily due to negative operating cash flows and costs associatedwith developing the ESG Direct segment. Net investment income decreased by $1.2 million from $3.3 million in thethree months ended June 30, 2001 to $2.1 million in the three months ended June30, 2002.  The decrease is a function ofthe decline in our overall investment portfolio.

 

We do not maintain separate balance sheet data for our operatingsegments.  Accordingly we do not reviewand evaluate the financial results of the operating segments based upon balancesheet data.

 

25

----

 

The followingtable reflects the investment results for the three months ended June 30, 2002:

 
|                       |   | **Average  Investments**       |   | **Net  Investment  Income(1)** |   | **Annualized  Effective  Yield** |   | **Net  Realized  Investment  Gains/(Losses)** |   |
|----------------------------|--------|--------------------------------|--------|--------------------------------|--------|----------------------------------|--------|-----------------------------------------------|--------|
|                       |   | **U.S.  dollars in thousands** |   |
|                       |   |                           |   |                           |   |                             |   |                                          |   |
| Investments                |   | 122,206                        |   | 2,016                          |   | 6.6                              | %      | (538                                          | )      |
| Other  investments         |   | 7,594                          |   | 28                             |   | 1.5                              | %      | —                                        |   |
| Cash  and cash equivalents |   | 5,424                          |   | 70                             |   | 5.2                              | %      | —                                        |   |
| Total                      |   | 135,224                        |   | 2,114                          |   | 6.3                              | %      | (538                                          | )      |

 

The followingtable reflects our investment results for the three months ended June 30, 2001:

 
|                       |   | **Average  Investments**       |   | **Net  Investment  Income(1)** |   | **Annualized  Effective  Yield** |   | **Net  Realized  Investment  Gains/(Losses)** |   |
|----------------------------|--------|--------------------------------|--------|--------------------------------|--------|----------------------------------|--------|-----------------------------------------------|--------|
|                       |   | **U.S.  dollars in thousands** |   |
|                       |   |                           |   |                           |   |                             |   |                                          |   |
| Investments                |   | 164,094                        |   | 2,846                          |   | 6.9                              | %      | 719                                           |   |
| Other  investments         |   | 14,252                         |   | 275                            |   | 7.7                              | %      | (4,200                                        | )      |
| Cash  and cash equivalents |   | 16,668                         |   | 205                            |   | 4.9                              | %      | —                                        |   |
| Total                      |   | 195,014                        |   | 3,326                          |   | 6.8                              | %      | (3,481                                        | )      |

 

The followingtable reflects the investment results for the six months ended June 30, 2002:

 
|                       |   | **Average  Investments**       |   | **Net  Investment  Income(1)** |   | **Annualized  Effective  Yield** |   | **Net  Realized  Investment  Gains/(Losses)** |   |
|----------------------------|--------|--------------------------------|--------|--------------------------------|--------|----------------------------------|--------|-----------------------------------------------|--------|
|                       |   | **U.S.  dollars in thousands** |   |
|                       |   |                           |   |                           |   |                             |   |                                          |   |
| Investments                |   | 133,278                        |   | 3,708                          |   | 5.6                              | %      | (1,615                                        | )      |
| Other  investments         |   | 9,896                          |   | 158                            |   | 3.2                              | %      |                                          |   |
| Cash  and cash equivalents |   | 5,564                          |   | 96                             |   | 3.5                              | %      | —                                        |   |
| Total                      |   | 148,738                        |   | 3,962                          |   | 5.3                              | %      | (1,615                                        | )      |

 

The followingtable reflects the investment results for the six months ended June 30, 2001:

 
|                       |   | **Average  Investments**       |   | **Net  Investment  Income(1)** |   | **Annualized  Effective  Yield** |   | **Net  Realized  Investment  Gains/(Losses)** |   |
|----------------------------|--------|--------------------------------|--------|--------------------------------|--------|----------------------------------|--------|-----------------------------------------------|--------|
|                       |   | **U.S.  dollars in thousands** |   |
|                       |   |                           |   |                           |   |                             |   |                                          |   |
| Investments                |   | 171,064                        |   | 5,775                          |   | 6.8                              | %      | 1,467                                         |   |
| Other  investments         |   | 15,498                         |   | 362                            |   | 4.7                              | %      | (4,200                                        | )      |
| Cash  and cash equivalents |   | 20,532                         |   | 597                            |   | 5.8                              | %      | —                                        |   |
| Total                      |   | 207,094                        |   | 6,734                          |   | 6.5                              | %      | (2,733                                        | )      |

 

----

(1)                                  Netinvestment income is net of investment-related expenses.

 

**InvestmentPortfolio**

 

*Maturity and Duration of Portfolio*

 

The maximum effectivematurity for any single security in our investment portfolio is set at 30 yearsfor U.S. government and U.S. government agency securities with full faith andcredit guarantees and at 10 years for all other issues, measured from the dateof settlement.  The duration of theportfolio varies according to decisions taken by management (with input fromthe investment advisor), on business changes and the outlook for interest ratemovements.  The benchmark for suchduration is approximately 3 years.

 

*Quality of Debt Securities in Portfolio*

 

The minimum averagecredit quality of our investment portfolio is AA.

 

26

----

 

*Equity Securities and Real Estate*

 

Our investment policy isto allow up to 10% of our investment assets to be held in equitysecurities.  Currently, there are noequity securities held in the Company’s portfolio.  We do not intend to invest in real estate other than for our ownuse.

 

*Diversification and Liquidity*

 

No more than 3% ofour investment portfolio may be invested in the securities of any singleissuer, with the exception of sovereign governments or agencies, includingsupranational agencies, with an AA rating or better.

 

As of June 30, 2002, total investments and cash were$124.9 million, compared to $154.9 million at December 31, 2001.  All fixed maturity securities in ourinvestment portfolio are classified as available for sale and are carried atfair value.

 

The fixed maturityinvestment portfolios as of June 30, 2002 and December 31, 2001 were asfollows:

 
| **As at June 30, 2002**                                                                |   | **Fair  Value**                |       | **Duration  (Years)** |   | **Market  Yield** |   | **Average  Credit  Rating** |   |
|----------------------------------------------------------------------------------------|--------|--------------------------------|------------|-----------------------|--------|-------------------|--------|-----------------------------|--------|
|                                                                                   |   | **U.S.  dollars in thousands** | ** ** |
| Corporate  securities                                                                  |   | 40,896                         |       | 2.3                   |   | 4.9               | %      | AA                          |   |
| U.S. treasury  securities and obligations of U.S. government corporations and agencies |   | 29,171                         |       | 2.4                   |   | 4.0               | %      | AAA                         |   |
| Asset-backed  securities/Mortgage-backed securities                                    |   | 25,146                         |       | 2.1                   |   | 6.6               | %      | AAA                         |   |
| Obligations  of states and political subdivisions                                      |   | 11,189                         |       | 2.5                   |   | 5.2               | %      | AAA                         |   |
| Foreign  currency debt securities                                                      |   | 5,598                          |       | 0.7                   |   | 4.0               | %      | AAA                         |   |
| Total                                                                                  |   | 112,000                        |       | 2.0                   |   | 4.9               | %      |                        |   |

 
| **As at December 31, 2001**                                                             |   | **Fair  Value**                |   | **Duration  (Years)** |   | **Market  Yield** |   | **Average  Credit  Rating** |   |
|-----------------------------------------------------------------------------------------|--------|--------------------------------|--------|-----------------------|--------|-------------------|--------|-----------------------------|--------|
|                                                                                    |   | **U.S.  dollars in thousands** |   |
| Corporate  securities                                                                   |   | 43,799                         |   | 2.8                   |   | 5.2               | %      | AA                          |   |
| U.S.  treasury securities and obligations of U.S. government corporations and  agencies |   | 53,466                         |   | 3.6                   |   | 4.6               | %      | AAA                         |   |
| Asset-backed  securities/Mortgage-backed securities                                     |   | 25,599                         |   | 2.5                   |   | 7.3               | %      | AAA                         |   |
| Obligations  of states and political subdivisions                                       |   | 16,505                         |   | 2.7                   |   | 5.7               | %      | AAA                         |   |
| Foreign  currency debt securities                                                       |   | 5,475                          |   | 1.0                   |   | 4.2               | %      | AAA                         |   |
| Total                                                                                   |   | 144,844                        |   | 2.7                   |   | 5.4               | %      |                        |   |

 

In 2002, we will continueto follow our investment policy and guidelines while seeking to increaselong-term value by continuing to invest in selected strategic investments inaccordance with our current commitments as set out in “Strategic Investments”below.  A strategic investment isdefined as an investment in a reinsurance-related enterprise, ceding company ordistribution channel that is expected to generate or secure additionalprofitable business for the Company.

 

**RelatedParty Transactions**

 

We are a party to severalInvestment Advisory Agreements with Head Asset Management LLC, an affiliate ofHead & Company, L.L.C.  Under theseagreements, Head Asset Management supervises and directs the investment of ourasset portfolio in accordance with investment objectives and guidelines that wehave established.  Mr. Head, theChairman of our Board of Directors and our former CEO, controls Head AssetManagement.  ESG is the principal clientof Head Asset Management.  Under ourInvestment Advisory Agreement with Head Asset Management, we pay fees quarterlyin arrears equal to:

 

•                  0.20% per year of the first $150million or less of the market value of the managed assets, and

•                  0.15% per year of the managed assetsin excess of $150 million.

 

27

----

 

We may terminate theInvestment Advisory Agreements upon five days written notice, and Head AssetManagement may terminate the agreements upon 90 days written notice.  We incurred $57 thousand and $66 thousand infees to Head Asset Management LLC in the three and six months ended June 30,2002 respectively, and $88 thousand and $129 thousand in the three and sixmonths ended June 30, 2001.

 

The Audit Committee ofour Board of Directors periodically reviews our investment policies andarrangements to ensure that they are consistent with our overall goals, strategiesand objectives.  Overall investmentguidelines are approved by the Audit Committee to ensure appropriate levels ofportfolio liquidity, credit quality, diversification and volatility.  In addition, the Audit Committee is nowreviewing our investment advisory relationship with Head Asset Management LLC,in the context of our other banking relationships, to determine whether changesshould be made to any of these relationships.

 

**Administrative Expenses**

 

Totaladministrative expenses, which includes personnel costs, professional servicefees, interest expense, foreign exchange gains/losses and other expenses,increased by $3.4 million, or 47.9%, from $7.1 million for the three monthsended June 30, 2001 to $10.5 million for the three months ended June 30,2002.  This increase results primarilyfrom realized and unrealized foreign exchange losses of $2.4 million.  Realized and unrealized foreign exchangelosses relate to the revaluation of assets and liabilities, denominated inforeign currencies.

 

**StrategicInvestments**

 

From December 1998through June 2000, we operated IPT GmbH and later VBB Bermuda Limited,subsidiaries that provided disease management services in Germany.  These services, which included physicianreferrals, a medical information hotline, second opinion services, cardiacrehabilitation and access to disease management advisors, comprised the healthcare segment of our business.

 

Effective as of June 30,2000, we transferred all the assets of our health care segment to 4Sigma.  These assets had a book value of $8 millionat the time of transfer.  In exchangefor the transferred assets, we received 8,000,000 shares of Series A preferredstock, representing a 69% equity interest in 4 Sigma.  In addition, affiliates of John C Head III, the Chairman of ourBoard of Directors, invested $3.0 million in cash in exchange for a 28% equityinterest in 4Sigma.  Dr. Gerald Moeller,a director of ESG from July 1999 to August 2000 and the president of our healthcare division from July 1999 to June 2000, also invested $400,000 in cash inexchange for a minority equity interest in 4Sigma.  The board members of 4Sigma include John C Head III, Dr. GeraldMoeller and Dr. Herbert Palmberger, who also serves as outside counsel to ESGin Germany.  During the fourth quarter2001, ESG booked a write-down of the cost, for impairment, of $8.0 millionagainst its investment in 4Sigma Ltd.

 

ESG does not have votingcontrol of, nor does it exercise operational control over, this company.

 

In the secondquarter of 2001, the Company participated in a rights offering by 4Sigma forconvertible preferred debt totaling $0.8 million, which in November 2001,converted into 0.8 million shares of Series E preferred stock.  Also, in November 2001, the Companycommitted to make an additional capital injection in 4Sigma of $1.8 million, inexchange for 1.8 million shares of Series E preferred stock.  As at June 30, 2002 we had invested $1.1million of this commitment.  Mr. Headhas also committed to invest an additional $1.2 million in cash in 4Sigma onthese same terms and conditions.  Weevaluate our investment in 4Sigma on a quarterly basis.

 

**Liquidity and Capital Resources**

 

Operating activities usednet cash of $31.7 million for the six months ended June 30, 2002 and $14.5million for six months ended June 30, 2001.

 

Reinsurance balancesreceivable decreased from $190.5 million as at December 31, 2001 to $187.8million as at June 30, 2002.  Werecognize premiums receivable at the inception of the reinsurance contract,based upon information received from intermediaries and ceding companies.  Every quarter we compare estimated writtenpremiums to actual premiums, as reported by ceding companies and revise ourestimates of written premiums if appropriate. Any change in these estimates will impact the premiums receivablebalance.

 

Reinsurance recoverableon incurred losses increased from $28.6 million as at December 31, 2001 to$43.8 million as at June 30, 2002.  Thisincrease was due to additional losses being incurred above our net retentionlevels

 

28

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that enable us to make recoveries from our excess of loss reinsurers,plus quota share cessions to two of our retrocessionaires.

 

Deferred acquisitioncosts decreased from $38.9 million at December 31, 2001 to $36.3 million atJune 30, 2002, as unearned premium declined over the period, a factor ofreduced premium writings and earnings.

 

At December 2001,reserves for unpaid losses and loss expenses were $148.9 million and at June30, 2002, reserves for unpaid losses and loss expenses were $172.9million.  This increase primarilyrelates to the deterioration on the Norwegian book of business, compounded bythe depreciation of the US Dollar against the Norwegian Kroner and other majorcurrencies in the quarter.

 

At June 30, 2002,unearned premium reserves were $82.8 million compared to $100.7 million atDecember 31, 2001.  Unearned premiumreserves are established to cover the unexpired period of contracts ofreinsurance that we have underwritten. At June 30, 2002, acquisition costs payable were $39.6 million comparedto $42.8 million at December 31, 2001. The balance represents acquisition expenses due on gross reinsurancepremiums that we have written.

 

We expect that ourfinancial and operational needs for the foreseeable future will be met by fundsgenerated from operations and the proceeds from the sale of investments.  As we rely on cash flows from operations, areduction in the demand for our services could reduce the availability of funds.  Cash flows from operations in future yearsmay differ substantially from net income. As reinsurance contracts mature, we will be required to pay out a higherpercentage of incurred losses in loss payments, which may affect cashflows.  Additionally, although weprimarily invest in high quality assets, a diminution in the value of ourportfolio could hurt our ability to continue financing our own operations.

 

As of June 30, 2002, wehad the following material commitments for operating leases, other commitments(4sigma) and employment contracts:

 
|                         |   | **Total  Commitments in U.S. Dollars (in thousands)** |   |
|------------------------------|--------|-------------------------------------------------------|--------|
| **Years ending December 31** |   | **Lease  &  Other  Commitments**                  |   | **Less  Sublease  Income** |   | **Net** |   | **Employee  Commitments** |   | **Total** |   |
|                         |   |                                                  |   |   |   |   |   |   |   |   |   |
| 2002                         |   | 1,234                                                 |   | 110 |   | 1,124 |   | 237 |   | 1,361 |   |
| 2003                         |   | 827                                                   |   | 38 |   | 789 |   | 71 |   | 860 |   |
| 2004                         |   | 569                                                   |   | — |   | 569 |   | — |   | 569 |   |
| 2005                         |   | 289                                                   |   | — |   | 289 |   | — |   | 289 |   |
| 2006                         |   | 202                                                   |   | — |   | 202 |   | — |   | 202 |   |
| 2007  to 2012                |   | 936                                                   |   | — |   | 936 |   | — |   | 936 |   |
| Total                        |   | 4,057                                                 |   | 148 |   | 3,909 |   | 308 |   | 4,217 |   |

 

As of December 31, 2001,we had the following material commitments for operating leases and employmentcontracts:

 
|                         |   | **Total  Commitments in U.S. Dollars (in thousands)** |   |
|------------------------------|--------|-------------------------------------------------------|--------|
| **Years ending December 31** |   | **Lease  &  Other  Commitments**                  |   | **Less  Sublease  Income** |   | **Net** |   | **Employee  Commitments** |   | **Total** |   |
|                         |   |                                                  |   |   |   |   |   |   |   |   |   |
| 2002                         |   | 1,743                                                 |   | 200 |   | 1,543 |   | 563 |   | 2,106 |   |
| 2003                         |   | 745                                                   |   | 36 |   | 709 |   | 80 |   | 789 |   |
| 2004                         |   | 523                                                   |   | — |   | 523 |   | — |   | 523 |   |
| 2005                         |   | 263                                                   |   | — |   | 263 |   | — |   | 263 |   |
| 2006                         |   | 184                                                   |   | — |   | 184 |   | — |   | 184 |   |
| 2007  to 2012                |   | 839                                                   |   | — |   | 839 |   | — |   | 839 |   |
| Total                        |   | 4,297                                                 |   | 236 |   | 4,061 |   | 643 |   | 4,704 |   |

 

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In November 2001, wecommitted to make an additional capital injection in 4Sigma of $1.8 million, inincrements of $100,000 as funds are needed by 4Sigma, in exchange for 1.8 millionshares of Series E preferred stock.  Asof June 30, 2002 we had invested $1.1 million of this commitment.

 

In support of ourbusiness, we enter into Letters of Credit and Trust Account arrangements withceding companies.  As at December 31,2001, we had in total $91.0 million of outstanding Letters of Credit and TrustAccounts (representing 62.8% of investments available for sale) of which $27.0million related to Letters of Credit issued and $64.0 million was in TrustAccounts.  As of June 30, 2002, we hadin total $86.3 million of outstanding Letters of Credit and Trust Accounts(representing 77.0% of investments available for sale) of which $24.8 millionrelated to Letters of Credit issued and $61.5 million was in Trust Accounts.  These arrangements are secured against ourfixed maturity investment portfolio. Management have assessed the Company’s cash flow requirements, takinginto account these arrangements.

 

**Exposure Management**

 

We manage ourunderwriting risk exposures primarily through an excess of loss reinsuranceprogram.  For 2002, this programprovides reinsurance protection up to a known accumulation of $5,000,000 forPersonal Accident exposure and up to $5,000,000 per person for Medical Expenseexposure.

 

**Cautionary Statement Regarding Forward-Looking Statements**

 

Certain statements andinformation included in this Form 10-Q constitute “forward-looking statements”within the meaning of the Private Securities Litigation Reform Act of1995.  These statements express ourintentions, strategies, or predictions for the future.  In addition, from time to time, we may makeforward-looking statements, orally or in writing.  Forward-looking statements in this Form 10-Q include, amongothers, statements regarding:

 

•                                          the ongoingadequacy of our loss reserves;

 

•                                          ourcontinuing ability to increase premium rates and strengthen terms of trade inthe North and Latin American markets without major loss of business;

 

•                                          theanticipated growth in Direct business in Asia and Europe;

 

•                                          the impact ofrate increases on premiums written over the 2001 underwriting year; and

 

•                                          the outcomeof our ongoing litigation.

 

These forward-lookingstatements involve known and unknown risks and uncertainties that may causeactual results to be materially different from the results expressed or impliedby the forward-looking statements. These factors include, among other things:

 

•                                          **Economic Recession. **An economic slowdown worldwide, or in any of our key markets,could reduce demand for our products and services.  If the general economic downturn continues or worsens, the marketfor many insurance products may also diminish. We obtain a significant portion of our business from sellingreinsurance, and if the primary insurance market declines, there could be anequal effect on the reinsurance market.

 

•                                          **Insurance Industry Volatility. **The September 11, 2001, terroristattacks in the United States (and their aftermath) may increase volatility ininsurance and reinsurance markets.** **That volatility could adverselyaffect market participants, like ESG, whose direct exposure to the terroristattacks is limited.

 

•                                          **Inadequate Loss Reserves. **We maintain reserves to cover the estimated liabilityfor reported and unreported claims. Inadequate reserves could be caused by our failure to value accuratelythe risks of certain business, inaccurate information from ceding clients, orextraordinary events.  If our reservesprove insufficient to cover the actual losses we incur, we would have toincrease our reserves and incur a charge to our earnings.

 

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•                                          **Medical Cost Increases. **Our medical reinsurance premiums reflect certainassumptions regarding increases in the cost of medical care.  Medical costs (particularly prescriptioncosts) are difficult to gauge, especially in the United States.  Changes or advances in medical technologycould increase our costs.  Legislativeor judicial developments that are adverse to medical providers also mightincrease costs.  An increase in coststhat eclipses the assumptions reflected in our premiums could result in lossesfor us.

 

•                                          **Credit Risks. **Fromtime to time, we may cede a portion of our reinsurance risk to other insurersor reinsurers.  If these companies donot fulfill their obligations to us, we may be exposed to a greater risk thanwe had anticipated.

 

•                                          **Loss of Key Clients**.  Our contracts with our customers aregenerally short term.  We can make noassurance that any customer will retain our services after its contract hasended.  We have several customers thatgenerate substantial revenues, including the Companion Insurance Companyaccount, which accounted for 15% of our revenues in the three months ended June30, 2002 and 17% of our revenues in the year ended December 31, 2001.  The loss of this customer could adverselyaffect our revenues.  If one of ourcustomers is acquired or merges with another company, our contract mayterminate early.

 

•                                          **Direct Marketing Risks.**  Our direct marketing business must gauge thecredit, life, and accident risks faced by customers in multiple geographicregions.  If we fail to accurately pricethe risks we assume, including the estimated life of the policies we reinsure,we may have to pay out more than we have taken in as premiums.

 

•                                          **Competition. **Ourreinsurance business competes with other international reinsurers, most notablyAmerican Re, Everest Re, Latin America Re, Swiss Re, Hanover Re, andLloyd’s.  ESG Direct competes primarilywith GE Capital, AIG, and ACE.  Thesecompetitors have greater financial resources than we do, have been operatinglonger, and have established long-term relationships with others in theindustry, all of which may be significant competitive advantages.

 

•                                          **Competitive Pricing Practices. **Competitors may seek to capturemarket share by selling services and products at prices that fall below levelsthat ESG management expects to be profitable. If a competitor employs this strategy in any of the markets in which weoperate, we could lose many customers and be forced to exit the market.

 

•                                          **Credit Rating Downgrade. **In our reinsurance and direct marketing businesses,the rating assigned to our credit by agencies such as Standard and Poor’s andFitch can affect our business opportunities. Any downgrade in our rating could make it more difficult for us toattract and retain customers.

 

•                                          **Loss of Key Employees.**  As a small company, our success is dependenton our ability to retain our existing executive officers and attract additionalqualified personnel in the future.  Theloss of the services of an executive officer would affect adversely our abilityto conduct business.

 

•                                          **Interest Rate Fluctuations. **We invest the majority of the money we receive aspremiums in fixed rate instruments such as government and corporate bonds.  Typically, the fair market value of a fixedrate instrument varies inversely with the fluctuations in interest rates.  While our investments can fall in value, ourliabilities tend to remain fixed. Consequently, a decline in the value of our investment portfolio couldreduce our net income or lead to a loss.

 

•                                          **Investment Risks. **We have contracted with Head Asset Management L.L.C. tosupervise and direct the investment of our asset portfolio.  Poor performance on the part of thisinvestment manager could have an adverse impact on our financial performance.

 

•                                          **Foreign Currency Exchange Risks. **Because we conduct business innumerous geographic regions and currencies around the world, fluctuations incurrency exchange rates can materially affect our earnings.

 

•                                          **Inflation. **Weprovide reinsurance in certain geographical markets, such as Latin America,that have experienced sustained periods of high inflation.  In an inflationary cycle, there is a riskthat the

 

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amounts we will owe onour coverage obligations will exceed the amounts we received as premiums.

 

•                                          **Legislative and Regulatory Changes. **Legislators and regulators couldintroduce new laws and regulations that affect the manner in which we conductour business.  Our direct marketingbusiness, for example, could be affected by new laws or regulations limitingthe use of personal data for direct marketing efforts.  New occupational safety legislation in thecountries where we reinsure these risks could increase our costs.  Additional unexpected regulatory burdenscould increase our compliance costs and lower our profit margins.

 

•                                          **Tax Exposure. **Forpurposes of many countries, including the United States, ESG is not engaged inthe conduct of any trade or business in such country, and, as a result, is notsubject to corporate income tax therein. If, however, any country, including the U.S. were to contendsuccessfully that our operations subject us to corporate income tax, we wouldbe liable for tax on net income received by ESG to the extent it had beenreceived at a permanent place of business. If corporate income taxes did apply to income received by ESG, theywould reduce our net income, if any.

 

•                                          **Litigation Risks.**  In the normal course of business, we are involved in litigation.  By its nature, litigation is uncertain andcould have a material adverse effect that is not anticipated by management.

 

•                                          **Cyclical Changes in the Market**.  The reinsurance market is affected byfluctuations in the investment environment and extraordinary events.  If we fail to anticipate these cyclicaltrends, we may incur losses in our contracts.

 

We undertake noobligation to update any forward-looking statement, whether as a result of newinformation, future events or otherwise. All subsequent, written and oral, forward-looking statementsattributable to ESG or persons acting on our behalf are qualified by thecautionary statements in this Form 10-Q.

 

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**ITEM 3.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK**

 

**Market Risk**

 

We are subject to marketrisk arising from the potential change in value of our various financialinstruments. The Company’s currentinvestment strategy seeks to maximize income through a high quality,diversified and fixed maturity portfolio, while maintaining an adequate levelof liquidity.  The Company’s mix of investments is adjusted continuously,consistent with its current and projected operating results, working capitalrequirements and market conditions.  The fixed maturities in theinvestment portfolio are comprised of non-trading available for salesecurities.

 

The investmentportfolio is comprised of fixed maturity securities that are subject tointerest rate risk and foreign currency risk.

 

**Interest Rate Risk**

 

Interest rate risk isthe potential change in value of the fixed maturity portfolio due to change inmarket interest rates.  Interest rate risk on our portfolio offixed maturity investments, especially fixed rate instruments, is a significantsource of our market risk.  In addition,the credit worthiness of the issuer, relative values of alternativeinvestments, liquidity and general market conditions may affect fair values ofinterest rate sensitive instruments.

 

Our general strategy withrespect to fixed maturity securities is to invest in high quality securitieswhile maintaining diversification to avoid significant concentrations inindividual issuers’ industry segments or countries.

 

There has been nosignificant change in market or interest rate risk since December 31, 2001.

 

**Foreign Currency Risk**

 

Foreign currency riskis the potential change in value, income, and cash flow arising from adversechanges in foreign currency exchange rates.  Our functionalcurrency is the U.S. Dollar.  However,we write reinsurance business in numerous geographic regions and currencies,giving rise to the risk that the ultimate settlement of receivables andpayables on reinsurance transactions will differ from the amounts currentlyrecorded as assets and liabilities in the financial statements.  Generally, the Companyprefers to maintain the capital of its foreign operations in U.S. dollarassets, although this varies by regulatory jurisdiction in accordance withmarket needs.  In certain cases, theCompany’s foreign operations maintain capital in the currency of the country ofits geographic location, consistent with local regulatory guidelines.

 

Each foreign operationmay conduct business in its local currency as well as the currency of othercountries in which it operates.  Theprimary foreign currency exposures are the Euro, Norwegian Kroner, AustralianDollar, Hong Kong Dollar and Great Britain Pound.

 

We generally do not hedgethe foreign currency exposure of the subsidiaries transacting business incurrencies other than their functional currency (transaction exposure).  We are currently putting in place a foreignexchange hedging strategy and policy, which will consider the use of derivativeinstruments, if appropriate.

 

**Inflation**

 

Inflation has not had amaterial impact on our operations for any of the periods presented.  We write reinsurance in Latin America, whichhas experienced periods of high inflation. However, it is possible that future inflationary conditions may impactsubsequent accounting periods.

 

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**PARTII**

 

**Item 1.**                                                       **Legal Proceedings**

See the description ofour pending lawsuit involving Odyssey Re in our Annual Report on Form 10-K forthe fiscal year ended December 31, 2001.

 

**Item 2.**                                                       **Changes in Securities**

Not applicable.

 

**Item 3.**                                                       **Defaults Upon Senior Securities**

Not applicable.

 

**Item 4.**                                                       **Submission of Matters to a Vote of Securities Holders**

The Annual GeneralMeeting of Shareholders was held pursuant to notice on May 6, 2002.  There were present at the meeting, in personor represented by proxy, the holders of 11,375,533 shares of the outstandingcommon stock of the Company, which represented approximately 96.1% of theoutstanding shares as at March 15, 2002, the record date.  The matters voted on at the meeting and thevotes cast were as follows:

 

**Proposal 1.**         **Election of Directors**

Anthony J. Hobson waselected as a Class 1 director to serve until the 2004 Annual General Meeting ofShareholders and Alasdair P. Davis and David C. Winn were elected as Class 2 directorsto serve until the 2005 Annual General Meeting of Shareholders.

 
|               |   | **For**   |   | **Withheld** |   |
|--------------------|--------|-----------|--------|--------------|--------|
| Anthony  J. Hobson |   | 8,457,086 |   | 2,918,447    |   |
| Alasdair  P. Davis |   | 8,214,822 |   | 3,160,711    |   |
| David  C. Winn     |   | 6,180,322 |   | 5,195,211    |   |

 

**Proposal 2.**         **Ratification of the Appointment ofIndependent Auditors**

The selection of Deloitte& Touche as independent auditors for the fiscal year ending December 31,2002 was ratified with 6,394,192 shares voting in favor of such proposal,4,955,241 shares voting against and 26,100 shares abstaining from voting.

 

**Proposal 3.**         **Approval of the Company’s 2002 StockIncentive Plan**

This proposal was notapproved, with 3,915,095 shares voting in favor, 5,747,634 shares votingagainst, 5,004 shares abstaining, and 1,707,800 broker non-votes.

 

**Proposal 4.**            **Resolution of Shareholders regardingadoption of a performance-based senior executive compensation scheme.**

This proposal wasapproved, with 5,191,423 shares voting in favor, 4,462,569 shares votingagainst, 13,741 shares abstaining, and 1,707,800 broker non-votes.

 

A summary of the resultsof this Annual General Meeting was contained in a press release issued by theCompany on May 10, 2002.

 

**Item 5****.**                                                       **Other Information**

Not applicable.

 

**Item 6.**                                                       **Exhibits and Reports on Form 8-K**

 

(a)                                  ExhibitIndex

Exhibit 11.1                               Computationof Earnings Per Share

 

Exhibit 99.1                               Certification Pursuantto 18 U.S.C.  Section 1350, as AdoptedPursuant to Section 906 of the Sarbanes-Oxley Act of 2002

 

Exhibit 99.2                               Certification Pursuantto 18 U.S.C.  Section 1350, as AdoptedPursuant to Section 906 of the Sarbanes-Oxley Act of 2002

 

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Exhibit 99.3                               Code of Conduct Policy(Incorporated by reference from the Company’s Form 10-Q for the quarter endedJune 30, 2002 filed with the Securties and Exchange Commission on August 19,2002)

 

(b)                                 Duringthe three months ended June 30, 2002, ESG did not file any Reports on Form 8-K.

 

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**SIGNATURES**

 

Pursuant to therequirements of the Securities Exchange Act of 1934, the registrant has dulycaused this report to be signed on its behalf by the undersigned thereunto dulyauthorized.

 

 
|               | ESG RE LIMITED |
|--------------------|----------------|
|               |           |
|               |           |
| Date: May 30, 2003 | By:            | /s/Alasdair P. Davis |   |
|               |           | Alasdair P. Davis |
|               |           | Chief Executive Officer |
|               |           |
| Date: May 30, 2003 | By:            | /s/Aodh O’Murchu |   |
|               |           | Aodh O’Murchu |
|               |           | Controller & Chief  Accounting Officer |
|                    |                |  |  |  |

 

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**CERTIFICATIONSUNDER EXCHANGE ACT RULE 13A-14 AND 15D-14**

 

I, Alasdair P. Davis,hereby certify that:

 

1.              Ihave reviewed this quarterly report on Form 10-Q of ESG Re Limited;

 

2.              Basedon my knowledge, this quarterly report does not contain any untrue statement ofa material fact or omit to state a material fact necessary to make thestatements made, in light of the circumstances under which such statements weremade, not misleading with respect to the period covered by this quarterlyreport; and

 

3.              Basedon my knowledge, the financial statements, and other financial informationincluded in this quarterly report, fairly present in all material respects thefinancial condition, results of operations and cash flows of the registrant asof, and for, the periods presented in this quarterly report.

 

 

Dated this 30thMay, 2003

 
| /s/  Alasdair P. Davis   |   |
|--------------------------|--------|
| Alasdair  P. Davis       |
| Chief  Executive Officer |

 

**************************************************

 

I, Aodh O’Murchu, herebycertify that:

 

1.              I have reviewed this quarterly report on Form 10-Q of ESG Re Limited;

 

2.              Based on my knowledge, this quarterly report does not contain any untruestatement of a material fact or omit to state a material fact necessary to makethe statements made, in light of the circumstances under which such statementswere made, not misleading with respect to the period covered by this quarterlyreport; and

 

3.              Based on my knowledge, the financial statements, and other financialinformation included in this quarterly report, fairly present in all materialrespects the financial condition, results of operations and cash flows of theissuer as of, and for, the periods presented in this quarterly report.

 

 

Dated this 30thMay, 2003

 
| /s/  Aodh O’Murchu                    |   |
|--------------------------------------------|--------|
| Aodh  O’Murchu                        |
| Controller  & Chief Accounting Officer |

 

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