**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

**WASHINGTON,D.C. 20549**

 

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**FORM 10-QA**

**(Amendment No. 2)**

 

**ý****          ****QUARTERLY REPORT PURSUANT TO SECTION 13 OR15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**

 

**OR**

 

**o****          ****TRANSITION REPORT PURSUANT TO SECTION 13 OR15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**

 

**For the quarterlyperiod ended March 31, 2002**

**Commission File Number000-23481**

 

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**ESG RE LIMITED**

(Exact name of registrant as specifiedin its charter)

 

| **Bermuda**                                                    |   | **Not Applicable**                   |
|----------------------------------------------------------------|--------|--------------------------------------|
| (State or other jurisdiction of  Incorporation oforganization) |   | (I.R.S. Employer Identification No.) |

 

**16 Church StreetHamilton HM11, Bermuda**

(Address of executive offices, zipcode)

 

**(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 been subjectto such filing requirements for the past 90 days. Yes:  ý No  o

 

The number of the Registrant’s common shares (par value$1.00 per share) outstanding as of May 9, 2002 was 11,831,063.

 

 

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**EXPLANATORY STATEMENT:**

 

**We are filing this Form 10-Q/A(Amendment No. 2) to restate in their entirety Items 1 and 2 of Part 1 of ourquarterly report of Form 10-Q for the quarter ended March 31, 2002.  For completeness purposes, the full Form10-Q is filed herein, however, no other parts have been amended.**

 

**As previously disclosed, Deloitte& Touche resigned as independent auditors effective November 22, 2002 andsubsequently withdrew its audit report related to the year ended December 31,2001 and review reports for the quarters ended September 30, 2001, March 31,2002 and June 30, 2002.  We subsequentlyretained BDO International as our new auditors.**

 

**We have restated our financialstatements for the three months ended March 31, 2002 and our financialstatements for the year ended December 31, 2001 to reflect the correctaccounting treatment of the co-reinsurance contract with ACE INA OverseasInsurance Company Ltd (“ACE”).  We havealso restated our financial statements for the years ended December 31, 2001,2000 and 1999 and our financial statements for the three and nine months endedSeptember 30, 2000 to correct an error in our Foreign Currency TranslationAccount.  For further discussion ofthese restatements, please refer to Managements Discussion and Analysis ofFinancial Condition and Results of Operations and Notes 6 and 7 of theCondensed Consolidated Financial Statements.**

 

**Unless otherwise noted, all of theinformation in this Form 10-Q/A is as of March 31, 2002 and does not reflectany subsequent information on events other than this restatement.**

 

**For a discussion of our recentderegistration of our common stock under the Securities Exchange Act of 1934,and the related delisting of our common stock by The Nasdaq Stock Market, see“Management’s Discussion and Analysis of Financial Condition and Results of Operations– Recent Developments”.**

 

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**TABLE OF CONTENTS**

 
| **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 | 15 |
| Item  3.    |   | Quantitative  and Qualitative Disclosures about Market Risk                                 | 29 |
|        |   |                                                                                        |
| **PART II** |
|        |   |                                                                                        |
| Item 1.     |   | Legal Proceedings                                                                           | 30 |
| Item  2.    |   | Changes  in Securities and Use of Proceeds                                                  | 30 |
| Item 3.     |   | Defaults Upon  Senior Securities                                                            | 30 |
| Item  4.    |   | Submission  of Matters to a Vote of Security Holder                                         | 30 |
| Item  5.    |   | Other  Information                                                                          | 30 |
| Item 6.     |   | Exhibits and  Reports on Form 8-K                                                           | 30 |

 

Unless the contextrequires otherwise, references in this form 10-Q to “ESG”, “we”, “us”, “our”,and “Ours” mean ESG Re Limited and the subsidiaries through which it operates.

 

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# **PART I****– FINANCIALINFORMATION**

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

# **ESG RE LIMITED**

# **Condensed Consolidated Balance Sheets(as restated)**

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

 
|                                                                                                                                                                                                        |   | **March 31,   2002** |    | **December  31,   2001** |   |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|----------------------|---------|--------------------------|--------|
|                                                                                                                                                                                                        |   | **(Unaudited)**      |    |                     |   |
| ASSETS                                                                                                                                                                                                      |   |                 |    |                     |   |
| Investments  available for sale, at fair value (cost: $133,665 and $146,369)                                                                                                                                |   | $                    | 132,126 |                     | $      | 144,844 |   |
| Cash  and cash equivalents                                                                                                                                                                                  |   | 4,641                |    | 3,915                    |   |
| Other  investments                                                                                                                                                                                          |   | 6,689                |    | 6,172                    |   |
| Total  investments and cash                                                                                                                                                                                 |   | 143,456              |    | 154,931                  |   |
| Accrued  investment income                                                                                                                                                                                  |   | 1,940                |    | 2,028                    |   |
| Management  fees receivable                                                                                                                                                                                 |   | 470                  |    | 296                      |   |
| Reinsurance  balances receivable                                                                                                                                                                            |   | 188,646              |    | 190,526                  |   |
| Reinsurance  recoverable on incurred losses                                                                                                                                                                 |   | 33,045               |    | 28,630                   |   |
| Funds  retained by ceding companies                                                                                                                                                                         |   | 22,131               |    | 24,629                   |   |
| Prepaid  reinsurance premiums                                                                                                                                                                               |   | 1,400                |    | 1,523                    |   |
| Deferred  acquisition costs                                                                                                                                                                                 |   | 35,689               |    | 38,886                   |   |
| Receivable  for securities sold                                                                                                                                                                             |   | —               |    | 2,318                    |   |
| Deferred  tax asset                                                                                                                                                                                         |   | 1,349                |    | 1,339                    |   |
| Other  assets                                                                                                                                                                                               |   | 8,003                |    | 7,277                    |   |
| Cash  and cash equivalents held in a fiduciary capacity                                                                                                                                                     |   | 838                  |    | 1,724                    |   |
|                                                                                                                                                                                                        |   |                 |    |                     |   |
| TOTAL  ASSETS                                                                                                                                                                                               |   | $                    | 436,967 |                     | $      | 454,107 |   |
|                                                                                                                                                                                                        |   |                 |    |                     |   |
| LIABILITIES                                                                                                                                                                                                 |   |                 |    |                     |   |
| Unpaid  losses and loss expenses                                                                                                                                                                            |   | $                    | 148,264 |                     | $      | 148,905 |   |
| Unearned  premiums                                                                                                                                                                                          |   | 87,442               |    | 100,718                  |   |
| Acquisition  costs payable                                                                                                                                                                                  |   | 43,831               |    | 42,843                   |   |
| Reinsurance  balances payable                                                                                                                                                                               |   | 55,377               |    | 51,927                   |   |
| Payable  for securities purchased                                                                                                                                                                           |   | 70                   |    | —                   |   |
| Accrued  expenses, accounts payable, and other liabilities ($85 and $85 due to related  parties)                                                                                                            |   | 11,298               |    | 12,920                   |   |
| Fiduciary  liabilities                                                                                                                                                                                      |   | 838                  |    | 1,724                    |   |
| Total  liabilities                                                                                                                                                                                          |   | 347,120              |    | 359,037                  |   |
|                                                                                                                                                                                                        |   |                 |    |                     |   |
| SHAREHOLDERS’  EQUITY                                                                                                                                                                                  |   |                 |    |                     |   |
| Preference  shares, 50,000,000 shares authorized; no shares issued and outstanding as of  March 31, 2002 and December 31, 2001                                                                              |   | —               |    | —                   |   |
| Class  B common shares, 100,000,000 shares authorized; no shares issued and  outstanding as of March 31, 2002 and December 31, 2001                                                                         |   | —               |    | —                   |   |
| Common  shares, par value $1 per share; 100,000,000 shares authorized; 11,831,063  shares issued and outstanding as of March 31, 2002 and 11,831,063 shares  issued and outstanding as of December 31, 2001 |   | 11,831               |    | 11,831                   |   |
| Additional  paid-in capital                                                                                                                                                                                 |   | 208,221              |    | 208,221                  |   |
| Unearned  compensation                                                                                                                                                                                      |   | (271                 | )       | (333                     | )      |
| Accumulated  other comprehensive income:                                                                                                                                                                    |   |                 |    |                     |   |
| Foreign  currency translation adjustments, net of tax                                                                                                                                                       |   | 57                   |    | (201                     | )      |
| Unrealized  gains on securities, net of tax                                                                                                                                                                 |   | (1,539               | )       | (1,525                   | )      |
| Accumulated  other comprehensive income                                                                                                                                                                     |   | (1,482               | )       | (1,726                   | )      |
| Retained  (deficit)                                                                                                                                                                                         |   | (128,452             | )       | (122,923                 | )      |
| Total  shareholders’ equity                                                                                                                                                                            |   | 89,847               |    | 95,070                   |   |
|                                                                                                                                                                                                        |   |                 |    |                     |   |
| TOTAL  LIABILITIES AND SHAREHOLDERS’ EQUITY                                                                                                                                                            |   | $                    | 436,967 |                     | $      | 454,107 |   |

 

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

 

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**ESG RELIMITED**

 

# **Condensed Consolidated Statements ofOperations**

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

# **(Unaudited)**

# ** **

|                                    |   | **Three  Months Ended** |   |
|-----------------------------------------|--------|-------------------------|--------|
|                                    |   | **March 31,  2002**     |   | **March 31,  2001** |   |
|                                    |   | **(as  restated)**      |   |   | ** ** |
| REVENUES                                |   |                    |   |   |   |
| Net  premiums written                   |   | $                       | 25,907 |   | $ | 37,193 |   |
| Change  in unearned premiums            |   | 13,031                  |   | 3,116 |   |
|                                    |   |                    |   |   |   |
| Net  premiums earned                    |   | 38,938                  |   | 40,309 |   |
| Management  fee revenue                 |   | 507                     |   | 230 |   |
| Net  investment income                  |   | 1,848                   |   | 3,408 |   |
| Loss  on equity investments             |   | —                  |   | (27 | ) |
| Net  realized investment gains (losses) |   | (1,077                  | )      | 748 |   |
|                                    |   | 40,216                  |   | 44,668 |   |
| EXPENSES                                |   |                    |   |   |   |
| Losses  and loss expenses               |   | 25,286                  |   | 29,985 |   |
| Acquisition  costs                      |   | 13,214                  |   | 11,934 |   |
| Administrative  expenses                |   | 7,245                   |   | 6,692 |   |
|                                    |   | 45,745                  |   | 48,611 |   |
| NET  (LOSS) INCOME BEFORE TAXES         |   | (5,529                  | )      | (3,943 | ) |
| Income  tax expense                     |   | —                  |   | — |   |
| NET  (LOSS) INCOME AFTER TAXES          |   | $                       | (5,529 | ) | $ | (3,943 | ) |
|                                    |   |                    |   |   |   |
| PER SHARE DATA                          |   |                    |   |   |   |
| Basic  net loss per share               |   | $                       | (0.47  | ) | $ | (0.33 | ) |
| Diluted  net loss per share             |   | $                       | (0.47  | ) | $ | (0.33 | ) |
| Weighted  average shares outstanding    |   | 11,831,063              |   | 11,782,500 |   |
| Basic                                   |   | 11,831,063              |   | 11,782,500 |   |
| Diluted                                 |   |                    |   |   |   |
|                                    |   |                    |   |   |   |
| 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)**

 
|                                                                        |   | **Three  Months Ended** |    |
|-----------------------------------------------------------------------------|--------|-------------------------|---------|
|                                                                        |   | **March 31,  2002**     |    | **March 31,  2001** |   |
|                                                                        |   | **(as  restated)**      |    |   | ** ** |
| CASH  FLOWS FROM OPERATING ACTIVITIES                                       |   |                    |    |   |   |
| Net  cash used in operating activities                                      |   | $                       | (11,040 | ) | $ | (6,476 | ) |
|                                                                        |   |                    |    |   |   |
| CASH  FLOWS FROM INVESTING ACTIVITIES                                       |   |                    |    |   |   |
| Cost  of fixed maturity investments acquired – available for sale      |   | (82,963                 | )       | (115,573 | ) |
| Proceeds  from sale of fixed maturity investments – available for sale |   | 96,798                  |    | 119,141 |   |
| Funding  of strategic investments                                           |   | (540                    | )       | — |   |
| Purchases  of fixed assets                                                  |   | (1,529                  | )       | (278 | ) |
| Net  cash provided by investing activities                                  |   | 11,766                  |    | 3,290 |   |
|                                                                        |   |                    |    |   |   |
| CASH  FLOWS FROM FINANCING ACTIVITIES                                       |   |                    |    |   |   |
| Repurchase  of common shares                                                |   | —                  |    | (58 | ) |
| Net  cash used in financing activities                                      |   | —                  |    | (58 | ) |
|                                                                        |   |                    |    |   |   |
| Net  increase/(decrease) in cash                                            |   | 726                     |    | (3,244 | ) |
| Cash  and cash equivalents at January 1                                     |   | 3,915                   |    | 26,032 |   |
|                                                                        |   |                    |    |   |   |
| Cash  and cash equivalents at March 31                                      |   | $                       | 4,641   |   | $ | 22,788 |   |

 

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

 

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#### **ESG RE LIMITED**

#### **Condensed Consolidated Statements ofComprehensive Income**

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

**(Unaudited)**

** **
|                                                 |   | **Three  Months Ended** |       |
|------------------------------------------------------|--------|-------------------------|------------|
|                                                 |   | **March 31, 2002**      |       | **March 31, 2001** |   |
|                                                 |   | **(as  restated)**      | ** ** |   | ** ** |
| Net  (loss) income                                   |   | $                       | (5,529     | ) | $ | (3,943 | ) |
| Other  comprehensive income, net of tax:             |   |                    |       |   |   |
| Foreign  currency translation adjustments            |   | 258                     |       | 310 |   |
| Net  unrealized holding (losses)/gains on securities |   | (14                     | )          | 3,498 |   |
|                                                 |   |                    |       |   |   |
| Other  comprehensive income                          |   | 244                     |       | 3,808 |   |
|                                                 |   |                    |       |   |   |
| Comprehensive  (loss) income                         |   | $                       | (5,285     | ) | $ | (135 | ) |

 

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

 

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# **NOTESTO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**

 

**1.  BASIS OFPRESENTATION**

 

The accompanyingunaudited condensed consolidated financial statements of ESG Re Limited have beenprepared in accordance with generally accepted accounting principles in theUnited 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)          PREMIUM REVENUES

 

We estimate and recognizepremiums written at the inception of the reinsurance contract based uponinformation 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 reinsurance contractswhich we enter are primarily of short duration.  For retroactive contracts the amount by which the amount paid forreinsurance coverage exceeds the recorded liabilities is charged to earnings.  If the liabilities exceed the amount paidthe excess is deferred and amortized into income over the remaining settlementperiod.  Premiums written are recognizedas earned over the coverage period in proportion to the amount of protectionprovided.  Unearned premium reserves areestablished to cover the unexpired contract period.

 

(B)           RESERVE FOR LOSSES ANDLOSS EXPENSES

 

The reserve for unpaidlosses and loss adjustment expenses includes an estimate of reported casereserves 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 maturity securitiesare classified as available for sale and are reported at estimated fairvalue.  Investments that are availablefor sale are expected to be held for an indefinite period but may be solddepending on interest rates and other considerations.  Other investments over which we exercise significant influenceare accounted for under the equity method. Otherwise these investments are accounted for at cost.  Unrealized investment gains and losses oninvestments available for sale, net of applicable deferred income tax, arereported as a separate component of “accumulated other comprehensive income”.  Realized gains or losses on sale ofinvestments are determined on the basis of average cost.  The carrying values of investments availablefor sale and other investments are adjusted for impairments in value that areconsidered to be other than temporary.

 

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(D)          DEFERRED ACQUISITION 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)           REINSURANCE PREMIUMSCEDED

 

Reinsurance premiumsceded are reported as prepaid reinsurance premiums and amortized over therespective contract or policy periods in proportion to the amount of insuranceprotection provided.  Commissions onreinsurance ceded are deferred over the terms of the contracts of reinsuranceto which they relate and amortized in proportion to the amount of insuranceprotection provided.

 

(F)           FOREIGN CURRENCYTRANSLATION

 

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)           USE OF 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)          FAIR VALUE OF FINANCIALINSTRUMENTS

 

The carrying value of our investments approximatestheir fair value and is based on quoted market prices.  Due to the uncertainty with respect to boththe timing and amount of the proceeds to be realized from our otherinvestments, it is not practicable to determine the fair value of these otherinvestments.  The carrying values ofother 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 FASB issued Statement of FinancialAccounting Standard (SFAS) No. 141, *BusinessCombinations*.  SFAS No. 141requires that all business combinations initiated after June 30, 2001 beaccounted for under the purchase method and addresses the initial recognition andmeasurement of goodwill and other intangible assets acquired in a businesscombination.  Management does not expectthe adoption of SFAS No. 141 to have an impact on our financial position,results of operations, or cash flows.

 

In June 2001, FASB issued Statement of FinancialAccounting Standard (SFAS) No. 142, *Goodwilland Other Intangible Assets*. SFAS No. 142 addresses the initial recognition and measurement ofintangible assets acquired outside of a business combination and the accountingfor goodwill and other intangible assets subsequent to their acquisition.  SFAS No. 142 provides that intangible assetswith finite useful lives be amortized and that goodwill and intangible assetswith indefinite lives not be amortized, but rather be tested at least annuallyfor

 

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impairment.  Management does notexpect the adoption of SFAS No. 142 to have an impact on our financialposition, results of operations, or cash flows.

 

In October 2001, the FASB issued SFAS No. 144, *Accounting for the Impairment or Disposal of**Long-Lived Assets* (SFAS No.144).  SFAS No. 144 supersedes SFAS No.121, *Accounting for the**Impairment of Long-Lived Assets and for Long-LivedAssets to be Disposed of*, and some provisions of AccountingPrinciples Board Opinion 30.  SFAS No.144 sets new criteria for determining when an asset can be classified asheld-for-sale as well as modifying the financial statement presentationrequirements of operating losses from discontinued operations.  SFAS No. 144 is effective for fiscal yearsbeginning after December 15, 2001.  Weevaluated the provisions of SFAS No. 144 and management does not expect theadoption of SFAS No. 144 to have an impact on our financial position, resultsof operations, or cash flows.

 

**4.  COMMITMENTS ANDCONTINGENCIES**

 

*(A) EMPLOYMENT CONTRACTS AND LEASE COMMITMENTS*

We have employmentcontracts with several employees for original terms of one to five years whichhave total minimum commitments of $0.5 million as at March 31, 2002 and totalminimum commitments of $0.6 million as at December 31, 2001, excluding anyperformance bonuses that are determined by our Board of Directors.  The contracts include various non-competeclauses following termination of employment.

 

ESG and its subsidiarieshave various obligations under operating leases.  The future minimum commitments under operating leases andemployment contracts are as follows:

 
| **U.S. dollars in thousands** |   | **Employment    Commitments** |   | **Lease  & Other   Commitments** |   | **Total** |   |
|-------------------------------|--------|-------------------------------|--------|--------------------------------------|--------|-----------|--------|
| Years Ending December 31,     |   |                          |   |                                 |   |      |   |
| 2002                          |   | 463                           |   | 756                                  |   | 1,219     |   |
| 2003                          |   | 67                            |   | 699                                  |   | 766       |   |
| 2004                          |   | —                        |   | 514                                  |   | 514       |   |
| 2005                          |   | —                        |   | 259                                  |   | 259       |   |
| 2006                          |   | —                        |   | 181                                  |   | 181       |   |
| Over  five years              |   | —                        |   | 825                                  |   | 825       |   |
| Total                         |   | $                             | 530    |                                 | $      | 3,234     |   | $ | 3,764 |   |
|                               |        |                               |        |                                      |        |           |        |  |  |  |

 

*(B) LETTERS OF CREDIT*

As of March 31, 2002, Secured Letters of Credit andTrust Accounts in the aggregate amount of $90.9 million have been issued infavor of ceding companies with $27.3 million related to Letters of Creditissued and $63.6 million related to Trust Accounts in force.  The Letters of Credit and Trust Accounts aresecured by a lien on the Company’s fixed maturities investment portfolio, equalto 120% of the amount of the outstanding Letters of Credit, and 102% of theamount of the outstanding Trust Accounts. As of December 31, 2001, Secured Letters of Credit and Trust Accounts inthe amount of $91.0 million were issued in favor of ceding companies.

 

*(C) PENSION OBLIGATIONS*

A subsidiary company isobligated to make contributions to defined contribution pension plans foremployees.  As of March 31, 2002 andDecember 31, 2001, there were outstanding liabilities for pension contributionsof $659 thousand and $294 thousand respectively.

 

*(D) COMMITMENTS & CONTINGENCIES*

 

LITIGATION

 

Weand our subsidiaries, in common with the insurance industry in general, aresubject to litigation, including claims for punitive damages, in the normalcourse of business.  We do not believethat such litigation will have a material adverse effect on our financial condition,future operating results, or liquidity.

 

In February 2000, Odyssey Re(Sphere Drake) instituted an action in England against a broker, Stirling CookeBrown and others, alleging fraud and conspiracy on the reinsurance placement of1997 and 1998 Personal Accident and Workers Compensation “carve out” businesswith Odyssey Re (Sphere Drake).  During1998, ESG accepted a 25% quota share reinsurance treaty with Odyssey Re (SphereDrake).  This treaty terminated as of

 

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December 31, 1998, but we renewed our participation for 1999 directlywith the underwriting agent involved in the 1998 year.  In December 1999, we gave notice to rescindour contract with Odyssey Re (UK) for misrepresentation and failure to disclosematerial facts.  On November 29, 2000,we filed suit in the High Court to seek a judicial confirmation of ourrescission.  On February 5, 2001,Odyssey Re (Sphere Drake) filed a response. In December 2002, Odyssey Re (Sphere Drake) accepted our rescission ofthis treaty in return for a contribution to its legal fees.

 

We have also given notice weintend to rescind the 1999 account. This matter is in discovery and is now set for arbitration in late2003.  We believe the outcome of thepending litigation between Odyssey Re (Sphere Drake) and Stirling Cooke Brownand others will have an impact on this arbitration.

 

*(E) STRATEGIC INVESTMENTS*

 

In November 2001, wecommitted to make an additional capital infusion in 4Sigma of $1.8 million, inincrements of $100,000 as funds are needed by 4Sigma, in exchange for 1.8million shares of Series E preferred stock. As of March 31, 2002 we had invested $0.8 million of this commitment.

 

**5.  RELATED PARTIES**

 

Included in netinvestment income for the three months ended March 31, 2002 and 2001 are $73 thousandin fees charged by Head Asset Management in the three months ended March 31,2002 and $41 thousand in fees charged by Head Asset Management in the threemonths ended March 31, 2001.  For a moredetailed description of our agreement with Head Asset Management, please see“Related Party Transactions” in “Management’s Discussion and Analysis of theFinancial Condition and Results of Operation”.

 

**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 by our 10-K/A (Amendment No. 4) filing of May 30,2003.  We also restated our Form 10-Qfor the quarter ended March 31, 2002 to reflect this restatement and filed therestated accounts in our Form 10-Q/A (Amendment No. 1) on August 22, 2002 whichis now further amended in this Form 10-Q/A (Amendment No. 2).

 

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 foreigncurrency translation adjustments included in accumulated other comprehensiveincome, 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

 

11

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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.

 

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

 

We signed aco-reinsurance contract with ACE in November 2001 that became effectiveretroactively as of January 1, 2001. Under SFAS 113, the premiums written during the retroactive period weredeemed to be written on our own account with the co-reinsurance to ACE treatedas a retroactive retrocession arrangement. However, we did not show premiums earned, losses and loss adjustmentexpenses and acquisition costs in our reported revenues and expenses, inrespect of the retroactive period, in the third and fourth quarters of 2001 andthe first and second quarters of 2002. During the quarter ended September 30, 2002, we realized this error inour treatment of the ACE contract and restated our figures for the correctaccounting treatment of this contract. In accordance with SFAS 113, we did not recognize any of the profits ofthe ACE share of the reinsurance contract in our statement of operations andhence, there was no impact on our reported net income or net loss in anyaffected period.  The following tableshows the impact that the correct accounting for this contract had on ourconsolidated balance sheets as of March 31, 2002 and December 31, 2001.

 
|                               |   | **March 31,  2002**            |   | **December  31, 2001**        |   |
|------------------------------------|--------|--------------------------------|--------|-------------------------------|--------|
|                               |   | **As  Restated**               |   | **As  previously   Reported** |   | **As  Restated** |   | **As  previously   Reported** |   |
|                               |   | **U.S.  dollars in thousands** |   |
| Deferred  Acquisition Costs        |   | 35,689                         |   | 38,074                        |   | 38,886 |   | 40,308 |   |
| Unpaid  losses & loss Expenses |   | 148,264                        |   | 143,613                       |   | 148,905 |   | 146,383 |   |
| Unearned  Premiums                 |   | 87,442                         |   | 94,286                        |   | 100,718 |   | 104,395 |   |
| Acquisition  Costs Payable         |   | 43,831                         |   | 44,023                        |   | 42,843 |   | 43,110 |   |
| Shareholders  Equity               |   | 89,847                         |   | 89,847                        |   | 95,070 |   | 95,070 |   |

 

The following statementshows the impact that the correct accounting for this contract had on ourconsolidated statement of operations for quarter ended March 31, 2002.  It had no impact on the consolidatedstatement of operations for the quarter ended March 31, 2001.

** **
|                    |   | **Three  Months Ended   March 31, 2002  U.S. dollars in thousands** |   |
|-------------------------|--------|---------------------------------------------------------------------|--------|
|                    |   | **As  Restated**                                                    |   | **As  Previously Reported** | ** ** |
| Net  Premiums earned    |   | 38,938                                                              |   | 35,771 |   |
| Loss  and loss expenses |   | 25,286                                                              |   | 23,157 |   |
| Acquisition  Costs      |   | 13,214                                                              |   | 12,176 |   |
| Net  Loss               |   | (5,529                                                              | )      | (5,529 | ) |

 

**9.  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 months ended March 31, 2002 and 2001, by line of business and intotal, for the ESG Reinsurance segment were as follows:

 
| **Three months ended  March 31, 2002** |   | **Medical**                    |   | **Accident** |   | **Credit** |   | **Life** |   | **Other** |   | **Total** |   |
|----------------------------------------|--------|--------------------------------|--------|--------------|--------|------------|--------|----------|--------|-----------|--------|-----------|--------|
|                                   |   | **U.S.  dollars in thousands** |   |
| Gross  premiums written                |   | 14,594                         |   | 9,275        |   | (230       | )      | 262      |   | 304       |   | 24,205    |   |
| Net  premiums written                  |   | 11,272                         |   | 7,902        |   | (228       | )      | 290      |   | 1,019     |   | 20,255    |   |
| Net  premiums earned                   |   | 27,921                         |   | 4,674        |   | 128        |   | (119     | )      | 1,132     |   | 33,736    |   |
| Losses  and loss expenses              |   | 21,499                         |   | 2,837        |   | 45         |   | 223      |   | 181       |   | 24,785    |   |
| Acquisition  costs                     |   | 7,887                          |   | 1,546        |   | 48         |   | 185      |   | 360       |   | 10,026    |   |
| Operating  costs                       |   | 3,739                          |   | 713          |   | 20         |   | 20       |   | 173       |   | 4,665     |   |
| Net  underwriting income/(loss)        |   | (5,204                         | )      | (422         | )      | 15         |   | (547     | )      | 418       |   | (5,740    | )      |

 

12

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| **Three months ended   March 31, 2001** |   | **Medical**                    |   | **Accident** |   | **Credit** |   | **Life** |   | **Other** |   | **Total** |   |
|-----------------------------------------|--------|--------------------------------|--------|--------------|--------|------------|--------|----------|--------|-----------|--------|-----------|--------|
|                                    |   | **U.S.  dollars in thousands** |   |
| Gross  premiums written                 |   | 15,977                         |   | 7,403        |   | (1,158     | )      | (1,177   | )      | 240       |   | 21,285    |   |
| Net  premiums written                   |   | 13,170                         |   | 4,099        |   | (1,023     | )      | (1,123   | )      | 130       |   | 15,253    |   |
| Net  premiums earned                    |   | 13,251                         |   | 20,311       |   | (195       | )      | 687      |   | 251       |   | 34,305    |   |
| Losses  and loss expenses               |   | 11,218                         |   | 17,574       |   | (117       | )      | (331     | )      | (580      | )      | 27,764    |   |
| Acquisition  costs                      |   | 3,508                          |   | 6,012        |   | (95        | )      | 442      |   | (167      | )      | 9,700     |   |
| Operating  costs                        |   | 2,137                          |   | 2,160        |   | 9          |   | 112      |   | 41        |   | 4,459     |   |
| Net  underwriting income/(loss)         |   | (3,612                         | )      | (5,435       | )      | 8          |   | 464      |   | 957       |   | (7,618    | )      |

 

Underwriting results for the three months ended March31, 2002 and 2001, by line of business and in total, for the ESG Direct segmentwere as follows:

 
| **Three months ended   March 31, 2002** |   | **Accident** |   | **Credit** |   | **Total** |   |
|-----------------------------------------|--------|--------------|--------|------------|--------|-----------|--------|
|                                    |   |         |   |       |   |      |   |
| Gross  premiums written                 |   | $            | 4,808  |       | $      | 844       |   | $ | 5,652 |   |
| Net  premiums written                   |   | 4,808        |   | 844        |   | 5,652     |   |
| Net  premiums earned                    |   | 4,830        |   | 372        |   | 5,202     |   |
| Losses  and loss expenses               |   | 455          |   | 46         |   | 501       |   |
| Acquisition  costs                      |   | 2,986        |   | 202        |   | 3,188     |   |
| Operating  costs                        |   | 1,748        |   | 734        |   | 2,482     |   |
| Net  underwriting income/(loss)         |   | $            | (359   | )          | $      | (610      | )      | $ | (969 | ) |

 
| **Three months ended   March 31, 2001** |   | **Accident** |   | **Credit** |   | **Total** |   |
|-----------------------------------------|--------|--------------|--------|------------|--------|-----------|--------|
|                                    |   |         |   |       |   |      |   |
| Gross  premiums written                 |   | $            | 5,939  |       | $      | 16,001    |   | $ | 21,940 |   |
| Net  premiums written                   |   | 5,939        |   | 16,001     |   | 21,940    |   |
| Net  premiums earned                    |   | 5,834        |   | 170        |   | 6,004     |   |
| Losses  and loss expenses               |   | 2,187        |   | 34         |   | 2,221     |   |
| Acquisition  costs                      |   | 2,228        |   | 6          |   | 2,234     |   |
| Operating  costs                        |   | 2,116        |   | 17         |   | 2,133     |   |
| Net  underwriting income/(loss)         |   | $            | (697   | )          | $      | 113       |   | $ | (584 | ) |

 

13

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**INDEPENDENTACCOUNTANTS’ REVIEW REPORT**

 

**Report of Independent Accountants**

 

To theBoard of Directors and Shareholders

ESG ReLimited

 

We havereviewed the condensed consolidated balance sheet of ESG Re Limited andsubsidiaries as of March 31, 2002, and the related condensed consolidatedstatements of operations and comprehensive income/loss for the three-monthperiods ended March 31, 2002 and 2001, and cash flows for the three-monthperiods ended March 31, 2002 and 2001 included in the accompanying Securitiesand Exchange Commission Form 10-Q (Amendment No. 2) for the period ended March31, 2002. These financial statements are the responsibility of the Company’smanagement.

 

Weconducted our review in accordance with standards established by the AmericanInstitute of Certified Public Accountants. A review of interim financialinformation consists principally of applying analytical procedures to financialdata, and making inquiries of persons responsible for financial and accountingmatters. It is substantially less in scope than an audit conducted inaccordance with generally accepted auditing standards, the objective of whichis the expression of an opinion regarding the financial statements taken as awhole. Accordingly, we do not express such an opinion.

 

Based onour reviews, we are not aware of any material modifications that should be madeto the condensed consolidated financial statements referred to above for themto be in conformity with accounting principles generally accepted in the UnitedStates of America.

 

We havepreviously audited, in accordance with auditing standards generally accepted inthe United States of America, the consolidated restated balance sheet as ofDecember 31, 2001, and the related restated consolidated statements ofoperations, 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.

 

Thecondensed consolidated balance sheets as of March 31, 2002 and December 31,2001 and the condensed consolidated statements of operations and comprehensiveincome/loss for the three-month periods ended March 31, 2002 and 2001 and cashflows for the three-month periods ended March 31, 2002 and 2001 have beenrestated.  The effects of therestatements are set out in Notes 6 and 7 to the unaudited condensedconsolidated financial statements.

 

BDOInternational

 

DublinIreland

 

Date:May 30, 2003

 

14

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**ITEM 2****.   MANAGEMENT DISCUSSION AND ANALYSIS OFFINANCIAL CONDITION AND RESULTS OF  OPERATIONS.**

 

*The following discussion and analysis addresses thefinancial condition of ESG as of March 31, 2002 compared with December 31, 2001and our results of operation for the three months ended March 31, 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 audited financial statements and related notescontained in our 2001 Annual Report on Form 10-K/A (Amendment No. 4).  Our independent accountants have reviewedour unaudited condensed consolidated financial statements for the three monthsended March 31, 2001 and 2002 in accordance with auditing standards generally acceptedin the United States of America.  Theresults of our operations for the period ended March 31, 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 to November 20, 2002, our commonstock was traded on NASDAQ under the symbol ESREF.  On November 20, 2002, the trading symbol was changed to ESREE toreflect the unfiled status of our Quarterly Report on Form 10-Q for the quarterended September 30, 2002.

 

On November 25, 2002, we received a Nasdaq StaffDetermination letter indicating that, as a result of our failure to timely fileits Report on Form 10-Q for the period ended September 30, 2002, our securitieswould be delisted from the Nasdaq Stock Market, effective at the opening ofbusiness on December 3, 2002.  Werequested an oral hearing before a Nasdaq Listing Qualifications Panel (the“Panel”) to review the Staff Determination, which request stayed the delistingof our securities.  Thereafter, onDecember 17, 2002, we were notified that we failed to maintain a closing bidprice of at least $1.00 per share for 30 consecutive trading days, and that weshould discuss our plan to remedy that additional deficiency at thehearing.  The hearing was held onDecember 20, 2002.  By letter datedJanuary 31, 2003, we were was advised that the Panel had determined that oursecurities would be delisted from The Nasdaq Stock Market effective with theopening of business on Tuesday, February 4, 2003.  The reason given for the decision was the failure to timely fileour quarterly report on Form 10-Q for the quarter ended September 30, 2002.  In addition, the Panel cited as a reason forits delisting decision, our failure to file any of the amendments to previouslyfiled reports under the Securities Exchange Act of 1934, as amended, for any ofthe anticipated restatements of certain information in our financialstatements.  Nasdaq’s delisting decisionwill 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 securities arebeing 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.

 

15

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*Legal Proceedings*

 

We and our subsidiaries, incommon with the insurance industry in general, are subject to litigation,including claims for punitive damages, in the normal course of business.  We do not believe that such litigation willhave a material adverse effect on our financial condition, future operatingresults, or liquidity.

 

In February 2000, Odyssey Re(Sphere Drake) instituted an action in England against a broker, Stirling CookeBrown and others, alleging fraud and conspiracy on the reinsurance placement of1997 and 1998 Personal Accident and Workers Compensation “carve out” businesswith Odyssey Re (Sphere Drake).  During1998, ESG accepted a 25% quota share reinsurance treaty with Odyssey Re (SphereDrake).  This treaty terminated as ofDecember 31, 1998, but we renewed our participation for 1999 directly with theunderwriting agent involved in the 1998 year. In December 1999, we gave notice to rescind our contract with Odyssey Re(UK) for misrepresentation and failure to disclose material facts.  On November 29, 2000, we filed suit in theHigh Court to seek a judicial confirmation of our rescission.  On February 5, 2001, Odyssey Re (SphereDrake) filed a response.  In December2002, Odyssey Re (Sphere Drake) accepted our rescission of this treaty inreturn for a contribution to its legal fees.

 

We have also given notice weintend to rescind the 1999 account. This matter is in discovery and is now set for arbitration in late2003.  We believe the outcome of thepending litigation between Odyssey Re (Sphere Drake) and Stirling Cooke Brownand 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 that consolidatesthe financial results of our subsidiaries. At the same time we were unable to determine the periods in which theoriginal errors occurred and therefore to correct this error, we restated ourfinancial statements for the year ended December 31, 2001 in order to reflect afourth quarter adjustment to foreign currency translation adjustments, and inaccumulated other comprehensive income, other expenses, and consolidatesstatements of changes in shareholders’ equity of $3,992 thousand.  The restated accounts were filed in our10-K/A (Amendment No. 3) filing of August 22, 2002 which has been furtheramended by our 10-K/A (Amendment No. 4) filing of May 30, 2003.  We also restated our Form 10-Q for thequarter ended March 31, 2002 to reflect this restatement and filed the restatedaccounts in our Form 10-Q/A (Amendment No. 1) on August 22, 2002 which is nowfurther amended in this Form 10-Q/A (Amendment No. 2).

 

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 foreigncurrency translation adjustments included in accumulated other comprehensiveincome, 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.

 

16

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

 

We signed aco-reinsurance contract with ACE in November 2001 that became effective retroactivelyas of January 1, 2001.  Under SFAS 113,the premiums written during the retroactive period were deemed to be written onour own account with the co-reinsurance to ACE treated as a retroactiveretrocession arrangement.  However, wedid not show premiums earned, losses and loss adjustment expenses andacquisition costs in our reported revenues and expenses, in respect of theretroactive period, in the third and fourth quarters of 2001 and the first andsecond quarters of 2002.  During thequarter ended September 30, 2002, we realized this error in our treatment ofthe ACE contract and restated our figures for the correct accounting treatmentof this contract.  In accordance withSFAS 113, we did not recognize any of the profits of the ACE share of thereinsurance contract in our statement of operations and hence, there was noimpact on our reported 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 March 31, 2002 and December 31, 2001.

 
|                               |   | **March 31,  2002**            |   | **December  31, 2001**      |   |
|------------------------------------|--------|--------------------------------|--------|-----------------------------|--------|
|                               |   | **As  Restated**               |   | **As  previously Reported** |   | **As  Restated** |   | **As  previously Reported** |   |
|                               |   | **U.S.  dollars in thousands** |   |
| Deferred  Acquisition Costs        |   | 35,689                         |   | 38,074                      |   | 38,886 |   | 40,308 |   |
| Unpaid  losses & loss Expenses |   | 148,264                        |   | 143,613                     |   | 148,905 |   | 146,383 |   |
| Unearned  Premiums                 |   | 87,442                         |   | 94,286                      |   | 100,718 |   | 104,395 |   |
| Acquisition  Costs Payable         |   | 43,831                         |   | 44,023                      |   | 42,843 |   | 43,110 |   |
| Shareholders  Equity               |   | 89,847                         |   | 89,847                      |   | 95,070 |   | 95,070 |   |

 

The following statementshows the impact that the correct accounting for this contract had on ourconsolidated statement of operations for quarter ended March 31, 2002.  It had no impact on the consolidatedstatement of operations for the quarter ended March 31, 2001.

 
|                    |   | **Three  Months Ended   March 31, 2002  U.S. dollars in thousands** |   |
|-------------------------|--------|---------------------------------------------------------------------|--------|
|                    |   | **As  Restated**                                                    |   | **As  Previously Reported** |   |
| Net  Premiums earned    |   | 38,938                                                              |   | 35,771 |   |
| Loss  and loss expenses |   | 25,286                                                              |   | 23,157 |   |
| Acquisition  Costs      |   | 13,214                                                              |   | 12,176 |   |
| Net  Loss               |   | (5,529                                                              | )      | (5,529 | ) |

 

**Principal Activitiesand Sources of Revenue**

 

Our principal activities include providing accident, health,credit, life, and special risk reinsurance and related product marketing anddevelopment services.  We also managepremiums on behalf of co-reinsurers on North American business written in 2001and 2002.  We report the results of ourbusiness activities under two segments: ESG Reinsurance and ESG Direct.  We evaluate the results of these segmentsbased on business writings out of each of our producing offices.  ESG Reinsurance provides traditionalreinsurance products, primarily in the U.S. medical insurance market, and ESGDirect provides direct marketing services, bancassurance services, andsupporting technologies, as well as targeted reinsurance products for creditlife and other special risks.

 

Wederive our revenues principally from:

 

•      premiums for reinsuranceproducts,

•      fees for direct marketingservices,

•      management fees, and

•      investment income.

 

17

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**Resultsof Operations**

 

**Total Revenues**

 

Our total revenues forthe three months ended March 31, 2002 were $40.2 million, compared with totalrevenues of $44.7 million for the three months ended March 31, 2001.

 

Our net loss for the three months ended March 31, 2002was $5.5 million, compared to a net loss of $3.9 million for the three monthsended March 31, 2001.  Net loss pershare for the three months ended March 31, 2002 was $0.47, compared with a netloss per share of $0.33 for the three months ended March 31, 2001.  Key elements of the quarter’s results were(i) an underwriting result of $0.4 million, which was below our expectations,primarily due to losses suffered in our North American medical business of $3.0million, particularly on one contract in the 2000 underwriting year whichrelated to the late reporting of claims, and (ii) realized investment losses of$1.1 million, the majority of which related to a corporate bond which was soldas it no longer met our investment criteria.

 

**NetUnderwriting Income**

 

For the three monthsended March 31, 2002, we managed, on our own behalf and on behalf of ourco-reinsurers, total premiums of $21.4 million, of which we placed $(8.5)million with co-reinsurers and retroceded $4.0 million, resulting in $25.9million net premiums written.  For thethree months ended March 31, 2001, we managed, on our own behalf and on behalfof our co-reinsurers, total gross premiums of $45.3 million, of which weplaced $2.1 million with co-reinsurers and retroceded $6.0 million, resultingin $37.2 million net premiums written. The 52.8% decrease in gross premiums and 30.4% decrease in net premiumswritten during the three months ended March 31, 2002 is primarily a factor oflarge estimated premium write-downs of $18.2 million in respect of our NorthAmerican medical business, of which 50% is co-reinsured.  These premium adjustments were in relationto risks underwritten in late 2001, thereby not materially impacting the resultin the quarter.  The decrease was alsoaffected by a change in the basis of estimation used to recognize premium onthe Bancassurance business, written by our ESG Direct segment.

 

Of $25.9 million netpremiums written in the three months ended March 31, 2002, $20.2 million was attributableto the ESG Reinsurance segment, and $5.7 million was attributable to the ESGDirect segment.  For the three monthsended March 31, 2001, total premiums written was $37.2 million, of which $15.3million was attributable to the ESG Reinsurance segment, and $21.9 million wasattributable to the ESG Direct segment.

 

Gross and net premiums written and net premiums earnedfor the three months ended March 31, 2002 and 2001 were as follows: 

 
|                              |   | **Three  Months Ended**       |       |
|-----------------------------------|--------|-------------------------------|------------|
|                              |   | **March 31  2002**            |       | **March  31  2001** |   |
|                              |   | **U.S.  dollars in millions** | ** ** |
| **ESG Reinsurance**               |   |                          |       |   |   |
|                              |   |                          |       |   |   |
| Total  premiums managed           |   | 15.7                          |       | 23.4 |   |
| Amount  placed with co-reinsurers |   | 8.5                           |       | (2.1 | ) |
| Gross  premiums written           |   | 24.2                          |       | 21.3 |   |
| Retroceded                        |   | (4.0                          | )          | (6.0 | ) |
| Net  premiums written             |   | 20.2                          |       | 15.3 |   |
|                              |   |                          |       |   |   |
| Net  premiums earned              |   | 33.7                          |       | 34.3 |   |

 
|                              |   | **Three  Months Ended**       | ** ** |
|-----------------------------------|--------|-------------------------------|------------|
|                              |   | **March 31  2002**            | ** ** | **March 31  2001** | ** ** |
|                              |   | **U.S.  dollars in millions** | ** ** |
| **ESG  Direct**                   |   |                          |       |   |   |
|                              |   |                          |       |   |   |
| Total  premiums managed           |   | 5.7                           |       | 21.9 |   |
| Amount  placed with co-reinsurers |   | 0.0                           |       | 0.0 |   |
| Gross  premiums written           |   | 5.7                           |       | 21.9 |   |
| Retroceded                        |   | 0.0                           |       | 0.0 |   |
| Net  premiums written             |   | 5.7                           |       | 21.9 |   |
|                              |   |                          |       |   |   |
| Net  premiums earned              |   | 5.2                           |       | 6.0 |   |

 

Total premiums that wemanage on our behalf and on behalf of our co-reinsurers for the three monthsended March 31, 2002, consisted of the following:

 

18

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•              New Business.  Approximately $0.7 million, or 3.3%, of total premiums managedwas generated from new business.

•              Renewal Business.  Approximately $20.7 million, or 96.7% oftotal premiums managed was generated from renewal business.

 

**UnderwritingResults**

 

Underwriting results for the three months ended March31, 2002 and 2001, by line of business and in total, for the ESG Reinsurancesegment were as follows:

 
| **Three months ended   March 31, 2002** |   | **Medical**                    |   | **Accident** |   | **Credit** |   | **Life** |   | **Other** |   | **Total** |   |
|-----------------------------------------|--------|--------------------------------|--------|--------------|--------|------------|--------|----------|--------|-----------|--------|-----------|--------|
|                                    |   | **U.S.  dollars in thousands** |   |
| Gross  premiums written                 |   | 14,594                         |   | 9,275        |   | (230       | )      | 262      |   | 304       |   | 24,205    |   |
| Net  premiums written                   |   | 11,272                         |   | 7,902        |   | (228       | )      | 290      |   | 1,019     |   | 20,255    |   |
| Net  premiums earned                    |   | 27,921                         |   | 4,674        |   | 128        |   | (119     | )      | 1,132     |   | 33,736    |   |
| Losses  and loss expenses               |   | 21,499                         |   | 2,837        |   | 45         |   | 223      |   | 181       |   | 24,785    |   |
| Acquisition  costs                      |   | 7,887                          |   | 1,546        |   | 48         |   | 185      |   | 360       |   | 10,026    |   |
| Operating  costs                        |   | 3,739                          |   | 713          |   | 20         |   | 20       |   | 173       |   | 4,665     |   |
| Net  underwriting income/(loss)         |   | (5,204                         | )      | (422         | )      | 15         |   | (547     | )      | 418       |   | (5,740    | )      |

 
| **Three months ended   March 31, 2001** |   | **Medical**                    |   | **Accident** |   | **Credit** |   | **Life** |   | **Other** |   | **Total** |   |
|-----------------------------------------|--------|--------------------------------|--------|--------------|--------|------------|--------|----------|--------|-----------|--------|-----------|--------|
|                                    |   | **U.S.  dollars in thousands** |   |
| Gross  premiums written                 |   | 15,977                         |   | 7,403        |   | (1,158     | )      | (1,177   | )      | 240       |   | 21,285    |   |
| Net  premiums written                   |   | 13,170                         |   | 4,099        |   | (1,023     | )      | (1,123   | )      | 130       |   | 15,253    |   |
| Net  premiums earned                    |   | 13,251                         |   | 20,311       |   | (195       | )      | 687      |   | 251       |   | 34,305    |   |
| Losses  and loss expenses               |   | 11,218                         |   | 17,574       |   | (117       | )      | (331     | )      | (580      | )      | 27,764    |   |
| Acquisition  costs                      |   | 3,508                          |   | 6,012        |   | (95        | )      | 442      |   | (167      | )      | 9,700     |   |
| Operating  costs                        |   | 2,137                          |   | 2,160        |   | 9          |   | 112      |   | 41        |   | 4,459     |   |
| Net  underwriting income/(loss)         |   | (3,612                         | )      | (5,435       | )      | 8          |   | 464      |   | 957       |   | (7,618    | )      |

 

The operating ratios forthe three months ended March 31, 2002 and 2001, by line of business and intotal, for the ESG Reinsurance segment were as follows:

 
| **Three Months Ended March 31,   2002** |   | **Medical** |   | **Accident** |   | **Credit** |   | **Life** |   | **Other** |   | **Total** |   |
|-----------------------------------------|--------|-------------|--------|--------------|--------|------------|--------|----------|--------|-----------|--------|-----------|--------|
|                                    |   |        |   |         |   |       |   |     |   |      |   |      |   |
| Loss  ratio                             |   | 77.0        | %      | 60.7         | %      | 35.2       | %      | n/m      |   | 16.0      | %      | 73.5      | %      |
| Acquisition  expense ratio              |   | 28.2        | %      | 33.1         | %      | 37.5       | %      | n/m      |   | 31.8      | %      | 29.7      | %      |
| Loss  and acquisition expense ratio     |   | 105.2       | %      | 93.8         | %      | 72.7       | %      | n/m      |   | 47.8      | %      | 103.2     | %      |
| Operating  expense ratio                |   |        |   |         |   |       |   |     |   |      |   | 13.8      | %      |
| Combined  ratio                         |   |        |   |         |   |       |   |     |   |      |   | 117.0     | %      |

 
| **Three Months Ended March 31,   2001** |   | **Medical** |   | **Accident** |   | **Credit** |   | **Life** |   | **Other** |   | **Total** |   |
|-----------------------------------------|--------|-------------|--------|--------------|--------|------------|--------|----------|--------|-----------|--------|-----------|--------|
|                                    |   |        |   |         |   |       |   |     |   |      |   |      |   |
| Loss  ratio                             |   | 84.7        | %      | 86.5         | %      | 60.0       | %      | n/m      |   | n/m       |   | 80.9      | %      |
| Acquisition  expense ratio              |   | 26.5        | %      | 29.6         | %      | 48.8       | %      | n/m      |   | n/m       |   | 28.3      | %      |
| Loss  and acquisition expense ratio     |   | 111.1       | %      | 116.1        | %      | 108.8      | %      | n/m      |   | n/m       |   | 109.2     | %      |
| Operating  expense ratio                |   |        |   |         |   |       |   |     |   |      |   | 13.0      | %      |
| Combined  ratio                         |   |        |   |         |   |       |   |     |   |      |   | 122.2     | %      |

 

We calculated the operatingexpense ratios for the three months ended March 31, 2002 and March 31, 2001 byexpressing total administrative expenses net of corporate office expense, as apercentage of net premiums earned.

 

19

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Thekey elements in the performance of the Reinsurance segment for the quarter were– (i) a large loss of $3.0 million on North American medical business, writtenin 2000, and (ii) a loss of $0.5 million, on one life contract written out ofLatin America, also in the 2000 underwriting year.

 

Underwriting results for the three months ended March31, 2002 and 2001, by line of business and in total, for the ESG Direct segmentwere as follows:

 
| **Three months ended   March 31, 2002** |   | **Accident** |   | **Credit** |   | **Total** |   |
|-----------------------------------------|--------|--------------|--------|------------|--------|-----------|--------|
|                                    |   |         |   |       |   |      |   |
| Gross  premiums written                 |   | $            | 4,808  |       | $      | 844       |   | $ | 5,652 |   |
| Net  premiums written                   |   | 4,808        |   | 844        |   | 5,652     |   |
| Net  premiums earned                    |   | 4,830        |   | 372        |   | 5,202     |   |
| Losses  and loss expenses               |   | 455          |   | 46         |   | 501       |   |
| Acquisition  costs                      |   | 2,986        |   | 202        |   | 3,188     |   |
| Operating  costs                        |   | 1,748        |   | 734        |   | 2,482     |   |
| Net  underwriting income/(loss)         |   | $            | (359   | )          | $      | (610      | )      | $ | (969 | ) |

 
| **Three months ended   March 31, 2001** |   | **Accident** |   | **Credit** |   | **Total** |   |
|-----------------------------------------|--------|--------------|--------|------------|--------|-----------|--------|
|                                    |   |         |   |       |   |      |   |
| Gross  premiums written                 |   | $            | 5,939  |       | $      | 16,001    |   | $ | 21,940 |   |
| Net  premiums written                   |   | 5,939        |   | 16,001     |   | 21,940    |   |
| Net  premiums earned                    |   | 5,834        |   | 170        |   | 6,004     |   |
| Losses  and loss expenses               |   | 2,187        |   | 34         |   | 2,221     |   |
| Acquisition  costs                      |   | 2,228        |   | 6          |   | 2,234     |   |
| Operating  costs                        |   | 2,116        |   | 17         |   | 2,133     |   |
| Net underwriting  income/(loss)         |   | $            | (697   | )          | $      | 113       |   | $ | (584 | ) |

 

The operating ratios forthe three months ended March 31, 2002 and 2001, by line of business and intotal, for the ESG Direct segment were as follows:

 
| **Three Months Ended March 31, 2002** |   | **Accident** |   | **Credit** |   | **Total** |   |
|---------------------------------------|--------|--------------|--------|------------|--------|-----------|--------|
| Loss  ratio                           |   | 9.4          | %      | 12.4       | %      | 9.6       | %      |
| Acquisition  expense ratio            |   | 61.8         | %      | 54.3       | %      | 61.3      | %      |
| Loss  and acquisition expense ratio   |   | 71.2         | %      | 66.7       | %      | 70.9      | %      |
| Operating  expense ratio              |   |         |   |       |   | 47.7      | %      |
| Combined  ratio                       |   |         |   |       |   | 118.6     | %      |

 
| **Three Months Ended March 31, 2001** |   | **Accident** |   | **Credit** |   | **Total** |   |
|---------------------------------------|--------|--------------|--------|------------|--------|-----------|--------|
| Loss  ratio                           |   | 37.5         | %      | 20.0       | %      | 37.0      | %      |
| Acquisition  expense ratio            |   | 38.2         | %      | 3.5        | %      | 37.2      | %      |
| Loss  and acquisition expense ratio   |   | 75.7         | %      | 23.5       | %      | 74.2      | %      |
| Operating  expense ratio              |   |         |   |       |   | 35.5      | %      |
| Combined  ratio                       |   |         |   |       |   | 109.7     | %      |

 

We commenced the ESG Directbusiness during 2000 by writing business in the Asia region, expanding intoEurope in early 2001.  The above resultsreflect the early development of both lines of business.  The change in the loss and acquisitionexpense ratios, when comparing to the corresponding period last year, isprimarily due to obtaining additional information, over the previous twelvemonths, as the business develops. Initial set-up costs together with low premium volumes contribute to thehigh expense ratio.

 

20

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**Geographic Spread**

 

The distribution of grosswritten premiums for the three months ended March 31, 2001 and 2002, is asfollows:

 
|                 |   | **Three  Months Ended** |   |
|----------------------|--------|-------------------------|--------|
|                 |   | **March 31   2002**     |   | **March 31   2001** |   |
| **ESG  Reinsurance** |   |                    |   |   |   |
|                 |   |                    |   |   |   |
| Western  Europe      |   | 18.4                    | %      | (48.1 | )% |
| North  America       |   | 62.1                    | %      | 128.8 | % |
| Latin  America       |   | 17.5                    | %      | 7.1 | % |
| Asia                 |   | 0.1                     | %      | (7.5 | )% |
| Other                |   | 1.9                     | %      | 19.7 | % |
| Total                |   | 100.0                   | %      | 100.0 | % |

 
|            |   | **Three  Months Ended** |   |
|-----------------|--------|-------------------------|--------|
|            |   | **March 31   2002**     |   | **March 31   2001** |   |
| **ESG  Direct** |   |                    |   |   |   |
|            |   |                    |   |   |   |
| Western  Europe |   | 14.9                    | %      | 72.9 | % |
| Asia            |   | 85.1                    | %      | 27.1 | % |
| Total           |   | 100.0                   | %      | 100.0 | % |

 

**Product Mix**

 

The distribution of grosspremiums written by line of business for the three months ended March 31, 2001and 2002 is as follows:

 
|                 |   | **Three  Months Ended** |   |
|----------------------|--------|-------------------------|--------|
|                 |   | **March 31   2002**     |   | **March 31   2001** |   |
| **ESG  Reinsurance** |   |                    |   |   |   |
|                 |   |                    |   |   |   |
| Medical              |   | 60.3                    | %      | 75.1 | % |
| Personal  Accident   |   | 38.3                    | %      | 34.8 | % |
| Credit               |   | (1.0                    | )%     | (5.4 | )% |
| Life                 |   | 1.1                     | %      | (5.6 | )% |
| Other                |   | 1.3                     | %      | 1.1 | % |
| Total                |   | 100.0                   | %      | 100.0 | % |

 
|               |   | **Three  Months Ended** |   |
|--------------------|--------|-------------------------|--------|
|               |   | **March 31   2002**     |   | **March 31   2001** |   |
| **ESG  Direct**    |   |                    |   |   |   |
|               |   |                    |   |   |   |
| Personal  Accident |   | 85.1                    | %      | 27.1 | % |
| Credit             |   | 14.9                    | %      | 72.9 | % |
| Total              |   | 100.0                   | %      | 100.0 | % |

 

In respect of the Directsegment, the significant change in the geographic and product split relates tothe recognition of premium on the Bancassurance credit line of business,written out of the Western European region. The change in the basis of estimation used to recognize the premium onBancassurance business gives rise to a disproportionate split between WesternEurope and Asia, on a geographic spread basis, and Credit and PersonalAccident, on a product mix basis.  Thischange does not have a material impact on the reported result for the quarter.

 

21

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Initial estimates ofannualized premium on the Bancassurance business were revised from $16.0million in the first quarter 2001 to $6.7 million annualized premium, by thefourth quarter 2001.

 

**Management Fee Revenue**

 

For the three monthsended March 31, 2002, we earned $0.5 million in management fee revenue.  This figure represents a 150.0% increasefrom the $0.2 million management fees earned in the three months ended March31, 2001.  The majority of managementfee revenue in 2002 and 2001 consists of fees earned on those premiums managedon behalf of our co-reinsurers. Management fees increased in the first quarter of 2002, primarily due tothe recognition of fees earned on business co-reinsured on our North Americanbook of business.

 

**Net Investment Income**

 

Asat March 31, 2002, our cash and invested assets totaled $143.5 million,compared with cash and invested assets of $154.9 million as at December 31, 2001. This decrease in our cash and invested assets is primarily due tonegative operating cash flows and developing the ESG Direct infrastructure.  Net investment income decreased by $1.6million from $3.4 million in the three months ended March 31, 2001 to $1.8million in the three months ended March 31, 2002.

 

We do not maintain separatebalance sheet data for our operating segments. Accordingly we do not review and evaluate the financial results of theoperating segments based upon balance sheet data.

 

The following tablereflects the investment results for the three months ended March 31, 2002:

 
|                       |   | **Average   Investments**      |    | **Net   Investment   Income(1)** |   | **Annualized    Effective   Yield** |   | **Net  Realized   Investment   Gains** |   |
|----------------------------|--------|--------------------------------|---------|----------------------------------|--------|-------------------------------------|--------|----------------------------------------|--------|
|                       |   | **U.S.  dollars in thousands** |    |
|                       |   |                           |    |                             |   |                                |   |                                   |   |
| Investments                |   | $                              | 137,081 |                             | $      | 1,684                               |   | 4.9                                    | %      | $ | (1,077 | ) |
| Other  investments         |   | 6,431                          |    | 130                              |   | 8.1                                 | %      | —                                 |   |
| Cash  and cash equivalents |   | 4,278                          |    | 34                               |   | 3.2                                 | %      | —                                 |   |
| Total                      |   | $                              | 147,790 |                             | $      | 1,848                               |   | 5.0                                    | %      | $ | (1,077 | ) |

 

----

(1) Net investment incomeis net of investment-related expenses and income on premium receivable andfunds held by ceding companies.

 

The following tablereflects our investment results for the three months ended March 31, 2001: 

 
|                       |   | **Average   Investments**      |    | **Net   Investment   Income(1)** |   | **Annualized    Effective   Yield** |   | **Net  Realized   Investment   Gains** |   |
|----------------------------|--------|--------------------------------|---------|----------------------------------|--------|-------------------------------------|--------|----------------------------------------|--------|
|                       |   | **U.S.  dollars in thousands** |    |
|                       |   |                           |    |                             |   |                                |   |                                   |   |
| Investments                |   | $                              | 168,675 |                             | $      | 3,065                               |   | 7.3                                    | %      | $ | 748 |   |
| Other  investments         |   | 17,855                         |    | 88                               |   | 2.0                                 | %      | —                                 |   |
| Cash  and cash equivalents |   | 24,030                         |    | 255                              |   | 4.2                                 | %      | —                                 |   |
| Total                      |   | $                              | 210,560 |                             | $      | 3,408                               |   | 6.5                                    | %      | $ | 748 |   |

 

----

(1) Net investment incomeis net of investment-related expenses and income on premium receivable andfunds held by ceding companies.

 

22

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**Investment Portfolio**

 

*Maturity and Durationof Portfolio*

 

The maximum effective maturity for any single security inour investment portfolio is set at 30 years for U.S. government and U.S. governmentagency securities with full faith and credit guarantees and at 10 years for allother issues, measured from the date of settlement.  The duration of the portfolio varies according to decisions takenby the investment advisor on the outlook for interest rate movements.  The benchmark for such duration isapproximately 3 years.

 

*Quality of DebtSecurities in Portfolio*

 

The minimum average credit quality of our investmentportfolio is AA.

 

*Equity Securities andReal Estate*

 

Our investment policy is to allow up to 10% of ourinvestment assets to be held in equity securities.  We do not intend to invest in real estate other than for our ownuse.

 

*Diversification andLiquidity*

 

No more than 3% of our investment portfolio may beinvested in the securities of any single issuer, with the exception ofsovereign governments or agencies, including supranational agencies, with an AArating or better.

 

Asof March 31, 2002, total investments and cash were $143.5 million, compared to$209.6 million at March 31, 2001.  Allfixed maturity securities in our investment portfolio are classified asavailable for sale and are carried at fair value.

 

The fixed maturity investment portfolios as of March 31,2002 and 2001 were as follows:

 
| **As at March  31,  2002**                                                         |   | **Fair   Value**               |    | **Duration   (Years)** |   | **Market   Yield** |   | **Average   Credit   Rating** |   |
|-----------------------------------------------------------------------------------------|--------|--------------------------------|---------|------------------------|--------|--------------------|--------|-------------------------------|--------|
|                                                                                    |   | **U.S.  dollars in thousands** |    |
| Corporate  securities                                                                   |   | $                              | 48,016  |                   | 2.4    |               | 5.5    | %                             | AA     |   |
| U.S.  treasury securities and obligations of U.S. government corporations and  agencies |   | 40,447                         |    | 3.3                    |   | 4.8                | %      | AAA                           |   |
| Asset-backed  securities/Mortgage-backed securities                                     |   | 23,303                         |    | 2.2                    |   | 7.4                | %      | AAA                           |   |
| Obligations  of states and political subdivisions                                       |   | 15,005                         |    | 2.6                    |   | 5.8                | %      | AAA                           |   |
| Foreign  currency debt securities                                                       |   | 5,355                          |    | 0.8                    |   | 4.1                | %      | AAA                           |   |
| Total                                                                                   |   | $                              | 132,126 |                   | 2.2    |               | 5.5    | %                             |   |   |

 
| **As at March 31, 2001**                                                               |   | **Fair**

**Value**            |    | **Duration   (Years)** |   | **Market   Yield** |   | **Average   Credit   Rating** |   |
|----------------------------------------------------------------------------------------|--------|--------------------------------|---------|------------------------|--------|--------------------|--------|-------------------------------|--------|
|                                                                                   |   | **U.S.  dollars in thousands** |    |
| Corporate  securities                                                                  |   | $                              | 78,334  |                   | 3.6    |               | 6.7    | %                             | AA     |   |
| U.S.  treasury securities and obligations of U.S. government corporations and agencies |   | 30,902                         |    | 2.9                    |   | 5.9                | %      | AAA                           |   |
| Asset-backed  securities/Mortgage-backed securities                                    |   | 35,419                         |    | 2.6                    |   | 8.1                | %      | AAA                           |   |
| Obligations  of states and political subdivisions                                      |   | 18,360                         |    | 2.8                    |   | 6.8                | %      | AAA                           |   |
| Foreign  currency debt securities                                                      |   | 5,857                          |    | 2.9                    |   | 4.9                | %      | AAA                           |   |
| Total                                                                                  |   | $                              | 168,872 |                   | 3.0    |               | 6.5    | %                             |   |   |

 

In 2002, we will continue to follow our investmentpolicy and guidelines while seeking to improve long-term value by continuing toinvest in selected strategic investments in accordance with our currentcommitments as set out in “Strategic Investments” below.  A strategic investment is defined as aninvestment in a reinsurance-related

 

23

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enterprise, ceding company or distribution channel that is expected togenerate or secure additional profitable business for us.

 

**RelatedParty Transactions**

 

We are a party to several Investment AdvisoryAgreements with Head Asset Management LLC, an affiliate of Head & Company,L.L.C.  Under these agreements, HeadAsset Management supervises and directs the investment of our asset portfolioin accordance with investment objectives and guidelines that we haveestablished.  Mr. Head, the Chairman ofour Board of Directors and our former CEO, controls Head Asset Management.  ESG is the principal client of Head AssetManagement.  Under our InvestmentAdvisory Agreement with Head Asset Management, we pay fees quarterly in arrearsequal to:

 

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

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

 

We may terminate the Investment Advisory Agreementsupon five days written notice, and Head Asset Management may terminate theagreements upon 90 days written notice. We incurred $73 thousand in fees to Head Asset Management LLC in thethree months ended March 31, 2002, and $41 thousand in the three months endedMarch 31, 2001.  The expense for thethree months ended March 31, 2001 was lower than expected, due to an adjustmentmade for an over accrual in the prior quarter.

 

The Audit Committee of our Board of Directorsperiodically reviews our investment policies and arrangements to ensure thatthey are consistent with our overall goals, strategies and objectives.  Overall investment guidelines are approvedby the Audit Committee to ensure appropriate levels of portfolio liquidity,credit quality, diversification and volatility.  In addition, the Audit Committee has now reviewed our investmentadvisory relationship with Head Asset Management LLC in the context of ourother banking relationships to determine whether changes should be made to anyof these relationships.

 

**Administrative Expenses**

 

Total administrativeexpenses, which includes personnel costs, professional service fees, interestexpense and other expenses, increased by $0.5 million, or 7.5%, from $6.7million for the three months ended March 31, 2001 to $7.2 million for the threemonths ended March 31, 2002.  Thisincrease is primarily due to the increase in both realized and unrealizedforeign exchange losses, incurred on the revaluation of assets and liabilities,denominated in foreign currencies.

 

**StrategicInvestments**

 

From December 1998 through June 2000, we operated IPT GmbHand later VBB Bermuda Limited, subsidiaries that provided disease managementservices in Germany.  These services,which included physician referrals, a medical information hotline, secondopinion services, cardiac rehabilitation and access to disease managementadvisors, comprised the health care segment of our business.

 

Effective as of June 30, 2000, we transferred all the assetsof our health care segment to 4Sigma. These assets had a book value of $8 million at the time oftransfer.  In exchange for thetransferred assets, we received 8,000,000 shares of Series A preferred stock,representing a 69% equity interest in 4 Sigma. In addition, affiliates of John C Head III, the Chairman of our Board ofDirectors, invested $3.0 million in cash in exchange for a 28% equity interest in4Sigma.  Dr. Gerald Moeller, a directorof ESG from July 1999 to August 2000 and the president of our health caredivision 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 took a reserve of $8.0 million against its investment in 4Sigma Ltd.

 

ESG does not have voting control of, nor does it exerciseoperational control over, this company.

 

24

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In November 2001, we committed to make an additional capitalinfusion in 4Sigma of $1.8 million, in increments of $100,000 as funds areneeded by 4Sigma, in exchange for 1.8 million shares of Series E preferredstock.  As at March 31, 2002 we hadinvested $0.8 million of this commitment. Mr. Head has also committed to invest an additional $1.2 million in cashin 4Sigma on these same terms and conditions. We evaluate our investment in 4Sigma periodically.

 

**Liquidity and CapitalResources**

 

Operating activities used net cash of $11.0 million for thethree months ended March 31, 2002 and $6.5 million for three months ended March31, 2001.

 

Reinsurance balances receivable decreased from $190.5million as at December 31, 2001 to $188.6 million as at March 31, 2002.  We recognize premiums receivable at theinception of the reinsurance contract, based upon information received fromintermediaries and ceding companies. Every quarter we compare estimated written premiums to actual premiums,as reported by ceding companies and revise our estimates of written premiums ifappropriate.  Any change in theseestimates will impact the premiums receivable balance.

 

Reinsurance recoverable on incurred losses increased from$28.6 million as at December 31, 2001 to $33.0 million as at March 31,2002.  This increase was due toadditional losses being incurred above our net retention levels that enable usto make recoveries from our excess of loss reinsurers, plus the additionalquota share cessions to two of our retrocessionaires.

 

Deferred acquisition costs decreased from $38.8 million atDecember 31, 2001 to $35.7 million at March 31, 2002, as unearned premiumdeclines over the period, a factor of reduced premium writings and earnings.

 

At December 31, 2001, reserves for unpaid losses and lossexpenses were $148.9 million and at March 31, 2002, reserves for unpaid lossesand loss expenses were $148.3 million. This decrease is also a function of reduced underwritings in 2001.

 

At March 31, 2002, unearned premium reserves were $87.4million compared to $100.7 million at December 31, 2001.  Unearned premium reserves are established tocover the unexpired period of contracts of reinsurance that we haveunderwritten.  At March 31, 2002,acquisition costs payable were $43.8 million compared to $42.8 million atDecember 31, 2001.  The balancerepresents acquisition expenses due on gross reinsurance premiums that we havewritten.

 

We expect that our financial and operational needs for theforeseeable future will be met by funds generated from operations and theproceeds from the sale of investments. As we rely on cash flows from operations, a reduction in the demand forour services could reduce the availability of funds.  Cash flows from operations in future years may differsubstantially from net income.  Asreinsurance contacts mature, we will be required to pay out a higher percentageof incurred losses in loss payments, which may affect cash flows.  Additionally, although we primarily investin high quality assets, a diminution in the value of our portfolio could hurtour ability to continue financing our own operations.

 

As of March 31, 2002, we had the following materialcommitments for operating leases 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                         |   | $                                                     | 904    |   | $ | 148 |   | $ | 756 |   | $ | 463 |   | $ | 1,219 |   |
| 2003                         |   | 735                                                   |   | 36 |   | 699 |   | 67 |   | 766 |   |
| 2004                         |   | 514                                                   |   |   |   | 514 |   |   |   | 514 |   |
| 2005                         |   | 259                                                   |   |   |   | 259 |   |   |   | 259 |   |
| 2006                         |   | 181                                                   |   |   |   | 181 |   |   |   | 181 |   |
| 2007  to 2012                |   | 825                                                   |   |   |   | 825 |   |   |   | 825 |   |
| Total                        |   | $                                                     | 3,418  |   | $ | 184 |   | $ | 3,234 |   | $ | 530 |   | $ | 3,764 |   |

 

25

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As of December 31, 2001, we had the following materialcommitments for operating leases and employment contracts:

 
|                         |   | **Total Commitments in  US. 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 |   |

 

In support of our business, we enter into Letters of Creditand Trust Account arrangements with ceding companies.  As at December 31, 2001, we had in total $91.0 million ofoutstanding Letters of Credit and Trust Accounts of which $27.0 million relatedto Letters of Credit issued and $64.0 million was in Trust Accounts.  As of March 31, 2002, we had in total $90.9million of outstanding Letters of Credit and Trust Accounts of which $27.3million related to Letters of Credit issued and $63.6 million was in TrustAccounts.  These arrangements weresecured against our fixed maturity investment portfolio.

 

**Exposure Management**

 

We manage our underwriting risk exposures primarily throughan excess of loss reinsurance program. For 2002, this program provides reinsurance protection up to a knownaccumulation of $5,000,000 for Personal Accident exposures and up to $5,000,000per person for Medical Expense exposure.

 

**Cautionary StatementRegarding Forward-Looking Statements**

 

Certain statements and information included in thisForm 10-K constitute “forward-looking statements” within the meaning of thePrivate Securities Litigation Reform Act of 1995.  These statements express our intentions, strategies, orpredictions for the future.  Inaddition, from time to time, we may make forward-looking statements, orally orin writing.  Forward-looking statementsin this Form 10-Q include, among others, statements regarding:

 
| • |   | the ongoing adequacy of  our loss reserves;                                                                                                              |
|--------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                     |
| • |   | our continuing ability  to increase premium rates and strengthen terms of trade in the North and  Latin American markets without major loss of business; |
|   |   |                                                                                                                                                     |
| • |   | the anticipated growth  in Direct business in Asia and Europe; and                                                                                       |
|   |   |                                                                                                                                                     |
| • |   | the impact of rate  increases on premiums written over the 2001 underwriting year.                                                                       |
|   |   |                                                                                                                                                     |
| • |   | the outcome of 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:

 

26

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| **•** |   | **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 market for  many insurance products may also diminish.   We obtain a significant portion of our business from selling  reinsurance, and if the primary insurance market declines, there could be an  equal effect on the reinsurance market.                                                                                                                                                                                             |
|------------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|       |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
| **•** |   | **Insurance  Industry Volatility. **The  September 11, 2001, terrorist attacks in the United States (and their aftermath)  may increase volatility in insurance and reinsurance markets.** **That  volatility could adversely affect market participants, like ESG, whose direct  exposure to the terrorist attacks is limited.                                                                                                                                                                                                                                                                                                                        |
|       |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
| **•** |   | **Inadequate  Loss Reserves. **We  maintain reserves to cover the estimated liability for reported and  unreported claims.  Inadequate  reserves could be caused by our failure to value accurately the risks of  certain business, inaccurate information from ceding clients, or  extraordinary events.  If our reserves  prove insufficient to cover the actual losses we incur, we would have to  increase our reserves and incur a charge to our earnings.                                                                                                                                                                                   |
|       |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
| **•** |   | **Medical  Cost Increases. **Our  medical reinsurance premiums reflect certain assumptions regarding increases  in the cost of medical care.  Medical  costs (particularly prescription costs) are difficult to gauge, especially in  the United States.  Changes or  advances in medical technology could increase our costs.  Legislative or judicial developments that  are adverse to medical providers also might increase costs.  An increase in costs that eclipses the  assumptions reflected in our premiums could result in losses for us.                                                                                    |
|       |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
| **•** |   | **Credit  Risks. **From time to  time, we may cede a portion of our reinsurance risk to other insurers or  reinsurers.  If these companies do not  fulfill their obligations to us, we may be exposed to a greater risk than we  had anticipated.                                                                                                                                                                                                                                                                                                                                                                                                      |
|       |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
| •     |   | **Loss  of Key Clients**.  Our  contracts with our customers are generally short term.  We can make no assurance that any customer  will retain our services after its contract has ended.  We have several customers that generate  substantial revenues, including the Companion Insurance Company account,  which accounted for 28% of our revenues in the three months ended March 31,  2002 and 17% of our revenues in the year ended December 31, 2001.  The loss of this customer could adversely  affect our revenues.  If one of our  customers is acquired or merges with another company, our contract may  terminate early. |
|       |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
| **•** |   | **Direct  Marketing Risks.**   Our direct marketing business must gauge the credit, life, and  accident risks faced by customers in multiple geographic regions.  If we fail to accurately price the 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. **Our reinsurance business  competes with other international reinsurers, most notably American Re,  Everest Re, Latin America Re, Swiss Re, Hanover Re, and Lloyd’s.  ESG Direct competes primarily with GE  Capital, AIG, and ACE.  These  competitors have greater financial resources than we do, have been operating  longer, and have established long-term relationships with others in the  industry, all of which may be significant competitive advantages.                                                                                                                                                         |
|       |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
| **•** |   | **Competitive  Pricing Practices. **Competitors  may seek to capture market share by selling services and products at prices  that fall below levels that ESG management expects to be profitable.  If a competitor employs this strategy in  any of the markets in which we operate, 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 and Fitch can affect our  business opportunities.  Any downgrade  in our rating could make it more difficult for us to attract and retain  customers.                                                                                                                                                                                                                                                                                                                               |
|       |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
| •     |   | **Loss  of Key Employees.**   As a small company, our success is dependent on our ability to retain  our existing executive officers and attract additional qualified personnel in  the future.  The loss of the services  of an executive officer would affect adversely our ability to conduct  business.                                                                                                                                                                                                                                                                                                                                            |

 

27

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| **•** |   | **Interest  Rate Fluctuations. **We  invest the majority of the money we receive as premiums in fixed rate  instruments such as government and corporate bonds.  Typically, the fair market value of a fixed rate instrument  varies inversely with the fluctuations in interest rates.  While our investments can fall in value,  our liabilities tend to remain fixed.   Consequently, a decline in the value of our investment portfolio could  reduce our net income or lead to a loss.                                                                                                                  |
|------------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|       |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
| **•** |   | **Investment  Risks. **We have  contracted with Head Asset Management L.L.C. to supervise and direct the  investment of our asset portfolio.   Poor performance on the part of this investment manager could have an  adverse impact on our financial performance.                                                                                                                                                                                                                                                                                                                                                     |
|       |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
| **•** |   | **Foreign  Currency Exchange Risks. **Because  we conduct business in numerous geographic regions and currencies around the  world, fluctuations in currency exchange rates can affect our earnings.  We maintain investments in currencies in  which we will collect premiums and pay claims, thus creating a partial  natural hedge against exchange rate fluctuations.  While we do not expect our exposure to foreign currency risk to  materially affect our profitability, volatility in exchange rates could  affect our business adversely.                                                               |
|       |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
| **•** |   | **Inflation. **We provide reinsurance  in certain geographical markets, such as Latin America, that have experienced  sustained periods of high inflation.   In an inflationary cycle, there is a risk that the amounts we will owe  on our coverage obligations will exceed the amounts we received as premiums.                                                                                                                                                                                                                                                                                                      |
|       |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
| **•** |   | **Legislative  and Regulatory Changes. **Legislators  and regulators could introduce new laws and regulations that affect the  manner in which we conduct our business.   Our direct marketing business, for example, could be affected by new  laws or regulations limiting the use of personal data for direct marketing  efforts.  New occupational safety  legislation in the countries where we reinsure these risks could increase our  costs.  Additional unexpected  regulatory burdens could increase our compliance costs and lower our profit  margins.                                           |
|       |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
| •     |   | **Tax  Exposure. **For  purposes of many countries, including the United States, ESG is not engaged  in the conduct of any trade or business in such country, and, as a result, is  not subject to corporate income tax therein.   If, however, any country, including the U.S. were to contend  successfully that our operations subject us to corporate income tax, we would  be liable for tax on net income received by ESG to the extent it had been  received at a permanent place of business.   If corporate income taxes did apply to income received by ESG, they  would 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 and  could have a material adverse effect that is not anticipated by management.                                                                                                                                                                                                                                                                                                                                                                                                     |
|       |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
| •     |   | **Cyclical  Changes in the Market**.   The reinsurance market is affected by fluctuations in the investment  environment and extraordinary events.   If we fail to anticipate these cyclical trends, we may incur losses in  our contracts.                                                                                                                                                                                                                                                                                                                                                                            |

 

Weundertake no obligation to update any forward-looking statement, whether as aresult of new information, future events or otherwise.  All subsequent, written and oral,forward-looking statements attributable to ESG or persons acting on our behalfare qualified by the cautionary statements in this Form 10-Q.

 

28

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

 

**Market Risk**

 

We are subject to market risk arising from the potentialchange in value of our various financial instruments.  These changes may be due to fluctuations in interest rates orforeign currency rates, or both in the case of foreign currencyinvestments.  We monitor our exposure tointerest rate and currency rate risk on a quarterly basis and currently do notbelieve that the use of derivatives to manage such risk is necessary.  We intend to reevaluate the need for a formalhedging strategy on a periodic basis, and may determine that such a strategy,including the use of derivative instruments, is appropriate in the future.

 

**Interest Rate Risk**

 

Our largest source of market risk is interest rate risk onour portfolio of fixed maturity investments, especially fixed rateinstruments.  In addition, the creditworthiness of the issuer, relative values of alternative investments, liquidityand general market conditions may affect fair values of interest rate sensitiveinstruments.

 

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.

 

**Foreign Currency Risk**

 

Our functional currency is the U.S. Dollar.  However, we write reinsurance business innumerous geographic regions and currencies, giving rise to the risk that theultimate settlement of receivables and payables on reinsurance transactionswill differ from the amounts currently recorded as assets and liabilities inthe financial statements.  We generallydo not hedge the foreign currency exposure of its subsidiaries transactingbusiness in currencies other than their functional currency (transaction exposure).  The primary functional currency exposuresare European Euro, Norwegian Kroner, Australian Dollar, Hong Kong Dollar andGreat Britain Pound.  We believe thatour foreign currency transaction exposure is immaterial to our consolidatedresults of operations due to the partial natural hedge produced by normal cashflow operations.

 

**Inflation**

 

Inflation has not had a material impact on our operationsfor any of the three years presented. We write reinsurance in Latin America, which has experienced periods ofhigh inflation.  However, it is possiblethat future inflationary conditions may impact subsequent accounting periods.

 

29

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**PART II**

 

**Item1.****                    LegalProceedings**

 

See thedescription of our pendinglawsuit involving Odyssey Re in our Annual Report on Form 10-K for the fiscalyear ended December 31, 2001.

 

**Item 2.****                    Changes inSecurities and Use of Proceeds**

Not applicable.

 

**Item 3.****                    Defaults UponSenior Securities**

Not applicable.

 

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

None.

 

**Item5.****                    OtherInformation**

Not applicable.

 

**Item 6.****                    Exhibits andReports on Form 8-K**

 

(a)           Exhibit Index

 

Exhibit 11.1            Computation of Earnings Per Share

 

Exhibit 99.1            Certification of Chief ExecutiveOfficer pursuant to section 906 of The Sarbanes-Oxley Act of 2002.

 

Exhibit 99.2            Certification of Controller andChief Accounting Officer pursuant to section 906 of The Sarbanes-Oxley Act of2002.

 

(b)           Duringthe three months ended March 31, 2002, ESG filed the following Reports on Form8-K:

 

•      Form 8-K datedJanuary 31, 2002, Item 5, containing an announcement regarding ESG taking areserve of $8 million against its investment in 4Sigma Ltd.

 

•      Form 8-K datedFebruary 8, 2002, Item 5, containing an announcement of Steven H. Debrovner’sresignation, effective January 4, 2002.

 

30

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**SIGNATURES**

 

Pursuant to the requirements of the SecuritiesExchange Act of 1934, the registrant has duly caused this report to be signedon its behalf by the undersigned thereunto duly authorized.

 

 
|                     |   | 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 |                   |

 

31

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**CERTIFICATIONS UNDER EXCHANGE ACTRULE 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.              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 issuer 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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