**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

** **

----

 

**FORM10-Q**

 

**QUARTERLYREPORT PURSUANT TO SECTION 13 OR 15(d)OF THE SECURITIES EXCHANGE ACT OF 1934**

**For the quarterly period ended September 30,2001**

**Commission file number 000-23481**

** **

----

 

**ESG RE LIMITED**

(Exact name of Registrant as specified in its charter)

 

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

 

----

 

Indicate by check mark whetherthe Registrant (1) has filed all reports required to be filed by Section 13 or15(d) of the Securities Exchange Act of 1934 during the  preceding 12 months (or for such  shorter period that the  Registrant  was required  to file such reports, and (2) has been subject to such filingrequirements for the past 90 days. Yes ý    No o

 

The number of the Registrant’scommon shares  (par value  $1.00 per share) outstanding as of November8, 2001, was 11,787,725.

 

** **

**ESGRE LIMITED**

** **

**INDEX**

** **

**Part I.  Financial Information**

 

** **
| **Item 1**                     | Financial Statements and Supplementary Data                                                 |
|--------------------------------|---------------------------------------------------------------------------------------------|
|                           |                                                                                        |
|                           | Condensed Consolidated Balance Sheets                                                       |
|                           |                                                                                        |
|                           | Condensed Consolidated Statements of  Operations                                            |
|                           |                                                                                        |
|                           | Condensed Consolidated Statements of Cash  Flows                                            |
|                           |                                                                                        |
|                           | Condensed Consolidated Statements of Comprehensive  Income (Loss)                           |
|                           |                                                                                        |
|                           | Notes to Condensed Consolidated Financial  Statements                                       |
|                           |                                                                                        |
| **Item 2**                     | Management’s Discussion and Analysis of  Financial Condition and Results of Operations |
|                           |                                                                                        |
| **Item 3**                     | Quantitative and Qualitative Disclosures  About Market Risk                                 |
|                           |                                                                                        |
| **Part II. Other Information** |
|                           |                                                                                        |
| **Item 1**                     | Legal Proceedings                                                                           |
|                           |                                                                                        |
| **Item 2**                     | Changes in Securities and Use of Proceeds                                                   |
|                           |                                                                                        |
| **Item 3**                     | Defaults Upon Senior Securities                                                             |
|                           |                                                                                        |
| **Item 4**                     | Submission of Matters to a Vote of Security  Holders                                        |
|                           |                                                                                        |
| **Item 5**                     | Other Information                                                                           |
|                           |                                                                                        |
| **Item 6**                     | Exhibits and Reports on Form 8-K                                                            |
|                           |                                                                                        |
|                           | Signatures                                                                                  |

 

# **PART I – FINANCIALINFORMATION**

# **ITEM 1. FINANCIALSTATEMENTS AND SUPPLEMENTARY DATA**

# **ESG RE LIMITED**

# **CondensedConsolidated Balance Sheets**

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

 
|                                                                                                                                                                            |   | **September 30,** |        | **December 31,** |   |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|-------------------|-------------|------------------|--------|
|                                                                                                                                                                            |   | **2001**          |        | **2000**         |   |
| **ASSETS**                                                                                                                                                                      |   | **(Unaudited)**   |        |             |   |
| Investments – available for sale, at fair  value (cost: $157,958 and $166,513)                                                                                             |   | $                 | 165,008     |             | $      | 168,478 |   |
| Cash and cash equivalents                                                                                                                                                       |   | 5,842             |        | 26,032           |   |
| Other investments                                                                                                                                                               |   | 14,499            |        | 17,736           |   |
| Total  investments and cash                                                                                                                                                     |   | 185,349           |        | 212,246          |   |
|                                                                                                                                                                            |   |              |        |             |   |
| Accrued investment income                                                                                                                                                       |   | 2,794             |        | 3,240            |   |
| Management fees receivable                                                                                                                                                      |   | 43                |        | 713              |   |
| Reinsurance balances receivable                                                                                                                                                 |   | 182,456           |        | 241,587          |   |
| Reinsurance recoverable on incurred losses                                                                                                                                      |   | 20,645            |        | 15,633           |   |
| Funds retained by ceding companies                                                                                                                                              |   | 14,424            |        | 18,432           |   |
| Prepaid reinsurance premiums                                                                                                                                                    |   | 2,051             |        | 5,432            |   |
| Deferred acquisition costs                                                                                                                                                      |   | 39,134            |        | 46,611           |   |
| Other assets                                                                                                                                                                    |   | 6,979             |        | 6,281            |   |
| Cash and cash equivalents held in a  fiduciary capacity                                                                                                                         |   | 2,223             |        | 4,619            |   |
|                                                                                                                                                                            |   |              |        |             |   |
| **TOTAL  ASSETS**                                                                                                                                                               |   | **$**             | **456,098** | ** **       | **$**  | **554,794** | ** ** |
| **LIABILITIES**                                                                                                                                                                 |   |              |        |             |   |
| Unpaid losses and loss expenses                                                                                                                                                 |   | $                 | 152,890     |             | $      | 179,614 |   |
| Unearned premiums                                                                                                                                                               |   | 111,589           |        | 148,124          |   |
| Acquisition costs payable                                                                                                                                                       |   | 40,237            |        | 64,604           |   |
| Reinsurance balances payable                                                                                                                                                    |   | 23,461            |        | 30,511           |   |
| Accrued expenses, accounts payable, and  other liabilities ($80 and $85 due to related parties)                                                                                 |   | 15,556            |        | 13,756           |   |
| Fiduciary liabilities                                                                                                                                                           |   | 2,223             |        | 4,619            |   |
| Total liabilities                                                                                                                                                               |   | 345,956           |        | 441,228          |   |
|                                                                                                                                                                            |   |              |        |             |   |
| **SHAREHOLDERS’ EQUITY**                                                                                                                                                   |   |              |        |             |   |
| Preference shares, 50,000,000 shares  authorized; no shares issued and outstanding for 2001 and 2000                                                                            |   | --                |        | --               |   |
| Class B common shares, 100,000,000 shares  authorized; no shares issued and outstanding for 2001 and 2000                                                                       |   | --                |        | --               |   |
| Common shares, par value $1 per share;  100,000,000 shares authorized; 11,787,725 shares issued and outstanding for  2001 and 11,777,086 shares issued and outstanding for 2000 |   | 11,788            |        | 11,777           |   |
| Additional paid-in capital                                                                                                                                                      |   | 207,995           |        | 207,646          |   |
| Accumulated other comprehensive income:                                                                                                                                         |   |              |        |             |   |
| Foreign currency translation adjustments                                                                                                                                        |   | (4,694            | )           | (5,331           | )      |
| Unrealized gains  on securities, net of tax                                                                                                                                     |   | 7,206             |        | 1,965            |   |
| Accumulated other comprehensive income                                                                                                                                          |   | 2,512             |        | (3,366           | )      |
| Retained (deficit)                                                                                                                                                              |   | (112,153          | )           | (102,491         | )      |
| Total shareholders’ equity                                                                                                                                                 |   | 110,142           |        | 113,566          |   |
| **TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY**                                                                                                                             |   | $                 | 456,098     |             | $      | 554,794 |   |

##### ** **

The accompanying notes are an integral part of the condensedconsolidated financial statements.

 

# **ESG RE LIMITED**

# **CondensedConsolidated Statements of Operations**

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

# **(Unaudited)**

 
|                                                            |   | **Three Months Ended** |       | **Nine Months Ended** |       |
|-----------------------------------------------------------------|--------|------------------------|------------|-----------------------|------------|
|                                                            |   | **September 30,**      |       | **September 30,**     |       | **September 30,** |   | **September 30,** |   |
|                                                            |   | **2001**               |       | **2000**              |       | **2001** |   | **2000** |   |
| **REVENUES**                                                    |   |                   |       |                  |       |   |   |   |   |
| Net premiums written                                            |   | $                      | 8,898      |                  | $          | 16,010 |   | $ | 75,763 |   | $ | 165,164 |   |
| Change in unearned premiums                                     |   | 18,334                 |       | 23,746                |       | 32,260 |   | 8,849 |   |
|                                                            |   |                   |       |                  |       |   |   |   |   |
| Net premiums earned                                             |   | 27,232                 |       | 39,756                |       | 108,023 |   | 174,013 |   |
| Management fee revenue                                          |   | (132                   | )          | 224                   |       | 288 |   | 1,180 |   |
| Net investment income                                           |   | 2,512                  |       | 3,600                 |       | 9,247 |   | 9,691 |   |
| (Loss)/gain on equity investments                               |   | --                     |       | 23                    |       | (29 | ) | 309 |   |
| Net realized investment gain/(loss)                             |   | 215                    |       | 472                   |       | (2,517 | ) | (599 | ) |
|                                                            |   | 29,827                 |       | 44,075                |       | 115,012 |   | 184,594 |   |
| **EXPENSES**                                                    |   |                   |       |                  |       |   |   |   |   |
| Losses and loss expenses                                        |   | 14,762                 |       | 44,477                |       | 70,985 |   | 144,395 |   |
| Acquisition costs                                               |   | 8,561                  |       | 18,264                |       | 33,564 |   | 56,387 |   |
| Administrative expenses                                         |   | 6,407                  |       | 16,382                |       | 20,225 |   | 32,479 |   |
|                                                            |   | 29,730                 |       | 79,123                |       | 124,774 |   | 233,261 |   |
|                                                            |   |                   |       |                  |       |   |   |   |   |
| **INCOME (LOSS) FROM CONTINUING OPERATIONS  BEFORE TAXES**      |   | 97                     |       | (35,048               | )          | (9,762 | ) | (48,667 | ) |
| Income tax expense                                              |   | --                     |       | --                    |       | -- |   | -- |   |
|                                                            |   |                   |       |                  |       |   |   |   |   |
| **INCOME (LOSS) FROM CONTINUING OPERATIONS**                    |   | 97                     |       | (35,048               | )          | (9,762 | ) | (48,667 | ) |
|                                                            |   |                   |       |                  |       |   |   |   |   |
| Net Income (Loss) from discontinued  operations (Note 4)        |   | --                     |       | 750                   |       | -- |   | (5,178 | ) |
|                                                            |   |                   |       |                  |       |   |   |   |   |
| **NET INCOME (LOSS)**                                           |   | $                      | 97         |                  | $          | (34,298 | ) | $ | (9,762 | ) | $ | (53,845 | ) |
|                                                            |   |                   | ** ** |                  | ** ** |   | ** ** |   | ** ** |
| **PER  SHARE DATA**                                             |   |                   | ** ** |                  | ** ** |   | ** ** |   | ** ** |
| Basic net income (loss) per share from  continuing operations   |   | $                      | 0.01       |                  | $          | (2.97 | ) | $ | (0.83 | ) | $ | (4.14 | ) |
|                                                            |   |                   |       |                  |       |   |   |   |   |
| Diluted net income (loss) per share from  continuing operations |   | 0.01                   |       | (2.97                 | )          | (0.83 | ) | (4.14 | ) |
|                                                            |   |                   |       |                  |       |   |   |   |   |
| Basic net income (loss) per share                               |   | $                      | 0.01       |                  | $          | (2.90 | ) | $ | (0.83 | ) | $ | (4.58 | ) |
| Diluted net income (loss) per share                             |   | 0.01                   |       | (2.90                 | )          | (0.83 | ) | (4.58 | ) |
|                                                            |   |                   |       |                  |       |   |   |   |   |
| **WEIGHTED AVERAGE SHARES OUTSTANDING**                         |   |                   |       |                  |       |   |   |   |   |
| Basic                                                           |   | 11,787,725             |       | 11,817,349            |       | 11,786,000 |   | 11,746,066 |   |
| Diluted                                                         |   | 11,787,725             |       | 11,817,349            |       | 11,786,000 |   | 11,746,066 |   |
|                                                            |   |                   |       |                  |       |   |   |   |   |
| Dividends declared per share                                    |   | --                     |       | $                     | 0.08       |   | -- |   | $ | 0.16 |   |

 

**Theaccompanying notes are an integral part of the condensed consolidated financialstatements.**

 

# **ESG RE LIMITED**

# **Condensed ConsolidatedStatements of Cash Flows**

(U.S. dollars in thousands)

**(Unaudited)**

** **
|                                                                        |   | **Nine Months Ended**  |    |
|-----------------------------------------------------------------------------|--------|------------------------|---------|
|                                                                        |   | **September 30, 2001** |    | **September 30, 2000** |   |
| **CASH FLOWS FROM OPERATING ACTIVITIES**                                    |   |                   |    |   |   |
| Net cash used by operating activities                                       |   | $                      | (23,924 | ) | $ | (44 | ) |
|                                                                        |   |                   |    |   |   |
| **CASH FLOWS FROM INVESTING ACTIVITIES**                                    |   |                   |    |   |   |
| Cost of fixed maturity investments acquired  – available for sale      |   | (183,557               | )       | (157,716 | ) |
| Proceeds from sale of fixed maturity  investments – available for sale |   | 189,465                |    | 162,580 |   |
| Funding of other investments                                                |   | (854                   | )       | (8,740 | ) |
| Proceeds from other investments                                             |   | -                      |    | 800 |   |
| Purchases of fixed assets                                                   |   | (1,262                 | )       | (476 | ) |
| Net cash provided/(used) by investing  activities                           |   | 3,792                  |    | (3,552 | ) |
|                                                                        |   |                   |    |   |   |
| **CASH FLOWS FROM FINANCING ACTIVITIES**                                    |   |                   |    |   |   |
| Dividends paid                                                              |   | (58                    | )       | (2,859 | ) |
| Repurchase of common shares                                                 |   | -                      |    | (2,234 | ) |
| Net cash used in financing activities                                       |   | (58                    | )       | (5,093 | ) |
|                                                                        |   |                   |    |   |   |
| Net (decrease) in cash                                                      |   | (20,190                | )       | (8,689 | ) |
| Cash and cash equivalents at January 1                                      |   | 26,032                 |    | 28,278 |   |
|                                                                        |   |                   |    |   |   |
| Cash and cash equivalents at September 30                                   |   | $                      | 5,842   |   | $ | 19,589 |   |

 

**Theaccompanying notes are an integral part of the condensed consolidated financialstatements.**

 

#### **ESG RE LIMITED**

#### **CondensedConsolidated Statements of Comprehensive Income (Loss)**

(U.S. dollars in thousands)

**(Unaudited)**

 
|                                                                        |   | **Three Months Ended** |   | **Nine Months Ended** |   |
|-----------------------------------------------------------------------------|--------|------------------------|--------|-----------------------|--------|
|                                                                        |   | **September 30,**      |   | **September 30,**     |   | **September 30,** |   | **September 30,** |   |
|                                                                        |   | **2001**               |   | **2000**              |   | **2001** |   | **2000** |   |
| Net income (loss)                                                           |   | $                      | 97     |                  | $      | (34,298 | ) | $ | (9,762 | ) | $ | (53,845 | ) |
| Other  comprehensive income, net of tax:                                    |   |                   |   |                  |   |   |   |   |   |
| Foreign currency translation adjustments                                    |   | 305                    |   | (2,400                | )      | 638 |   | (3,142 | ) |
| Unrealized gains on securities:                                             |   |                   |   |                  |   |   |   |   |   |
| Unrealized holding gains arising during the  period                         |   | 3,838                  |   | 1,527                 |   | 5,241 |   | 315 |   |
| Less reclassification adjustment for  losses/(gains) included in net income |   | --                     |   | (472                  | )      | -- |   | 599 |   |
| Other  comprehensive income (loss)                                          |   | 4,143                  |   | (1,345                | )      | 5,879 |   | (2,228 | ) |
|                                                                        |   |                   |   |                  |   |   |   |   |   |
| Comprehensive  income (loss)                                                |   | $                      | 4,240  |                  | $      | (35,643 | ) | $ | (3,883 | ) | $ | (56,073 | ) |

 

**Theaccompanying notes are an integral part of the condensed consolidated financialstatements.**

** **

**NOTES TO THEUNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**

 

**1.  BASIS OF PRESENTATION**

 

The accompanying unauditedcondensed consolidated financial statements of ESG Re Limited (together withits subsidiaries, the “Company”) have been prepared in accordance withgenerally accepted accounting principles in the United States of America (“U.S.GAAP”) except pursuant to the rules and regulations of the Securities andExchange Commission which do not include all of the information and footnotesrequired by generally accepted accounting principles for complete financialstatements.  In the opinion ofmanagement, these unaudited financial statements reflect all adjustments considerednecessary for a fair presentation of financial position, results of operationsand comprehensive income as of and for the periods presented.  The results of operations for any interimperiod are not necessarily indicative of the results for a full year.  These unaudited condensed consolidatedfinancial statements should be read in conjunction with the auditedconsolidated financial statements, and related notes thereto, included in theCompany’s 2000 Annual Report on Form 10-K.

 

The preparation of financialstatements in accordance with U.S. GAAP requires management to make estimatesand assumptions that affect the reported amounts of assets and liabilities andcontingent assets and liabilities at the date of the financial statements andthe reported amounts of revenues and expenses during the reporting period aswell as the disclosure of such amounts. Actual results could materially differ from those estimates andassumptions.

 

**2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES**

 

The Company’s condensedconsolidated financial statements have been prepared in accordance with U.S.GAAP.  The Company’s significantaccounting policies include the following:

 

*(A)      PREMIUMREVENUES*

Premiums written are estimatedand recognized at the inception of the reinsurance contract, based uponinformation received from intermediaries and ceding companies.  The Company compares estimated writtenpremiums to actual premiums as reported by ceding companies on a periodicbasis.  The timeliness and frequency ofceding company reports vary considerably by ceding company, line of businessand geographic area, which means that the actual ultimate premium written maynot be known with certainty for prolonged periods.  Differences between such estimates and actual amounts as reportedby ceding companies are recorded in the period in which the actual amounts aredetermined.

 

The reinsurance contractsentered into by the Company are primarily of short duration.  Retrospective reinsurance contracts areaccounted for in accordance with SFAS No. 113. Premiums written are recognized as earned over the coverage period inproportion to the amount of protection provided.  Unearned premium reserves are established to cover the unexpiredcontract period.

 

*(B)      RESERVEFOR LOSSES AND LOSS EXPENSES*

The reserve for unpaid lossesand loss adjustment expenses includes an estimate of reported case reserves andan estimate for losses incurred but not reported.  Case reserves are estimated based on ceding company reports andother data considered relevant to the estimation process.  The liability for losses incurred but notreported is based to a large extent on the expectations of ceding companiesabout ultimate loss ratios at the inception of the contracts, supplemented byindustry experience and the Company’s specific historical experience whereavailable.  As the Company has limitedspecific historical experience on a significant number of its programs on whichto base its estimate of losses incurred but not reported, its reliance onceding company expectations and industry experience is necessarily increased,which increases the uncertainty involved in the loss estimation process

 

The reserves as established bymanagement are reviewed periodically, and adjustments are made in the periodsin which they become known.  Althoughmanagement believes that an adequate provision has been made for the liabilityfor losses and loss expenses, based on all available information, there can beno assurance that the ultimate losses will not differ significantly from theamounts provided.

 

*(C)     INVESTMENTS*

Fixed maturity securities areclassified as available for sale and are reported at estimated fair value.  Investments that are available for sale areexpected to be held for an indefinite period but may be sold depending oninterest rates and other considerations. Other investments are accounted for at the lower of cost or estimatedrealizable value.  Unrealized investmentgains and losses on investments available for sale, net of applicable deferredincome tax, are reported as a separate component of "accumulated othercomprehensive income”.  Realized gainsor losses on sale of investments are determined on the basis of averagecost.  The carrying values ofinvestments available for sale and other investments are adjusted forimpairments in value that are considered to be other than temporary.

 

*(D)   DEFERRED ACQUISITION COSTS*

Costs relatingto the production of the new business (primarily commissions and certain costsof marketing) are deferred and included in the deferred acquisition cost assetto the extent that such costs are recoverable from future related policyrevenues.  The deferred acquisitioncosts are being amortized over the periods in which the related premiums areearned.  Such deferred costs arereviewed to determine if they are recoverable from future income, includinginvestment income and, if not considered recoverable, are charged to expense.

 

*(E)   REINSURANCE PREMIUMS CEDED*

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

 

*(F)   FOREIGN CURRENCY TRANSLATION*

The functionaland reporting currency of the Company is U.S. dollars.  Foreign currency receivables or payablesthat are denominated in a currency other than U.S. dollars are translated intoU.S. dollars at the rates of exchange in effect at the balance sheet date.  The resulting exchange gains or losses areincluded in the results of operations. Exchange gains and losses related to the translation of investmentsavailable for sale are included in the net unrealized appreciation(depreciation) of investments, net of deferred income taxes, as a separatecomponent of “accumulated other comprehensive income”.  Assets and liabilities related to foreignoperations are translated into U.S. dollars at the exchange rate in effect atthe balance sheet date; revenues and expenses are translated into U.S. dollarsusing weighted average rates for the period. Gains and losses resulting fromtranslating foreign currency financial statements, net of deferred incometaxes, are excluded from income and included as a separate component of“accumulated other comprehensive income”.

 

*(G)    USE OF ESTIMATES*

*The preparation of financialstatements in accordance with U.S. generally accepted accounting principlesrequires management to make estimates and assumptions that affect the reportedamounts of assets and liabilities and disclosure of contingent assets andliabilities at the date of the financial statements and the reported amounts ofrevenues and expenses during the reporting period as well as the disclosure ofsuch amounts.  Actual results,particularly for premiums written, premiums earned and loss reserves couldmaterially differ from those estimates and assumptions.*

* *

*(H)    FAIR VALUE OF FINANCIALINSTRUMENTS*

*The carrying value of the Company’sinvestments approximates their fair value and is based on quoted marketprices.  Due to the uncertainty withrespect to both the timing and amount of the proceeds to be realized from theCompany’s other investments, it is not practicable to determine the fair valueof these other investments. The carrying value of other financial instruments,including cash and cash equivalents, accrued investment income, and otherreceivables and payables approximate their estimated fair value due to theshort-term nature of the balances.*

* *

**3.  COMMITMENTS AND CONTINGENCIES**

 

*(A)  EMPLOYMENT CONTRACTS*

The Company has entered intoemployment contracts with several employees for terms of one to five years,which have total minimum commitments of $0.9 million, excluding any performancebonuses, that are determined by the Board of Directors of the Company as atSeptember 30, 2001. The contracts include various non-compete clauses followingtermination of employment.

 

*(B)  LEASE COMMITMENTS*

The Company and its subsidiarieshave various obligations under operating leases.

The future minimum commitmentsunder lease and employment agreements are as follows:

 
|                          |   | **Lease**       |   | **Less Sublease** |   |    |   | **Employment** |   |      |   |
|-------------------------------|--------|-----------------|--------|-------------------|--------|---------|--------|----------------|--------|-----------|--------|
| **U.S. dollars in thousands** |   | **Commitments** |   | **Income**        |   | **Net** |   | **Contracts**  |   | **Total** |   |
| Years Ending December 31,     |   |            |   |              |   |    |   |           |   |      |   |
| 2001                          |   | 320             |   | 73                |   | 247     |   | 265            |   | 512       |   |
| 2002                          |   | 1,058           |   | 212               |   | 846     |   | 508            |   | 1,354     |   |
| 2003                          |   | 793             |   | 38                |   | 755     |   | 77             |   | 832       |   |
| 2004                          |   | 558             |   | -                 |   | 558     |   | -              |   | 558       |   |
| 2005                          |   | 353             |   | -                 |   | 353     |   | -              |   | 353       |   |
| Over Five Years               |   | 654             |   | -                 |   | 654     |   | -              |   | 654       |   |
|                          |   |            |   |              |   |    |   |           |   |      |   |
| Total                         |   | $               | 3,736  |              | $      | 323     |   | $              | 3,413  |      | $      | 850 |   | $ | 4,263 |   |
|                               |        |                 |        |                   |        |         |        |                |        |           |        |  |  |  |  |  |

 

*(C)    LETTERS OF CREDIT*

As of September 30, 2001,Secured Letters of Credit and Trust Accounts in the aggregate amount of $106.2million have been issued in favor of ceding companies with $57.6 millionrelated to Letters of Credit issued and $48.6 million related to Trust Accountsin force.  The Letters of Credit andTrust Accounts are secured by a lien on the Company’s fixed maturitiesinvestment portfolio, equal to 110% of the amount of the outstanding Letters ofCredit, and 102% of the amount of the outstanding Trust Accounts.  As of December 31, 2000, Secured Letters ofCredit and Trust Accounts in the amount of $95.8 million were issued in favorof ceding companies.

 

The Company’s current Letter ofCredit facility will expire on December 31, 2001. The Company is in discussionswith its bankers with respect to renewing this facility for another year.

 

(D)      PENSION OBLIGATIONS

Certain subsidiaries of theCompany are obligated to make defined contributions to pension plans for theiremployees.  As of September 30, 2001,there were outstanding liabilities for pension contributions of  $556 thousand.

 

(E)       *CONTINGENCIES*

ESG and its subsidiaries, incommon with the insurance industry in general, are subject to litigation,including claims for punitive damages, in the normal course of their business.ESG does not believe that such litigation will have a material adverse effecton its financial condition, future operating results or liquidity.

 

In February 2000, Odyssey Reinstituted an action in England against a broker, Stirling Cooke Brown,alleging fraud and conspiracy on the reinsurance placement of 1997 and 1998personal accident and workers compensation “carve out” business with OdysseyRe.  These proceedings mirror earlierproceedings commenced in New York, which were dismissed on jurisdictionalgrounds. During 1998, ESG accepted a 25% quota share reinsurance treaty withOdyssey Re (UK) retroactive to January 1, 1998.  This treaty covers various insurance companies involved in thelitigation Odyssey Re instituted in New York over 1997 and 1998 business.  This treaty terminated as of December 31,1998 but ESG renewed its participation for 1999 directly to one of those cedingcompanies.  In December 1999, theCompany gave notice to rescind its contract with Odyssey Re (UK) formisrepresentation and failure to disclose material facts.  On November 29, 2000 the company filed suitin the High Court to seek judicial confirmation of its rescission. On February5, 2001 Odyssey Re filed a response.  OnMarch 21, 2001, the Company filed a motion for summary judgment.  The motion was substantially based on anadmission by Odyssey Re (UK) that a misrepresentation had been made to theCompany in connection with the quota share agreement, and was supported byevidence from fact and expert witnesses. The Company’s intention was to re-evaluate the motion if Odyssey Re (UK)served any evidence.  Subsequently,Odyssey Re (UK) withdrew their admission, and, less than a week before the datescheduled for the hearing, and in violation of the applicable rules of court,they served their evidence, in which they made it clear, for the first time,that they intended to plead a positive case that the representation wastrue.  Odyssey Re’s evidence also raisedother factual issues by way of defence, which had not been contained in theirinitial pleading.

 

The Company has now recognized that the court would be very unlikely togive a summary judgment on the evidence as it stands, and hasaccordingly withdrawn its motion.  Thiswithdrawal is in no way an acknowledgement that the company’s prospects ofsuccess in its litigation with Odyssey Re (UK) are any less good than they were,but simply an acceptance that the issues, which have been raised, require atrial.  Indeed, the Company remainsconfident that it will prevail in that litigation, and intends to pursue thelitigation aggressively.  The Companymay reissue its motion for summary judgment at any time if justified by thestate of the evidence and the pleadings. This matter will be heard no earlierthan late 2002.

 

The Company has also givennotice to rescind the 1999 account. This matter is now set for arbitration inlate 2002.

 

At this time, the Company isunable to determine the amount of its exposure and the possible effect upon theCompany’s business, financial condition or results of operation from these twocontracts.

 

 

**4.  DISCONTINUED OPERATIONS**

 

On August 10, 2000, the Boardof Directors approved a plan for the divestiture of its Health CareDivision.  Implementation of that planresulted in the divestiture of 4Sigma (formerly VVB Bermuda Limited) effectiveJune 30, 2000, to affiliates of the Chairman and senior management of theHealth Care Division.  The investors in4Sigma include the Company, affiliates of the Chairman of the Company(“Chairman”), Dr. Gerald Moeller, previously a member of the board of ESG ReLimited and Chief Executive-Healthcare Division and former management of theHealth Care Division.  Terms comparableto those offered to the affiliates of the Chairman were offered to non-relatedparties.  The Company owns 8,000,000convertible preference shares in 4Sigma.

 

4Sigma delivers disease anddemand management services to health plans in Germany. It currently has a 4%share of a 60 million-person market with only three significant competitors.Recent changes in German law to be effective July 1, 2002 require all Germanhealth insurers to provide disease and demand management services to theirmembers.

 

 4Sigma has been successful in writing new business, however, thevolume of business needed to cover operating costs has currently not beenachieved.   To support immediate cashneeds and to preserve its equity participation in 4Sigma, in the secondquarter, the Company participated in a rights offering by 4Sigma forconvertible preferred debt totaling $0.8 million. Subsequently, 4Sigmare-evaluated its business model and has effected several changes includingreducing its management expense and consolidating its operations from Hamburgto Munich.

 

In November 2001, the Companyagreed to participate in an additional rights offering to further supportprojected cash needs through December 2002. That participation is in the form of a commitment for up to $1.8million, in $100,000 increments, as funds are needed.  Future funding requests will be evaluated on a monthly basis anda complete re-assessment will be effected before April 1st nextyear.

 

For the three months endedSeptember 30, 2000, the Healthcare Division recovered expenses of $750 thousandand consequentially reported net income of $750 thousand, or $0.07 pershare.  For the nine months endedSeptember 30, 2000, operating results included revenues of $343 thousand and anoperating loss of $4,985 thousand, or $0.44 per share, respectively.

 

Additionally on August 10, 2000 the Board of Directors approved a planto liquidate it majority-owned subsidiary in Indonesia.  This operation reported a net loss of $0.2million on revenues of $0.4 million in the first half of 2000.

 

**5.  RELATED PARTIES**

 

Included in net investmentincome for the three months and nine months ended September 30, 2001 wererelated party investment expenses of $85 thousand and $214 thousand,respectively.

 

**6.  NEW ACCOUNTING PRONOUNCEMENTS**

 

In June 2001,the FASB issued Statement of Financial Accounting Standard (SFAS) No. 141, *Business Combinations*.  SFAS No. 141 requires that all businesscombinations initiated after June 30, 2001 be accounted for under the purchasemethod and addresses the initial recognition and measurement of goodwill andother intangible assets acquired in a business combination.  Management does not expect the adoption ofSFAS No. 141 to have an impact on the financial position, results of operationsor cash flows of the Company.

 

In June 2001,the Financial Accounting Standards Board (“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 impairment.  Management does notexpect the adoption of SFAS No. 142 to have an impact on the financialposition, results of operations, or cash flows of the company.

 

In October2001, the FASB issued SFAS No. 144, *Accountingfor the Impairment or Disposal of**Long-LivedAssets* (SFAS No. 144).  SFASNo. 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 presentation requirementsof operating losses from discontinued operations.  SFAS No. 144 is effective for fiscal years beginning afterDecember 15, 2001.  We are currentlyevaluating the provisions of SFAS No. 144.

 

**INDEPENDENTACCOUNTANTS’ REVIEW REPORT**

 

To the Board of Directors andShareholders of ESG Re Limited

 

We have reviewed theaccompanying condensed consolidated balance sheet of ESG Re Limited andsubsidiaries as of September 30, 2001 and the related condensed consolidatedstatements of operations, comprehensive income and cash flows for the threemonth and nine month periods ended September 30, 2001 and 2000.  These financial statements are theresponsibility of the Company’s management.

 

We conducted our review inaccordance with standards established by the American Institute of CertifiedPublic Accountants.  A review of interimfinancial information consists principally of applying analytical procedures tofinancial data and of making inquiries of persons responsible for financial andaccounting matters.  It is substantiallyless in scope than an audit conducted in accordance with generally acceptedauditing standards, the objective of which is the expression of an opinionregarding the financial statements taken as a whole.  Accordingly, we do not express such an opinion.

 

Based upon our review, we arenot aware of any material modifications that should be made to such condensedconsolidated financial statements for them to be in conformity with accountingprinciples generally accepted in the United States of America.

 

We have previously audited, inaccordance with auditing standards generally accepted in the United States ofAmerica, the consolidated balance sheet of ESG Re Limited and subsidiaries asof December 31, 2000 and the related consolidated statements of operations,comprehensive income, changes in shareholders’ equity and cash flows for theyear then ended (not presented herein) and in our report dated April 2, 2001,we expressed an unqualified opinion on those consolidated financial statements.  In our opinion, the information set forth inthe accompanying condensed consolidated balance sheet as of December 31, 2000is fairly stated, in all material respects, in relation to the consolidatedbalance sheet from which it has been derived.

 

Deloitte & Touche

Chartered Accountants

Dublin, Ireland

November 13, 2001

 

**ITEM 2.  MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS****OF  OPERATIONS.**

* *

*Thefollowing is a discussion and analysis of the financial condition as ofSeptember 30, 2001and the results of operations of ESG Re Limited andsubsidiaries (the “Company” or “ESG”) for the three months and nine monthsended September 30, 2001 as compared to the three months and nine months endedSeptember 30, 2000.  This discussion andanalysis should be read in conjunction with the attached unaudited condensedconsolidated financial statements and notes thereto and the auditedconsolidated financial statements of the Company as of and for the year endedDecember 31, 2000 and notes thereto included in the Company’s Annual Report onForm 10-K for the fiscal year ended December 31, 2000.  The unaudited condensed consolidatedfinancial statements as of and for the three months and nine months endedSeptember 30, 2001 and for the three months and nine months ended September 30,2000 and notes thereto have been reviewed by independent accountants inaccordance with standards established by the American Institute of CertifiedPublic Accountants.*

 

*Theresults of operations and cash flows for any interim period are not necessarilyindicative of results for the full year. In addition, this quarterly report contains forward-looking statementsregarding future profit levels, premium growth, cash flows and other matters, whichinvolve risks and uncertainties that may affect the actual results ofoperations of the Company.  Thefollowing important factors, among others, could cause actual results to differmaterially from those set forth in the forward-looking statements: claimsfrequency, claims severity, economic activity, competitive pricing and theregulatory environment in which the Company operates.*

# ** **

 

# **GENERAL**

 

Effective with the divestitureof the health care business in June, 2000, the Company now considers itsreinsurance activities to constitute a single operating segment on the basisthat such activities are monitored and evaluated primarily on a company-widebasis. The major lines of business of the Company’s reinsurance operationsinclude medical expense, personal accident and disability, credit, life andother special risk reinsurance. The results from the Health Care division arereported in prior periods as discontinued operations.

### ** **

 

### **EVENTS OF SEPTEMBER 11, 2001**

 

After an initial portfolioanalysis of exposures and liabilities as a result of the September 11th eventin the United States, the Company again reviewed its exposure as of 3rdQuarter 2001.  The Company believes thatits total exposure will be approximately US$250,000 (split US$100,000 from theLondon operation and US$150,000 from the Toronto operation) gross beforereinsurance.

 

The resultant impact from thisevent has been a decrease in the capacity in the Accident and Healthreinsurance market.  This affects theCompany positively as premium rates are hardening dramatically, but negativelyas it makes outwards reinsurance more expensive.

 

 

### **RESULTS OF OPERATIONS**

 

For the three months ended September 30, 2001, theCompany had net income of $0.1 million compared to a net loss of $34.3 millionfor the third quarter of 2000.  Netincome per share for the three months ended September 30, 2001 was $0.01compared with a net loss per share of $2.90 for the third quarter 2000.  Included in last year’s results was incomefrom discontinued operations of  $0.8million or $0.07 per shares representing the recovering of expenses relating tothe divested non-core health care operations. The net operating loss for third quarter 2001, which excluded realizedinvestment gains and losses, was $0.01 per share.  Net operating loss for the third quarter 2000, which excludesrealized investment gains and losses and loss on equity investments, was $2.94per share.

 

An underwriting profit (before operating expenses) of $3.9 million forthe quarter and investment income of $2.7 million offset operating expenses of$6.4 million and negative management fees of $0.1 million.

 

For the nine months endedSeptember 30, 2001, the Company had a net loss of $9.8 million, compared to anet loss of $53.8 million for the same period in 2000.  Net loss per share for the nine months endedSeptember 30, 2001 was $0.83 compared to net loss per share of $4.58 for thenine months ended September 30, 2000.

 

Total revenues for the threemonths ended September 30, 2001 were $29.8 million, consisting of net premiumsearned of $27.2 million, net investment income of $2.5 million, realizedinvestment gains of $0.2 million, and management fee revenue of $(0.1)million.  For the three months endedSeptember 30, 2000 total revenues were $44.1 million consisting of net premiumsearned of $39.8 million, net investment income of $3.6 million, realizedinvestment gains of $0.5 million, gain on equity investments of under $0.1million and management fee revenue of $0.2 million.

 

Total revenues for the ninemonths ended September 30, 2001 were $115.0 million, consisting of net earnedpremiums of $108.0 million, net investment income of $9.2 million, realizedinvestments losses of $2.5 million, and management fee revenue of  $0.3 million.  For the nine months ended September 30, 2000 total revenues were$184.6 million consisting of net premiums earned of $174.0 million, netinvestment income of $9.7 million, realized investment losses of $0.6 million,gain on equity investments of $0.3 million and management fee revenue of $1.2million.

 

For the three months endedSeptember 30,2001, expenses were $29.7 million, consisting of $14.7million of losses and loss expenses, $8.6 million of acquisition costs, and$6.4 million of operating expenses. Total expenses for the three months ended September 30, 2000 were $79.1million, consisting of $44.5 million of losses and loss expenses, $18.2 millionof acquisition costs, and $16.4 million of operating expenses (including aprovision to legal reserve of $8.4 million).

 

Total expenses for the ninemonths ended September 30, 2001 were $124.8 million, consisting of $71.0million of losses and loss expense, $33.6 million of acquisition costs, and$20.2 million of operating expenses. For the nine months ended September 30, 2000, total expenses were $233.3million, consisting of $144.4 million of losses and loss expense, $56.4 millionof acquisition costs, and $32.5 million of operating expenses.

 

 

** NETUNDERWRITING INCOME**

 

Gross premiums written declinedby $10.6 million, or 33.4%, for the three months ended September 30, 2001,compared to the corresponding prior year period.  For the nine months ended September 30, 2001, gross premiumswritten decreased by $89.4 million, or 54.1% when compared with the same prioryear period.  The reduction, for themost part, is a reflection of the Company’s stated objective to reduce premiumwritings, concentrating on those markets that offer the best profitopportunities.  In addition, the Companyrescinded one medical treaty underwritten in 1999 in the first quarter of thisyear, which resulted in a reduction in Gross Written and Net Earned Premium of$9.5 million, respectively.

 

An underwriting profit (beforeoperating costs) of $3.9 million and $4.4 million was posted in the quarter andnine months ended September 30, 2001, respectively. Business underwritten in2001 contributed approximately one-half of this result as premiums written thisyear are now beginning to earn through. Also, we are seeing positivedevelopment on business written last year. The year to date results were negatively impacted by the cost of $2.2million incurred in the first quarter to exit certain unprofitable books ofbusiness that automatically would have renewed.  Rate increases being effected on premiums written in respect ofthe 2001 underwriting year are now having an effect on underwriting results,and are expected to contribute significantly more in ensuing quarters as thatpremium is earned.  It is important tonote that the significant reserving done in the third quarter of last yearcontinues to prove adequate in connection with the Company’s efforts to closeout the 1998 and the 1999 underwriting years.

 

Underwriting results for the three months ended September 30, 2001 and2000, by line of business and in total were as follows:

 
| **Three months ended**         |   |        |   |         |   |       |   |     |   |      |   |      |   |
|--------------------------------|--------|-------------|--------|--------------|--------|------------|--------|----------|--------|-----------|--------|-----------|--------|
| **September 30, 2001**         |   |        |   | **Personal** |   |       |   |     |   |      |   |      |   |
| **U.S. dollars in thousands**  |   | **Medical** |   | **Accident** |   | **Credit** |   | **Life** |   | **Other** |   | **Total** |   |
|                           |   |        |   |         |   |       |   |     |   |      |   |      |   |   |   |   |   |   |   |
| Gross premiums written         |   | $           | 21,218 |         | $      | 5,627      |   | $        | (4,340 | )         | $      | (1,746    | )      | $ | 455 |   | $ | 21,213 |   |
|                           |   |        |   |         |   |       |   |     |   |      |   |      |   |
| Net premiums written           |   | 9,430       |   | 5,099        |   | (4,359     | )      | (1,714   | )      | 442       |   | 8,898     |   |
|                           |   |        |   |         |   |       |   |     |   |      |   |      |   |
| Net premiums earned            |   | 16,688      |   | 9,856        |   | 513        |   | (383     | )      | 558       |   | 27,232    |   |
| Losses and loss expenses       |   | 2,731       |   | 11,301       |   | 221        |   | (252     | )      | 761       |   | 14,762    |   |
| Acquisition costs              |   | 5,054       |   | 3,568        |   | 469        |   | 4        |   | (534      | )      | 8,561     |   |
| Operating costs                |   | 4,029       |   | 2,129        |   | 111        |   | (83      | )      | 121       |   | 6,307     |   |
|                           |   |        |   |         |   |       |   |     |   |      |   |      |   |
| Net underwriting income (loss) |   | $           | 4,874  |         | $      | (7,142     | )      | $        | (288   | )         | $      | (52       | )      | $ | 210 |   | $ | (2,398 | ) |

 
| **Three months ended**         |   |        |       |         |       |       |       |     |       |      |       |      |       |
|--------------------------------|--------|-------------|------------|--------------|------------|------------|------------|----------|------------|-----------|------------|-----------|------------|
| **September 30, 2000**         |   |        |       | **Personal** |       |       |       |     |       |      |       |      |       |
| **U.S. dollars in thousands**  |   | **Medical** | ** ** | **Accident** | ** ** | **Credit** | ** ** | **Life** | ** ** | **Other** | ** ** | **Total** | ** ** |
|                           |   |        |       |         |       |       |       |     |       |      |       |      |       |   |   |   |   |   |   |
| Gross premiums written         |   | $           | 28,314     |         | $          | 5,520      |       | $        | (2,039     | )         | $          | 735       |       | $ | (698 | ) | $ | 31,832 |   |
|                           |   |        |       |         |       |       |       |     |       |      |       |      |       |
| Net premiums written           |   | 13,987      |       | 4,301        |       | (1,906     | )          | 559      |       | (931      | )          | 16,010    |       |
|                           |   |        |       |         |       |       |       |     |       |      |       |      |       |
| Net premiums earned            |   | 26,647      |       | 11,908       |       | (306       | )          | 1,288    |       | 219       |       | 39,756    |       |
| Losses and loss expenses       |   | 26,589      |       | 16,066       |       | (510       | )          | 1,862    |       | 470       |       | 44,477    |       |
| Acquisition costs              |   | 11,772      |       | 5,000        |       | 732        |       | 534      |       | 226       |       | 18,264    |       |
| Operating costs                |   | 10,081      |       | 4,603        |       | 100        |       | 498      |       | 85        |       | 15,367    |       |
|                           |   |        |       |         |       |       |       |     |       |      |       |      |       |
| Net underwriting income (loss) |   | $           | (21,795    | )            | $          | (13,761    | )          | $        | (628       | )         | $          | (1,606    | )          | $ | (562 | ) | $ | (38,352 | ) |

 

For the quarter ended September30, 2001, as mentioned previously, overall gross written premiums declined fromprior year levels.  The majority of thedecline is in medical writings.  Thethird quarter includes the effect of a 50/50 co-reinsurance managementagreement between ESG Re North America Ltd., a subsidiary of the Company, andAce Capital Re Overseas Ltd., entered into on November 1, 2001, with effectfrom January 1, 2001.  ESG Re NorthAmerica Ltd. writes primarily North American medical coverage.

 

The negative amounts reportedfor the Life and Credit books of business in the third quarter is a function ofadjusting estimated written premium to actual as current information isreceived from cedants.  Also, theCompany continues to experience negative development on its Norwegian personalaccident book from prior underwriting years.

 

Underwriting results for the nine months ended September 30, 2001 and2000, by line of business and in total were as follows:

 
| **Nine months ended**          |   |        |   |         |   |       |   |     |   |      |   |      |   |
|--------------------------------|--------|-------------|--------|--------------|--------|------------|--------|----------|--------|-----------|--------|-----------|--------|
| **September 30, 2001**         |   |        |   | **Personal** |   |       |   |     |   |      |   |      |   |
| **U.S. dollars in thousands**  |   | **Medical** |   | **Accident** |   | **Credit** |   | **Life** |   | **Other** |   | **Total** |   |
|                           |   |        |   |         |   |       |   |     |   |      |   |      |   |   |   |   |   |   |   |
| Gross premiums written         |   | $           | 67,271 |         | $      | 24,761     |   | $        | 4,883  |      | $      | (3,139    | )      | $ | 2,412 |   | $ | 96,188 |   |
|                           |   |        |   |         |   |       |   |     |   |      |   |      |   |
| Net premiums written           |   | 50,867      |   | 21,567       |   | 5,088      |   | (4,000   | )      | 2,241     |   | 75,763    |   |
|                           |   |        |   |         |   |       |   |     |   |      |   |      |   |
| Net premiums earned            |   | 61,352      |   | 45,365       |   | (251       | )      | (898     | )      | 2,455     |   | 108,023   |   |
| Losses and loss expenses       |   | 36,365      |   | 35,801       |   | (1,477     | )      | (1,628   | )      | 1,924     |   | 70,985    |   |
| Acquisition costs              |   | 19,231      |   | 14,679       |   | 497        |   | 110      |   | (953      | )      | 33,564    |   |
| Operating costs                |   | 11,664      |   | 8,035        |   | (22        | )      | (180     | )      | 448       |   | 19,945    |   |
|                           |   |        |   |         |   |       |   |     |   |      |   |      |   |
| Net underwriting income (loss) |   | $           | (5,908 | )            | $      | (13,150    | )      | $        | 751    |      | $      | 800       |   | $ | 1,036 |   | $ | (16,471 | ) |

 
| **Nine months ended**          |   |        |       |         |       |       |       |     |       |      |       |      |       |
|--------------------------------|--------|-------------|------------|--------------|------------|------------|------------|----------|------------|-----------|------------|-----------|------------|
| **September 30, 2000**         |   |        |       | **Personal** |       |       |       |     |       |      |       |      |       |
| **U.S. dollars in thousands**  |   | **Medical** | ** ** | **Accident** | ** ** | **Credit** | ** ** | **Life** | ** ** | **Other** | ** ** | **Total** | ** ** |
|                           |   |        |       |         |       |       |       |     |       |      |       |      |       |   |   |   |   |   |   |
| Gross premiums written         |   | $           | 129,557    |         | $          | 51,741     |       | $        | 1,982      |      | $          | 5,356     |       | $ | 3,131 |   | $ | 191,767 |   |
|                           |   |        |       |         |       |       |       |     |       |      |       |      |       |
| Net premiums written           |   | 109,341     |       | 46,844       |       | 1,950      |       | 4,822    |       | 2,207     |       | 165,164   |       |
|                           |   |        |       |         |       |       |       |     |       |      |       |      |       |
| Net premiums earned            |   | 118,080     |       | 42,828       |       | 5,910      |       | 4,593    |       | 2,602     |       | 174,013   |       |
| Losses and loss expenses       |   | 97,138      |       | 39,110       |       | 2,032      |       | 3,505    |       | 2,610     |       | 144,395   |       |
| Acquisition costs              |   | 36,435      |       | 13,411       |       | 3,626      |       | 1,571    |       | 1,344     |       | 56,387    |       |
| Operating costs                |   | 19,638      |       | 7,988        |       | 767        |       | 869      |       | 708       |       | 29,970    |       |
|                           |   |        |       |         |       |       |       |     |       |      |       |      |       |
| Net underwriting income (loss) |   | $           | (35,131    | )            | $          | (17,681    | )          | $        | (515       | )         | $          | (1,352    | )          | $ | (2,060 | ) | $ | (56,739 | ) |

 

For the nine months endedSeptember 30, 2001, gross written premiums are approximately last year’s level,again, in line with the company’s stated objectives.  The net underwriting loss was a function of total operating costsas the majority of earned premium from prior underwriting years is contributinglittle in the way of underwriting profits, again in line withexpectations.  Improvement in netunderwriting income will be a function of operating results from the 2001underwriting year, as those premiums are earned, and management of operatingcosts in line with reduced premium writings.

**OperatingRatios**

 

The operating ratios for thethree months ended September 30, 2001 and 2000, by line of business and intotal were as follows:

 
| **Three months ended**             |   |        |   | **Personal** |   |       |   |     |   |      |   |      |   |
|------------------------------------|--------|-------------|--------|--------------|--------|------------|--------|----------|--------|-----------|--------|-----------|--------|
| **September 30, 2001**             |   | **Medical** |   | **Accident** |   | **Credit** |   | **Life** |   | **Other** |   | **Total** |   |
|                               |   |        |   |         |   |       |   |     |   |      |   |      |   |
| Loss ratio                         |   | 16.4        | %      | 114.7        | %      | 43.1       | %      | 65.8     | %      | 136.4     | %      | 55.2      | %      |
| Acquisition expense ratio          |   | 30.3        | %      | 36.2         | %      | 91.4       | %      | (1.0     | )%     | (95.9     | )%     | 31.4      | %      |
| Loss and acquisition expense ratio |   | 46.7        | %      | 150.9        | %      | 134.5      | %      | 64.8     | %      | 40.5      | %      | 85.6      | %      |
| Operating expense ratio            |   |        |   |         |   |       |   |     |   |      |   | 23.2      | %      |
|                               |   |        |   |         |   |       |   |     |   |      |   |      |   |
| Combined ratio                     |   |        |   |         |   |       |   |     |   |      |   | 108.8     | %      |

 
| **Three months ended**             |   |        |   | **Personal** |   |       |   |     |   |      |   |      |       |
|------------------------------------|--------|-------------|--------|--------------|--------|------------|--------|----------|--------|-----------|--------|-----------|------------|
| **September 30, 2000**             |   | **Medical** |   | **Accident** |   | **Credit** |   | **Life** |   | **Other** |   | **Total** | ** ** |
|                               |   |        |   |         |   |       |   |     |   |      |   |      |       |
| Loss ratio                         |   | 99.8        | %      | 134.9        | %      | n/m        |   | 144.6    | %      | 214.6     | %      | 111.9     | %          |
| Acquisition expense ratio          |   | 44.2        | %      | 42.0         | %      | n/m        |   | 41.4     | %      | 103.2     | %      | 45.9      | %          |
| Loss and acquisition expense ratio |   | 144.0       | %      | 176.9        | %      | n/m        |   | 186.0    | %      | 317. 8    | %      | 157.8     | %          |
| Operating expense ratio            |   |        |   |         |   |       |   |     |   |      |   | 38.7      | %          |
|                               |   |        |   |         |   |       |   |     |   |      |   |      |       |
| Combined ratio                     |   |        |   |         |   |       |   |     |   |      |   | 196.5     | %          |

 

The positive development on theNorth American medical book in the three months ended September 30, 2001contributed significantly to the 16.4% loss ratio reported above.  The nine months’ result for this book ismore reflective of the expected loss ratio on the overall book.

The operating ratios for the nine months ended September 30, 2001 and2000, by line of business and in total were as follows:

 
| **Nine months ended September 30, 2001** |   | **Medical** |   | **Personal Accident** |   | **Credit** |   | **Life** |   | **Other** |   | **Total** |   |
|------------------------------------------|--------|-------------|--------|-----------------------|--------|------------|--------|----------|--------|-----------|--------|-----------|--------|
|                                     |   |        |   |                  |   |       |   |     |   |      |   |      |   |
| Loss ratio                               |   | 59.3        | %      | 78.9                  | %      | n/m        |   | n/m      |   | 78.4      | %      | 65.7      | %      |
| Acquisition expense ratio                |   | 31.3        | %      | 32.4                  | %      | n/m        |   | n/m      |   | (38.8     | )%     | 31.1      | %      |
| Loss and acquisition expense ratio       |   | 90.6        | %      | 111.3                 | %      | n/m        |   | n/m      |   | 39.6      | %      | 96.8      | %      |
| Operating expense ratio                  |   |        |   |                  |   |       |   |     |   |      |   | 18.5      | %      |
|                                     |   |        |   |                  |   |       |   |     |   |      |   |      |   |
| Combined ratio                           |   |        |   |                  |   |       |   |     |   |      |   | 115.3     | %      |

 
| **Nine months ended September 30, 2000** |   | **Medical** |   | **Personal Accident** |   | **Credit** |   | **Life** |   | **Other** |   | **Total** |   |
|------------------------------------------|--------|-------------|--------|-----------------------|--------|------------|--------|----------|--------|-----------|--------|-----------|--------|
|                                     |   |        |   |                  |   |       |   |     |   |      |   |      |   |
| Loss ratio                               |   | 82.3        | %      | 91.3                  | %      | 34.4       | %      | 76.3     | %      | 100.3     | %      | 83.0      | %      |
| Acquisition expense ratio                |   | 30.8        | %      | 31.3                  | %      | 61.3       | %      | 34.2     | %      | 51.7      | %      | 32.4      | %      |
| Loss and acquisition expense ratio       |   | 113.1       | %      | 122.6                 | %      | 95.7       | %      | 110.5    | %      | 152.0     | %      | 115.4     | %      |
| Operating expense ratio                  |   |        |   |                  |   |       |   |     |   |      |   | 17.2      | %      |
|                                     |   |        |   |                  |   |       |   |     |   |      |   |      |   |
| Combined ratio                           |   |        |   |                  |   |       |   |     |   |      |   | 132.6     | %      |

 

The operating expense ratios for the three months and ninemonths ended September 30, 2001 and 2000, respectively, were calculated byexpressing total administrative expenses net of corporate office expenses as apercentage of net premiums earned. Total operating expenses for the three months ended September 30, 2001represent 70.1% of net premiums written and 23.2% of net premiums earned,compared to 96.0% and 38.7%, respectively, for the prior year.  Total operating expenses for the nine monthsended September 30, 2001 represent 26.3% of net premiums written and 18.5% ofnet premiums earned, compared to 18.1% and 17.2%, respectively, for the prioryear.  Savings currently being generatedfrom the rationalization of the company’s traditional reinsurance business arebeing invested in the expansion of its ESG-Direct division.  The Company has a stated objective tofurther rationalize its expense base to bring it more in line with industrynorms for the premium volume now being written.

# ** **

# **GeographicalDistribution**

 

The distribution of grosswritten premiums for the three months ended September 30, 2001 and 2000 and forthe year ended December 31, 2000, is as follows:

** **
|           |   | **Three months ended September 30, 2001** |   | **Three months ended September 30, 2000** |   | **Year ended December 31, 2000** |   |
|----------------|--------|-------------------------------------------|--------|-------------------------------------------|--------|----------------------------------|--------|
| Western Europe |   | (19.0                                     | )%     | 1.8                                       | %      | 18.4                             | %      |
| North America  |   | 83.7                                      | %      | 95.7                                      | %      | 53.8                             | %      |
| Latin America  |   | 6.2                                       | %      | (9.4                                      | )%     | 15.7                             | %      |
| Asia           |   | 15.2                                      | %      | 7.9                                       | %      | 5.6                              | %      |
| Other          |   | 13.9                                      | %      | 4.0                                       | %      | 6.5                              | %      |
|           |   |                                      |   |                                      |   |                             |   |
| Total          |   | 100.0                                     | %      | 100.0                                     | %      | 100.0                            | %      |

 

The Company expects to continuewriting North American business given the current favorable market conditions.

 

The distribution of grosswritten premiums for the nine months ended September 30, 2001 and 2000 and forthe year ended December 31, 2000, is as follows:

 
|           |   | **Nine months ended September 30, 2001** |   | **Nine months ended September 30, 2000** |   | **Year ended December 31, 2000** |   |
|----------------|--------|------------------------------------------|--------|------------------------------------------|--------|----------------------------------|--------|
| Western Europe |   | 26.7                                     | %      | 20.1                                     | %      | 18.4                             | %      |
| North America  |   | 48.7                                     | %      | 56.6                                     | %      | 53.8                             | %      |
| Latin America  |   | 4.9                                      | %      | 18.7                                     | %      | 15.7                             | %      |
| Asia           |   | 13.5                                     | %      | 2.5                                      | %      | 5.6                              | %      |
| Other          |   | 6.2                                      | %      | 2.1                                      | %      | 6.5                              | %      |
|           |   |                                     |   |                                     |   |                             |   |
| Total          |   | 100.0                                    | %      | 100.0                                    | %      | 100.0                            | %      |

 

**Product Mix**

 

The distribution of grosspremiums written by line of business for the three months ended September 30,2001 and 2000, and for the year ended December 31, 2000 was as follows:

** **
|              |   | **Three months ended September 30, 2001** |   | **Three months ended September 30, 2000** |   | **Year ended December 31, 2000** |   |
|-------------------|--------|-------------------------------------------|--------|-------------------------------------------|--------|----------------------------------|--------|
| Medical           |   | 100.0                                     | %      | 88.9                                      | %      | 71.0                             | %      |
| Personal Accident |   | 26.5                                      | %      | 17.4                                      | %      | 22.0                             | %      |
| Credit            |   | (20.5                                     | )%     | (6.4                                      | )%     | 1.4                              | %      |
| Life              |   | (8.2                                      | )%     | 2.3                                       | %      | 3.7                              | %      |
| Other             |   | 2.2                                       | %      | (2.2                                      | )%     | 1.9                              | %      |
|              |   |                                      |   |                                      |   |                             |   |
| Total             |   | 100.0                                     | %      | 100.0                                     | %      | 100.0                            | %      |

 

The distribution of grosspremiums written by line of business for the nine months ended September 30,2001 and 2000, and for the year ended December 31, 2000 was as follows:

** **
|              |   | **Nine months ended September 30, 2001** |   | **Nine months ended September 30, 2000** |   | **Year ended December 31, 2000** |   |
|-------------------|--------|------------------------------------------|--------|------------------------------------------|--------|----------------------------------|--------|
| Medical           |   | 69.9                                     | %      | 67.6                                     | %      | 71.0                             | %      |
| Personal Accident |   | 25.7                                     | %      | 27.0                                     | %      | 22.0                             | %      |
| Credit            |   | 5.1                                      | %      | 1.0                                      | %      | 1.4                              | %      |
| Life              |   | (3.3                                     | )%     | 2.8                                      | %      | 3.7                              | %      |
| Other             |   | 2.6                                      | %      | 1.6                                      | %      | 1.9                              | %      |
|              |   |                                     |   |                                     |   |                             |   |
| Total             |   | 100.0                                    | %      | 100.0                                    | %      | 100.0                            | %      |

 

Through co-reinsurance of theNorth American medical portfolio and the expansion of credit and life programs,the Company expects to continue to reduce the proportion of medical business inthe portfolio going forward.

 

**ExposureManagement**

 

The Company manages itsunderwriting risk exposures through geographic distribution, an excess of lossreinsurance program, and co-reinsurance. The Company’s excess liability insurance policy generally provideslimits up to a maximum of $30 million per occurrence, with a minimum attachmentpoint generally of $1 million.

 

**ManagementFee Revenue**

 

Management fee revenue for thequarter was negative $132 thousand representing a downward adjustment ofestimated commissions due to the Company from overrider arrangements withretrocessionaires. The reduction of $356 thousand from the corresponding priorperiod is due to the company retaining more business for its own account.

 

For the nine months endedSeptember 30, 2001, management fee revenue was $288 thousand, a reduction of$892 thousand from the corresponding period in 2000, due to the companyretaining more business for its own account.

 

**OperatingExpenses**

 

Total administrative expensesfor the three months ended September 30, 2001 were $6.4 million, compared to$16.4 million for the three months ended September 30, 2000 and $7.1 millionfor the three months ended June 31, 2001. The decrease in the quarter when compared to the second quarter of thisyear was the result of adding $0.9 million to the company’s legal reserve inthe second quarter to cover estimated costs associated with resolving disputesin respect of certain reinsurance contracts. Otherwise, savings generated from various actions being taken to rightsize the traditional reinsurance division are being invested in the ESG Directsegment as the Company effects its strategy to expand those operations intoSouthern Europe.

 

### **Net Realized Investment Losses**

 

Following the work done latelast year to fully address the underwriting issues of the past, the Companyinitiated a full review and audit of all entities where it holds a minorityshareholding interest.  Based on theinitial results of this exercise, it adjusted its carrying value of theseinvestments by $4.2 million in the second quarter.  This provision is included in Net Realized InvestmentLosses.  The current realizable valuefor these investments is reported at $14.8 million at September 30, 2001. InOctober 2001, the Company concluded the sale of its shareholding inAtlanticare, Inc for $1.25 million. The loss of approximately $3.4 million wascovered by the second quarter provision.

### ** **

### **INVESTMENT RESULTS**

 

The investment results for thethree months ended September 30, 2001 and 2000 were as follows:

 
| **Three Months ended September 30, 2001  U.S dollars in thousands** |   | **Average Investments** |    | **Net Investment Income(1)** |   | **Annualized Effective Yield** |   | **Net Realized Investment Gains** |   |
|---------------------------------------------------------------------|--------|-------------------------|---------|------------------------------|--------|--------------------------------|--------|-----------------------------------|--------|
| Investments  – available for sale                              |   | $                       | 164,483 |                         | $      | 2,305                          |   | 5.6                               | %      | $ | 215 |   |
| Other investments                                                   |   | 14,375                  |    | 107                          |   | 3.0                            | %      | --                                |   |
| Cash and cash equivalents                                           |   | 6,641                   |    | 100                          |   | 6.0                            | %      | --                                |   |
| Total                                                               |   | $                       | 185,499 |                         | $      | 2,512                          |   | 4.9                               | %      | $ | 215 |   |

 
| **Three Months ended September 30, 2000  U.S dollars in thousands** |   | **Average Investments** |    | **Net Investment Income(1)** |   | **Annualized Effective Yield** |   | **Net Realized Investment Gains** |   |
|---------------------------------------------------------------------|--------|-------------------------|---------|------------------------------|--------|--------------------------------|--------|-----------------------------------|--------|
| Investments – available for sale                               |   | $                       | 176,938 |                         | $      | 3,255                          |   | 7.4                               | %      | $ | 472 |   |
| Other investments                                                   |   | 14,724                  |    | 89                           |   | 2.4                            | %      | --                                |   |
| Cash and cash equivalents                                           |   | 18,006                  |    | 256                          |   | 5.7                            | %      | --                                |   |
| Total                                                               |   | $                       | 209,668 |                         | $      | 3,600                          |   | 6.9                               | %      | $ | 472 |   |

 

----

(1)  Net investmentincome is net of investment-related expenses

 

The investment results for the nine months ended September 30,2001 and 2000 were as follows:

 
| **Nine Months ended September 30, 2001  U.S dollars in thousands** |   | **Average Investments** |    | **Net Investment Income(1)** |   | **Annualized Effective Yield** |   | **Net Realized Investment Losses** |   |
|--------------------------------------------------------------------|--------|-------------------------|---------|------------------------------|--------|--------------------------------|--------|------------------------------------|--------|
| Investments  – available for sale                             |   | $                       | 168,350 |                         | $      | 8,802                          |   | 6.4                                | %      | $ | 1,683 |   |
| Other investments                                                  |   | 16,426                  |    | 469                          |   | 3.8                            | %      | (4,200                             | )      |
| Cash and cash equivalents                                          |   | 18,032                  |    | 696                          |   | 5.1                            | %      | --                                 |   |
| Total                                                              |   | $                       | 202,808 |                         | $      | 9,247                          |   | 5.1                                | %      | $ | (2,517 | ) |

 
| **Nine Months ended September 30, 2000  U.S dollars in thousands** |   | **Average Investments** |    | **Net Investment Income(1)** |   | **Annualized Effective Yield** |   | **Net Realized Investment Losses** |   |
|--------------------------------------------------------------------|--------|-------------------------|---------|------------------------------|--------|--------------------------------|--------|------------------------------------|--------|
| Fixed  maturity investments                                        |   | $                       | 177,432 |                         | $      | 8,760                          |   | 6.6                                | %      | $ | (599 | ) |
| Other investments                                                  |   | 13,287                  |    | 345                          |   | 3.5                            | %      | --                                 |   |
| Cash and cash equivalents                                          |   | 22,490                  |    | 586                          |   | 3.5                            | %      | --                                 |   |
| Total                                                              |   | $                       | 213,209 |                         | $      | 9,691                          |   | 6.1                                | %      | $ | (599 | ) |

 

----

(1)  Net investmentincome is net of investment-related expenses

# ** **

# **Liquidity andCapital Resources**

 

As of September 30, 2001, totalinvestments and cash were $185.3 million compared to $212.2 million at December31, 2000.  Cash flow from operatingactivities for the nine months ended September 30, 2001 was a negative $23.9million.  All fixed maturity securitiesin the Company’s investment portfolio are classified as available for sale andare carried at fair value.  The fixedmaturity investment portfolio as of September 30, 2001 and December 31, 2000,were as follows:

 
| **As at September 30, 2001  U.S. dollars in thousands**                                |   | **Fair  Value** |    | **Duration (Years)** |   | **Market Yield** |   | **Average Credit Rating** |   |
|----------------------------------------------------------------------------------------|--------|----------------------|---------|----------------------|--------|------------------|--------|---------------------------|--------|
| Corporate securities                                                                   |   | $                    | 64,415  |                 | 3.2    |             | 5.4    | %                         | AA     |   |
| U.S. treasury securities and obligations of  U.S. government corporations and agencies |   | 45,603               |    | 3.7                  |   | 4.8              | %      | AAA                       |   |
| Mortgage & Asset backed securities                                                 |   | 27,035               |    | 2.8                  |   | 7.1              | %      | AAA                       |   |
| Obligations of states and political  subdivisions                                      |   | 22,326               |    | 2.5                  |   | 5.0              | %      | AAA                       |   |
| Foreign currency debt securities                                                       |   | 5,629                |    | 1.1                  |   | 4.2              | %      | AAA                       |   |
|                                                                                   |   |                 |    |                 |   |             |   |                      |   |   |
| Total                                                                                  |   | $                    | 165,008 |                 | 2.7    |             | 5.3    | %                         | AA     |   |

 
| **As at December 31, 2000  U.S. dollars in thousands**                                 |   | **Fair  Value** |    | **Duration (Years)** |   | **Market Yield** |   | **Average Credit Rating** |   |
|----------------------------------------------------------------------------------------|--------|----------------------|---------|----------------------|--------|------------------|--------|---------------------------|--------|
| Corporate securities                                                                   |   | $                    | 71,382  |                 | 3.0    |             | 6.6    | %                         | A+     |   |
| U.S. treasury securities and obligations of  U.S. government corporations and agencies |   | 38,127               |    | 2.4                  |   | 6.1              | %      | AAA                       |   |
| Mortgage & Asset backed securities                                                 |   | 33,771               |    | 3.0                  |   | 8.1              | %      | AAA                       |   |
| Obligations of states and political  subdivisions                                      |   | 18,753               |    | 3.0                  |   | 7.3              | %      | AA+                       |   |
| Foreign currency debt securities                                                       |   | 6,445                |    | 1.6                  |   | 4.5              | %      | AAA                       |   |
|                                                                                   |   |                 |    |                 |   |             |   |                      |   |   |
| Total                                                                                  |   | $                    | 168,478 |                 | 2.6    |             | 6.5    | %                         | AA     |   |

** **

The Company’s investment policyobjective is to maximize long-term investment returns while maintaining aliquid, high-quality portfolio.  To thisend, the investment policy requires that the portfolio have an average creditquality rating of AA, no more than 3% of the portfolio invested in thesecurities of a single issuer (other than issues of sovereign governments witha rating of AA or better), and a target duration of 2.75 years.  The Company’s investment portfolio reflectsits investment policy and guidelines.

 

The Company expects that itsfinancial and operational needs for the foreseeable future will be met by fundsgenerated from operations and from liquidating a small percentage of itsinvestment portfolio.  The Companyexpects to remain highly capitalized after any near-term investment portfolioliquidation.

 

Shareholders’ equity as ofSeptember 30, 2001 was $110.1 million compared to $113.6 million at December31, 2000.  Book value per common sharedecreased to $9.34 as of September 30, 2001 from $9.64 as of December 31, 2000.

# ** **

# ** **

# **ITEM 3.QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK**

 

INTEREST RATE RISK

The largest source of marketrisk for the Company is interest rate risk on its portfolio of fixed maturityinvestments, especially fixed rate instruments. In addition, the creditworthiness of the issuer, relative values of alternative investments, liquidityand general market conditions may affect fair values of interest rate sensitiveinstruments.

 

The Company’s general strategywith respect to fixed maturity securities is to invest in high qualitysecurities while maintaining diversification and to avoid significantconcentrations in individual issuers’ industry segments or countries.

 

# **FOREIGN CURRENCY RISK**

The Company’s functionalcurrency is the U.S. dollar.  However,the Company writes reinsurance business in numerous geographic regions andcurrencies, giving rise to the risk that the ultimate settlement of receivablesand payables on reinsurance transactions will differ from the amounts currentlyrecorded as assets and liabilities in the financial statements.  The Company intends to hold investments incurrencies in which it will collect premiums and pay claims, thus creating apartial natural hedge against exchange rate fluctuations.  The Company believes that its exposure toforeign currency risk is not material.

 

INFLATION

Inflation has not had amaterial impact on the Company’s operations for the periods presented.  The Company writes reinsurance business inLatin America, which has experienced periods of high inflation.  However, it is possible that futureinflationary conditions may impact subsequent accounting periods.

 

THE EURO

**On January 1, 1999, a single currency, the “euro” wasadopted as the national currency of the 11 participating countries in theEuropean Monetary Union, including Ireland and Germany, two of the countries inwhich the Company operates and in which the Company maintains a significantpresence.   The Company’s Irish andGerman subsidiaries will not be required to use the euro for accountingpurposes prior to January 1, 2002. Currently, the Company expects that the impact of the conversion willhave no material impact on the Company’s operations, accounting systems orfinancial reporting.**

** **

**RISK FACTORS**

** **

**Certain statements and information included in this Form10Q constitute “forward-looking” statements within the meaning of the PrivateSecurities Litigation Reform Act of 1995. These statements express our intentions, strategies or predictions forthe future.  In addition, from time totime, the Company may make forward-looking statements, orally or inwriting.  Forward-looking statements inthe Form 10Q include, among others, statements regarding:**

** **

**•**      the impact of rate increases on premiumswritten over the 2001 underwriting year

**•**      the ongoing adequacy of the Company’s lossreserves

**•**      the Company’s continuing ability toincrease premium rates and strengthen terms of trade in the North and LatinAmerican markets without major loss of business, and

**•**      the anticipated growth in direct businessin Asia and Europe

** **

**These forward-looking statements involve known or unknownrisks, uncertainties or other factors which may cause actual results tomaterially differ from predictions made by the Company.  These factors include, among other things:**

** **

**•**      incidence of claims at a frequency orseverity that exceeds the Company’s estimates

**•**      the Company’s inability to maintainrelationships with key clients

**•**      the Company’s inability to anticipate thecyclical changes of the reinsurance market

**•**      change in U.S. or foreign tax laws orinterpretations of such laws that are adverse to the Company’s interests

**•**      the inadequacy of the Company’s lossreserves

**•**      fluctuation of foreign currency exchangerates

**•**      the passage of legislation, in anyjurisdiction in which the Company does business, that subjects the Company toadditional regulation

**•**      loss of key employees

**•**      changes in the application of the currentregulatory environment

**•**      major medical technology changes in the US

**•**      negative changes in the rating

**•**      recession in any key markets

**•**      uncertainties and costs associated withlitigation and claims asserted or threatened against the Company, includinglitigation threatened by ESG shareholders

**•**      naïve capacity in the reinsurance market

**•**      significant changes in data protectionlaws in key markets; and

**•**      inability to continue to develop andmaintain systems that support the Direct business in Asia and Europe

** **

**We undertake no obligation to update any forward-lookingstatements, whether as a result of new information or other wise, other than asrequired by law.  All subsequent writtenor oral forward-looking statements attributable to the Company are qualified bythe cautionary statements in this Report on Form 10Q.**

 

###### **PART II   OTHER INFORMATION**

###### ** **

 

###### **ITEM 1. LEGAL PROCEEDINGS**

 

Other than as disclosed herein,there are no lawsuits pending, or to the knowledge of the Company, threatened,to which the Company or any of its subsidiaries or affiliates is a party or ofwhich any of their properties is subject other than the routine litigationincidental to the business.  Pleaserefer to the notes to the financial statements under 3 (E). In amendments totheir respective Schedules 13D filed with the Securities and ExchangeCommission in September and October 2001, Vicuna Advisors LLC and SCFundamental LLC (and their related entities) (“Investors”) stated that theywere considering the possibility of initiating litigation against the Companyin Bermuda. The Investors stated that they were considering a proceedingalleging that the Company’s affairs had been conducted in a manner that wasoppressive to minority shareholders. The Investors indicated that such aproceeding might seek, among other remedies, an order removing ESG’s Chairmanof the Board from service as a Company director and cancellation of certainequity-based benefits paid to the Chairman. The Company believes that thepotential claims described by Investors are without merit. To date, the Companyhas received no notice indicating that Investors have initiated the threatenedlitigation in Bermuda.

 

 

###### **ITEM 2. CHANGES INSECURITIES AND USE OF PROCEEDS**

 

Not applicable.

 

 

**ITEM 3. DEFAULTS UPON SENIOR SECURITIES**

 

Not applicable.

 

 

### **ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITIESHOLDERS**

 

Not Applicable.

 

 

### **ITEM 5. OTHER INFORMATION**

 

On November 8, 2001, under authoritygranted by the shareholders in December 1997, the Board increased the number ofdirectors from six to seven and appointed Mr. Tony Hobson to fill thenewly-created vacancy.  A copy of thepress release issued by the Company is attached as Exhibit 99.1.

 

 

###### **ITEM 6. EXHIBITSAND REPORTS ON FORM 8-K**

 

(a)   Exhibits

 

Exhibit 10.1            SubscriptionAgreement and Bondholders Conversion Agreement relating to an investment in4Sigma (Bermuda) Ltd.

 

Exhibit 11.1            Computationof Earnings Per Share

 

Exhibit 15.1            Consent ofDeloitte & Touche

 

Exhibit 99.1            Pressrelease dated November 8, 2001 announcing appointment of new director

 

(b)   Reportson Form 8-K

 

Not Applicable.

 

SIGNATURES

 

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

 

 
| November 14,  2001 |                                              |
|--------------------|---------------------------------------------------|
|               | ESG RE  LIMITED                                   |
|               |                                              |   |
|               |                                              |   |
|               | By:                                          |     /s/ Mark E. Oleksik |   |
|               | Name: Mark  E. Oleksik                            |
|               | Title:  Senior Financial Officer & Controller |