**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

**Washington,D.C. 20549**

 

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**FORM 10-Q/A**

 

**(Amendment No. 1)**

 

**QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)**

**OF THE SECURITIES EXCHANGE ACT OF 1934**

 

**For thequarterly period ended September 30, 2001**

** **

**Commissionfile number 000-23481**

 

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**ESG RE LIMITED**

(Exact name of Registrantas 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)       |

 

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Indicate by check mark whether the Registrant (1) has filed all reportsrequired to be filed by Section 13 or 15(d) of the Securities Exchange Act of1934 during the preceding 12 months (or for such shorter period that theRegistrant was required to file such reports, and (2) has been subject to suchfiling requirements for the past 90 days. Yes ýNo o

 

The number of the Registrant’s common shares (par value $1.00 pershare) outstanding as of November 8, 2001, was 11,787,725.

 

 

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**EXPLANATORY STATEMENT:**

 

**We are filing this Form 10-Q/A (Amendment No. 1) to restatein their entirety Items 1 and 2 of Part 1 of our quarterly report of Form 10-Qfor the quarter ended September 30, 2001. For completeness purposes, the full Form 10-Q is filed herein, however,no other parts have been amended.**

 

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

 

**We have restated our financial statements for the three andnine months ended September 30, 2001 and our financial statements for the yearended December 31, 2001 to reflect the correct accounting treatment of theco-reinsurance contract with ACE INA Overseas Insurance Company Ltd(“ACE”).  We have also restated ourfinancial statements for the years ended December 31, 2001, 2000 and 1999 andour financial statements for the three and nine months ended September 30, 2000to correct an error in our Foreign Currency Translation Account.  For further discussion of theserestatements, please refer to Managements Discussion and Analysis of FinancialCondition and Results of Operations and Notes 7 and 8 of the CondensedConsolidated Financial Statements.**

 

**The restated number for the years ended December 31, 2000 and1999, resulting from the correction to the Foreign Currency Translation Accounthave not been audited.  As a result theConsolidated Balance Sheet as at December 31, 2000 is presented herein on anunaudited basis, however management believes that the unaudited financialstatements include all adjustments necessary for a fair presentation of ourfinancial position as at December 31, 2000.**

 

**Unless otherwise noted, all of the information in this Form10-Q/A is as of September 30, 2001 and does not reflect any subsequentinformation on events other than this restatement.**

 

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

 

**We have also provided, in the Management’s Discussion andAnalysis of Financial Condition and Results of Operations” a breakdown of ourresults between our two segments: ESG Reinsurance and ESG Direct.  This information was not included in ouroriginal Form 10-Q for the quarter ended September 30, 2001.**

 

2

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**ESG RE LIMITED**

** **

**INDEX**

 
| **Part I. Financial  Information** |
|------------------------------------|
|                               |   |
| **Item  1**                        | Financial  Statements and Supplementary Data |
|                               |   |
|                               | Condensed  Consolidated Balance Sheets | 4 |
|                               |   |
|                               | Condensed  Consolidated Statements of Operations | 5 |
|                               |   |
|                               | Condensed  Consolidated Statements of Cash Flows | 6 |
|                               |   |
|                               | Condensed  Consolidated Statements of Comprehensive Income (Loss) | 7 |
|                               |   |
|                               | Notes  to Condensed Consolidated Financial Statements | 8 |
|                               |   |
| **Item 2**                         | Management’s  Discussion and Analysis of Financial Condition and Results of Operations | 17 |
|                               |   |
| **Item 3**                         | Quantitative  and Qualitative Disclosures About Market Risk | 29 |
|                               |   |
| **Part II. Other Information**     |
|                               |   |
| **Item 1**                         | Legal Proceedings | 31 |
|                               |   |
| **Item  2**                        | Changes  in Securities and Use of Proceeds | 31 |
|                               |   |
| **Item 3**                         | Defaults Upon  Senior Securities | 31 |
|                               |   |
| **Item  4**                        | Submission  of Matters to a Vote of Security Holders | 31 |
|                               |   |
| **Item 5**                         | Other Information | 31 |
|                               |   |
| **Item 6**                         | Exhibits and  Reports on Form 8-K | 31 |
|                               |   |
|                               | Signatures | 32 |

 

3

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# **PART I – FINANCIALINFORMATION**

# ** **

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

# ** **

# **ESG RE LIMITED**

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

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

 
|                                                                                                                                                                             |   | **September  30,  2001** |        | **December  31,  2000** |   |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|--------------------------|-------------|-------------------------|--------|
|                                                                                                                                                                             |   | **(Unaudited)**          |        | **(Unaudited)**         |   |
| **ASSETS**                                                                                                                                                                       |   |                     |        |                    |   |
| 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                                                                                                                                                      |   | 38,117                   |        | 46,611                  |   |
| Other  assets                                                                                                                                                                    |   | 6,979                    |        | 6,281                   |   |
| Cash  and cash equivalents held in a fiduciary capacity                                                                                                                          |   | 2,223                    |        | 4,619                   |   |
|                                                                                                                                                                             |   |                     |        |                    |   |
| **TOTAL  ASSETS**                                                                                                                                                                |   | **$**                    | **455,081** | ** **              | **$**  | **554,794** | ** ** |
| **LIABILITIES**                                                                                                                                                                  |   |                     |        |                    |   |
| Unpaid  losses and loss expenses                                                                                                                                                 |   | $                        | 153,998     |                    | $      | 179,614 |   |
| Unearned  premiums                                                                                                                                                               |   | 110,062                  |        | 148,124                 |   |
| Acquisition  costs payable                                                                                                                                                       |   | 39,639                   |        | 64,604                  |   |
| Reinsurance  balances payable                                                                                                                                                    |   | 23,461                   |        | 30,511                  |   |
| Accrued  expenses, accounts payable, and other liabilities ($80 and $85 due to related  parties)                                                                                 |   | 15,656                   |        | 13,756                  |   |
| Fiduciary  liabilities                                                                                                                                                           |   | 2,223                    |        | 4,619                   |   |
| Total  liabilities                                                                                                                                                               |   | 345,039                  |        | 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                                                                                                                                                      |   | 207,991                  |        | 207,642                 |   |
| Accumulated  other comprehensive income:                                                                                                                                         |   |                     |        |                    |   |
| Foreign currency  translation adjustments                                                                                                                                        |   | (131                     | )           | (768                    | )      |
| Unrealized gains  on securities, net of tax                                                                                                                                      |   | 7,206                    |        | 1,965                   |   |
| Accumulated  other comprehensive income                                                                                                                                          |   | 7,075                    |        | 1,197                   |   |
| Retained  (deficit)                                                                                                                                                              |   | (116,812                 | )           | (107,050                | )      |
| Total  shareholders’ equity                                                                                                                                                 |   | 110,042                  |        | 113,566                 |   |
| **TOTAL  LIABILITIES AND SHAREHOLDERS’ EQUITY**                                                                                                                             |   | $                        | 455,081     |                    | $      | 554,794 |   |

 

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

 

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# **ESG RE LIMITED**

# **CondensedConsolidated Statements of Operations** (as restated)

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

# **(Unaudited)**

 
|                                                            |   | **Three  Months Ended**  |       | **Nine  Months Ended**   |       |
|-----------------------------------------------------------------|--------|--------------------------|------------|--------------------------|------------|
|                                                            |   | **September  30,  2001** | ** ** | **September  30,  2000** | ** ** | **September  30,  2001** | ** ** | **September  30,  2000** | ** ** |
| **REVENUES**                                                    |   |                     |       |                     |       |   |   |   |   |
| Net premiums  written                                           |   | $                        | 8,898      |                     | $          | 16,010 |   | $ | 75,763 |   | $ | 165,164 |   |
| Change in  unearned premiums                                    |   | 19,861                   |       | 23,746                   |       | 33,787 |   | 8,849 |   |
|                                                            |   |                     |       |                     |       |   |   |   |   |
| Net premiums  earned                                            |   | 28,759                   |       | 39,756                   |       | 109,550 |   | 174,013 |   |
| Management fee  revenue                                         |   | (132                     | )          | 224                      |       | 288 |   | 1,180 |   |
| Net investment  income                                          |   | 2,512                    |       | 3,600                    |       | 9,247 |   | 9,691 |   |
| Gain/(loss)  on equity investments                              |   | —                   |       | 23                       |       | (29 | ) | 309 |   |
| Net  realized investment gain/(loss)                            |   | 215                      |       | 472                      |       | (2,517 | ) | (599 | ) |
|                                                            |   | 31,354                   |       | 44,075                   |       | 116,539 |   | 184,594 |   |
| **EXPENSES**                                                    |   |                     |       |                     |       |   |   |   |   |
| Losses and loss  expenses                                       |   | 15,870                   |       | 44,477                   |       | 72,093 |   | 144,395 |   |
| Acquisition  costs                                              |   | 8,980                    |       | 18,264                   |       | 33,983 |   | 56,387 |   |
| Administrative  expenses                                        |   | 6,407                    |       | 20,453                   |       | 20,225 |   | 36,550 |   |
|                                                            |   | 31,257                   |       | 83,194                   |       | 126,301 |   | 237,332 |   |
|                                                            |   |                     |       |                     |       |   |   |   |   |
| **INCOME  (LOSS) FROM CONTINUING OPERATIONS BEFORE TAXES**      |   | 97                       |       | (39,119                  | )          | (9,762 | ) | (52,738 | ) |
| Income  tax expense                                             |   | —                   |       | —                   |       | — |   | — |   |
|                                                            |   |                     |       |                     |       |   |   |   |   |
| **INCOME (LOSS) FROM CONTINUING  OPERATIONS**                   |   | 97                       |       | (39,119                  | )          | (9,762 | ) | (52,738 | ) |
|                                                            |   |                     |       |                     |       |   |   |   |   |
| Net Income (Loss) from discontinued operations (Note  4)        |   | —                   |       | 750                      |       | — |   | (5,178 | ) |
|                                                            |   |                     |       |                     |       |   |   |   |   |
| **NET INCOME (LOSS)**                                           |   | $                        | 97         |                     | $          | (38,369 | ) | $ | (9,762 | ) | $ | (57,916 | ) |
|                                                            |   |                     | ** ** |                     | ** ** |   | ** ** |   | ** ** |
| **PER  SHARE DATA**                                             |   |                     | ** ** |                     | ** ** |   | ** ** |   | ** ** |
| Basic net income  (loss) per share from continuing operations   |   | $                        | 0.01       |                     | $          | (3.31 | ) | $ | (0.83 | ) | $ | (4.49 | ) |
|                                                            |   |                     |       |                     |       |   |   |   |   |
| Diluted net  income (loss) per share from continuing operations |   | 0.01                     |       | (3.31                    | )          | (0.83 | ) | (4.49 | ) |
|                                                            |   |                     |       |                     |       |   |   |   |   |
| Basic net income  (loss) per share                              |   | $                        | 0.01       |                     | $          | (3.25 | ) | $ | (0.83 | ) | $ | (4.93 | ) |
| Diluted net  income (loss) per share                            |   | 0.01                     |       | (3.25                    | )          | (0.83 | ) | (4.93 | ) |
|                                                            |   |                     |       |                     |       |   |   |   |   |
| **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.**

** **

**5**

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** **

# **ESG RE LIMITED**

# **CondensedConsolidated Statements of Cash Flows** (as restated)

(U.S. dollars inthousands)

**(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.**

 

6

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#### **ESG RE LIMITED**

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

(U.S. dollars inthousands)

**(Unaudited)**

 
|                                                 |   | **Three  Months Ended**  |       | **Nine  Months Ended**   |       |                     |
|------------------------------------------------------|--------|--------------------------|------------|--------------------------|------------|--------------------------|
|                                                 |   | **September  30,  2001** | ** ** | **September  30,  2000** | ** ** | **September  30,  2001** | ** ** | **September  30,  2000** | ** ** |   |
|                                                 |   |                     |       |                     |       |                     |   |   |   |   |
| Net  income (loss)                                   |   | $                        | 97         |                     | $          | (38,369                  | ) | $ | (9,762 | ) | $ | (57,916 | ) |
| Other  comprehensive income, net of tax:             |   |                     |       |                     |       |                     |   |   |   |   |
| Foreign  currency translation adjustments            |   | 305                      |       | 1,671                    |       | 638                      |   | 929 |   |   |
| Net  unrealized holding (losses)/gains on securities |   | 3,838                    |       | 1,055                    |       | 5,241                    |   | 914 |   |   |
| Other  comprehensive income (loss)                   |   | 4,143                    |       | 2,726                    |       | 5,879                    |   | 1,843 |   |   |
|                                                 |   |                     |       |                     |       |                     |   |   |   |   |
| Comprehensive  income (loss)                         |   | $                        | 4,240      |                     | $          | (35,643                  | ) | $ | (3,883 | ) | $ | (56,073 | ) |

 

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

 

7

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**NOTES TO THE UNAUDITED CONDENSEDCONSOLIDATED FINANCIAL STATEMENTS**

 

**1.  BASIS OF PRESENTATION**

 

The accompanying unaudited condensed consolidated financial statementsof ESG Re Limited (together with its subsidiaries, the “Company”) have beenprepared in accordance with generally accepted accounting principles in theUnited States of America (“U.S. GAAP”) except pursuant to the rules andregulations of the Securities and Exchange Commission which do not include allof the information and footnotes required by generally accepted accountingprinciples for complete financial statements. In the opinion of management, these unaudited financial statementsreflect all adjustments considered necessary for a fair presentation offinancial position, results of operations and comprehensive income as of andfor the periods presented.  The resultsof operations for any interim period are not necessarily indicative of theresults for a full year.  Theseunaudited condensed consolidated financial statements should be read inconjunction with the audited consolidated financial statements, and relatednotes thereto, included in the Company’s 2000 Annual Report on Form 10-K.

 

The preparation of financial statements in accordance with U.S. GAAPrequires management to make estimates and assumptions that affect the reportedamounts of assets and liabilities and contingent assets and liabilities at thedate of the financial statements and the reported amounts of revenues andexpenses during the reporting period as well as the disclosure of suchamounts.  Actual results could materiallydiffer from those estimates and assumptions.

 

**2.  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES**

 

The Company’s condensed consolidated financial statements have beenprepared in accordance with U.S. GAAP. The Company’s significant accounting policies include the following:

 

*(A)**            PREMIUMREVENUES*

Premiums written are estimated and recognized at the inception of thereinsurance contract, based upon information received from intermediaries andceding companies.  The Company comparesestimated written premiums to actual premiums as reported by ceding companieson a periodic basis.  The timeliness andfrequency of ceding company reports vary considerably by ceding company, lineof business and geographic area, which means that the actual ultimate premiumwritten may not be known with certainty for prolonged periods.  Differences between such estimates andactual amounts as reported by ceding companies are recorded in the period inwhich the actual amounts are determined.

 

The reinsurance contracts entered into by the Company are primarily ofshort duration.  Retrospectivereinsurance contracts are accounted for in accordance with SFAS No. 113.  Premiums written are recognized as earnedover the coverage period in proportion to the amount of protectionprovided.  Unearned premium reserves areestablished to cover the unexpired contract period.

 

*(B)**            RESERVEFOR LOSSES AND LOSS EXPENSES*

The reserve for unpaid losses and loss adjustment expenses includes anestimate of reported case reserves and an estimate for losses incurred but notreported.  Case reserves are estimatedbased on ceding company reports and other data considered relevant to theestimation process.  The liability forlosses incurred but not reported is based to a large extent on the expectationsof ceding companies about ultimate loss ratios at the inception of thecontracts, supplemented by industry experience and the Company’s specifichistorical experience where available. As the Company has limited specific historical experience on asignificant number of its programs on which to base its estimate of lossesincurred but not reported, its reliance on ceding company expectations andindustry experience is necessarily increased, which increases the uncertaintyinvolved in the loss estimation process.

 

The reserves as established by management are reviewed periodically,and adjustments are made in the periods in which they become known.  Although management believes that anadequate provision has been made for the liability for losses and loss expenses,based on all available information, there can be no assurance that the ultimatelosses will not differ significantly from the amounts provided.

 

*(C)**           INVESTMENTS*

Fixed maturity securities are classified as available for sale and arereported at estimated fair value. Investments that are available for sale are expected to be held for anindefinite period but may be sold depending on interest rates and otherconsiderations.  Other investments areaccounted for at the lower of cost or estimated realizable value.  Unrealized investment gains and losses oninvestments available for sale, net of applicable deferred income tax, are

 

8

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reported as a separate component of “accumulated other comprehensiveincome”.  Realized gains or losses onsale of investments are determined on the basis of average cost.  The carrying values of investments availablefor sale and other investments are adjusted for impairments in value that areconsidered to be other than temporary.

 

*(D)**         DEFERRED ACQUISITIONCOSTS*

Costs relating to the production of the new business(primarily commissions and certain costs of marketing) are deferred andincluded in the deferred acquisition cost asset to the extent that such costsare recoverable from future related policy revenues.  The deferred acquisition costs are being amortized over theperiods in which the related premiums are earned.  Such deferred costs are reviewed to determine if they arerecoverable from future income, including investment income and, if notconsidered recoverable, are charged to expense.

 

*(E)**          REINSURANCE PREMIUMSCEDED*

Reinsurance premiums ceded are reported as prepaidreinsurance premiums and amortized over the respective contract or policyperiods in proportion to the amount of insurance protection provided.  Commissions on reinsurance ceded aredeferred over the terms of the contracts of reinsurance to which they relateand amortized in proportion to the amount of insurance protection provided.

 

*(F)**          FOREIGN CURRENCYTRANSLATION*

The functional and reporting currency of the Companyis U.S. dollars.  Foreign currencyreceivables or payables that are denominated in a currency other than U.S.dollars are translated into U.S. dollars at the rates of exchange in effect atthe balance sheet date.  The resultingexchange gains or losses are included in the results of operations.  Exchange gains and losses related to thetranslation of investments available for sale are included in the netunrealized appreciation (depreciation) of investments, net of deferred incometaxes, as a separate component of “accumulated other comprehensiveincome”.  Assets and liabilities relatedto foreign operations are translated into U.S. dollars at the exchange rate ineffect at the balance sheet date; revenues and expenses are translated into U.S.dollars using weighted average rates for the period. Gains and losses resultingfrom translating foreign currency financial statements, net of deferred incometaxes, are excluded from income and included as a separate component of“accumulated other comprehensive income”.

 

*(G)**           USEOF 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)**           FAIRVALUE OF FINANCIAL INSTRUMENTS*

*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 into employment contracts with severalemployees for terms of one to five years, which have total minimum commitmentsof $0.9 million, excluding any performance bonuses, that are determined by theBoard of Directors of the Company as at September 30, 2001. The contractsinclude various non-compete clauses following termination of employment.

 

9

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*(B)  LEASECOMMITMENTS*

The Company and its subsidiaries have various obligations underoperating leases.

The future minimum commitments under lease and employment agreementsare as follows:

 
| **U.S.  dollars in thousands** |   | **Lease  Commitment** |   | **Less  Sublease  Income** |   | **Net** |   | **Employment  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 OFCREDIT*

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

 

The Company’s current Letter of Credit facility will expire on December31, 2001. The Company is in discussions with its bankers with respect torenewing this facility for another year.

 

*(D) PENSION OBLIGATIONS*

Certain subsidiaries of the Company are obligated to make definedcontributions to pension plans for their employees.  As of September 30, 2001, there were outstanding liabilities forpension contributions of  $556 thousand.

 

*(E)  CONTINGENCIES*

ESG and its subsidiaries, in common with the insurance industry ingeneral, are subject to litigation, including claims for punitive damages, inthe normal course of their business. ESG does not believe that such litigationwill have a material adverse effect on its financial condition, futureoperating results or liquidity.

 

In February 2000, Odyssey Re instituted an action in England against abroker, Stirling Cooke Brown, alleging fraud and conspiracy on the reinsuranceplacement of 1997 and 1998 personal accident and workers compensation “carveout” business with Odyssey Re.  Theseproceedings mirror earlier proceedings commenced in New York, which weredismissed on jurisdictional grounds. 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, OdysseyRe (UK) withdrew their admission, and, less than a week before the date scheduledfor the hearing, and in violation of the applicable rules of court, they servedtheir evidence, in which they made it clear, for the first time, that theyintended to plead a positive case that the representation was true.  Odyssey Re’s evidence also raised otherfactual issues by way of defence, which had not been contained in their initialpleading.

 

The Company has now recognized that the court would be very unlikely togive a summary judgment on the evidence as it stands, and has accordingly withdrawnits motion.  This withdrawal is in noway an acknowledgement that the company’s prospects of success in itslitigation with Odyssey Re (UK) are any less good than they were, but simply anacceptance that the issues, which have been raised, require a trial.  Indeed, the Company remains confident thatit will prevail in that litigation, and intends to pursue the litigationaggressively.  The Company may reissueits motion for summary judgment at any time if justified by the state of theevidence and the pleadings. This matter will be heard no earlier than late2002.

 

The Company has also given notice to rescind the 1999 account. Thismatter is now set for arbitration in late 2002.

 

10

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At this time, the Company is unable to determine the amount of itsexposure and the possible effect upon the Company’s business, financialcondition or results of operation from these two contracts.

 

**4.   DISCONTINUEDOPERATIONS**

 

On August 10, 2000, the Board of Directors approved a plan for thedivestiture of its Health Care Division. Implementation of that plan resulted in the divestiture of 4Sigma(formerly VVB Bermuda Limited) effective June 30, 2000, to affiliates of theChairman and senior management of the Health Care Division.  The investors in 4Sigma include the Company,affiliates of the Chairman of the Company (“Chairman”), Dr. Gerald Moeller,previously a member of the board of ESG Re Limited and ChiefExecutive-Healthcare Division and former management of the Health CareDivision.  Terms comparable to thoseoffered to the affiliates of the Chairman were offered to non-relatedparties.  The Company owns 8,000,000convertible preference shares in 4Sigma.

 

4Sigma delivers disease and demand management services to health plansin Germany. It currently has a 4% share of a 60 million-person market with onlythree significant competitors. Recent changes in German law to be effectiveJuly 1, 2002 require all German health insurers to provide disease and demandmanagement services to their members.

 

4Sigma has been successful in writing new business, however, the volumeof 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 Company agreed to participate in an additionalrights offering to further support projected cash needs through December2002.  That participation is in the formof a commitment for up to $1.8 million, in $100,000 increments, as funds areneeded.  Future funding requests will beevaluated on a monthly basis and a complete re-assessment will be effectedbefore April 1st next year.

 

For the three months ended September 30, 2000, the Healthcare Divisionrecovered expenses of $750 thousand and consequentially reported net income of$750 thousand, or $0.07 per share.  Forthe nine months ended September 30, 2000, operating results included revenuesof $343 thousand and an operating 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 investment income for the three months and nine monthsended September 30, 2001 were related party investment expenses of $85 thousandand $214 thousand, respectively.

 

**6.   NEW ACCOUNTING PRONOUNCEMENTS**

 

In June 2001, the FASB issued Statement of FinancialAccounting Standard (SFAS) No. 141, *BusinessCombinations*.  SFAS No. 141requires that all business combinations initiated after June 30, 2001 beaccounted for under the purchase method and addresses the initial recognitionand measurement of goodwill and other intangible assets acquired in a businesscombination.  Management does not expectthe adoption of SFAS No. 141 to have an impact on the financial position,results of operations or cash flows of the Company.

 

In June 2001, the Financial Accounting Standards Board(“FASB”) issued Statement of Financial Accounting Standard (SFAS) No. 142, *Goodwill and Other Intangible Assets*.  SFAS No. 142 addresses the initialrecognition and measurement of intangible assets acquired outside of a businesscombination and the accounting for goodwill and other intangible assetssubsequent to their acquisition.  SFASNo. 142 provides that intangible assets with finite useful lives be amortizedand that goodwill and intangible assets with indefinite lives not be amortized,but rather be tested at least annually for impairment.  Management does not expect the adoption ofSFAS No. 142 to have an impact on the financial position, results of operations,or cash flows of the company.

 

11

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In October 2001, the FASB issued SFAS No. 144, *Accounting for the Impairment or Disposal of**Long-Lived Assets* (SFAS No.144).  SFAS No. 144 supersedes SFAS No.121, *Accounting  for the**Impairmentof Long-Lived Assets and for Long-Lived Assets to be Disposed of*,and some provisions of Accounting Principles Board Opinion 30.  SFAS No. 144 sets new criteria fordetermining when an asset can be classified as held-for-sale as well asmodifying the financial statement presentation requirements of operating lossesfrom discontinued operations.  SFAS No.144 is effective for fiscal years beginning after December 15, 2001.  We are currently evaluating the provisionsof SFAS No. 144.

 

**7.  RESTATEMENT OF FINANCIAL STATEMENTS – Co-reinsurance Agreements with ACEINA Overseas Insurance Company Ltd (“ACE”).**

 

We signed a co-reinsurance contract with ACEin November 2001 that became effective retroactively as of January 1,2001.  Under SFAS 113, the premiumswritten during the retroactive period were deemed to be written on our ownaccount with the co-reinsurance to ACE treated as a retroactive retrocessionarrangement.  However, we did not showpremiums earned, losses and loss adjustment expenses and acquisition costs inour reported revenues and expenses, in respect of the retroactive period, inthe third and fourth quarters of 2001 and the first and second quarters of2002.  During the quarter endedSeptember 30, 2002, we realized this error in our treatment of the ACE contractand restated our figures for the correct accounting treatment of thiscontract.  In accordance with SFAS 113,we did not recognize any of the profits of the ACE share of the reinsurancecontract in our statement of operations and hence, there was no impact on ourreported net income or net loss in any affected period.  The following table shows the impact thatthe correct accounting for this contract had on our consolidated balance sheetas of September 30, 2001.  It had noimpact on our Consolidated Balance Sheet as at December 31, 2000.

 
|                            |   | **As Restated**               |       | **As previously reported** |   |
|---------------------------------|--------|-------------------------------|------------|----------------------------|--------|
|                            |   | **U.S. dollars in thousands** | ** ** |
| Deferred Acquisition Costs      |   | 38,117                        |       | 39,134                     |   |
| Unpaid loss & loss Expenses |   | 153,998                       |       | 152,890                    |   |
| Unearned Premiums               |   | 110,062                       |       | 111,589                    |   |
| Acquisition Costs Payable       |   | 39,639                        |       | 40,237                     |   |
| Shareholders Equity             |   | 110,042                       |       | 110,042                    |   |

 

The following statement shows the impact thatthe correct accounting for this contract had on our consolidated statement ofoperations for the three and nine months ended September 30, 2001.  It had no impact on the consolidatedstatement of operations for the three and nine months ended September 30, 2000.

 
|                     |   | **Three Months Ended  September 30, 2001** |       | **Nine Months Ended  September 30, 2001** |       |
|--------------------------|--------|--------------------------------------------|------------|-------------------------------------------|------------|
|                     |   | **As Restated**                            | ** ** | **As previously  reported**               | ** ** | **As Restated** | ** ** | **As previously  reported** | ** ** |
|                     |   | **U.S. dollars in thousands**              | ** ** |
| Net premiums earned      |   | 28,759                                     |       | 27,232                                    |       | 109,550 |   | 108,023 |   |
| Loss & loss Expenses |   | 15,870                                     |       | 14,762                                    |       | 72,093 |   | 70,985 |   |
| Acquisition Costs        |   | 8,980                                      |       | 8,561                                     |       | 33,983 |   | 33,564 |   |
| Net Income/(loss)        |   | 97                                         |       | 97                                        |       | (9,762 | ) | (9,762 | ) |

 

**8. RESTATEMENT OF FINANCIAL STATEMENTS – Foreign Currency Translation**

 

During the second quarter of 2002, wedetermined that foreign currency translation adjustments, included in datedother comprehensive income and other expenses, had been misstated by $3,992thousand due to an error in the system that consolidates the financial resultsof our subsidiaries.  At the same timewe were unable to determine the periods in which the original errors occurredand therefore to correct this error, we restated our financial statements forthe year December 31, 2001 in order to reflect a fourth quarter adjustment toforeign currency translation adjustments, and in accumulated other comprehensiveincome, other expenses, and consolidates statements of changes in shareholders’equity of $3,992 thousand.  The restatedaccounts were filed in our 10-K/A (Amendment No. 3) filing of August 22, 2002,which has been further amended by our 10-K/A (Amendment No. 4) filing of May30, 2003.

 

12

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Following further investigation we havesubsequently determined that the error of $3,992 thousand occurred in thefollowing years:

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

 

We have further restated our financialstatements for the fiscal year December 31, 2001, 2000 and 1999 and for thethree and nine months ended September 30, 2000 in order to reflect the correctforeign currency translation adjustments included in accumulated othercomprehensive income, other expenses, and consolidated statements of changes inshareholders’ equity.  The restatementhas had the following impact on our consolidated balance sheets as at September30, 2001 and December 31, 2000:

 
|                                                                                 |   | **September 30, 2001**        |       | **December 31, 2000**         |       |
|--------------------------------------------------------------------------------------|--------|-------------------------------|------------|-------------------------------|------------|
|                                                                                 |   | **U.S. dollars in thousands** |       | **U.S. dollars in thousands** |       |
|                                                                                 |   | **As Restated**               | ** ** | **As previously  restated**   | ** ** | **As Restated** | ** ** | **As previously  restated** | ** ** |
| Foreign currency Translation  adjustments, in accumulated other comprehensive income |   | (131                          | )          | (4,694                        | )          | (768 | ) | (5,331 | ) |
| Retained deficit                                                                     |   | (116,812                      | )          | (112,253                      | )          | 107,050 |   | 102,491 |   |

 

The restatement has had no impact on ourstatements of operations and comprehensive income (loss) for the three and ninemonths ended September 30, 2001 and the following impact on our statements ofoperations and comprehensive income (loss) for the three and nine months endedSeptember 30, 2000.

 
|                                                                                          |   | **Three Months Ended  September 30, 2000** |       | **Nine Months Ended  September 30, 2000** |       |
|-----------------------------------------------------------------------------------------------|--------|--------------------------------------------|------------|-------------------------------------------|------------|
|                                                                                          |   | **U.S. dollars in thousands**              |       | **U.S. dollars in thousands**             |       |
|                                                                                          |   | **As Restated**                            | ** ** | **As previously  reported**               | ** ** | **As Restated** | ** ** | **As previously  reported** | ** ** |
| Other expenses                                                                                |   | 20,453                                     |       | 16,382                                    |       | 36,550 |   | 32,479 |   |
| Net Loss                                                                                      |   | (38,369                                    | )          | (34,298                                   | )          | (57,916 | ) | (53,845 | ) |
| Foreign currency translation adjustments, in consolidated statements of  comprehensive income |   | 1,671                                      |       | (2,400                                    | )          | 929 |   | (3,142 | ) |

 

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

 

**9. SEGMENT INFORMATION**

 

We operate two complementary businesssegments, ESG Reinsurance and ESG Direct. Our larger segment ESG Reinsurance, provides medical, personal accident,credit life, disability and special risks reinsurance to selected insurers andreinsurers.  Our smaller but growingsegment ESG Direct provides direct marketing services, expertise in thedevelopment of reinsurance and insurance products and supporting technology tofinancial institutions in Asia,

 

13

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

 

Underwriting results for three and nine months ended September 30, 2001and 2000, by line of business and in total for the ESG Reinsurance segment wereas follows:

 
| **Three months ended  September 30, 2001** |   | **Medical**                    |       | **Accident** |   | **Credit** |   | **Life** |   | **Other** |   | **Total** |   |
|--------------------------------------------|--------|--------------------------------|------------|--------------|--------|------------|--------|----------|--------|-----------|--------|-----------|--------|
|                                       |   | **U.S.  dollars in thousands** | ** ** |
| Gross  premiums written                    |   | $                              | 21,218     |         | $      | 1,495      |   | $        | (202   | )         | $      | (1,746    | )      | $ | 455 |   | $ | 21,220 |   |
| Net  premiums written                      |   | 9,430                          |       | 967          |   | (221       | )      | (1,714   | )      | 442       |   | 8,904     |   |
| Net  premiums earned                       |   | 18,215                         |       | 5,734        |   | 317        |   | (383     | )      | 558       |   | 24,441    |   |
| Losses  and loss expenses                  |   | 3,839                          |       | 10,452       |   | 171        |   | (252     | )      | 761       |   | 14,971    |   |
| Acquisition  costs                         |   | 5,473                          |       | 1,145        |   | 591        |   | 4        |   | (534      | )      | 6,679     |   |
| Technical  profit/(loss)                   |   | 8,903                          |       | (5,863       | )      | (445       | )      | (135     | )      | 331       |   | 2,791     |   |
| Operating  costs                           |   | 4,029                          |       | 640          |   | 73         |   | (83      | )      | 121       |   | 4,780     |   |
|                                       |   |                           |       |         |   |       |   |     |   |      |   |      |   |
| Net  underwriting income (loss)            |   | $                              | 4,874      |         | $      | (6,503     | )      | $        | (518   | )         | $      | (52       | )      | $ | 210 |   | $ | (1,989 | ) |

 

 
| **Three months ended  September 30, 2000** |   | **Medical**                    |       | **Accident** |   | **Credit** |   | **Life** |   | **Other** |   | **Total** |   |
|--------------------------------------------|--------|--------------------------------|------------|--------------|--------|------------|--------|----------|--------|-----------|--------|-----------|--------|
|                                       |   | **U.S.  dollars in thousands** | ** ** |
| Gross  premiums written                    |   | $                              | 28,314     |         | $      | 3,692      |   | $        | (2,039 | )         | $      | 735       |   | $ | (698 | ) | $ | 30,004 |   |
| Net  premiums written                      |   | 13,987                         |       | 2,473        |   | (1,906     | )      | 559      |   | (931      | )      | 14,182    |   |
| Net  premiums earned                       |   | 26,647                         |       | 11,273       |   | (306       | )      | 1,288    |   | 219       |   | 39,121    |   |
| Losses  and loss expenses                  |   | 26,589                         |       | 15,762       |   | (510       | )      | 1,862    |   | 470       |   | 44,173    |   |
| Acquisition  costs                         |   | 11,772                         |       | 4,609        |   | 732        |   | 534      |   | 226       |   | 17,873    |   |
| Technical  Profit/(Loss)                   |   | (11,714                        | )          | (9,098       | )      | (528       | )      | (1,108   | )      | (477      | )      | (22,925   | )      |
| Operating  costs                           |   | 12,810                         |       | 4,286        |   | 69         |   | 630      |   | 107       |   | 17,902    |   |
|                                       |   |                           |       |         |   |       |   |     |   |      |   |      |   |
| Net  underwriting income (loss)            |   | $                              | (24,824    | )            | $      | (13,384    | )      | $        | (597   | )         | $      | (1,738    | )      | $ | (584 | ) | $ | (40,827 | ) |

 

 
| **Nine months ended  September 30, 2001** |   | **Medical**                    |       | **Accident** |   | **Credit** |   | **Life** |   | **Other** |   | **Total** |   |
|-------------------------------------------|--------|--------------------------------|------------|--------------|--------|------------|--------|----------|--------|-----------|--------|-----------|--------|
|                                      |   | **U.S.  dollars in thousands** | ** ** |
| Gross  premiums written                   |   | $                              | 67,271     |         | $      | 12,052     |   | $        | (3,349 | )         | $      | (3,139    | )      | $ | 2,412 |   | $ | 75,247 |   |
| Net  premiums written                     |   | 50,867                         |       | 8,858        |   | (3,144     | )      | (4,000   | )      | 2,241     |   | 54,822    |   |
| Net  premiums earned                      |   | 62,879                         |       | 32,700       |   | (1,143     | )      | (898     | )      | 2,455     |   | 95,993    |   |
| Losses  and loss expenses                 |   | 37,473                         |       | 33,281       |   | (1,726     | )      | (1,628   | )      | 1,924     |   | 69,324    |   |
| Acquisition  costs                        |   | 19,650                         |       | 7,574        |   | 673        |   | 110      |   | (953      | )      | 27,054    |   |
| Technical  profit/(loss)                  |   | 5,756                          |       | (8,155       | )      | (90        | )      | 620      |   | 1,484     |   | (385      | )      |
| Operating  costs                          |   | 11,664                         |       | 3,364        |   | (480       | )      | (180     | )      | 448       |   | 14,816    |   |
|                                      |   |                           |       |         |   |       |   |     |   |      |   |      |   |
| Net  underwriting income (loss)           |   | $                              | (5,908     | )            | $      | (11,519    | )      | $        | 390    |      | $      | 800       |   | $ | 1,036 |   | $ | (15,201 | ) |

 

 
| **Nine months ended  September 30, 2000** |   | **Medical**                    |       | **Accident** |   | **Credit** |   | **Life** |   | **Other** |   | **Total** |   |
|-------------------------------------------|--------|--------------------------------|------------|--------------|--------|------------|--------|----------|--------|-----------|--------|-----------|--------|
|                                      |   | **U.S.  dollars in thousands** | ** ** |
| Gross  premiums written                   |   | $                              | 129,557    |         | $      | 49,913     |   | $        | 1,982  |      | $      | 5,356     |   | $ | 3,131 |   | $ | 189,939 |   |
| Net  premiums written                     |   | 109,341                        |       | 45,016       |   | 1,950      |   | 4,822    |   | 2,207     |   | 163,336   |   |
| Net  premiums earned                      |   | 118,080                        |       | 42,193       |   | 5,910      |   | 4,593    |   | 2,602     |   | 173,378   |   |
| Losses  and loss expenses                 |   | 97,138                         |       | 38,806       |   | 2,032      |   | 3,505    |   | 2,610     |   | 144,091   |   |
| Acquisition  costs                        |   | 36,435                         |       | 13,020       |   | 3,626      |   | 1,571    |   | 1,344     |   | 55,996    |   |
| Technical  Profit/(loss)                  |   | (15,493                        | )          | (9,633       | )      | 252        |   | (483     | )      | (1,352    | )      | (26,709   | )      |
| Operating  costs                          |   | 22,367                         |       | 7,671        |   | 736        |   | 1,001    |   | 730       |   | 32,505    |   |
|                                      |   |                           |       |         |   |       |   |     |   |      |   |      |   |
| Net  underwriting income (loss)           |   | $                              | (37,860    | )            | $      | (17,304    | )      | $        | (484   | )         | $      | (1,484    | )      | $ | (2,082 | ) | $ | (59,214 | ) |

 

14

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Underwriting results for the three and nine months ended September 30,2001 and 2000, by line of business and in total, for the ESG Direct segment,were as follows:

 
| **Three months  ended September 30, 2001** |   | **Accident**                   |       | **Credit** |       | **Total** |       |
|--------------------------------------------|--------|--------------------------------|------------|------------|------------|-----------|------------|
|                                       |   | **U.S. dollars in  thousands** | ** ** |
| **Gross  premiums written**                |   | **4,132**                      | ** ** | **(4,138** | **)**      | **(6**    | **)**      |
| **Net  premiums written**                  |   | **4,132**                      | ** ** | **(4,138** | **)**      | **(6**    | **)**      |
| **Net  premiums earned**                   |   | **4,122**                      | ** ** | **196**    | ** ** | **4,318** | ** ** |
| **Losses  and loss expenses**              |   | **849**                        | ** ** | **50**     | ** ** | **899**   | ** ** |
| **Acquisition  costs**                     |   | **2,423**                      | ** ** | **(122**   | **)**      | **2,301** | ** ** |
| **Technical  profit/(loss)**               |   | **850**                        | ** ** | **268**    | ** ** | **1,118** | ** ** |
| **Operating  costs**                       |   | **1,489**                      | ** ** | **38**     | ** ** | **1,527** | ** ** |
| **Net  underwriting income/(loss)**        |   | **(639**                       | **)**      | **230**    | ** ** | **(409**  | **)**      |

# ** **

 
| **Three months  ended September 30, 2000** |   | **Accident**                   |       | **Credit** |       | **Total**  |       |
|--------------------------------------------|--------|--------------------------------|------------|------------|------------|------------|------------|
|                                       |   | **U.S. dollars in  thousands** | ** ** |
| **Gross  premiums written**                |   | **1,828**                      | ** ** | **0**      | ** ** | **1,828**  | ** ** |
| **Net  premiums written**                  |   | **1,828**                      | ** ** | **0**      | ** ** | **1,828**  | ** ** |
| **Net  premiums earned**                   |   | **635**                        | ** ** | **0**      | ** ** | **635**    | ** ** |
| **Losses  and loss expenses**              |   | **304**                        | ** ** | **0**      | ** ** | **304**    | ** ** |
| **Acquisition  costs**                     |   | **391**                        | ** ** | **0**      | ** ** | **391**    | ** ** |
| **Technical  profit/(loss)**               |   | **(60**                        | **)**      | **0**      | ** ** | **(60**    | **)**      |
| **Operating  costs**                       |   | **1,536**                      | ** ** | **0**      | ** ** | **1,536**  | ** ** |
| **Net  underwriting income/(loss)**        |   | **(1,596**                     | **)**      | **0**      | ** ** | **(1,596** | **)**      |

 

 
| **Nine months  ended September 30, 2001** |   | **Accident**                   |       | **Credit** |       | **Total**  |       |
|-------------------------------------------|--------|--------------------------------|------------|------------|------------|------------|------------|
|                                      |   | **U.S. dollars in  thousands** | ** ** |
| **Gross  premiums written**               |   | **12,709**                     | ** ** | **8,232**  | ** ** | **20,941** | ** ** |
| **Net  premiums written**                 |   | **12,709**                     | ** ** | **8,232**  | ** ** | **20,941** | ** ** |
| **Net  premiums earned**                  |   | **12,665**                     | ** ** | **892**    | ** ** | **13,557** | ** ** |
| **Losses  and loss expenses**             |   | **2,520**                      | ** ** | **249**    | ** ** | **2,769**  | ** ** |
| **Acquisition  costs**                    |   | **7,105**                      | ** ** | **(176**   | **)**      | **6,929**  | ** ** |
| **Technical  profit/(loss)**              |   | **3,040**                      | ** ** | **819**    | ** ** | **3,859**  | ** ** |
| **Operating  costs**                      |   | **4,671**                      | ** ** | **458**    | ** ** | **5,129**  | ** ** |
| **Net  underwriting income/(loss)**       |   | **(1,631**                     | **)**      | **361**    | ** ** | **(1,270** | **)**      |

 

 
| **Nine months  ended September 30, 2000** |   | **Accident**                   |       | **Credit** |       | **Total**  |       |
|-------------------------------------------|--------|--------------------------------|------------|------------|------------|------------|------------|
|                                      |   | **U.S. dollars in  thousands** | ** ** |
| **Gross  premiums written**               |   | **1,828**                      | ** ** | **0**      | ** ** | **1,828**  | ** ** |
| **Net  premiums written**                 |   | **1,828**                      | ** ** | **0**      | ** ** | **1,828**  | ** ** |
| **Net  premiums earned**                  |   | **635**                        | ** ** | **0**      | ** ** | **635**    | ** ** |
| **Losses  and loss expenses**             |   | **304**                        | ** ** | **0**      | ** ** | **304**    | ** ** |
| **Acquisition  costs**                    |   | **391**                        | ** ** | **0**      | ** ** | **391**    | ** ** |
| **Technical  profit/(loss)**              |   | **(60**                        | **)**      | **0**      | ** ** | **(60**    | **)**      |
| **Operating  costs**                      |   | **1,536**                      | ** ** | **0**      | ** ** | **1,536**  | ** ** |
| **Net  underwriting income/(loss)**       |   | **(1,596**                     | **)**      | **0**      | ** ** | **(1,596** | **)**      |

 

15

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**Report of Independent Accountants**

 

To the Board of Directors and Shareholders

ESG Re Limited

 

We have reviewed the condensed consolidated balance sheet of ESG ReLimited and subsidiaries as of September 30, 2001, and the related condensedconsolidated statements of operations and comprehensive income/loss for thethree-month and nine-month periods ended September 30, 2001, and cash flows forthe nine-month periods ended September 30, 2001 included in the accompanyingSecurities and Exchange Commission Form 10-Q for the period ended September 30,2001. These financial statements are the responsibility of the Company’smanagement.

 

We conducted our review in accordance with standards established by theAmerican Institute of Certified Public Accountants. A review of interimfinancial information consists principally of applying analytical procedures tofinancial data, and making inquiries of persons responsible for financial andaccounting matters. It is substantially less in scope than an audit conductedin accordance with generally accepted auditing standards, the objective ofwhich is the expression of an opinion regarding the financial statements takenas a whole. Accordingly, we do not express such an opinion.

 

Based on our reviews, we are not aware of any material modificationsthat should be made to the condensed consolidated financial statements referredto above for them to be in conformity with accounting principles generallyaccepted in the United States of America.

 

The condensed consolidated balance sheets as of September 30, 2001 andDecember 31, 2000 and the condensed consolidated statements of operations andcomprehensive income/loss for the three-month and nine-month periods endedSeptember 30, 2001 and September 30, 2000 and cash flows for the nine-monthperiod ended September 30, 2001 and 2000 have been restated.  The effects of the restatements are set outin Notes 7 and 8 to the unaudited condensed consolidated financial statements.

 

 

BDO International

 

Dublin Ireland

 

Date: May 30, 2003

 

16

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

 

*Thefollowing is a discussion and analysis addresses the financial condition of ESGas of September 30, 2001compared with December 31, 2000 and our results ofoperation for the three and nine months ended September 30, 2001 compared withthe same periods last year.  You shouldread this discussion and analysis with our unaudited condensed consolidatedfinancial statements and related notes included in Item 1 of this Form 10-Q,and our audited financial statements and related notes contained in our 2000Annual Report on Form 10-K.  Ourindependent accountants have reviewed our unaudited condensed consolidatedfinancial statements for the three and nine months ended September 30, 2001 and2000 in accordance with auditing standards generally accepted in the UnitedStates of America.  The results of ouroperations for the period ended September 30, 2001 are not necessarilyindicative of our results for the full year.*

 

*Certainstatements and information included in this Form 10-Q constitute “forward-lookingstatements” within the meaning of the Private Litigation Reform Act of1995.  These statements express ourintentions, strategies, or predictions for the future.  Actual results may differ from ESG’spredictions.  For more informationregarding forward-looking statements, please see “Cautionary StatementRegarding Forward-Looking Statements,” below.*

 

**Recent Developments**

 

*Market Information*

 

FromDecember 12, 1997 to November 20, 2002, our common stock was traded on NASDAQunder the symbol ESREF.  On November 20,2002, the trading symbol was changed to ESREE to reflect the unfiled status ofour Quarterly Report on Form 10-Q for the quarter ended September 30, 2002.

 

On November 25,2002, we received a Nasdaq Staff Determination letter indicating that, as aresult of our  failure to timely fileits Report on Form 10-Q for the period ended September 30, 2002, our securitieswould be delisted from the Nasdaq Stock Market, effective at the opening ofbusiness on December 3, 2002.  Werequested an oral hearing before a Nasdaq Listing Qualifications Panel (the“Panel”) to review the Staff Determination, which request stayed the delistingof our securities.  Thereafter, onDecember 17, 2002, we were notified that we failed to maintain a closing bidprice of at least $1.00 per share for 30 consecutive trading days, and that weshould discuss our plan to remedy that additional deficiency at thehearing.  The hearing was held onDecember 20, 2002.  By letter datedJanuary 31, 2003, we were was advised that the Panel had determined that oursecurities would be delisted from The Nasdaq Stock Market effective with theopening of business on Tuesday, February 4, 2003.  The reason given for the decision was the failure to timely fileour quarterly report on Form 10-Q for the quarter ended September 30,2002.  In addition, the Panel cited as areason for its delisting decision, our failure to file any of the amendments topreviously filed reports under the Securities Exchange Act of 1934, as amended,for any of the anticipated restatements of certain information in our financialstatements.  Nasdaq’s delisting decisionwill not be appealed.

 

On March 17, 2003 we filed with the SEC ourcertification on Form 15 to deregister our common stock under the SecuritiesExchange Act of 1934, as amended (“the Exchange Act”). Upon filing, ourobligations to file reports Form 10-K, Form 10-Q and other periodic reportsthat were not yet due were immediately suspended.  Our certification to deregister is expected to become finalwithin 90 days of filing.  If the SECdetermines to deny our certification within such 90 day period, we would have60 days to bring all periodic reports due current.

 

We intend to continue to make available to ourshareholders quarterly and annual financial information in substantially thesame form as presently made available. We also intend to generally comply with the corporate governanceregulations and guidelines that would be applicable if our common stock wasstill registered under the Exchange Act and listed on Nasdaq.

 

The Company’s securities are being quoted through thePink Sheets stock quotation service.  Weanticipate (although there is no assurance), that Carr Securities Corp., PortWashington, NY, and Morgan Keegan & Co., Inc., Birmingham, AL, will continueto quote our common stock.  There is noassurance that a trading market will develop.

 

17

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*LegalProceedings*

 

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

 

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

 

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

 

### ***Events ofSeptember 11, 2001***

 

After an initialportfolio analysis of exposures and liabilities as a result of the September 11thevent in the United States, the Company again reviewed its exposure as of3rd Quarter 2001.  TheCompany believes that its total exposure will be approximately US$250,000(split US$100,000 from the London operation and US$150,000 from the Torontooperation) gross before reinsurance.

 

The resultant impact fromthis event has been a decrease in the capacity in the Accident and Health reinsurancemarket.  This affects the Companypositively as premium rates are hardening dramatically, but negatively as itmakes outwards reinsurance more expensive.

 

**RESTATEMENT OF FINANCIAL STATEMENTS**

 

*Co-reinsurance Agreements with ACE INA Overseas InsuranceCompany Ltd*

 

We signed a co-reinsurance contract with ACEin November 2001 that became effective retroactively as of January 1,2001.  Under SFAS 113, the premiumswritten during the retroactive period were deemed to be written on our ownaccount with the co-reinsurance to ACE treated as a retroactive retrocessionarrangement.  However, we did not showpremiums earned, losses and loss adjustment expenses and acquisition costs inour reported revenues and expenses, in respect of the retroactive period, in thethird and fourth quarters of 2001 and the first and second quarters of2002.  During the quarter endedSeptember 30, 2002, we realized this error in our treatment of the ACE contractand restated our figures for the correct accounting treatment of this contract.  In accordance with SFAS 113, we did notrecognize any of the profits of the ACE share of the reinsurance contract inour statement of operations and hence, there was no impact on our reported netincome or net loss in any affected period. The following table shows the impact that the correct accounting forthis contract had on our consolidated balance sheet as of September 30,2001.  It had no impact on ourConsolidated Balance Sheet as at December 31, 2000.

 
|                            |   | **As Restated**               |       | **As previously reported** |   |
|---------------------------------|--------|-------------------------------|------------|----------------------------|--------|
|                            |   | **U.S. dollars in thousands** | ** ** |
| Deferred Acquisition Costs      |   | 38,117                        |       | 39,134                     |   |
| Unpaid loss & loss Expenses |   | 153,998                       |       | 152,890                    |   |
| Unearned Premiums               |   | 110,062                       |       | 111,589                    |   |
| Acquisition Costs Payable       |   | 39,639                        |       | 40,237                     |   |
| Shareholders Equity             |   | 110,042                       |       | 110,042                    |   |

 

18

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The following statement shows the impact thatthe correct accounting for this contract had on our consolidated statement ofoperations for the three and nine months ended September 30, 2001.  It had no impact on the consolidatedstatement of operations for the three and nine months ended September 30, 2000.

 
|                     |   | **Three Months Ended  September 30, 2001** |       | **Nine Months Ended  September 30, 2000** |       |
|--------------------------|--------|--------------------------------------------|------------|-------------------------------------------|------------|
|                     |   | **As Restated**                            | ** ** | **As previously  reported**               | ** ** | **As Restated** | ** ** | **As previously  reported** | ** ** |
|                     |   | **U.S. dollars in thousands**              | ** ** |
| Net premiums earned      |   | 28,759                                     |       | 27,232                                    |       | 109,550 |   | 108,023 |   |
| Loss & loss Expenses |   | 15,870                                     |       | 14,762                                    |       | 72,093 |   | 70,985 |   |
| Acquisition Costs        |   | 8,980                                      |       | 8,561                                     |       | 33,983 |   | 33,564 |   |
| Net Income/(loss)        |   | 97                                         |       | 97                                        |       | (9,762 | ) | (9,762 | ) |

 

*Foreign Currency Translation*

 

During the second quarter of 2002, wedetermined that foreign currency translation adjustments, included in datedother comprehensive income and other expenses, had been misstated by $3,992thousand due to an error in the system that consolidates the financial resultsof our subsidiaries.  At the same timewe were unable to determine the periods in which the original errors occurredand therefore to correct this error, we restated our financial statements forthe year December 31, 2001 in order to reflect a fourth quarter adjustment toforeign currency translation adjustments, and in accumulated othercomprehensive income, other expenses, and consolidates statements of changes inshareholders’ equity of $3,992 thousand. The restated accounts were filed in our 10-K/A (Amendment No. 3) filingof August 22, 2002, which was further amended in our 10K/A (Amendment No. 4)filing of May 30, 2003.

 

Following further investigation we havesubsequently determined that the error of $3,992 thousand occurred in thefollowing years:

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

 

We have further restated our financialstatements for the fiscal year December 31, 2001, 2000 and 1999 and for thethree and nine months ended September 30, 2000 in order to reflect the correctforeign currency translation adjustments included in accumulated othercomprehensive income, other expenses, and consolidated statements of changes inshareholders’ equity.  The restatementhas had the following impact on our consolidated balance sheets as at September30, 2001 and December 31, 2000:

 
|                                                                                 |   | **September 30, 2001**        |       | **December 31, 2000**         |       |
|--------------------------------------------------------------------------------------|--------|-------------------------------|------------|-------------------------------|------------|
|                                                                                 |   | **U.S. dollars in thousands** |       | **U.S. dollars in thousands** |       |
|                                                                                 |   | **As Restated**               | ** ** | **As previously  restated***  | ** ** | **As Restated** | ** ** | **As previously  restated*** | ** ** |
| Foreign currency Translation  adjustments, in accumulated other comprehensive income |   | (131                          | )          | (4,694                        | )          | (768 | ) | (5,331 | ) |
| Retained deficit                                                                     |   | (116,812                      | )          | (112,253                      | )          | 107,050 |   | 102,491 |   |

 

19

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The restatement has had no impact on ourstatements of operations and comprehensive income (loss) for the three and ninemonths ended September 30, 2001 and the following impact on our statements ofoperations and comprehensive income (loss) for the three and nine months endedSeptember 30, 2000.

 
|                                                                                          |   | **Three Months Ended  September 30, 2000** |       | **Nine Months Ended  September 30, 2000** |       |
|-----------------------------------------------------------------------------------------------|--------|--------------------------------------------|------------|-------------------------------------------|------------|
|                                                                                          |   | **U.S. dollars in thousands**              |       | **U.S. dollars in thousands**             |       |
|                                                                                          |   | **As  Restated**                           | ** ** | **As previously  reported**               | ** ** | **As Restated** | ** ** | **As previously  reported** | ** ** |
| Other expenses                                                                                |   | 20,453                                     |       | 16,382                                    |       | 36,550 |   | 32,479 |   |
| Net Loss                                                                                      |   | (38,369                                    | )          | (34,298                                   | )          | (57,916 | ) | (53,845 | ) |
| Foreign currency translation adjustments, in consolidated statements of  comprehensive income |   | 1,671                                      |       | (2,400                                    | )          | 929 |   | (3,142 | ) |

 

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

----

*The previous restatement was reflected inour Form 10-K/A filed August, 22, 2002.

 

**PrincipalActivities and Sources of Revenue**

 

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

 

We derive our revenuesprincipally from:

 

•                  Premiumsfor reinsurance products,

•                  Feesfor direct marketing services,

•                  Managementfees, and

•                  Investmentincome.

 

### **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 $38.4 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 $3.25 for the third quarter 2000.  Included in last year’s results was incomefrom discontinued operations of $0.8 million or $0.06 per shares representingthe recovering of expenses relating to the divested non-core health careoperations.  The net operating loss forthird quarter 2001, which excluded realized investment gains and losses, was$0.01 per share.  Net operating loss forthe third quarter 2000, which excludes realized investment gains and losses andloss investments, was $3.29 per 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 management fee losses of $0.1 million.

 

For the nine months ended September 30, 2001, the Company had a netloss of $9.8 million, compared to a net loss of $57.9 million for the sameperiod in 2000.  Net loss per share forthe nine months ended September 30, 2001 was

$0.83 compared to net loss per share of $4.93 for the nine months endedSeptember 30, 2000.

 

Total revenues for the three months ended September 30, 2001 were $31.4million, consisting of net premiums earned of $28.8 million, net investmentincome of $2.5 million, realized investment gains of $0.2 million, andmanagement fee revenue of $(0.1) million. For the three months ended September 30, 2000 total revenues were $44.1million consisting of net premiums earned of $39.8 million, net investmentincome of $3.6 million, realized

 

20

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investment gains of $0.5 million, gain on equity investments of under$0.1 million and management fee revenue of $0.2 million.

 

Total revenues for the nine months ended September 30, 2001 were $116.5million, consisting of net earned premiums of $109.5 million, net investmentincome of $9.2 million, realized investments losses of $2.5 million, andmanagement fee revenue of $0.3 million. For the nine months ended September 30, 2000 total revenues were $184.6million consisting of net premiums earned of $174.0 million, net investmentincome of $9.7 million, realized investment losses of $0.6 million, gain onequity investments of $0.3 million and management fee revenue of $1.2 million.

 

For the three months ended September 30,2001, expenses were$31.3 million, consisting of $15.9 million of losses and loss expenses, $9.0million of acquisition costs, and $6.4 million of operating expenses.  Total expenses for the three months endedSeptember 30, 2000 were $83.2 million, consisting of $44.5 million of losses andloss expenses, $18.2 million of acquisition costs, and $20.5 million ofoperating expenses (including a provision to legal reserve of $8.4 million).

 

Total expenses for the nine months ended September 30, 2001 were $126.3million, consisting of $72.1 million of losses and loss expense, $34.0 millionof acquisition costs, and $20.2 million of operating expenses.  For the nine months ended September 30,2000, total expenses were $237.3 million, consisting of $144.4 million oflosses and loss expense, $56.4 million of acquisition costs, and $36.5 millionof operating expenses.

 

**NETUNDERWRITING INCOME**

 

Gross premiums written declined by $10.6 million, or 33.4%, for thethree months ended September 30, 2001, compared to the corresponding prior yearperiod.  For the nine months endedSeptember 30, 2001, gross premiums written decreased by $95.6 million, or 49.8%when compared with the same prior year period. The reduction, for the most part, is a reflection of the Company’sstated objective to reduce premium writings, concentrating on those marketsthat offer the best profit opportunities. In addition, the Company rescinded one medical treaty underwritten in1999 in the first quarter of this year, which resulted in a reduction in GrossWritten and Net Earned Premium of $9.5 million, respectively.

 

An underwriting profit (before operating costs) of $3.9 million and$3.5 million was posted in the quarter and nine months ended September 30,2001, respectively. Business underwritten in 2001 contributed approximatelyone-half of this result as premiums written this year are now beginning to earnthrough. Also, we are seeing positive development on business written lastyear.  The year to date results werenegatively impacted by the cost of $2.2 million incurred in the first quarterto exit certain unprofitable books of business that automatically would haverenewed.  Rate increases being effectedon premiums written in respect of the 2001 underwriting year are now having aneffect on underwriting results, and are expected to contribute significantlymore in ensuing quarters as that premium is earned.  It is important to note that the significant reserving done inthe third quarter of last year continues to prove adequate in connection withthe Company’s efforts to close out 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, for the ESG Reinsurance segment were asfollows:

 
| **Three months ended  September 30, 2001** |   | **Medical**                    |       | **Accident** |   | **Credit** |   | **Life** |   | **Other** |   | **Total** |   |
|--------------------------------------------|--------|--------------------------------|------------|--------------|--------|------------|--------|----------|--------|-----------|--------|-----------|--------|
|                                       |   | **U.S.  dollars in thousands** | ** ** |
| Gross  premiums written                    |   | $                              | 21,218     |         | $      | 1,495      |   | $        | (202   | )         | $      | (1,746    | )      | $ | 455 |   | $ | 21,220 |   |
| Net  premiums written                      |   | 9,430                          |       | 967          |   | (221       | )      | (1,714   | )      | 442       |   | 8,904     |   |
| Net  premiums earned                       |   | 18,215                         |       | 5,734        |   | 317        |   | (383     | )      | 558       |   | 24,441    |   |
| Losses  and loss expenses                  |   | 3,839                          |       | 10,452       |   | 171        |   | (252     | )      | 761       |   | 14,971    |   |
| Acquisition  costs                         |   | 5,473                          |       | 1,145        |   | 591        |   | 4        |   | (534      | )      | 6,679     |   |
| Technical  profit/(loss)                   |   | 8,903                          |       | (5,863       | )      | (445       | )      | (135     | )      | 331       |   | 2,791     |   |
| Operating  costs                           |   | 4,029                          |       | 640          |   | 73         |   | (83      | )      | 121       |   | 4,780     |   |
|                                       |   |                           |       |         |   |       |   |     |   |      |   |      |   |
| Net  underwriting income (loss)            |   | $                              | 4,874      |         | $      | (6,503     | )      | $        | (518   | )         | $      | (52       | )      | $ | 210 |   | $ | (1,989 | ) |

 

21

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| **Three months ended  September 30, 2000** |   | **Medical**                    |       | **Accident** |   | **Credit** |   | **Life** |   | **Other** |   | **Total** |   |
|--------------------------------------------|--------|--------------------------------|------------|--------------|--------|------------|--------|----------|--------|-----------|--------|-----------|--------|
|                                       |   | **U.S.  dollars in thousands** | ** ** |
| Gross  premiums written                    |   | $                              | 28,314     |         | $      | 3,692      |   | $        | (2,039 | )         | $      | 735       |   | $ | (698 | ) | $ | 30,004 |   |
| Net  premiums written                      |   | 13,987                         |       | 2,473        |   | (1,906     | )      | 559      |   | (931      | )      | 14,182    |   |
| Net  premiums earned                       |   | 26,647                         |       | 11,273       |   | (306       | )      | 1,288    |   | 219       |   | 39,121    |   |
| Losses  and loss expenses                  |   | 26,589                         |       | 15,762       |   | (510       | )      | 1,862    |   | 470       |   | 44,173    |   |
| Acquisition  costs                         |   | 11,772                         |       | 4,609        |   | 732        |   | 534      |   | 226       |   | 17,873    |   |
| Technical  Profit/(Loss)                   |   | (11,714                        | )          | (9,098       | )      | (528       | )      | (1,108   | )      | (477      | )      | (22,925   | )      |
| Operating  costs                           |   | 12,810                         |       | 4,286        |   | 69         |   | 630      |   | 107       |   | 17,902    |   |
|                                       |   |                           |       |         |   |       |   |     |   |      |   |      |   |
| Net  underwriting income (loss)            |   | $                              | (24,824    | )            | $      | (13,384    | )      | $        | (597   | )         | $      | (1,738    | )      | $ | (584 | ) | $ | (40,827 | ) |

 

For the quarter ended September 30, 2001, as mentioned previously,overall gross written premiums declined from prior year levels.  The majority of the decline is in medicalwritings.  The third quarter includesthe effect of a 50/50 co-reinsurance management agreement between ESG Re NorthAmerica Ltd., a subsidiary of the Company, and Ace Capital Re Overseas Ltd.,entered into on November 1, 2001, with effect from January 1, 2001.  ESG Re North America Ltd. writes primarilyNorth American medical coverage.

 

The negative amounts reported for the Life and Credit books of businessin the third quarter is a function of adjusting estimated written premium toactual as current information is received from cedants.  Also, the Company continues to experiencenegative development on its Norwegian personal accident book from priorunderwriting years.

 

Underwriting results for the nine months ended September 30, 2001 and2000, by line of business and in total for the ESG Reinsurance segment were asfollows:

 
| **Nine months ended  September 30, 2001** |   | **Medical**                    |       | **Accident** |   | **Credit** |   | **Life** |   | **Other** |   | **Total** |   |
|-------------------------------------------|--------|--------------------------------|------------|--------------|--------|------------|--------|----------|--------|-----------|--------|-----------|--------|
|                                      |   | **U.S.  dollars in thousands** | ** ** |
| Gross  premiums written                   |   | $                              | 67,271     |         | $      | 12,052     |   | $        | (3,349 | )         | $      | (3,139    | )      | $ | 2,412 |   | $ | 75,247 |   |
| Net  premiums written                     |   | 50,867                         |       | 8,858        |   | (3,144     | )      | (4,000   | )      | 2,241     |   | 54,822    |   |
| Net  premiums earned                      |   | 62,879                         |       | 32,700       |   | (1,143     | )      | (898     | )      | 2,455     |   | 95,993    |   |
| Losses  and loss expenses                 |   | 37,473                         |       | 33,281       |   | (1,726     | )      | (1,628   | )      | 1,924     |   | 69,324    |   |
| Acquisition  costs                        |   | 19,650                         |       | 7,574        |   | 673        |   | 110      |   | (953      | )      | 27,054    |   |
| Technical  profit/(loss)                  |   | 5,756                          |       | (8,155       | )      | (90        | )      | 620      |   | 1,484     |   | (385      | )      |
| Operating  costs                          |   | 11,664                         |       | 3,364        |   | (480       | )      | (180     | )      | 448       |   | 14,816    |   |
|                                      |   |                           |       |         |   |       |   |     |   |      |   |      |   |
| Net  underwriting income (loss)           |   | $                              | (5,908     | )            | $      | (11,519    | )      | $        | 390    |      | $      | 800       |   | $ | 1,036 |   | $ | (15,201 | ) |

 

 
| **Nine months ended  September 30, 2000** |   | **Medical**                    |       | **Accident** |   | **Credit** |   | **Life** |   | **Other** |   | **Total** |   |
|-------------------------------------------|--------|--------------------------------|------------|--------------|--------|------------|--------|----------|--------|-----------|--------|-----------|--------|
|                                      |   | **U.S.  dollars in thousands** | ** ** |
| Gross  premiums written                   |   | $                              | 129,557    |         | $      | 49,913     |   | $        | 1,982  |      | $      | 5,356     |   | $ | 3,131 |   | $ | 189,939 |   |
| Net  premiums written                     |   | 109,341                        |       | 45,016       |   | 1,950      |   | 4,822    |   | 2,207     |   | 163,336   |   |
| Net  premiums earned                      |   | 118,080                        |       | 42,193       |   | 5,910      |   | 4,593    |   | 2,602     |   | 173,378   |   |
| Losses  and loss expenses                 |   | 97,138                         |       | 38,806       |   | 2,032      |   | 3,505    |   | 2,610     |   | 144,091   |   |
| Acquisition  costs                        |   | 36,435                         |       | 13,020       |   | 3,626      |   | 1,571    |   | 1,344     |   | 55,996    |   |
| Technical  Profit/(loss)                  |   | (15,493                        | )          | (9,633       | )      | 252        |   | (483     | )      | (1,352    | )      | (26,709   | )      |
| Operating  costs                          |   | 22,367                         |       | 7,671        |   | 736        |   | 1,001    |   | 730       |   | 32,505    |   |
|                                      |   |                           |       |         |   |       |   |     |   |      |   |      |   |
| Net  underwriting income (loss)           |   | $                              | (37,860    | )            | $      | (17,304    | )      | $        | (484   | )         | $      | (1,484    | )      | $ | (2,082 | ) | $ | (59,214 | ) |

 

For the nine months ended September 30, 2001, gross written premiumsare approximately half last year’s level, again, in line with the company’sstated objectives.  The net underwritingloss was a function of total operating costs as the majority of earned premiumfrom prior underwriting years is contributing little in the way of underwritingprofits, again in line with expectations. Improvement in net underwriting income will be a function of operatingresults from the 2001 underwriting year, as those premiums are earned, andmanagement of operating costs in line with reduced premium writings.

 

22

----

 

Underwriting results for the three and nine months ended September 30,2001 and 2000, by line of business and in total, for the ESG Direct segment,were as follows:

 
| **Three months  ended September 30, 2001** |   | **Accident**                   |       | **Credit** |       | **Total** |       |
|--------------------------------------------|--------|--------------------------------|------------|------------|------------|-----------|------------|
|                                       |   | **U.S. dollars in  thousands** | ** ** |
| **Gross  premiums written**                |   | **4,132**                      | ** ** | **(4,138** | **)**      | **(6**    | **)**      |
| **Net  premiums written**                  |   | **4,132**                      | ** ** | **(4,138** | **)**      | **(6**    | **)**      |
| **Net  premiums earned**                   |   | **4,122**                      | ** ** | **196**    | ** ** | **4,318** | ** ** |
| **Losses  and loss expenses**              |   | **849**                        | ** ** | **50**     | ** ** | **899**   | ** ** |
| **Acquisition  costs**                     |   | **2,423**                      | ** ** | **(122**   | **)**      | **2,301** | ** ** |
| **Technical  profit/(loss)**               |   | **850**                        | ** ** | **268**    | ** ** | **1,118** | ** ** |
| **Operating  costs**                       |   | **1,489**                      | ** ** | **38**     | ** ** | **1,527** | ** ** |
| **Net  underwriting income/(loss)**        |   | **(639**                       | **)**      | **230**    | ** ** | **(409**  | **)**      |

 

 
| **Three months  ended September 30, 2000** |   | **Accident**                   |       | **Credit** |       | **Total**  |       |
|--------------------------------------------|--------|--------------------------------|------------|------------|------------|------------|------------|
|                                       |   | **U.S. dollars in  thousands** | ** ** |
| **Gross  premiums written**                |   | **1,828**                      | ** ** | **0**      | ** ** | **1,828**  | ** ** |
| **Net  premiums written**                  |   | **1,828**                      | ** ** | **0**      | ** ** | **1,828**  | ** ** |
| **Net  premiums earned**                   |   | **635**                        | ** ** | **0**      | ** ** | **635**    | ** ** |
| **Losses  and loss expenses**              |   | **304**                        | ** ** | **0**      | ** ** | **304**    | ** ** |
| **Acquisition  costs**                     |   | **391**                        | ** ** | **0**      | ** ** | **391**    | ** ** |
| **Technical  profit/(loss)**               |   | **(60**                        | **)**      | **0**      | ** ** | **(60**    | **)**      |
| **Operating  costs**                       |   | **1,536**                      | ** ** | **0**      | ** ** | **1,536**  | ** ** |
| **Net  underwriting income/(loss)**        |   | **(1,596**                     | **)**      | **0**      | ** ** | **(1,596** | **)**      |

 

 
| **Nine months  ended September 30, 2001** |   | **Accident**                   |       | **Credit** |       | **Total**  |       |
|-------------------------------------------|--------|--------------------------------|------------|------------|------------|------------|------------|
|                                      |   | **U.S. dollars in  thousands** | ** ** |
| **Gross  premiums written**               |   | **12,709**                     | ** ** | **8,232**  | ** ** | **20,941** | ** ** |
| **Net  premiums written**                 |   | **12,709**                     | ** ** | **8,232**  | ** ** | **20,941** | ** ** |
| **Net  premiums earned**                  |   | **12,665**                     | ** ** | **892**    | ** ** | **13,557** | ** ** |
| **Losses  and loss expenses**             |   | **2,520**                      | ** ** | **249**    | ** ** | **2,769**  | ** ** |
| **Acquisition  costs**                    |   | **7,105**                      | ** ** | **(176**   | **)**      | **6,929**  | ** ** |
| **Technical  profit/(loss)**              |   | **3,040**                      | ** ** | **819**    | ** ** | **3,859**  | ** ** |
| **Operating  costs**                      |   | **4,671**                      | ** ** | **458**    | ** ** | **5,129**  | ** ** |
| **Net  underwriting income/(loss)**       |   | **(1,631**                     | **)**      | **361**    | ** ** | **(1,270** | **)**      |

 

 
| **Nine months  ended September 30, 2000** |   | **Accident**                   |       | **Credit** |       | **Total**  |       |
|-------------------------------------------|--------|--------------------------------|------------|------------|------------|------------|------------|
|                                      |   | **U.S. dollars in  thousands** | ** ** |
| **Gross  premiums written**               |   | **1,828**                      | ** ** | **0**      | ** ** | **1,828**  | ** ** |
| **Net  premiums written**                 |   | **1,828**                      | ** ** | **0**      | ** ** | **1,828**  | ** ** |
| **Net  premiums earned**                  |   | **635**                        | ** ** | **0**      | ** ** | **635**    | ** ** |
| **Losses  and loss expenses**             |   | **304**                        | ** ** | **0**      | ** ** | **304**    | ** ** |
| **Acquisition  costs**                    |   | **391**                        | ** ** | **0**      | ** ** | **391**    | ** ** |
| **Technical  profit/(loss)**              |   | **(60**                        | **)**      | **0**      | ** ** | **(60**    | **)**      |
| **Operating  costs**                      |   | **1,536**                      | ** ** | **0**      | ** ** | **1,536**  | ** ** |
| **Net  underwriting income/(loss)**       |   | **(1,596**                     | **)**      | **0**      | ** ** | **(1,596** | **)**      |

 

We commenced the Direct business for the Accident line of business inQuarter 3 of 2000 and for the Credit line of business in Quarter 1 of 2001.

 

23

----

 

**Operating Ratios**

 

The operating ratios for the three months ended September 30, 2001 and2000, by line of business for the reinsurance segment and in total were asfollows:

 
| **Three months ended  September 30, 2001** |   | **Medical** |   | **Accident** |   | **Credit** |   | **Life** |   | **Other** |   | **Total** |   |
|--------------------------------------------|--------|-------------|--------|--------------|--------|------------|--------|----------|--------|-----------|--------|-----------|--------|
| Loss  ratio                                |   | 21.1        | %      | 182.3        | %      | 53.9       | %      | 65.8     | %      | 136.4     | %      | 61.3      | %      |
| Acquisition  expense ratio                 |   | 30.0        | %      | 20.0         | %      | 186.4      | %      | (1.0     | )%     | (95.7     | )%     | 27.3      | %      |
| Loss  and acquisition expense ratio        |   | 51.1        | %      | 202.3        | %      | 240.3      | %      | 64.8     | %      | 40.7      | %      | 88.6      | %      |
| Operating  expense ratio                   |   |        |   |         |   |       |   |     |   |      |   | 19.6      | %      |
| Combined  ratio                            |   |        |   |         |   |       |   |     |   |      |   | 108.2     | %      |

 

 
| **Three months ended  September 30, 2000** |   | **Medical** | ** ** | **Accident** | ** ** | **Credit** | ** ** | **Life** | ** ** | **Other** | ** ** | **Total** | ** ** |
|--------------------------------------------|--------|-------------|------------|--------------|------------|------------|------------|----------|------------|-----------|------------|-----------|------------|
| Loss  ratio                                |   | 99.8        | %          | 139.8        | %          | 166.7      | %          | 144.6    | %          | 214.6     | %          | 112.9     | %          |
| Acquisition  expense ratio                 |   | 44.2        | %          | 40.9         | %          | (239.2     | )%         | 41.5     | %          | 103.2     | %          | 45.7      | %          |
| Loss  and acquisition expense ratio        |   | 144.0       | %          | 180.7        | %          | (72.5      | )%         | 186.1    | %          | 317.8     | %          | 158.6     | %          |
| Operating  expense ratio                   |   |        |       |         |       |       |       |     |       |      |       | 45.8      | %          |
| Combined ratio                             |   |        |       |         |       |       |       |     |       |      |       | 204.4     | %          |

 

The positive development on the North American medical book in thethree months ended September 30, 2001 contributed significantly to the 21.1% lossratio reported above.  The nine months’result for this book is more reflective of the expected loss ratio on theoverall book.

 

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

 
| **Nine months ended  September 30, 2001** |   | **Medical** |   | **Accident** |   | **Credit** |   | **Life** |   | **Other** |   | **Total** |   |
|-------------------------------------------|--------|-------------|--------|--------------|--------|------------|--------|----------|--------|-----------|--------|-----------|--------|
| Loss  ratio                               |   | 59.6        | %      | 101.8        | %      | 151.1      | %      | 181.3    | %      | 78.4      | %      | 72.2      | %      |
| Acquisition  expense ratio                |   | 31.3        | %      | 23.2         | %      | (58.9      | )%     | (12.3    | )%     | (38.8     | )%     | 28.2      | %      |
| Loss  and acquisition expense ratio       |   | 90.9        | %      | 125.0        | %      | 92.2       | %      | 169.0    | %      | 39.6      | %      | 100.4     | %      |
| Operating  expense ratio                  |   |        |   |         |   |       |   |     |   |      |   | 15.4      | %      |
| Combined  ratio                           |   |        |   |         |   |       |   |     |   |      |   | 115.8     | %      |

 

 
| **Nine months ended  September 30, 2000** |   | **Medical** |   | **Accident** |   | **Credit** |   | **Life** |   | **Other** |   | **Total** |   |
|-------------------------------------------|--------|-------------|--------|--------------|--------|------------|--------|----------|--------|-----------|--------|-----------|--------|
| Loss  ratio                               |   | 82.3        | %      | 92.0         | %      | 34.4       | %      | 76.3     | %      | 100.3     | %      | 83.1      | %      |
| Acquisition  expense ratio                |   | 30.9        | %      | 30.9         | %      | 61.4       | %      | 34.2     | %      | 51.7      | %      | 32.3      | %      |
| Loss  and acquisition expense ratio       |   | 113.1       | %      | 122.9        | %      | 95.8       | %      | 110.5    | %      | 152.0     | %      | 115.4     | %      |
| Operating  expense ratio                  |   |        |   |         |   |       |   |     |   |      |   | 18.7      | %      |
| Combined  ratio                           |   |        |   |         |   |       |   |     |   |      |   | 134.1     | %      |

 

The operating expense ratios for the three months and nine months endedSeptember 30, 2001 and 2000, respectively, were calculated by expressing totaladministrative expenses net of corporate office expenses as a percentage of netpremiums earned.  Total operatingexpenses for the three months ended September 30, 2001 represent 53.7% of netpremiums written and 19.6% of net premiums earned, compared to 126.5% and45.8%, respectively, for the prior year. Total operating expenses for the nine months ended September 30, 2001represent 27.0% of net premiums written and 15.4% of net premiums earned,compared to 19.9% and 18.7%, respectively, for the prior year.  Savings currently being generated from therationalization of the company’s traditional reinsurance business are beinginvested in the expansion of its ESG-Direct division.  The Company has a stated objective to further rationalize itsexpense base to bring it more in line with industry norms for the premiumvolume now being written.

 

24

----

 

The operating ratios for the three and nine months ended September 30,2001 and 2000, by line of business, for the Direct Segment and in total, wereas follows:

 
| **Three months  ended September 30, 2001** |   | **Accident** |   | **Credit** |       | **Total** |   |
|--------------------------------------------|--------|--------------|--------|------------|------------|-----------|--------|
| **Loss  ratio**                            |   | **20.6**     | **%**  | **25.5**   | **%**      | **20.8**  | **%**  |
| **Acquisition  expense ratio**             |   | **58.8**     | **%**  | **(62.2**  | **)%**     | **53.3**  | **%**  |
| **Loss  and acquisition expense ratio**    |   | **79.4**     | **%**  | **(36.7**  | **)%**     | **74.1**  | **%**  |
| **Operating  expense ratio**               |   |         |   |       | ** ** | **35.4**  | **%**  |
| **Combined  ratio**                        |   |         |   |       | ** ** | **109.5** | **%**  |

 

 
| **Three months  ended September 30, 2000** |   | **Accident** |   | **Credit** |       | **Total** |   |
|--------------------------------------------|--------|--------------|--------|------------|------------|-----------|--------|
| **Loss  ratio**                            |   | **47.9**     | **%**  | **0**      | **%**      | **47.9**  | **%**  |
| **Acquisition  expense ratio**             |   | **61.6**     | **%**  | **0**      | **%**      | **61.6**  | **%**  |
| **Loss  and acquisition expense ratio**    |   | **109.5**    | **%**  | **0**      | **%**      | **109.5** | **%**  |
| **Operating  expense ratio**               |   |         |   |       | ** ** | **241.9** | **%**  |
| **Combined  ratio**                        |   |         |   |       | ** ** | **351.4** | **%**  |

 

 
| **Nine months  ended September 30, 2001** |   | **Accident** |   | **Credit** |       | **Total** |   |
|-------------------------------------------|--------|--------------|--------|------------|------------|-----------|--------|
| **Loss  ratio**                           |   | **19.9**     | **%**  | **27.9**   | **%**      | **20.4**  | **%**  |
| **Acquisition  expense ratio**            |   | **56.1**     | **%**  | **(19.7**  | **)%**     | **51.1**  | **%**  |
| **Loss  and acquisition expense ratio**   |   | **76.0**     | **%**  | **8.2**    | **%**      | **71.5**  | **%**  |
| **Operating  expense ratio**              |   |         |   |       | ** ** | **37.8**  | **%**  |
| **Combined  ratio**                       |   |         |   |       | ** ** | **109.3** | **%**  |

 

 
| **Nine months  ended September 30, 2000** |   | **Accident** |   | **Credit** |       | **Total** |   |
|-------------------------------------------|--------|--------------|--------|------------|------------|-----------|--------|
| **Loss  ratio**                           |   | **47.9**     | **%**  | **0**      | **%**      | **47.9**  | **%**  |
| **Acquisition  expense ratio**            |   | **61.6**     | **%**  | **0**      | **%**      | **61.6**  | **%**  |
| **Loss  and acquisition expense ratio**   |   | **109.5**    | **%**  | **0**      | **%**      | **109.5** | **%**  |
| **Operating  expense ratio**              |   |         |   |       | ** ** | **241.9** | **%**  |
| **Combined  ratio**                       |   |         |   |       | ** ** | **351.4** | **%**  |

 

We commenced the Direct business for the Accident line of business inQuarter 3 of 2000 and for the Credit line of business in Quarter 1 of 2001.

 

# **GeographicalDistribution**

 

The distribution of gross written premiums for the three months endedSeptember 30, 2001 and 2000 and for the year ended December 31, 2000, is asfollows:

 
|            |   | **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 continue writing North American business giventhe current favorable market conditions.

 

25

----

 

The distribution of gross written premiums for the nine months endedSeptember 30, 2001 and 2000 and for the year ended December 31, 2000, is asfollows:

 
|            |   | **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 gross premiums written by line of business for thethree months ended September 30, 2001 and 2000, and for the year ended December31, 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 gross premiums written by line of business for thenine months ended September 30, 2001 and 2000, and for the year ended December31, 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 the North American medical portfolio and theexpansion of credit and life programs, the Company expects to continue toreduce the proportion of medical business in the portfolio going forward.

 

**ExposureManagement**

 

The Company manages its underwriting risk exposures through geographicdistribution, an excess of loss reinsurance program, and co-reinsurance.  The Company’s excess liability insurancepolicy generally provides limits up to a maximum of $30 million per occurrence,with a minimum attachment point generally of $1 million.

 

**ManagementFee Revenue**

 

Management fee revenue for the quarter was negative $132 thousandrepresenting a downward adjustment of estimated commissions due to the Companyfrom overrider arrangements with retrocessionaires. The reduction of $356thousand from the corresponding prior period is due to the company retainingmore business for its own account.

 

For the nine months ended September 30, 2001, management fee revenuewas $288 thousand, a reduction of $892 thousand from the corresponding periodin 2000, due to the company retaining more business for its own account.

 

26

----

 

**OperatingExpenses**

 

Total administrative expenses for the three months ended September 30,2001 were $6.4 million, compared to $20.5 million for the three months endedSeptember 30, 2000 and $7.1 million for the three months ended June 30,2001.  The decrease in the quarter whencompared to the second quarter of this year was the result of adding $0.9million to the company’s legal reserve in the second quarter to cover estimatedcosts associated with resolving disputes in respect of certain reinsurancecontracts.  Otherwise, savings generatedfrom various actions being taken to right size the traditional reinsurancedivision are being invested in the ESG Direct segment as the Company effectsits strategy to expand those operations into Southern Europe.

 

### **Net Realized Investment Losses**

 

Following the work done late last year to fully address theunderwriting issues of the past, the Company initiated a full review and auditof all entities where it holds a minority shareholding interest.  Based on the initial results of thisexercise, it adjusted its carrying value of these investments by $4.2 millionin the second quarter.  This provisionis included in Net Realized Investment Losses. The current realizable value for these investments is reported at $14.8million at September 30, 2001. In October 2001, the Company concluded the saleof its shareholding in Atlanticare, Inc for $1.25 million. The loss ofapproximately $3.4 million was covered by the second quarter provision.

 

### **INVESTMENT RESULTS**

 

The investment results for the three months ended September 30, 2001and 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 and2000 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 |                           | $      | 8,082                            |   | 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 | ) |

 

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

 

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# **Liquidity andCapital Resources**

 

As of September 30, 2001, total investments and cash were $185.3million compared to $212.2 million at December 31, 2000.  Cash flow from operating activities for thenine months ended September 30, 2001 was a negative $23.9 million.  All fixed maturity securities in theCompany’s investment portfolio are classified as available for sale and arecarried 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 policy objective is to maximize long-terminvestment returns while maintaining a liquid, high-quality portfolio.  To this end, the investment policy requiresthat the portfolio have an average credit quality rating of AA, no more than 3%of the portfolio invested in the securities of a single issuer (other thanissues of sovereign governments with a rating of AA or better), and a targetduration of 2.75 years.  The Company’sinvestment portfolio reflects its investment policy and guidelines.

 

The Company expects that its financial and operational needs for theforeseeable future will be met by funds generated from operations and fromliquidating a small percentage of its investment portfolio.  The Company expects to remain highlycapitalized after any near-term investment portfolio liquidation.

 

Shareholders’ equity as of September 30, 2001 was $110.1 millioncompared to $113.6 million at December 31, 2000.  Book value per common share decreased to $9.34 as of September30, 2001 from $9.64 as of December 31, 2000.

 

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# **ITEM3.**QUANTITATIVEAND QUALITATIVE DISCLOSURE ABOUT MARKET RISK

 

INTEREST RATE RISK

The largest source of market risk for the Company is interest rate riskon its portfolio of fixed maturity investments, especially fixed rateinstruments. In addition, the credit worthiness of the issuer, relative valuesof alternative investments, liquidity and general market conditions may affectfair values of interest rate sensitive instruments.

 

The Company’s general strategy with respect to fixed maturitysecurities is to invest in high quality securities while maintainingdiversification and to avoid significant concentrations in individual issuers’industry segments or countries.

 

FOREIGN CURRENCY RISK

The Company’s functional currency is the U.S. dollar.  However, the Company writes reinsurancebusiness in numerous geographic regions and currencies, giving rise to the riskthat the ultimate settlement of receivables and payables on reinsurancetransactions will differ from the amounts currently recorded as assets andliabilities in the financial statements. The Company intends to hold investments in currencies in which it willcollect premiums and pay claims, thus creating a partial natural hedge againstexchange rate fluctuations.  The Companybelieves that its exposure to foreign currency risk is not material.

 

INFLATION

Inflation has not had a material impact on the Company’s operations forthe periods presented.  The Companywrites reinsurance business in Latin America, which has experienced periods ofhigh inflation.  However, it is possiblethat future inflationary conditions may impact subsequent accounting periods.

 

THE EURO

On January 1, 1999, a single currency, the “euro” was adopted as thenational currency of the 11 participating countries in the European MonetaryUnion, including Ireland and Germany, two of the countries in which the Companyoperates and in which the Company maintains a significant presence.   The Company’s Irish and German subsidiarieswill not be required to use the euro for accounting purposes prior to January1, 2002.  Currently, the Company expectsthat the impact of the conversion will have no material impact on the Company’soperations, accounting systems or financial reporting.

** **

RISK FACTORS

Certain statements and information included in this Form 10Q constitute“forward-looking” statements within the meaning of the Private SecuritiesLitigation Reform Act of 1995.  Thesestatements express our intentions, strategies or predictions for thefuture.  In addition, from time to time,the Company may make forward-looking statements, orally or in writing.  Forward-looking statements in the Form 10Qinclude, among others, statements regarding:

** **

**•**                  the impact of rate increases on premiums writtenover the 2001 underwriting year

**•**                  the ongoing adequacy of the Company’s loss reserves

**•**                  the Company’s continuing ability to increase premiumrates and strengthen terms of trade in the North and Latin American marketswithout major loss of business, and

**•**                  the anticipated growth in direct business in Asiaand 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 or severity thatexceeds the Company’s estimates

**•**                  the Company’s inability to maintain relationshipswith key clients

**•**                  the Company’s inability to anticipate the cyclicalchanges 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 loss reserves

**•**                  fluctuation of foreign currency exchange rates

**•**                  the passage of legislation, in any jurisdiction inwhich the Company does business, that subjects the Company to additionalregulation

**•**                  loss of key employees

**•**                  changes in the application of the current regulatoryenvironment

 

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

**•**                  negative changes in the rating

**•**                  recession in any key markets

**•**                  uncertainties and costs associated with litigationand claims asserted or threatened against the Company, including litigationthreatened by ESG shareholders

**•**                  naïve capacity in the reinsurance market

**•**                  significant changes in data protection laws in keymarkets; and

**•**                  inability to continue to develop and maintainsystems 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.**

 

30

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

 

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

 

In amendments to their respective Schedules 13D filed with theSecurities and Exchange Commission in September and October 2001, VicunaAdvisors LLC and SC Fundamental LLC (and their related entities) (“Investors”)stated that they were considering the possibility of initiating litigationagainst the Company in Bermuda.  Theinvestors stated that they were considering a proceeding alleging that theCompany’s affairs had been conducted in a manner that was oppressive tominority shareholders.  The Investorsindicated that such a proceeding might seek, among other remedies, an orderremoving ESG’s Chairman of the Board from service as a Company director andcancellation of certain equity-based benefits paid to the Chairman.  The Company believes that the potentialclaims described by Investors are without merit.  To date, the Company has received no notice indicating thatInvestors have initiated the threatened litigation in Bermuda.

 

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

 

Not applicable.

 

###### **ITEM 3. DEFAULTSUPON 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 authority granted by the shareholders inDecember 1997, the Board increased the number of directors from six to sevenand appointed Mr. Tony Hobson to fill the newly-created vacancy.  A copy of the press release issued by theCompany is attached as Exhibit 99.1.

 

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

 

(a)          Exhibits

 
| Exhibit 10.1 |   | Subscription Agreement and Bondholders Conversion  Agreement relating to an investment in 4Sigma (Bermuda) Ltd.*      |
|--------------|--------|-----------------------------------------------------------------------------------------------------------------------|
|         |   |                                                                                                                  |
| Exhibit 11.1 |   | Computation of Earnings Per Share                                                                                     |
|         |   |                                                                                                                  |
| Exhibit 99.1 |   | Press release dated November 8, 2001 announcing  appointment of new director*                                         |
|         |   |                                                                                                                  |
| Exhibit 99.2 |   | Certification of Chief  Executive Officer pursuant to section 906 of The Sarbanes-Oxley Act of 2002.                  |
|         |   |                                                                                                                  |
| Exhibit 99.3 |   | Certification of  Controller and Chief Accounting Officer pursuant to section 906 of The Sarbanes-Oxley  Act of 2002. |

 

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* Incorporated by reference to the Company’s Form 10-Q for the quarterended September 30, 2001, filed with the Securities and Exchange Commission onNovember 14, 2001.

 

(b)         Reports on Form 8-K

 

Not Applicable.

 

 

SIGNATURES

 

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

 

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

 

32

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**CERTIFICATIONS UNDER EXCHANGE ACTRULE 13A-14 AND 15D-14**

 

I, Alasdair P. Davis, hereby certify that:

 

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

 

2.               Based on myknowledge, this quarterly report does not contain any untrue statement of amaterial fact or omit to state a material fact necessary to make the statementsmade, in light of the circumstances under which such statements were made, notmisleading with respect to the period covered by this quarterly report; and

 

3.               Based on myknowledge, the financial statements, and other financial information includedin this quarterly report, fairly present in all material respects the financialcondition, results of operations and cash flows of the registrant as of, and for,the periods presented in this quarterly report.

 

 

Dated this 30th May, 2003

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

 

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

 

I, Aodh O’Murchu, hereby certify that:

 

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

 

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

 

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

 

 

Dated this 30th May, 2003

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

 

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