** **

**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

**WASHINGTON, D.C. 20549**

** **

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**FORM 10-Q**

 

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

 

**For the quarterly period ended June 30th, 2002**

** **

**Commission File Number 000-23481**

 

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**ESG RE LIMITED**

(Exactname of registrant as specified in its charter)

 

| **Bermuda**

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

 

**16 Church Street**

**Hamilton HM11, Bermuda**

(Addressof executive offices, zip code)

 

**(441) 295-2185**

(Registrant’stelephone number, including area code)

 

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Indicateby check mark whether the Registrant (1) has filed all reports required to befiled by Section 13 or 15(d) of the Securities Exchange Act of 1934 during thepreceding 12 months (or for such shorter period that the Registrant wasrequired to file such reports), and (2) has been subject to such filingrequirements for the past 90 days. Yes: ý  No o

 

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

 

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**TABLE OFCONTENTS**

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

 

 

Unlessthe context requires otherwise, references in this Form 10-Q to “ESG,” “we,”“us,” “our” and “ours” mean ESG Re Limited and the subsidiaries through whichit operates.

 

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# **PART I — FINANCIAL INFORMATION**

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

# **ESG RE LIMITED**

# **CondensedConsolidated Balance Sheets**

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

 
|                                                                                                                                                                                                             |   | **June 30,  2002** |    | **December  31,  2001** |       |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|--------------------|---------|-------------------------|------------|
|                                                                                                                                                                                                             |   | **(Unaudited)**    |    |                    |       |
| ASSETS                                                                                                                                                                                                           |   |               |    |                    |       |
| Investments available for sale, at fair  value (cost: $110,903 and $146,369)                                                                                                                                     |   | $                  | 112,000 |                    | $          | 144,844 |   |
| Cash and cash equivalents                                                                                                                                                                                        |   | 6,244              |    | 3,915                   |       |
| Other investments                                                                                                                                                                                                |   | 6,660              |    | 6,172                   |       |
| Total investments and cash                                                                                                                                                                                       |   | 124,904            |    | 154,931                 | ** ** |
| Accrued investment income                                                                                                                                                                                        |   | 1,591              |    | 2,028                   |       |
| Management fees receivable                                                                                                                                                                                       |   | 947                |    | 296                     |       |
| Reinsurance balances receivable                                                                                                                                                                                  |   | 187,791            |    | 190,526                 |       |
| Reinsurance recoverable on incurred losses                                                                                                                                                                       |   | 43,824             |    | 28,630                  |       |
| Funds retained by ceding companies                                                                                                                                                                               |   | 26,081             |    | 24,629                  |       |
| Prepaid reinsurance premiums                                                                                                                                                                                     |   | 1,397              |    | 1,523                   |       |
| Deferred acquisition costs                                                                                                                                                                                       |   | 39,845             |    | 40,308                  |       |
| Receivable for securities sold                                                                                                                                                                                   |   | 388                |    | 2,318                   |       |
| Deferred tax asset                                                                                                                                                                                               |   | 1,368              |    | 1,339                   |       |
| Other assets                                                                                                                                                                                                     |   | 7,912              |    | 7,277                   |       |
| Cash and cash equivalents held in a fiduciary capacity                                                                                                                                                           |   | 206                |    | 1,724                   |       |
|                                                                                                                                                                                                             |   |               |    |                    |       |
| TOTAL ASSETS                                                                                                                                                                                                     |   | $                  | 436,254 |                    | $          | 455,529 |   |
|                                                                                                                                                                                                             |   |               |    |                    |       |
| LIABILITIES                                                                                                                                                                                                      |   |               |    |                    |       |
| Unpaid losses and loss expenses                                                                                                                                                                                  |   | $                  | 165,857 |                    | $          | 146,383 |   |
| Unearned premiums                                                                                                                                                                                                |   | 93,161             |    | 104,395                 |       |
| Acquisition costs payable                                                                                                                                                                                        |   | 39,781             |    | 43,110                  |       |
| Reinsurance balances payable                                                                                                                                                                                     |   | 54,975             |    | 51,927                  |       |
| Accrued expenses, accounts payable, and other liabilities ($54 and  $85 due to related parties)                                                                                                                  |   | 10,437             |    | 12,920                  |       |
| Fiduciary liabilities                                                                                                                                                                                            |   | 206                |    | 1,724                   |       |
| Total liabilities                                                                                                                                                                                                |   | 364,417            |    | 360,459                 |       |
|                                                                                                                                                                                                             |   |               |    |                    |       |
| SHAREHOLDERS’ EQUITY                                                                                                                                                                                        |   |               |    |                    |       |
| Preference shares, 50,000,000 shares authorized; no shares issued and  outstanding as of June 30, 2002 and   December 31, 2001                                                                              |   | —             |    | —                  |       |
| Class B common shares, 100,000,000 shares authorized; no  shares issued and outstanding as of June  30, 2002 and  December 31, 2001                                                                    |   | —             |    | —                  |       |
| Common shares, par value $1 per share; 100,000,000 shares authorized;  11,884,173 shares issued and outstanding as of June 30, 2002 and 11,831,063  shares issued and outstanding as of   December 31, 2001 |   | 11,884             |    | 11,831                  |       |
| Additional paid-in capital                                                                                                                                                                                       |   | 208,271            |    | 208,221                 |       |
| Unearned compensation                                                                                                                                                                                            |   | (261               | )       | (333                    | )          |
| Accumulated other comprehensive income:                                                                                                                                                                          |   |               |    |                    |       |
| Foreign currency translation adjustments, net of tax (as restated)                                                                                                                                               |   | (1,460             | )       | (201                    | )          |
| Unrealized gains/(losses) on securities, net of tax                                                                                                                                                              |   | 1,097              |    | (1,525                  | )          |
| Accumulated other comprehensive income                                                                                                                                                                           |   | (363               | )       | (1,726                  | )          |
| Retained (deficit) (as restated)                                                                                                                                                                                 |   | (147,694           | )       | (122,923                | )          |
| Total shareholders’ equity                                                                                                                                                                                  |   | 71,837             |    | 95,070                  |       |
|                                                                                                                                                                                                             |   |               |    |                    |       |
| TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY                                                                                                                                                                  |   | $                  | 436,254 |                    | $          | 455,529 |   |

#####  

##### The accompanyingnotes are an integral part of the consolidated financial statements.

#####  

##### 3

##### 

#####  

# **ESG RE LIMITED**

# **Condensed Consolidated Statements ofOperations**

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

# **(Unaudited)**

# ** **

|                                           |   | **Three  Months Ended** |    | **Six Months  Ended** |   |
|------------------------------------------------|--------|-------------------------|---------|-----------------------|--------|
|                                           |   | **June 30,  2002**      |    | **June 30,  2001**    |   | **June 30,  2002** |   | **June 30,  2001** |   |
| REVENUES                                       |   |                    |    |                  |   |   |   |   |   |
| Net premiums written                           |   | $                       | 22,072  |                  | $      | 29,672 |   | $ | 47,979 |   | $ | 66,865 |   |
| Change in unearned premiums                    |   | 2,106                   |    | 10,810                |   | 11,971 |   | 13,926 |   |
|                                           |   |                    |    |                  |   |   |   |   |   |
| Net premiums earned                            |   | 24,178                  |    | 40,482                |   | 59,950 |   | 80,791 |   |
| Management fee revenue                         |   | 672                     |    | 190                   |   | 1,179 |   | 420 |   |
| Net investment income                          |   | 2,114                   |    | 3,326                 |   | 3,962 |   | 6,734 |   |
| Loss on equity investments                     |   | —                  |    | —                |   | — |   | (27 | ) |
| Net realized investment losses                 |   | (538                    | )       | (3,481                | )      | (1,615 | ) | (2,733 | ) |
|                                           |   | 26,426                  |    | 40,517                |   | 63,476 |   | 85,185 |   |
| EXPENSES                                       |   |                    |    |                  |   |   |   |   |   |
| Losses and loss expenses                       |   | 29,842                  |    | 26,238                |   | 52,999 |   | 56,222 |   |
| Acquisition costs                              |   | 5,300                   |    | 13,070                |   | 17,476 |   | 25,003 |   |
| Administrative expenses                        |   | 10,525                  |    | 7,124                 |   | 17,772 |   | 13,818 |   |
|                                           |   | 45,667                  |    | 46,432                |   | 88,247 |   | 95,043 |   |
| (LOSS) FROM CONTINUING OPERATIONS BEFORE TAXES |   | (19,241                 | )       | (5,915                | )      | (24,771 | ) | (9,858 | ) |
| Income tax expense                             |   | —                  |    | —                |   | — |   | — |   |
|                                           |   |                    |    |                  |   |   |   |   |   |
| NET (LOSS)                                     |   | $                       | (19,241 | )                     | $      | (5,915 | ) | $ | (24,771 | ) | $ | (9,858 | ) |
| PER SHARE DATA                                 |   |                    |    |                  |   |   |   |   |   |
| Basic net (loss) per share                     |   | $                       | (1.62   | )                     | $      | (0.50 | ) | $ | (2.09 | ) | $ | (0.84 | ) |
| Diluted net (loss)                             |   | (1.62                   | )       | (0.50                 | )      | (2.09 | ) | (0.84 | ) |
| WEIGHTED AVERAGE SHARES OUTSTANDING            |   |                    |    |                  |   |   |   |   |   |
| Basic                                          |   | 11,857,618              |    | 11,787,725            |   | 11,857,618 |   | 11,785,000 |   |
| Diluted                                        |   | 11,857,618              |    | 11,787,725            |   | 11,857,618 |   | 11,785,000 |   |
| Dividends declared per share                   |   | —                  |    | —                |   | — |   | — |   |

 

Theaccompanying notes are an integral part of the consolidated financialstatements.

 

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**ESG RE LIMITED**

# **CondensedConsolidated Statements of Cash Flows**

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

**(Unaudited)**

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

 

Theaccompanying notes are an integral part of the consolidated financialstatements.

 

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**ESG RE LIMITED**

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

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

**(Unaudited)**

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

 

Theaccompanying notes are an integral part of the consolidated financialstatements.

 

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**NOTES TO THE UNAUDITED CONDENSED CONSOLIDATEDFINANCIAL STATEMENTS**

 

**1. BASIS OF PRESENTATION**

 

                Theaccompanying unaudited condensed consolidated financial statements of ESG ReLimited have been prepared in accordance with generally accepted accountingprinciples in the United States of America (“U.S. GAAP”) except pursuant to therules and regulations of the Securities and Exchange Commission which do notinclude all of the information and footnotes required by generally accepted accountingprinciples for complete financial statements. In the opinion of management, these unaudited condensed consolidatedfinancial statements reflect all adjustments considered necessary for a fairpresentation of financial position, results of operations and comprehensiveincome as of and for the periods presented. The results of operations for any interim period are not necessarilyindicative of the results for a full year. These unaudited condensed consolidated financial statements should beread in conjunction with the audited consolidated financial statements, andrelated notes thereto, included in ESG’s 2001 Annual Report on Form 10-K andany amendments thereafter.

 

**2.  SUMMARY OFSIGNIFICANT ACCOUNTING POLICIES**

 

                Ourcondensed consolidated financial statements have been prepared in accordancewith U.S GAAP.  Our significantaccounting policies include the following:

 

(A)                              PREMIUMREVENUES

 

We estimate and recognize premiums written at the inception of thereinsurance contract based upon information received from intermediaries andceding companies.  We compare estimatedwritten premiums to actual premiums as reported by ceding companies on aperiodic basis.  The timeliness andfrequency of ceding company reports vary considerably by ceding company, lineof business and geographic area, therefore the actual ultimate premium writtenmay not be known with certainty for prolonged periods, following the expirationof the reinsurance contract. Differences between such estimates and actual amounts as reported byceding companies are recorded in the period in which the actual amounts aredetermined.

 

The reinsurance contracts which we enter are primarily of shortduration.  For retroactive contracts theamount by which the amount paid for reinsurance coverage exceeds the recordedliabilities is charged to earnings.  Ifthe liabilities exceed the amount paid the excess is deferred and amortizedinto income over the remaining settlement period.  Premiums written are recognized as earned over the coverage periodin proportion to the amount of protection provided.  Unearned premium reserves are established to cover the unexpiredcontract period.

 

(B)                                RESERVE FORLOSSES 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.  We have somespecific historical experience on a significant number of our programs on whichto base our estimate of losses incurred but not reported.  There is a reliance on the expectations ofceding companies about ultimate loss ratios at the inception of the contracts,supplemented by industry experience, which increases the uncertainty involvedin the loss estimation process.  Thereserves as established by management are reviewed quarterly and adjustmentsare made in the periods in which they become known.  Although management believes that an adequate provision has beenmade for the liability for losses and loss expenses based on all availableinformation, there can be no assurance that the ultimate losses will not differsignificantly from the amounts provided.

 

(C)                                INVESTMENTS

 

Fixed maturity 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 overwhich we exercise significant influence are accounted for under the equitymethod.  Otherwise these investments areaccounted for at cost.  Unrealizedinvestment gains and losses on investments available for sale, net ofapplicable deferred income tax, are reported as a separate component of“accumulated other comprehensive income”. Realized gains or losses on sale of investments are determined on thebasis of average cost.  The costs ofinvestments available for sale and other investments are adjusted forimpairments in value that are considered to be other than temporary.

 

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(D)          DEFERRED ACQUISITIONCOSTS

 

We defer costs relating tothe production of new business, primarily commissions and telemarketing costsin respect of our Direct business, and include them in the deferred acquisitioncost asset to the extent that they are recoverable from future related policyrevenues.  We amortize the deferredacquisition costs in respect of commissions over the periods in which therelated premiums are earned.  Weamortize the deferred acquisition costs in relation to telemarketing over theexpected life of the policies. We review our deferred costs to determine ifthey are recoverable from future income, including investment income, and, ifthey are not, we charge them as an expense.

 

(E)                                 REINSURANCEPREMIUMS CEDED

 

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

 

(F)                                 FOREIGNCURRENCY TRANSLATION

 

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

 

(G)                                USE OFESTIMATES

 

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 disclosure of contingent assets andliabilities at the date of the financial statements and the reported amounts ofrevenues and expenses during the reporting period as well as the disclosure ofsuch amounts.  Actual results,particularly for premiums written, premiums earned and loss reserves couldmaterially differ from those estimates and assumptions.

 

(H)                               FAIR VALUE OFFINANCIAL INSTRUMENTS

 

The carrying value of our investments approximates their fair value andis based on quoted market prices.  Dueto the uncertainty with respect to both the timing and amount of the proceedsto be realized from our other investments, it is not practicable to determinethe fair value of these other investments. The carrying values of other financial instruments, including cash andcash equivalents, accrued investment income, and other receivables and payablesapproximate their estimated fair value due to the short term nature of thebalances.

 

**3.  ACCOUNTINGPRONOUNCEMENTS**

 

In June 2001, the FASB issued Statement of Financial AccountingStandard (SFAS) No. 141, *BusinessCombinations*.  SFAS No. 141requires that all business combinations initiated after June 30, 2002 beaccounted for under the purchase method and addresses the initial recognitionand measurement of goodwill and other intangible assets acquired in a businesscombination.  The adoption of SFAS No.141 did not have an impact on our financial position, results of operations, orcash flows.

 

In June 2001, FASB issued Statement of Financial Accounting Standard(SFAS) No. 142, *Goodwill and OtherIntangible Assets*.  SFAS No.142 addresses the initial recognition and measurement of intangible assetsacquired outside of a business combination and the accounting for goodwill andother intangible assets subsequent to their acquisition.  SFAS No. 142 provides that intangible assetswith finite useful lives be amortized and that goodwill and intangible assetswith indefinite lives not be amortized, but rather be tested at least annuallyfor

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impairment.  The adoption ofSFAS No. 142 did not have an impact on our financial position, results ofoperations, or cash flows.

 

 

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

 

                OnJuly 30, 2002, the FASB issued SFAS No. 146, *Accountingfor costs associated with exit or disposal activities (SFAS 146).*This statement requires costs associated with exit or disposal activities to berecognized when the costs are incurred, rather than at a date of commitment toan exit or disposal plan. SFAS 146 is effective for disposal activities afterDecember 31, 2002.

 

 

**4.  COMMITMENTS ANDCONTINGENCIES**

 

*(A)**     **EMPLOYMENT CONTRACTS, LEASE ANDOTHER COMMITMENTS*

We have employment contracts with severalemployees for original terms of one to five years which have total minimumcommitments of $0.3 million at June 30, 2002 and total minimum commitments of$0.6 million at December 31, 2001, excluding any performance bonuses that are determinedby our Board of Directors.  Thecontracts include various non-compete clauses following termination ofemployment.

 

ESG and its subsidiaries have variousobligations under operating leases.  Thefuture minimum commitments at June 30, 2002 under operating leases, othercommitments (4Sigma) and employment contracts are as follows:

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

 

In November 2001, we committed to make anadditional capital injection in 4Sigma of $1.8 million, in increments of$100,000 as funds are needed by 4Sigma, in exchange for 1.8 million shares ofSeries E preferred stock.  As of June30, 2002 we had invested $1.1 million of this commitment.

 

*(B)  LETTERS OF CREDIT*

As of June 30, 2002, Secured Letters of Credit andTrust Accounts in the aggregate amount of $86.3 million have been issued infavor of ceding companies with $24.8 million related to Letters of Creditissued and $61.5 million related to Trust Accounts in force.  The Letters of Credit and Trust Accounts aresecured by a lien on our fixed maturities investment portfolio, equal to 120%of the amount of the outstanding Letters of Credit, and 102% of the amount ofthe outstanding Trust Accounts.  As ofDecember 31, 2001, Secured Letters of Credit and Trust Accounts in the amountof $91.0 million were issued in favor of ceding companies.

 

*(C)  PENSION OBLIGATIONS*

A subsidiary company is obligated to makecontributions to defined contribution pension plans for employees.  As of June 30, 2002 and December 31, 2001,there were outstanding liabilities for pension contributions of $332 thousandand $294 thousand respectively.

 

*(D)**COMMITMENTS**& CONTINGENCIES*

 

LITIGATION

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

 

                InFebruary 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 were 

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dismissed on jurisdictional grounds.  During 1998, ESG accepted a 25% quota sharereinsurance treaty with Odyssey Re (UK) retroactive to January 1,1998.  This treaty covers variousinsurance companies involved in the litigation Odyssey Re instituted in NewYork over 1997 and 1998 business.  Thistreaty terminated as of December 31, 1998, but we renewed our participation for1999 directly with one of those ceding companies.  In December 1999, we gave notice to rescind our contract withOdyssey Re (UK) for misrepresentation and failure to disclose materialfacts.  On November 29, 2000, we filedsuit in the High Court to seek a judicial confirmation of our rescission.  On February 5, 2001, Odyssey Re filed aresponse.  On March 21, 2001, we filed amotion for summary judgment.  The motionwas substantially based on an admission by Odyssey Re (UK) that a misrepresentationhad been made to us in connection with the quota share, and was supported byevidence from fact and expert witnesses. Our intention was to re-evaluate the motion if Odyssey Re (UK) servedany evidence.  Subsequently, Odyssey Re(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 other factualissues by way of defense, which had not been contained in their initialpleading.

 

                Werecognized that the court was unlikely to give a summary judgment on theevidence as it stood and accordingly withdrew our motion.  This withdrawal is in no way anacknowledgement that our prospects of success in our litigation with Odyssey Re(UK) are any less good than they were, but simply an acceptance that theissues, which have been raised, require a trial.  Indeed, we remain confident that we will prevail in thatlitigation, and intend to pursue the litigation aggressively.  We may reissue our motion for summaryjudgment at any time if justified by the state of the evidence and thepleadings.  This matter is now set forarbitration in early 2003.

 

                Wehave also given notice we intend to rescind the 1999 account.

 

                Atthis time, we are unable to determine the amount of our exposure and thepossible effect upon our business, financial condition or results of operationfrom these two contracts.

 

**5.  RELATED PARTIES**

 

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

 

**6. PRIORPERIOD ADJUSTMENT**

 

                Duringthe second quarter of 2002, ESG determined that foreign currency translation adjustments included inother comprehensive income had been overstated by $3,992 thousand due to anerror in the internal system that consolidates the financial results of ESGsubsidiaries with functional currencies other than U.S. dollars. To correctthis error, ESG plans to restate its financial statements for the fiscal yearDecember 31, 2001 in order to reflect a fourth quarter adjustment to foreigncurrency translation adjustments of $3,992 thousand. Once ESG’s financialstatements for fiscal 2001 are restated, ESG will also restate its financialstatements for the quarter ended March 31, 2002 in order to bring forward therestated balances in foreign currency translation adjustment and in retaineddeficit.

 

                ESGhas reported the affected balance sheet items as if the restatement had alreadyoccurred. The effect on shareholders’ equity in ESG’s unaudited condensedconsolidated balance sheets as of December 31, 2001 is as follows:

 
|                                   |   | **December 31, 2001** |   |
|----------------------------------------|--------|-----------------------|--------|
|                                   |   | **As  Restated**      |   | **As  Previously Reported** |   |
| FC translation adjustments, net of tax |   | $201 thousand         |   | $4,193 thousand |   |
| Retained deficit                       |   | $122,923 thousand     |   | $118,931 thousand |   |

 

**7.              EARNINGS PER SHARE**

 

The following is a reconciliation of the numerators and denominators ofthe basic and diluted earnings per share computations for income fromcontinuing operations:

 
| **U.S. dollars in thousands except share and per share data** |   | **Income  (Numerator)** |    | **Shares  (Denominator)** |       | **Per Share  Amount** |   |
|---------------------------------------------------------------|--------|-------------------------|---------|---------------------------|------------|-----------------------|--------|
|                                                          |   |                    |    |                      |       |                  |   |
| **Three Months Ended June 30, 2002**                          |   |                    |    |                      |       |                  |   |
| *Basic  loss per share*                                       |   |                    |    |                      |       |                  |   |
| Loss available to common shareholders                         |   | $                       | (19,241 | )                         | 11,857,618 |                  | $      | (1.62 | ) |
|                                                          |   |                    |    |                      |       |                  |   |
| Effect of Dilutive Securities:                                |   |                    |    |                      |       |                  |   |
| Class A Warrants                                              |   |                    |    | —                    |       |                  |   |
| Director and Employee Options                                 |   |                    |    | —                    |       |                  |   |
| Class B Warrants                                              |   |                    |    | —                    |       |                  |   |
|                                                          |   |                    |    |                      |       |                  |   |
| *Diluted  loss per share*                                     |   | $                       | (19,241 | )                         | 11,857,618 |                  | $      | (1.62 | ) |
| Loss available to common shareholders                         |   | $                       | (19,241 | )                         | 11,857,618 |                  | $      | (1.62 | ) |
|                                                          |   |                    |    |                      |       |                  |   |
| **Three Months Ended June 30, 2001**                          |   |                    |    |                      |       |                  |   |
| *Basic  loss per share*                                       |   |                    |    |                      |       |                  |   |
| Loss available to common shareholders                         |   | $                       | (5,915  | )                         | 11,787,725 |                  | $      | (0.50 | ) |
|                                                          |   |                    |    |                      |       |                  |   |
| Effect of Dilutive Securities:                                |   |                    |    |                      |       |                  |   |
| Class A Warrants                                              |   |                    |    | —                    |       |                  |   |
| Director and Employee Options                                 |   |                    |    | —                    |       |                  |   |
| Class B Warrants                                              |   |                    |    | —                    |       |                  |   |
|                                                          |   |                    |    |                      |       |                  |   |
| *Diluted  loss per share*                                     |   | $                       | (5,915  | )                         | 11,787,725 |                  | $      | (0.50 | ) |
| Loss available to common shareholders                         |   | $                       | (5,915  | )                         | 11,787,725 |                  | $      | (0.50 | ) |

 

Class A warrants to purchase 1,381,200 common shares at $20 pershare were outstanding as of June 30, 2001 and 2002. Options to purchaseup to 2,518,301 common shares, issued at exercise prices between $2.01 and$26.00, were outstanding as of June 30, 2001. Options to purchase up to2,368,322 common shares, issued at exercise prices between $2.01 and $26.00,were outstanding as of June 30, 2002. The incremental shares from assumedexercise of options and warrants have not been included in the abovecomputation as they have an anti-dilutive effect on the net loss per commonshare.

 

10

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** **

**INDEPENDENT ACCOUNTANTS’ REVIEW REPORT**

** **

To the Board of Directors and Shareholders ofESG Re Limited

 

We have reviewed the accompanying condensedconsolidated balance sheet of ESG Re Limited and subsidiaries as of June 30,2002, and the related condensed consolidated statements of operations andcomprehensive income for the three month and six month periods ended June 30,2002 and June 30, 2001 and condensed consolidated statements of cash flows forthe six month periods ended June 30, 2002 and June 30, 2001.  These financial statements are theresponsibility of the Company’s management.

 

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

 

Based upon our review, we are not aware ofany material modifications that should be made to such condensed consolidatedfinancial statements for them to be in conformity with accounting principlesgenerally accepted in the United States of America.

 

We have previously audited, in accordancewith auditing standards generally accepted in the United States of America, theconsolidated balance sheet of ESG Re Limited and subsidiaries as of December31, 2001, and the related consolidated statements of operations, comprehensiveincome, changes in shareholders’ equity and cash flows for the year then ended(not presented herein) and in our report dated March 29, 2002, and August 19,2002, we expressed an unqualified opinion on those consolidated financialstatements.  In our opinion, theinformation set forth in the accompanying condensed consolidated balance sheetas of December 31, 2001, is fairly stated, in all material respects, in relationto the consolidated balance sheet from which it has been derived, after givingeffect to the restatement discussed in the following paragraph.

 

The condensed consolidated balance sheets asof December 31, 2001 and June 30, 2002 reflect the restatement of foreigncurrency translation adjustments, included in accumulated other comprehensiveincome, and of retained deficit. The effect of this restatement is set out inNote 6 to the unaudited condensed consolidated financial statements.

 

Deloitte & Touche

Chartered Accountants

Dublin, Ireland

**August 19, 2002**

** **

11

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**ITEM2. MANAGEMENT DISCUSSION AND ANALYSIS OFFINANCIAL CONDITION AND RESULTS OF OPERATIONS.**

 

*The following discussion and analysis addresses thefinancial condition of ESG as of June 30, 2002 compared with December 31, 2001and our results of operation for the three months and six months ended June 30,2002, compared with the same period last year. You should read this discussion and analysis with our unauditedcondensed consolidated financial statements and related notes included in Item1 of this Form 10-Q,  and our auditedfinancial statements and related notes contained in our 2001 Annual Report onForm 10-K and any amendments thereafter. Our independent accountants have reviewed our unaudited condensedconsolidated financial statements for the three months and six months endedJune 30, 2001 and 2002 in accordance with standards established by the AmericanInstitute of Certified Public Accountants. The results of our operations for the period ended June 30, 2002 are notnecessarily indicative of our results for the full year.*

 

*Certain statements and information included in this Form10-Q constitute “forward-looking statements” within the meaning of the PrivateLitigation Reform Act of 1995.  Thesestatements express our intentions, strategies, or predictions for the future.  Actual results may differ from ESG’spredictions.   For more informationregarding forward-looking statements, please see “Cautionary StatementRegarding Forward-Looking Statements,” below.*

 

**Principal Activitiesand Sources of Revenue**

 

Ourprincipal activities include providing accident, health, credit, life, andspecial risk reinsurance and related product marketing and developmentservices.  We also manage premiums onbehalf of co-reinsurers on North American business written in 2001 and2002.  We report the results of ourbusiness activities under two segments: ESG Reinsurance and ESG Direct.  We evaluate the results of these segmentsbased on business writings out of each of our producing offices.  ESG Reinsurance provides traditionalreinsurance products, primarily in the U.S. medical insurance market, and ESGDirect provides direct marketing services, bancassurance services, andsupporting technologies, as well as targeted reinsurance products for creditlife and other special risks.

 

Wederive our revenues principally from:

 

•                    premiums forreinsurance products,

•                    fees for directmarketing services,

•                    managementfees, and

•                    investmentincome.

 

**Overview**

 

**Restatement of Prior Period Financial Statements**

 

We announced in a press release dated August15th, 2002 that we will make an adjustment of$4.0 million to our foreign currency translation account.  This adjustment will be recorded in thefourth quarter of 2001 and requires us to restate our financial statements forthe year ended December 31, 2001 and the quarter ended March 31, 2002.  The adjustment to this account is due toerrors generated by our internal consolidation system that caused the accountbalance to be overstated.  We have nowreplaced and upgraded our internal consolidation system. For a furtherdiscussion of this adjustment and restatement, see note 6 to our unauditedcondensed consolidated financial statements.

 

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.  Translation adjustments arising are includedin the equity section of the balance sheet.

 

The adjustment and restatement will have thefollowing impact on our consolidated statement of operations and consolidatedbalance sheet, for the year ended December 31, 2001:

 

•                    Net loss hasincreased from $16,440 thousand, to $20,432 thousand

•                    Other expenseshave increased from $9,116 thousand to $13,108 thousand

•                    Net loss pershare has increased from $1.39 to $1.73 per share

•                    Foreigncurrency translation adjustments, included in accumulated other comprehensiveincome, has changed from $4,193 thousand to $201 thousand

•                    Foreigncurrency translation adjustments in consolidated statements of comprehensiveincome has changed from $1,138 thousand to $5,130 thousand

 

12

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The adjustment and restatement will have thefollowing impact on our financial results for the quarter ended March 31, 2002:

 

•                    Foreigncurrency translation adjustments will change to $57 thousand from $(3, 935)thousand

•                    The balance inour retained deficit account will increase from $124,460 thousand to $128,452thousand

 

 

We expect to file restated financialstatements for the year ended December 31, 2001 as an amendment to our annualreport on Form 10-K/A, and for the quarter ended March 31, 2002 as an amendmentto our quarterly report on Form 10-Q/A.

 

**Results ofOperations**

 

**TotalRevenues**

 

Our total revenuesfor the three and six months ended June 30, 2002 were $26.4 million and $63.5million respectively, compared with total revenues of $40.5 million and $85.2million for the three and six months ended June 30, 2001 respectively.

 

Our net loss for the three and six months ended June 30, 2002 was $19.2million and $24.8 million respectively, compared to a net loss of $5.9 millionand $9.9 million for the three and six months ended June 30, 2001.  Net loss per share for the three and sixmonths ended June 30, 2002 was $1.62 and $2.09 respectively, compared with anet loss per share of $0.50 and $0.84 for the three and six months ended June30, 2001.  Key elements of the quarter’sresults were (i) an underwriting result of $(11.0) million, which wassignificantly below our expectations, due to losses suffered primarily on theNorwegian Occupational Injury business of $13.5 million, on contracts writtenin 1998, and (ii) unrealized foreign exchange losses of $2.4 million, primarilyrelating to adverse movement in the Norwegian Kroner (NOK)/US Dollar (USD)exchange rate, exacerbated by the NOK reserve strengthening in the quarter.

 

**NetUnderwriting Income**

 

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

 

For the three and six months ended June 30, 2001, we managed, on ourown behalf and on behalf of our co–reinsurers, total gross premiums of$33.4 million and $78.8 million, of which we placed $1.7 million and $3.8million with co-reinsurers and retroceded $2.0 million and $8.1 million,resulting in net premiums written of $29.7 million and $66.9 respectively.

 

 The 27.5% increase in grossmanaged premiums and 25.6% decrease in net premiums written during the threemonths ended June 30, 2002, as compared to the similar period in 2001, isprimarily a function of the 50% ACE co-reinsurance arrangement in-force onNorth American business.  This contractcame into affect in July 2001.

 

Of $22.1 million net premiums written in the three months ended June30, 2002, $15.7 million was attributable to the ESG Reinsurance segment, and$6.4 million was attributable to the ESG Direct segment.  For the three months ended June 30, 2002total premiums managed was $42.6 million, of which $36.2 million wasattributable to the ESG Reinsurance segment, and $6.4 million was attributableto the ESG Direct segment.

 

With respect to the ESG Reinsurance segment, $3.2 million of the $6.2million premium retroceded in the three months ended June 30, 2002 relates toone contract, on the North American business.

 

Gross and net premiums written and net premiums earned for the threeand six months ended June 30, 2002 and 2001 were as follows:

 

|                             |   | **Three  months ended June 30** |   |
|----------------------------------|--------|---------------------------------|--------|
| **ESG Reinsurance**              |   | **2002**                        |   | **2001** |   |
|                             |   | **U.S. dollars in millions**    |   |
| Total premiums managed           |   | 36.2                            |   | 34.4 |   |
| Amount placed with co-reinsurers |   | 14.3                            |   | 1.7 |   |
| Gross premiums written           |   | 21.9                            |   | 32.7 |   |
| Retroceded                       |   | 6.2                             |   | 2.0 |   |
| Net premiums written             |   | 15.7                            |   | 30.7 |   |
|                             |   |                            |   |   |   |
| Net premiums earned              |   | 18.5                            |   | 37.2 |   |

 

 

13

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|                             |   | **Six months ended June 30**  |   |
|----------------------------------|--------|-------------------------------|--------|
| **ESG Reinsurance**              |   | **2002**                      |   | **2001** |   |
|                             |   | **U.S.  dollars in millions** |   |
| Total premiums managed           |   | 51.9                          |   | 57.8 |   |
| Amount placed with co-reinsurers |   | 5.8                           |   | 3.8 |   |
| Gross premiums written           |   | 46.1                          |   | 54.0 |   |
| Retroceded                       |   | 10.2                          |   | 8.1 |   |
| Net premiums written             |   | 35.9                          |   | 45.9 |   |
|                             |   |                          |   |   |   |
| Net premiums earned              |   | 49.0                          |   | 71.5 |   |

 

|                             |   | **Three  months ended June 30** | ** ** |
|----------------------------------|--------|---------------------------------|------------|
| **ESG Direct**                   |   | **2002**                        |       | **2001** | ** ** |
|                             |   | **U.S.  dollars in millions**   | ** ** |
| Total premiums managed           |   | 6.4                             |       | (1.0 | ) |
| Amount placed with co-reinsurers |   | —                          |       | — |   |
| Gross premiums written           |   | 6.4                             |       | (1.0 | ) |
| Retroceded                       |   | —                          |       | — |   |
| Net premiums written             |   | 6.4                             |       | (1.0 | ) |
|                             |   |                            |       |   |   |
| Net premiums earned              |   | 5.7                             |       | 3.2 |   |

 

|                             |   | **Six months ended June 30** |   |
|----------------------------------|--------|------------------------------|--------|
| **ESG Direct**                   |   | **2002**                     |   | **2001** |   |
|                             |   | **U.S. dollars in millions** |   |
| Total premiums managed           |   | 12.0                         |   | 20.9 |   |
| Amount placed with co-reinsurers |   | —                       |   | — |   |
| Gross premiums written           |   | 12.0                         |   | 20.9 |   |
| Retroceded                       |   | —                       |   | — |   |
| Net premiums written             |   | 12.0                         |   | 20.9 |   |
|                             |   |                         |   |   |   |
| Net premiums earned              |   | 10.9                         |   | 9.2 |   |

 

 

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

 

**UnderwritingResults**

 

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

 
| **Three  months ended June 30, 2002** |   | **Medical**                    |   | **Accident** |   | **Credit** |   | **Life** |   | **Other** |   | **Total** |   |
|---------------------------------------|--------|--------------------------------|--------|--------------|--------|------------|--------|----------|--------|-----------|--------|-----------|--------|
|                                  |   | **U.S.  dollars in thousands** |   |         |
| Gross premiums written                |   | 20,483                         |   | 2,824        |   | —     |   | 17       |   | (1,425    | )      | 21,899    |   |
| Net premiums written                  |   | 14,406                         |   | 2,894        |   | (36        | )      | (73      | )      | (1,524    | )      | 15,667    |   |
| Net premiums earned                   |   | 17,743                         |   | 2,364        |   | 56         |   | (367     | )      | (1,319    | )      | 18,477    |   |
| Losses and loss expenses              |   | 14,751                         |   | 15,671       |   | 237        |   | 167      |   | (853      | )      | 29,973    |   |
| Acquisition costs                     |   | 2,218                          |   | 259          |   | 5          |   | (81      | )      | (463      | )      | 1,938     |   |
| Operating costs                       |   | 6,472                          |   | 2,103        |   | 38         |   | 81       |   | 139       |   | 8,833     |   |
| Net underwriting income/(loss)        |   | (5,698                         | )      | (15,669      | )      | (224       | )      | (534     | )      | (142      | )      | (22,267   | )      |

 

 

14

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| **Six months ended June 30, 2002** |   | **Medical**                   |   | **Accident** |   | **Credit** |   | **Life** |   | **Other** |   | **Total** |   |
|------------------------------------|--------|-------------------------------|--------|--------------|--------|------------|--------|----------|--------|-----------|--------|-----------|--------|
|                               |   | **U.S. dollars in thousands** |   |
| Gross premiums written             |   | 35,077                        |   | 12,099       |   | (230       | )      | 279      |   | (1,121    | )      | 46,104    |   |
| Net premiums written               |   | 25,678                        |   | 10,796       |   | (264       | )      | 217      |   | (505      | )      | 35,922    |   |
| Net premiums earned                |   | 42,497                        |   | 7,038        |   | 184        |   | (486     | )      | (187      | )      | 49,046    |   |
| Losses and loss expenses           |   | 34,121                        |   | 18,508       |   | 282        |   | 390      |   | (672      | )      | 52,629    |   |
| Acquisition costs                  |   | 9,067                         |   | 1,805        |   | 53         |   | 105      |   | (103      | )      | 10,927    |   |
| Operating costs                    |   | 10,211                        |   | 2,816        |   | 58         |   | 101      |   | 312       |   | 13,498    |   |
| Net underwriting income/(loss)     |   | (10,902                       | )      | (16,091      | )      | (209       | )      | (1,082   | )      | 276       |   | (28,008   | )      |

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

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

 

The operating ratios for the three and six months ended June 30, 2002and 2001, by line of business and in total, for the ESG Reinsurance segmentwere as follows:

 
| **Three  months ended June 30, 2002** |   | **Medical** |   | **Accident** |   | **Credit** |   | **Life** |   | **Other** |   | **Total** |   |
|---------------------------------------|--------|-------------|--------|--------------|--------|------------|--------|----------|--------|-----------|--------|-----------|--------|
|                                  |   |        |   |         |   |       |   |     |   |      |   |      |   |
| Loss ratio                            |   | 83.1        | %      | 662.9        | %      | 423.2      | %      | n/m      |   | 64.7      | %      | 162.2     | %      |
| Acquisition expense ratio             |   | 12.5        | %      | 11.0         | %      | 8.9        | %      | n/m      |   | 35.1      | %      | 10.5      | %      |
| Loss and acquisition expense ratio    |   | 95.6        | %      | 673.9        | %      | 432.1      | %      | n/m      |   | 99.8      | %      | 172.7     | %      |
| Operating expense ratio               |   |        |   |         |   |       |   |     |   |      |   | 47.8      | %      |
| Combined ratio                        |   |        |   |         |   |       |   |     |   |      |   | 220.5     | %      |

 
| **Six months ended June 30, 2002** |   | **Medical** |   | **Accident** |   | **Credit** |   | **Life** |   | **Other** |   | **Total** |   |
|------------------------------------|--------|-------------|--------|--------------|--------|------------|--------|----------|--------|-----------|--------|-----------|--------|
|                               |   |        |   |         |   |       |   |     |   |      |   |      |   |
| Loss ratio                         |   | 80.3        | %      | 263.0        | %      | 153.3      | %      | n/m      |   | 359.4     | %      | 107.3     | %      |
| Acquisition expense ratio          |   | 21.3        | %      | 25.6         | %      | 28.8       | %      | n/m      |   | 55.1      | %      | 22.3      | %      |
| Loss and acquisition expense ratio |   | 101.6       | %      | 288.6        | %      | 182.1      | %      | n/m      |   | 414.5     | %      | 129.6     | %      |
| Operating expense ratio            |   |        |   |         |   |       |   |     |   |      |   | 27.5      | %      |
| Combined ratio                     |   |        |   |         |   |       |   |     |   |      |   | 157.1     | %      |

 

 

15

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The reduction in the acquisition expense ratio in the second quarter,primarily relates to the impact of:

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

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

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

 

We calculated the operating expenses ratios for the three months endedJune 30, 2002 and June 30, 2001 by expressing total administrative expenses netof corporate office expense, as a percentage of net premiums earned.  For a more detailed discussion of operatingexpenses, refer to commentary on “Administrative Expenses” on page 22.

 

The key elements in the performance of the Reinsurance segment for thequarter were (i) losses of $12.0 million on Norwegian Occupational Injurybusiness, written in 1999 and 2000, and (ii) the increase in operatingexpenses.

 

Underwriting results for the three and six months ended June 20, 2002and 2001, by line of business and in total, for the ESG Direct segment were asfollows:

 
| **Three  months ended June 30, 2002** |   | **Accident**                   |   | **Credit** |   | **Total** |   |
|---------------------------------------|--------|--------------------------------|--------|------------|--------|-----------|--------|
|                                  |   | **U.S.  dollars in thousands** |   |
| Gross premiums written                |   | 5,225                          |   | 1,182      |   | 6,407     |   |
| Net premiums written                  |   | 5,225                          |   | 1,182      |   | 6,407     |   |
| Net premiums earned                   |   | 5,263                          |   | 438        |   | 5,701     |   |
| Losses and loss expenses              |   | (464                           | )      | 333        |   | (131      | )      |
| Acquisition costs                     |   | 3,427                          |   | (66        | )      | 3,361     |   |
| Operating costs                       |   | 763                            |   | 818        |   | 1,581     |   |
| Net underwriting income/(loss)        |   | 1,537                          |   | (647       | )      | 890       |   |
|                                       |        |                                |        |            |        |           |        |  |  |  |  |  |

 
| **Six months ended June 30, 2002** |   | **Accident**                  |   | **Credit** |   | **Total** |   |
|------------------------------------|--------|-------------------------------|--------|------------|--------|-----------|--------|
|                               |   | **U.S. dollars in thousands** |   |
| Gross premiums written             |   | 10,033                        |   | 2,026      |   | 12,059    |   |
| Net premiums written               |   | 10,033                        |   | 2,026      |   | 12,059    |   |
| Net premiums earned                |   | 10,093                        |   | 810        |   | 10,903    |   |
| Losses and loss expenses           |   | (9                            | )      | 379        |   | 370       |   |
| Acquisition costs                  |   | 6,413                         |   | 136        |   | 6,549     |   |
| Operating costs                    |   | 2,511                         |   | 1,552      |   | 4,063     |   |
| Net underwriting income/(loss)     |   | 1,178                         |   | (1,257     | )      | (79       | )      |

 

 

16

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Theloss and loss expenses in the quarter and in the six months ended June 30,2002, results from the Company’s actual claim experience being better thanoriginal estimates.  Estimates continueto be revised as the portfolio develops.

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

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

 

The operating ratios for the three and six months ended June 30, 2002and 2001, by line of business and in total, for the ESG Direct segment were asfollows:

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

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

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

 

 

17

----

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

 

Theloss ratio in the quarter and in the six months ended June 30, 2002, resultsfrom the Company’s actual claim experience being better than originalestimates.

 

**GeographicSpread**

 

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

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

 

‘Other’ relates to business originating in Eastern Europe (4.8%) andrisks originating in the Middle East (5.8%)

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

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

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

 

In respect of the ESG Reinsurance segment, large premium write-downs inthe three months ended June 30, 2002, on business in Western Europe, gives riseto the negative percentage.

With respect to the ESG Direct segment, the percentage in the threemonths ended June 30, 2001, was affected by write-downs of estimated premiumson the Bancassurance business in Western Europe.

 

 

18

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**Product Mix**

 

The distribution of gross premiums written by line of business for thethree and six months ended June 30, 2002 and 2001 is as follows:

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

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

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

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

 

In respect of the Direct segment, the significant change in thegeographic and product split relates to the increase in premium on theBancassurance credit line of business, in Western Europe.  The change in the basis of estimation usedto recognize the premium on Bancassurance business gives rise to adisproportionate split between Western Europe and Asia, on a geographic spreadbasis, and Credit and Personal Accident, on a product mix basis.  This change does not have a material impacton the reported result for the quarter.

 

Initial estimates of gross written premium on the Bancassurancebusiness were revised from $16.6 million in the first quarter 2001 to $6.7million annualized premium, by the fourth quarter 2001.  During the three months ended June 30, 2001,the reduction in gross written premium for this business amounted to $3.6million.

 

**ManagementFee Revenue**

 

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

 

**NetInvestment Income**

 

As at June 30, 2002, our cash and invested assets totaled $124.9million, compared with cash and invested assets of $154.9 million as atDecember 31, 2001.  This decrease in ourcash and invested assets is primarily due to negative operating cash flows and costsassociated with developing the ESG Direct segment.  Net investment income 

 

 

19

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decreasedby $1.2 million from $3.3 million in the three months ended June 30, 2001 to$2.1 million in the three months ended June 30, 2002.  The decrease is a function of the decline in our overallinvestment portfolio.

 

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

 

The following table reflects the investment results for the threemonths ended June 30, 2002:

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

 

The following table reflects our investment results for the threemonths ended June 30, 2001: 

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

 

The following table reflects the investment results for the six monthsended June 30, 2002:

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

 

The following table reflects the investment results for the six monthsended June 30, 2001:

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

 

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

 

 

 

20

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**Investment Portfolio**

* *

*Maturity and Durationof Portfolio*

 

Themaximum effective maturity for any single security in our investment portfoliois set at 30 years for U.S. government and U.S. government agency securitieswith full faith and credit guarantees and at 10 years for all other issues,measured from the date of settlement. The duration of the portfolio varies according to decisions taken bymanagement (with input from the investment advisor), on business changes andthe outlook for interest rate movements. The benchmark for such duration is approximately 3 years.

 

*Quality of Debt Securities in Portfolio*

 

Theminimum average credit quality of our investment portfolio is AA.

 

*Equity Securities and Real Estate*

 

Ourinvestment policy is to allow up to 10% of our investment assets to be held inequity securities.  Currently, there areno equity securities held in the Company’s portfolio.  We do not intend to invest in real estate other than for our ownuse.

 

*Diversification and Liquidity*

 

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

 

Asof June30, 2002, total investments and cash were $124.9 million, compared to $154.9million at December 31, 2001.  All fixedmaturity securities in our investment portfolio are classified as available forsale and are carried at fair value.

 

Thefixed maturity investment portfolios as of June 30, 2002 and December 31, 2001were as follows:

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

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

 

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

 

 

21

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**Related Party Transactions**

 

We are a party to severalInvestment Advisory Agreements with Head Asset Management LLC, an affiliate ofHead & Company, L.L.C.  Under theseagreements, Head Asset Management supervises and directs the investment of our asset portfolio in accordance withinvestment objectives and guidelines that we have established.  Mr. Head, the Chairman of our Board ofDirectors and our former CEO, controls Head Asset Management.  ESG is the principal client of Head AssetManagement.  Under our Investment AdvisoryAgreement with Head Asset Management, we pay fees quarterly in arrears equalto:

 

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

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

 

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

 

The Audit Committee of our Board of Directors periodically reviews ourinvestment policies and arrangements to ensure that they are consistent withour overall goals, strategies and objectives. Overall investment guidelines are approved by the Audit Committee toensure appropriate levels of portfolio liquidity, credit quality,diversification and volatility.  Inaddition, the Audit Committee is now reviewing our investment advisoryrelationship with Head Asset Management LLC, in the context of our otherbanking relationships, to determine whether changes should be made to any ofthese relationships.

 

 

**AdministrativeExpenses**

 

Total administrative expenses, which includes personnel costs,professional service fees, interest expense, foreign exchange gains/losses andother expenses, increased by $3.4 million, or 47.9%, from $7.1 million for thethree months ended June 30, 2001 to $10.5 million for the three months endedJune 30, 2002.  This increase resultsprimarily from realized and unrealized foreign exchange losses of $2.4million.  Realized and unrealizedforeign exchange losses relate to the revaluation of assets and liabilities,denominated in foreign currencies.

 

**Strategic Investments**

 

FromDecember 1998 through June 2000, we operated IPT GmbH and later VBB BermudaLimited, subsidiaries that provided disease management services inGermany.  These services, which includedphysician referrals, a medical information hotline, second opinion services, cardiacrehabilitation and access to disease management advisors, comprised the healthcare segment of our business.

 

Effectiveas of June 30, 2000, we transferred all the assets of our health care segmentto 4Sigma.  These assets had a bookvalue of $8 million at the time of transfer. In exchange for the transferred assets, we received 8,000,000 shares ofSeries A preferred stock, representing a 69% equity interest in 4 Sigma.  In addition, affiliates of John C Head III,the Chairman of our Board of Directors, invested $3.0 million in cash inexchange for a 28% equity interest in 4Sigma. Dr. Gerald Moeller, a director of ESG from July 1999 to August 2000 andthe president of our health care division from July 1999 to June 2000, alsoinvested $400,000 in cash in exchange for a minority equity interest in4Sigma.  The board members of 4Sigmainclude John C Head III, Dr. Gerald Moeller and Dr. Herbert Palmberger, whoalso serves as outside counsel to ESG in Germany.  During the fourth quarter 2001, ESG booked a write-down of thecost, for impairment, of $8.0 million against its investment in 4Sigma Ltd.

 

ESGdoes not have voting control of, nor does it exercise operational control over,this company.

 

In the second quarter of 2001, we participated in a rights offeringby 4Sigma for convertible preferred debt totaling $0.8 million, which inNovember 2001, converted into 0.8 million shares of Series E preferredstock.  Also, in November 2001, wecommitted to make an additional capital injection in 4Sigma of $1.8 million, inexchange for 1.8 million shares of Series E preferred stock.  At June 30, 2002 we had invested $1.1 

 

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million of thiscommitment.  Mr. Head has also committedto invest an additional $1.2 million in cash in 4Sigma on these same terms andconditions.  We evaluate our investmentin 4Sigma on a quarterly basis.

**Liquidity and Capital Resources**

 

Operatingactivities used net cash of $31.7 million for the six months ended June 30,2002 and $14.5 million for six months ended June 30, 2001.

 

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

 

Reinsurancefunds recoverable on incurred losses increased from $28.6 million as atDecember 31, 2001 to $43.8 million as at June 30, 2002.  This increase was due to additional lossesbeing incurred above our net retention levels that enable us to make recoveriesfrom our excess of loss reinsurers, plus quota share cessions to two of ourretrocessionaires.

 

Deferredacquisition costs decreased from $40.3 million at December 31, 2001 to $39.8million at June 30, 2002, as unearned premium declined over the period, afactor of reduced premium writings and earnings.

 

AtDecember 2001, reserves for unpaid losses and loss expenses were $146.4 millionand at June 30, 2002, reserves for unpaid losses and loss expenses were $165.9million.  This increase primarilyrelates to the deterioration on the Norwegian book of business, compounded bythe depreciation of the US Dollar against the Norwegian Kroner and other majorcurrencies in the quarter.

 

AtJune 30, 2002, unearned premium reserves were $93.2 million compared to $104.4million at December 31, 2001.  Unearnedpremium reserves are established to cover the unexpired period of contracts ofreinsurance that we have underwritten. At June 30, 2002, acquisition costs payable were $39.8 million comparedto $43.1 million at December 31, 2001. The balance represents acquisition expenses due on gross reinsurancepremiums that we have written.

 

Weexpect that our financial and operational needs for the foreseeable future willbe met by funds generated from operations and the proceeds from the sale ofinvestments.  As we rely on cash flowsfrom operations, a reduction in the demand for our services could reduce theavailability of funds.  Cash flows fromoperations in future years may differ substantially from net income.  As reinsurance contracts mature, we will berequired to pay out a higher percentage of incurred losses in loss payments,which may affect cash flows. Additionally, although we primarily invest in high quality assets, adiminution in the value of our portfolio could hurt our ability to continuefinancing our own operations.

 

Asof June 30, 2002, we had the following material commitments for operatingleases, other commitments (4sigma) and employment contracts:

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

 

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Asof December 31, 2001, we had the following material commitments for operatingleases and employment contracts:

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

 

 

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

 

Insupport of our business, we enter into Letters of Credit and Trust Accountarrangements with ceding companies.  AtDecember 31, 2001, we had in total $91.0 million of outstanding Letters ofCredit and Trust Accounts (representing 62.8% of investments available for sale) ofwhich $27.0 million related to Letters of Credit issued and $64.0 million wasin Trust Accounts.  As of June 30, 2002,we had in total $86.3 million of outstanding Letters of Credit and TrustAccounts (representing 77.0% of investments available for sale) of which $24.8million related to Letters of Credit issued and $61.5 million was in TrustAccounts.  These arrangements aresecured against our fixed maturity investment portfolio.  Management have assessed our cash flowrequirements, taking into account these arrangements.

 

**Exposure Management**

 

Wemanage our underwriting risk exposures primarily through an excess of lossreinsurance program.  For 2002, thisprogram provides reinsurance protection up to a known accumulation of$5,000,000 for Personal Accident exposure and up to $5,000,000 per person forMedical Expense exposure.

 

**Cautionary Statement Regarding Forward-Looking Statements**

 

Certain statements and information included in this Form10-Q constitute “forward-looking statements” within the meaning of the PrivateSecurities Litigation Reform Act of 1995. These statements express our intentions, strategies, or predictions forthe future.  In addition, from time totime, we may make forward-looking statements, orally or in writing.  Forward-looking statements in this Form 10-Qinclude, among others, statements regarding:

 

•                                            the ongoingadequacy of our loss reserves;

 

•                                            our continuingability to increase premium rates and strengthen terms of trade in the Northand Latin American markets without major loss of business;

 

•                                            the anticipatedgrowth in Direct business in Asia and Europe;

 

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

 

•                                            the outcome ofour ongoing litigation.

 

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

 

•                                            **Economic Recession. **An economicslowdown worldwide, or in any of our key markets, could reduce demand for ourproducts and services.  If the generaleconomic downturn continues or worsens, the market for many insurance productsmay also diminish.  We obtain asignificant 

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portion of our business fromselling reinsurance, and if the primary insurance market declines, there couldbe an equal effect on the reinsurance market.

 

•                                            **Insurance Industry Volatility. **The September11, 2001, terrorist attacks in the United States (and their aftermath) mayincrease volatility in insurance and reinsurance markets.** **Thatvolatility could adversely affect market participants, like ESG, whose directexposure to the terrorist attacks is limited.

 

•                                            **Inadequate Loss Reserves. **We maintainreserves to cover the estimated liability for reported and unreportedclaims.  Inadequate reserves could becaused by our failure to value accurately the risks of certain business,inaccurate information from ceding clients, or extraordinary events.  If our reserves prove insufficient to coverthe actual losses we incur, we would have to increase our reserves and incur acharge to our earnings.

 

•                                            **Medical Cost Increases. **Our medicalreinsurance premiums reflect certain assumptions regarding increases in thecost of medical care.  Medical costs(particularly prescription costs) are difficult to gauge, especially in theUnited States.  Changes or advances inmedical technology could increase our costs. Legislative or judicial developments that are adverse to medicalproviders also might increase costs.  Anincrease in costs that eclipses the assumptions reflected in our premiums couldresult in losses for us.

 

•                                            **Credit Risks. **From time totime, we may cede a portion of our reinsurance risk to other insurers orreinsurers.  If these companies do notfulfill their obligations to us, we may be exposed to a greater risk than wehad anticipated.

 

•                                            **Loss of Key Clients**.  Ourcontracts with our customers are generally short term.  We can make no assurance that any customerwill retain our services after its contract has ended.  We have several customers that generatesubstantial revenues, including the Companion Insurance Company account, whichaccounted for 15% of our revenues in the three months ended June 30, 2002 and17% of our revenues in the year ended December 31, 2001.  The loss of this customer could adverselyaffect our revenues.  If one of ourcustomers is acquired or merges with another company, our contract mayterminate early.

 

•                                            **Direct Marketing Risks.**  Our direct marketing business must gauge the credit, life, andaccident risks faced by customers in multiple geographic regions.  If we fail to accurately price the risks we assume,including the estimated life of the policies we reinsure, we may have to payout more than we have taken in as premiums.

 

•                                            **Competition. **Our reinsurancebusiness competes with other international reinsurers, most notably AmericanRe, Everest Re, Latin America Re, Swiss Re, Hanover Re, and Lloyd’s.  ESG Direct competes primarily with GECapital, AIG, and ACE.  Thesecompetitors have greater financial resources than we do, have been operatinglonger, and have established long-term relationships with others in the industry,all of which may be significant competitive advantages.

 

•                                            **Competitive Pricing Practices. **Competitors mayseek to capture market share by selling services and products at prices thatfall below levels that ESG management expects to be profitable.  If a competitor employs this strategy in anyof the markets in which we operate, we could lose many customers and be forcedto exit the market.

 

•                                            **Credit Rating Downgrade. **In ourreinsurance and direct marketing businesses, the rating assigned to our creditby agencies such as Standard and Poor’s and Fitch can affect our businessopportunities.  Any downgrade in ourrating could make it more difficult for us to attract and retain customers.

 

•                                            **Loss of Key Employees.**  As a small company, our success is dependent on our ability toretain our existing executive officers and attract additional qualifiedpersonnel in the future.  The loss ofthe services of an executive officer would affect adversely our ability toconduct business.

 

•                                            **Interest Rate Fluctuations. **We invest themajority of the money we receive as premiums in fixed rate instruments such asgovernment and corporate bonds. Typically, the fair market value of a fixed rate instrument variesinversely with the fluctuations in interest rates.  While our investments 

 

 

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can fall in value, our liabilities tend toremain fixed.  Consequently, a declinein the value of our investment portfolio could reduce our net income or lead toa loss.

 

•                                            **Investment Risks. **We havecontracted with Head Asset Management L.L.C. to supervise and direct theinvestment of our asset portfolio.  Poorperformance on the part of this investment manager could have an adverse impacton our financial performance.

 

•                                            **Foreign Currency Exchange Risks. **Because weconduct business in numerous geographic regions and currencies around theworld, fluctuations in currency exchange rates can materially affect ourearnings.

 

•                                            **Inflation. **We providereinsurance in certain geographical markets, such as Latin America, that haveexperienced sustained periods of high inflation.  In an inflationary cycle, there is a risk that the amounts wewill owe on our coverage obligations will exceed the amounts we received aspremiums.

 

•                                            **Legislative and Regulatory Changes. **Legislators and regulators could introduce new laws and regulationsthat affect the manner in which we conduct our business.  Our direct marketing business, for example,could be affected by new laws or regulations limiting the use of personal datafor direct marketing efforts.  Newoccupational safety legislation in the countries where we reinsure these riskscould increase our costs.  Additionalunexpected regulatory burdens could increase our compliance costs and lower ourprofit margins.

 

•                                            **Tax Exposure. **For purposes ofmany countries, including the United States, ESG is not engaged in the conductof any trade or business in such country, and, as a result, is not subject tocorporate income tax therein.  If,however, any country, including the U.S. were to contend successfully that ouroperations subject us to corporate income tax, we would be liable for tax onnet income received by ESG to the extent it had been received at a permanentplace of business.  If corporate incometaxes did apply to income received by ESG, they would reduce our net income, ifany.

 

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

 

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

 

                We undertake no obligation toupdate any forward-looking statement, whether as a result of new information,future events or otherwise.  Allsubsequent, written and oral, forward-looking statements attributable to ESG orpersons acting on our behalf are qualified by the cautionary statements in thisForm 10-Q.

 

 

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

 

**Market Risk**

 

Weare subject to market risk arising from the potential change in value of ourvarious financial instruments. TheCompany’s current investment strategy seeks to maximize income through a highquality, diversified and fixed maturity portfolio, while maintaining anadequate level of liquidity.  TheCompany’s mix of investments is adjusted continuously, consistent with itscurrent and projected operating results, working capital requirements andmarket conditions.  The fixed maturities in the investment portfolio arecomprised of non-trading available for sale securities.

 

The investment portfolio is comprised of fixedmaturity securities that are subject to interest rate risk and foreign currencyrisk.

 

**Interest Rate Risk**

 

Interest rate risk is the potential change in value ofthe fixed maturity portfolio due to change in market interest rates.  Interestrate risk on our portfolio of fixed maturity investments, especially fixed rateinstruments, is a significant source of our market risk.  In addition, the credit worthiness of theissuer, relative values of alternative investments, liquidity and generalmarket conditions may affect fair values of interest rate sensitiveinstruments.

 

Ourgeneral strategy with respect to fixed maturity securities is to invest in highquality securities while maintaining diversification to avoid significantconcentrations in individual issuers’ industry segments or countries.

 

Therehas been no significant change in interest rate risk since December 31, 2001.

 

**Foreign Currency Risk**

 

Foreign currency risk is the potential changein value, income, and cash flow arising from adverse changes in foreigncurrency exchange rates.  Our functional currency isthe U.S. Dollar.  However, we writereinsurance business in numerous geographic regions and currencies, giving riseto the risk that the ultimate settlement of receivables and payables onreinsurance transactions will differ from the amounts currently recorded asassets and liabilities in the financial statements.  Generally, the Company prefers to maintain the capital of its foreignoperations in U.S. dollar assets, although this varies by regulatoryjurisdiction in accordance with market needs. In certain cases, the Company’s foreign operations maintain capital inthe currency of the country of its geographic location, consistent with localregulatory guidelines.

 

Each foreign operation may conduct businessin its local currency as well as the currency of other countries in which itoperates.  The primary foreign currencyexposures are the Euro, Norwegian Kroner, Australian Dollar, Hong Kong Dollarand Great Britain Pound.

 

Wegenerally do not hedge the foreign currency exposure of the subsidiariestransacting business in currencies other than their functional currency(transaction exposure).  We arecurrently putting in place a foreign exchange hedging strategy and policy,which will consider the use of derivative instruments, if appropriate.

 

**Inflation**

 

Inflationhas not had a material impact on our operations for any of the periodspresented.  We write reinsurance inLatin America, which has experienced periods of high inflation.  However, it is possible that futureinflationary conditions may impact subsequent accounting periods.

 

 

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**PART II**

 

**Item 1.****          ****LegalProceedings**

Seethe description of our pending lawsuit involving Odyssey Re in our AnnualReport on Form 10-K for the fiscal year ended December 31, 2001 and see note 4to our unaudited condensed consolidated financial statements in this report.

 

**Item 2.****          ****Changes inSecurities**

Notapplicable.

 

**Item 3.****          ****DefaultsUpon Senior Securities**

Notapplicable.

 

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

TheAnnual General Meeting of Shareholders was held pursuant to notice on May 6,2002.  There were present at themeeting, in person or represented by proxy, the holders of 11,375,533 shares ofthe outstanding common stock of ESG, which represented approximately 96.1% ofthe outstanding shares at March 15, 2002, the record date.  The matters voted on at the meeting and thevotes cast were as follows:

 

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

AnthonyJ. Hobson was elected as a Class 1 director to serve until the 2004 AnnualGeneral Meeting of Shareholders and Alasdair P. Davis and David C. Winn wereelected as Class 2 directors to serve until the 2005 Annual General Meeting ofShareholders.

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

 

John C. Head III, IsaoKuzuhara and David L. Newkirk continued as directors.

 

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

Theselection of Deloitte & Touche as independent auditors for the fiscal yearending December 31, 2002 was ratified with 6,394,192 shares voting in favor ofsuch proposal, 4,955,241 shares voting against and 26,100 shares abstainingfrom voting.

 

**Proposal 3.****                                  ****Approval ESG’s 2002 Stock IncentivePlan**

Thisproposal was not approved, with 3,915,095 shares voting in favor, 5,747,634shares voting against, 5,004 shares abstaining, and 1,707,800 broker non-votes.

 

**Proposal 4.****                                  ****Resolution of Shareholdersregarding adoption of a performance-based senior executive compensation scheme.**

Thisproposal was approved, with 5,191,423 shares voting in favor, 4,462,569 sharesvoting against, 13,741 shares abstaining, and 1,707,800 broker non-votes.

 

Asummary of the results of this Annual General Meeting was contained in a pressrelease issued by ESG on May 10, 2002.

 

**Item 5.****          ****OtherInformation**

Notapplicable.

 

**Item 6.****          ****Exhibitsand Reports on Form 8-K**

 

(a)**         **Exhibit Index

                        Exhibit 11.1**                                   **Computation ofEarnings Per Share

 

                        Exhibit 15.1**                                   **AwarenessLetter of Deloitte & Touche

 

                        Exhibit 99.1**                                   **CertificationPursuant to 18 U.S.C.  Section 1350, asAdopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

 

                        Exhibit 99.2**                                   **CertificationPursuant to 18 U.S.C.  Section 1350, asAdopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

 

                        Exhibit 99.3**                                   **Code of ConductPolicy

 

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

 

 

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**SIGNATURES**

 

                Pursuantto the requirements of the Securities Exchange Act of 1934, the registrant hasduly caused this report to be signed on its behalf by the undersigned thereuntoduly authorized.

 
|                        | ESG RE LIMITED            |
|-----------------------------|---------------------------|
|                        |                      |
| Date:  August 19, 2002 | /s/ Alasdair P. Davis     |
|                        | Alasdair P. Davis         |
|                        | Chief Executive Officer   |
|                        |                      |
| Date:  August 19, 2002 | /s/ Joe A. Quinn          |
|                        | Joe A. Quinn              |
|                        | Senior  Financial Officer |

 

 

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