**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

**WASHINGTON, D.C. 20549**

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**FORM 10-Q**

 

**ý****        QUARTERLY REPORTPURSUANT TO SECTION 13 OR 15(d) OF             THESECURITIES EXCHANGE ACT OF 1934**

** **

**OR**

 

**o****        TRANSITIONREPORT PURSUANT TO SECTION 13 OR 15(d) OF             THESECURITIES EXCHANGE ACT OF 1934**

 

 

**For the quarterly period ended March 31, 2002**

**Commission File Number 000-23481**

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**ESG RE LIMITED**

(Exactname of registrant as specified in its charter)

 

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

 

**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 May 9, 2002 was 11,831,063.

 

 

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** **

**TABLE OF CONTENTS**

 
| 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.

#  

# 2

# 

# **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)**

 
|                                                                                                                                                                                                        |   | **March 31,**   |    | **December  31,** |   |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|-----------------|---------|-------------------|--------|
|                                                                                                                                                                                                        |   | **2002**        |    | **2001**          |   |
| ASSETS                                                                                                                                                                                                      |   | **(Unaudited)** |    |              |   |
| Investments  available for sale, at fair value (cost: $133,665 and $146,369)                                                                                                                                |   | $               | 132,126 |              | $      | 144,844 |   |
| Cash and cash  equivalents                                                                                                                                                                                  |   | 4,641           |    | 3,915             |   |
| Other  investments                                                                                                                                                                                          |   | 6,689           |    | 6,172             |   |
| Total  investments and cash                                                                                                                                                                                 |   | 143,456         |    | 154,931           |   |
| Accrued  investment income                                                                                                                                                                                  |   | 1,940           |    | 2,028             |   |
| Management fees  receivable                                                                                                                                                                                 |   | 470             |    | 296               |   |
| Reinsurance  balances receivable                                                                                                                                                                            |   | 188,646         |    | 190,526           |   |
| Reinsurance  recoverable on incurred losses                                                                                                                                                                 |   | 33,045          |    | 28,630            |   |
| Funds retained  by ceding companies                                                                                                                                                                         |   | 22,131          |    | 24,629            |   |
| Prepaid  reinsurance premiums                                                                                                                                                                               |   | 1,400           |    | 1,523             |   |
| Deferred  acquisition costs                                                                                                                                                                                 |   | 38,074          |    | 40,308            |   |
| Receivable for  securities sold                                                                                                                                                                             |   | —          |    | 2,318             |   |
| Deferred tax  asset                                                                                                                                                                                         |   | 1,349           |    | 1,339             |   |
| Other assets                                                                                                                                                                                                |   | 8,003           |    | 7,277             |   |
| Cash and cash  equivalents held in a fiduciary capacity                                                                                                                                                     |   | 838             |    | 1,724             |   |
|                                                                                                                                                                                                        |   |            |    |              |   |
| TOTAL ASSETS                                                                                                                                                                                                |   | $               | 439,352 |              | $      | 455,529 |   |
|                                                                                                                                                                                                        |   |            |    |              |   |
| LIABILITIES                                                                                                                                                                                                 |   |            |    |              |   |
| Unpaid losses  and loss expenses                                                                                                                                                                            |   | $               | 143,613 |              | $      | 146,383 |   |
| Unearned  premiums                                                                                                                                                                                          |   | 94,286          |    | 104,395           |   |
| Acquisition  costs payable                                                                                                                                                                                  |   | 44,023          |    | 43,110            |   |
| Reinsurance  balances payable                                                                                                                                                                               |   | 55,377          |    | 51,927            |   |
| Payable for  securities purchased                                                                                                                                                                           |   | 70              |    | —            |   |
| Accrued  expenses, accounts payable, and other liabilities ($85 and $85 due to related  parties)                                                                                                            |   | 11,298          |    | 12,920            |   |
| Fiduciary  liabilities                                                                                                                                                                                      |   | 838             |    | 1,724             |   |
| Total liabilities                                                                                                                                                                                           |   | 349,505         |    | 360,459           |   |
|                                                                                                                                                                                                        |   |            |    |              |   |
| SHAREHOLDERS’  EQUITY                                                                                                                                                                                  |   |            |    |              |   |
| Preference  shares, 50,000,000 shares authorized; no shares issued and outstanding as of  March 31, 2002 and December 31, 2001                                                                              |   | —          |    | —            |   |
| Class B common  shares, 100,000,000 shares authorized; no   shares issued and outstanding as of March 31, 2002 and December 31,  2001                                                                  |   | —          |    | —            |   |
| Common shares,  par value $1 per share; 100,000,000 shares authorized; 11,831,063 shares  issued and outstanding as of March 31, 2002 and 11,831,063 shares issued and  outstanding as of December 31, 2001 |   | 11,831          |    | 11,831            |   |
| Additional  paid-in capital                                                                                                                                                                                 |   | 208,221         |    | 208,221           |   |
| Unearned  compensation                                                                                                                                                                                      |   | (271            | )       | (333              | )      |
| Accumulated  other comprehensive income:                                                                                                                                                                    |   |            |    |              |   |
| Foreign currency  translation adjustments, net of tax                                                                                                                                                       |   | (3,935          | )       | (4,193            | )      |
| Unrealized gains  on securities, net of tax                                                                                                                                                                 |   |  (1,539    | )       |  (1,525      | )      |
| Accumulated  other comprehensive income                                                                                                                                                                     |   | (5,474          | )       | (5,718            | )      |
| Retained  (deficit)                                                                                                                                                                                         |   | (124,460        | )       | (118,931          | )      |
| Total  shareholders’ equity                                                                                                                                                                            |   | 89,847          |    | 95,070            |   |
|                                                                                                                                                                                                        |   |            |    |              |   |
| TOTAL  LIABILITIES AND SHAREHOLDERS’ EQUITY                                                                                                                                                            |   | $               | 439,352 |              | $      | 455,529 |   |

#####  

##### The accompanying notes are an integral part of theconsolidated financial statements.

#####  

##### 3

##### 

#####  

# **ESG RE LIMITED**

# **Condensed Consolidated Statements ofOperations**

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

# **(Unaudited)**

# ** **

|                                    |   | **Three  Months Ended** |   |
|-----------------------------------------|--------|-------------------------|--------|
|                                    |   | **March 31,  2002**     |   | **March 31,  2001** |   |
| REVENUES                                |   |                    |   |   |   |
| Net premiums  written                   |   | $                       | 25,907 |   | $ | 37,193 |   |
| Change in  unearned premiums            |   | 9,864                   |   | 3,116 |   |
|                                    |   |                    |   |   |   |
| Net premiums  earned                    |   | 35,771                  |   | 40,309 |   |
| Management fee  revenue                 |   | 507                     |   | 230 |   |
| Net investment  income                  |   | 1,848                   |   | 3,408 |   |
| Loss on equity  investments             |   | —                  |   | (27 | ) |
| Net realized  investment gains (losses) |   | (1,077                  | )      | 748 |   |
|                                    |   | 37,049                  |   | 44,668 |   |
| EXPENSES                                |   |                    |   |   |   |
| Losses and loss  expenses               |   | 23,157                  |   | 29,985 |   |
| Acquisition  costs                      |   | 12,176                  |   | 11,934 |   |
| Administrative  expenses                |   | 7,245                   |   | 6,692 |   |
|                                    |   | 42,578                  |   | 48,611 |   |
| NET (LOSS)  INCOME BEFORE TAXES         |   | (5,529                  | )      | (3,943 | ) |
| Income tax  expense                     |   | —                  |   | — |   |
| NET (LOSS)  INCOME AFTER TAXES          |   | $                       | (5,529 | ) | $ | (3,943 | ) |
|                                    |   |                    |   |   |   |
| PER SHARE DATA                          |   |                    |   |   |   |
| Basic net loss  per share               |   | $                       | (0.47  | ) | $ | (0.33 | ) |
|                                    |   |                    |   |   |   |
| Diluted net loss  per share             |   | $                       | (0.47  | ) | $ | (0.33 | ) |
| Weighted average  shares outstanding    |   |                    |   |   |   |
| Basic                                   |   | 11,831,063              |   | 11,782,500 |   |
| Diluted                                 |   | 11,831,063              |   | 11,782,500 |   |
|                                    |   |                    |   |   |   |
| Dividends  declared per share           |   | $                       | — |   | $ | — |   |

 

Theaccompanying notes are an integral part of the consolidated financialstatements.

 

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# **ESGRE LIMITED**

# **CondensedConsolidated Statements of Cash Flows**

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

**(Unaudited)**

 

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

 

Theaccompanying notes are an integral part of the consolidated financialstatements.

 

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#### **ESGRE LIMITED**

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

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

**(Unaudited)**

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

 

Theaccompanying notes are an integral part of the consolidated financialstatements.

 

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

 

**1.  BASIS OF PRESENTATION**

 

The accompanying unaudited condensed consolidated financial statementsof ESG Re Limited have been prepared in accordance with generally acceptedaccounting principles in the United States of America (“U.S. GAAP”) exceptpursuant to the rules and regulations of the Securities and Exchange Commissionwhich do not include all of the information and footnotes required by generallyaccepted accounting principles for complete financial statements.  In the opinion of management, theseunaudited condensed consolidated financial statements reflect all adjustmentsconsidered necessary for a fair presentation of financial position, results ofoperations and comprehensive income as of and for the periods presented.  The results of operations for any interimperiod are not necessarily indicative of the results for a full year.  These unaudited condensed consolidatedfinancial statements should be read in conjunction with the auditedconsolidated financial statements, and related notes thereto, included in ESG’s2001 Annual Report on Form 10-K.

 

 

**2.  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES**

 

Our condensed consolidated financial statements have been prepared inaccordance with U.S GAAP.  Oursignificant accounting policies include the following:

 

(A)                              PREMIUM REVENUES

 

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

 

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

 

(B)                                RESERVE FOR LOSSES AND LOSS EXPENSES

 

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

 

(C)                                INVESTMENTS

 

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

 

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(D)          DEFERRED ACQUISITION COSTS

 

We defer costs relating to the production of newbusiness, primarily commissions and telemarketing costs in respect of ourDirect business, and include them in the deferred acquisition cost asset to theextent that they are recoverable from future related policy revenues.  We amortize the deferred acquisition costsin respect of commissions over the periods in which the related premiums areearned.  We amortize the deferredacquisition costs in relation to telemarketing over the expected life of thepolicies. We review our deferred costs to determine if they are recoverablefrom future income, including investment income, and, if they are not, wecharge them as an expense.

 

(E)                                 REINSURANCE PREMIUMS CEDED

 

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

 

(F)                                 FOREIGN CURRENCY TRANSLATION

 

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

 

(G)                                USE OF ESTIMATES

 

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

 

(H)                               FAIR VALUE OF FINANCIAL INSTRUMENTS

 

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

 

 

**3.  ACCOUNTING PRONOUNCEMENTS**

 

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

 

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

 

8

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impairment. Management does not expect the adoption of SFAS No. 142 to have animpact on our financial position, results of operations, or cash flows.

 

                InOctober 2001, the FASB issued SFAS No. 144, *Accountingfor the Impairment or Disposal of**Long-LivedAssets* (SFAS No. 144).  SFASNo. 144 supersedes SFAS No. 121, *Accountingfor the**Impairment of Long-LivedAssets and for Long-Lived Assets to be Disposed of*, and someprovisions of Accounting Principles Board Opinion 30.  SFAS No. 144 sets new criteria for determining when an asset canbe classified as held-for-sale as well as modifying the financial statementpresentation requirements of operating losses from discontinuedoperations.  SFAS No. 144 is effectivefor fiscal years beginning after December 15, 2001.  We evaluated the provisions of SFAS No. 144 and management doesnot expect the adoption of SFAS No. 144 to have an impact on our financialposition, results of operations, or cash flows.

 

 

**4.  COMMITMENTS AND CONTINGENCIES**

 

*(A)**     **EMPLOYMENT CONTRACTS AND LEASE COMMITMENTS*

We have employment contracts with several employees for original termsof one to five years which have total minimum commitments of $0.5 million as atMarch 31, 2002 and total minimum commitments of $0.6 million as at December 31,2001, excluding any performance bonuses that are determined by our Board ofDirectors.  The contracts includevarious non-compete clauses following termination of employment.

 

ESG and its subsidiaries have various obligations under operatingleases.  The future minimum commitmentsunder operating leases and employment contracts are as follows:

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

 

*(B)  LETTERS OFCREDIT*

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

 

*(C)  PENSIONOBLIGATIONS*

A subsidiary company is obligated to make contributions to definedcontribution pension plans for employees. As of March 31, 2002 and December 31, 2001, there were outstandingliabilities for pension contributions of $659 thousand and $645 thousandrespectively.

 

*      (D) COMMITMENTS & CONTINGENCIES*

LITIGATION

We and oursubsidiaries, in common with the insurance industry in general, are subject tolitigation, including claims for punitive damages, in the normal course oftheir business.  We do not believe thatsuch litigation will have a material adverse effect on our financial condition,future operating results, or liquidity.

 

In February 2000, Odyssey Re instituted an action in Englandagainst a broker, Stirling Cooke Brown, alleging fraud and conspiracy on thereinsurance placement of 1997 and 1998 Personal Accident and WorkersCompensation “carve out” business with Odyssey Re.  These proceedings mirror earlier proceedings commenced in NewYork, which were dismissed on jurisdictional grounds.  During 1998, ESG accepted a 25% quota share reinsurance treatywith Odyssey Re (UK) retroactive to January 1, 1998.  This treaty covers various insurancecompanies involved in the litigation 

 

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Odyssey Re instituted in New York over 1997 and 1998 business.  This treaty terminated as of December 31,1998, but we renewed our participation for 1999 directly with one of thoseceding companies.  In December 1999, wegave notice to rescind our contract with Odyssey Re (UK) for misrepresentationand failure to disclose material facts. On November 29, 2000, we filed suit in the High Court to seek a judicialconfirmation of our rescission.  OnFebruary 5, 2001, Odyssey Re filed a response. On March 21, 2001, we filed a motion for summary judgment.  The motion was substantially based on anadmission by Odyssey Re (UK) that a misrepresentation had been made to us inconnection with the quota share, and was supported by evidence from fact andexpert witnesses.  Our intention was tore-evaluate the motion if Odyssey Re (UK) served any evidence.  Subsequently, Odyssey Re (UK) withdrew theiradmission, and, less than a week before the date scheduled for the hearing, andin violation of the applicable rules of court, they served their evidence, inwhich they made it clear, for the first time, that they intended to plead apositive case that the representation was true.  Odyssey Re’s evidence also raised other factual issues by way ofdefense, which had not been contained in their initial pleading.

 

We recognized that the court was unlikely to give a summary judgment onthe evidence 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 summary judgmentat any time if justified by the state of the evidence and the pleadings.  This matter is now set for arbitration inearly 2003.

 

We have also given notice we intend to rescind the 1999 account.

 

At this time, we are unable to determine the amount of our exposure andthe possible effect upon our business, financial condition or results ofoperation from these two contracts.

 

STRATEGIC INVESTMENTS

In November 2001, we committed to make an additional capital infusionin 4Sigma of $1.8 million, in increments of $100,000 as funds are needed by4Sigma, in exchange for 1.8 million shares of Series E preferred stock.  As of March 31, 2002 we had invested $1.7million of this commitment.

 

**5.  RELATED PARTIES**

 

Included in net investment income for the three months ended March 31,2002 and 2001 are $73 thousand in fees charged by Head Asset Management in thethree months ended March 31, 2002 and $41 thousand in fees charged by HeadAsset Management in the three months ended March 31, 2001.  For a more detailed description of ouragreement with Head Asset Management, please see “Related Party Transactions”in “Management’s Discussion and Analysis of the Financial Condition and Resultsof Operation”. 

 

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**INDEPENDENT ACCOUNTANTS’ REVIEW REPORT**

 

To the Board of Directors and Shareholders of ESG Re Limited

 

We have reviewed the accompanying condensed consolidated balance sheetof ESG Re Limited and subsidiaries as of March 31, 2002, and the relatedcondensed consolidated statements of operations, comprehensive income and cashflows for the three month period ended March 31, 2002 and March 31, 2001.  These financial statements are theresponsibility of the Company’s management.

 

We conducted our review in accordance with auditing standards generallyaccepted in the United States of America. A review of interim financial information consists principally ofapplying analytical procedures to financial data and of making inquiries ofpersons responsible for financial and accounting matters.  It is substantially less in scope than anaudit conducted in accordance with generally accepted auditing standards, theobjective of which is the expression of an opinion regarding the financialstatements taken as a whole. Accordingly, we do not express such an opinion.

 

Based upon our review, we are not aware of any material modificationsthat should be made to such condensed consolidated financial statements forthem to be in conformity with accounting principles generally accepted in theUnited States of America.

 

We have previously audited, in accordance with auditing standardsgenerally accepted in the United States of America, the consolidated balancesheet of ESG Re Limited and subsidiaries as of December 31, 2001, and therelated consolidated statements of operations, comprehensive income, changes inshareholders’ equity and cash flows for the year then ended (not presentedherein) and in our report dated March 29, 2002, we expressed an unqualifiedopinion on those consolidated financial statements.  In our opinion, the information set forth in the accompanyingcondensed consolidated balance sheet as of December 31, 2001, is fairly stated,in all material respects, in relation to the consolidated balance sheet fromwhich it has been derived.

 

Deloitte & Touche

Chartered Accountants

Dublin, Ireland

**May 14, 2002**

** **

**11**

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**ITEM2.   MANAGEMENT DISCUSSION AND ANALYSISOF  FINANCIAL CONDITION AND RESULTSOF   OPERATIONS.**

 

*                The following discussion andanalysis addresses the financial condition of ESG as of March 31, 2002 comparedwith December 31, 2001 and our results of operation for the three months endedMarch 31, 2002, compared with the same period last year.  You should read this discussion and analysiswith our unaudited condensed consolidated financial statements and relatednotes included in Item 1 of this Form 10-Q, and our audited financial statements and related notes contained in our2001 Annual Report on Form 10-K.  Ourindependent accountants have reviewed our unaudited condensed consolidatedfinancial statements for the three months ended March 31, 2001 and 2002 inaccordance with auditing standards generally accepted in the United States ofAmerica.  The results of our operationsfor the period ended March 31, 2002 are not necessarily indicative of ourresults for the full year.*

 

*                Certain statements andinformation included in this Form 10-Q constitute “forward-looking statements”within the meaning of the Private Litigation Reform Act of 1995.  These statements express our intentions,strategies, or predictions for the future.  Actual results may differ from ESG’s predictions.   For more information regardingforward-looking statements, please see “Cautionary Statement Regarding Forward-LookingStatements,” 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.

 

                We derive our revenuesprincipally from:

 

•                  premiums for reinsuranceproducts,

•                  fees for direct marketingservices,

•                  management fees, and

•                  investment income.

 

**Results of Operations**

 

**Total Revenues**

 

                Our total revenues for the threemonths ended March 31, 2002 were $37.1 million, compared with total revenues of$44.7 million for the three months ended March 31, 2001.

 

                Our net loss forthe three months ended March 31, 2002 was $5.5 million, compared to a net lossof $3.9 million for the three months ended March 31, 2001.  Net loss per share for the three monthsended March 31, 2002 was $0.47, compared with a net loss per share of $0.33 forthe three months ended March 31, 2001. Key elements of the quarter’s results were (i) an underwriting result of$0.4 million, which was below our expectations, primarily due to lossessuffered in our North American medical business of $3.0 million, particularlyon one contract in the 2000 underwriting year which related to the latereporting of claims, and (ii) realized investment losses of $1.1 million, themajority of which related to a corporate bond which was sold as it no longermet our investment criteria.

 

**Net Underwriting Income**

 

For the threemonths ended March 31, 2002, we managed, on our own behalf and on behalf of ourco-reinsurers, total premiums of $21.4 million, of which we placed $(8.5)million with co-reinsurers and retroceded $4.0 million, resulting in $25.9million net premiums written.  For thethree months ended March 31, 2001, we managed, on our own behalf and on behalfof our co–reinsurers, total gross premiums of $45.3 million, of which weplaced $2.1 million with co-reinsurers and retroceded $6.0 million, resultingin $37.2 million net premiums written. The 52.8% decrease in gross premiums and 30.4% decrease in net premiumswritten during the three months ended March 31, 2002 is primarily a factor oflarge estimated premium write-downs of $18.2 million in respect of our NorthAmerican medical business, of which 50% is co-reinsured.  These premium adjustments were in relationto risks underwritten in 

 

12

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late 2001, therebynot materially impacting the result in the quarter.  The decrease was also affected by a change in the basis ofestimation used to recognize premium on the Bancassurance business, written byour ESG Direct segment.

 

Of $25.9 millionnet premiums written in the three months ended March 31, 2002, $20.2 millionwas attributable to the ESG Reinsurance segment, and $5.7 million was attributableto the ESG Direct segment.  For thethree months ended March 31, 2001, total premiums written was $37.2 million, ofwhich $15.3 million was attributable to the ESG Reinsurance segment, and $21.9million was attributable to the ESG Direct segment.

 

                Gross and net premiums writtenand net premiums earned for the three months ended March 31, 2002 and 2001 wereas follows: 
|                              |   | **Three  months ended March 31** |       |
|-----------------------------------|--------|----------------------------------|------------|
| **ESG  Reinsurance**              |   | **2002**                         |       | **2001** |   |
|                              |   | **U.S. dollars in millions**     | ** ** |
| Total premiums  managed           |   | 15.7                             |       | 23.4 |   |
| Amount placed  with co-reinsurers |   | 8.5                              |       | (2.1 | ) |
| Gross premiums  written           |   | 24.2                             |       | 21.3 |   |
| Retroceded                        |   | (4.0                             | )          | (6.0 | ) |
| Net premiums  written             |   | 20.2                             |       | 15.3 |   |
|                              |   |                             |       |   |   |
| Net premiums  earned              |   | 30.6                             |       | 34.3 |   |

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

 

Total premiumsthat we manage on our behalf and on behalf of our co-reinsurers for the threemonths ended March 31, 2002, consisted of the following:

 

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

•                  Renewal Business.  Approximately$20.7 million, or 96.7% of total premiums managed was generated from renewalbusiness.

 

 

**Underwriting Results**

 

                Underwritingresults for the three months ended March 31, 2002 and 2001, by line of businessand in total, for the ESG Reinsurance segment were as follows:

 
| **Three  months   ended** |   |                           |   |         |   |       |   |     |   |      |   |      |   |
|-------------------------------------|--------|--------------------------------|--------|--------------|--------|------------|--------|----------|--------|-----------|--------|-----------|--------|
| **March 31,  2002**                 |   | **Medical**                    |   | **Accident** |   | **Credit** |   | **Life** |   | **Other** |   | **Total** |   |
|                                |   | **U.S.  dollars in thousands** |   |
| Gross premiums  written             |   | 14,594                         |   | 9,275        |   | (230       | )      | 262      |   | 304       |   | 24,205    |   |
| Net premiums  written               |   | 11,272                         |   | 7,902        |   | (228       | )      | 290      |   | 1,019     |   | 20,255    |   |
| Net premiums  earned                |   | 24,754                         |   | 4,674        |   | 128        |   | (119     | )      | 1,132     |   | 30,569    |   |
| Losses and loss  expenses           |   | 19,370                         |   | 2,837        |   | 45         |   | 223      |   | 181       |   | 22,656    |   |
| Acquisition  costs                  |   | 6,849                          |   | 1,546        |   | 48         |   | 185      |   | 360       |   | 8,988     |   |
| Operating costs                     |   | 3,739                          |   | 713          |   | 20         |   | 20       |   | 173       |   | 4,665     |   |
| Net underwriting  income/(loss)     |   | (5,204                         | )      | (422         | )      | 15         |   | (547     | )      | 418       |   | (5,740    | )      |

 

13

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

 

Theoperating ratios for the three months ended March 31, 2002 and 2001, by line ofbusiness and in total, for the ESG Reinsurance segment were as follows:

 
| **Three  Months Ended March 31,**   |   |        |   |         |   |       |   |     |   |      |   |      |   |
|-------------------------------------|--------|-------------|--------|--------------|--------|------------|--------|----------|--------|-----------|--------|-----------|--------|
| **2002**                            |   | **Medical** |   | **Accident** |   | **Credit** |   | **Life** |   | **Other** |   | **Total** |   |
| Loss ratio                          |   | 78.3        | %      | 60.7         | %      | 35.2       | %      | n/m      |   | 16.0      | %      | 74.1      | %      |
| Acquisition  expense ratio          |   | 27.7        | %      | 33.1         | %      | 37.5       | %      | n/m      |   | 31.8      | %      | 29.4      | %      |
| Loss and  acquisition expense ratio |   | 106.0       | %      | 93.8         | %      | 72.7       | %      | n/m      |   | 47.8      | %      | 103.5     | %      |
| Operating  expense ratio            |   |        |   |         |   |       |   |     |   |      |   | 15.3      | %      |
| Combined ratio                      |   |        |   |         |   |       |   |     |   |      |   | 118.8     | %      |

 

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

 

                We calculated theoperating expense ratios for the three months ended March 31, 2002 and March31, 2001 by expressing total administrative expenses net of corporate officeexpense, as a percentage of net premiums earned.

 

The key elements in the performance of the Reinsurance segment for thequarter were — (i) a large loss of $3.0 million on North American medicalbusiness, written in 2000, and (ii) a loss of $0.5 million, on one lifecontract written out of Latin America, also in the 2000 underwriting year.

 

                Underwritingresults for the three months ended March 31, 2002 and 2001, by line of businessand in total, for the ESG Direct segment were as follows:

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

 

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

 

14

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Theoperating ratios for the three months ended March 31, 2002 and 2001, by line ofbusiness and in total, for the ESG Direct segment were as follows:

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

 

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

 

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

 

**Geographic Spread**

 

The distributionof gross written premiums for the three months ended March 31, 2001 and 2002,is as follows:

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

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

 

15

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**Product Mix**

 

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

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

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

 

In respect of theDirect segment, the significant change in the geographic and product splitrelates to the recognition of premium on the Bancassurance credit line ofbusiness, written out of the Western European region.  The change in the basis of estimation used to recognize thepremium on Bancassurance business gives rise to a disproportionate splitbetween Western Europe and Asia, on a geographic spread basis, and Credit andPersonal Accident, on a product mix basis. This change does not have a material impact on the reported result forthe quarter.

 

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

 

**Management Fee Revenue**

 

For the threemonths ended March 31, 2002, we earned $0.5 million in management feerevenue.  This figure represents a150.0% increase from the $0.2 million management fees earned in the threemonths ended March 31, 2001.  Themajority of management fee revenue in 2002 and 2001 consists of fees earned onthose premiums managed on behalf of our co-reinsurers.  Management fees increased in the firstquarter of 2002, primarily due to the recognition of fees earned on businessco-reinsured on our North American book of business.

 

**Net Investment Income**

 

                As at March 31, 2002, our cashand invested assets totaled $143.5 million, compared with cash and investedassets of  $154.9 million as at December31, 2001.  This decrease in our cash andinvested assets is primarily due to negative operating cash flows anddeveloping the ESG Direct infrastructure. Net investment income decreased by $1.6 million from $3.4 million in thethree months ended March 31, 2001 to $1.8 million in the three months endedMarch 31, 2002.

 

**               **We do notmaintain separate balance sheet data for our operating segments.  Accordingly we do not review and evaluatethe financial results of the operating segments based upon balance sheet data.

 

The followingtable reflects the investment results for the three months ended March 31,2002:

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

----

(1)           Net investment income is net ofinvestment-related expenses and income on premium receivable and funds held byceding companies.

 

16

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The followingtable reflects our investment results for the three months ended March 31,2001: 

 
|                       |   |                         |    | **Net**        |   | **Annualized** |   | **Net  Realized** |   |
|----------------------------|--------|------------------------------|---------|----------------|--------|----------------|--------|-------------------|--------|
|                       |   | **Average**                  |    | **Investment** |   | **Effective**  |   | **Investment**    |   |
|                       |   | **Investments**              |    | **Income(1)**  |   | **Yield**      |   | **Gains**         |   |
|                       |   | **U.S dollars in thousands** |    |
|                       |   |                         |    |           |   |           |   |              |   |
| Investments                |   | $                            | 168,675 |           | $      | 3,065          |   | 7.3               | %      | $ | 748 |   |
| Other  investments         |   | 17,855                       |    | 88             |   | 2.0            | %      | —            |   |
| Cash and cash  equivalents |   | 24,030                       |    | 55             |   | 4.2            | %      | —            |   |
| Total                      |   | $                            | 210,560 |           | $      | 3,408          |   | 6.5               | %      | $ | 748 |   |

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(1)                                  Net investment income is net ofinvestment-related expenses and income on premium receivable and funds held byceding companies.

 

 

**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 by theinvestment advisor on the outlook for interest rate movements.  The benchmark for such duration isapproximately 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.  We do not intend toinvest in real estate other than for our own use.

 

*Diversification and Liquidity*

 

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

 

                As of March 31, 2002, totalinvestments and cash were $143.5 million, compared to $209.6 million at March31, 2001.  All fixed maturity securitiesin our investment portfolio are classified as available for sale and arecarried at fair value.

 

Thefixed maturity investment portfolios as of March 31, 2002 and 2001 were asfollows:

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

 

17

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|                                                                                   |   |                           |    |         |   |       |   | **Average** |   |
|----------------------------------------------------------------------------------------|--------|--------------------------------|---------|--------------|--------|------------|--------|-------------|--------|
|                                                                                   |   | **Fair**                       |    | **Duration** |   | **Market** |   | **Credit**  |   |
| **As at  March 31, 2001**                                                              |   | **Value**                      |    | **(Years)**  |   | **Yield**  |   | **Rating**  |   |
|                                                                                   |   | **U.S.  dollars in thousands** |    |
| Corporate  securities                                                                  |   | $                              | 78,334  |         | 3.6    |       | 6.7    | %           | AA     |   |
| U.S. treasury  securities and obligations of U.S. government corporations and agencies |   | 30,902                         |    | 2.9          |   | 5.9        | %      | AAA         |   |
| Asset-backed  securities/Mortgage-backed securities                                    |   | 35,419                         |    | 2.6          |   | 8.1        | %      | AAA         |   |
| Obligations of  states and political subdivisions                                      |   | 18,360                         |    | 2.8          |   | 6.8        | %      | AAA         |   |
| Foreign currency  debt securities                                                      |   | 5,857                          |    | 2.9          |   | 4.9        | %      | AAA         |   |
| Total                                                                                  |   | $                              | 168,872 |         | 3.0    |       | 6.5    | %           |   |   |

 

In 2002, we will continueto follow our investment policy and guidelines while seeking to improvelong-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 is definedas an investment in a reinsurance-related enterprise, ceding company ordistribution channel that is expected to generate or secure additionalprofitable business for us.

 

 

**RelatedParty Transactions**

 

                We are a party toseveral Investment Advisory Agreements with Head Asset Management LLC, anaffiliate of Head & Company, L.L.C. Under these agreements, Head Asset Management supervises and directs theinvestment of our asset portfolio in accordance with investment objectives andguidelines that we have established. Mr. Head, the Chairman of our Board of Directors and our former CEO,controls Head Asset Management.  ESG isthe principal client of Head Asset Management. Under our Investment Advisory Agreement with Head Asset Management, wepay fees quarterly in arrears equal to:

 

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

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

 

                We may terminatethe Investment Advisory Agreements upon five days written notice, and HeadAsset Management may terminate the agreements upon 90 days written notice.  We incurred $73 thousand in fees to HeadAsset Management LLC in the three months ended March 31, 2002, and $41 thousandin the three months ended March 31, 2001. The expense for the three months ended March 31, 2001 was lower thanexpected, due to an adjustment made for an over accrual in the prior quarter.

 

                The AuditCommittee of our Board of Directors periodically reviews our investmentpolicies and arrangements to ensure that they are consistent with our overallgoals, 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 has now reviewed our investment advisoryrelationship with Head Asset Management LLC in the context of our other bankingrelationships to determine whether changes should be made to any of theserelationships.

 

 

**Administrative Expenses**

 

Totaladministrative expenses, which includes personnel costs, professional servicefees, interest expense and other expenses, increased by $0.5 million, or 7.5%,from $6.7 million for the three months ended March 31, 2001 to $7.2 million forthe three months ended March 31, 2002. This increase is primarily due to the increase in both realized andunrealized foreign exchange losses, incurred on the revaluation of assets andliabilities, denominated in foreign currencies.

 

18

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**StrategicInvestments**

 

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,cardiac rehabilitation and access to disease management advisors, comprised thehealth care 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 took a reserve of $8.0million against its investment in 4Sigma Ltd.

 

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

 

InNovember 2001, we committed to make an additional capital infusion in 4Sigma of$1.8 million, in increments of $100,000 as funds are needed by 4Sigma, inexchange for 1.8 million shares of Series E preferred stock.  As at March 31, 2002 we had invested $1.7million of this commitment.  Mr. Headhas also committed to invest an additional $1.2 million in cash in 4Sigma onthese same terms and conditions.  Weevaluate our investment in 4Sigma periodically.

 

 

**Liquidity and Capital Resources**

 

Operatingactivities used net cash of $11.0 million for the three months ended March 31,2001 and $6.5 million for three months ended March 31, 2001.

 

Reinsurancebalances receivable decreased from $190.5 million as at December 31, 2001 to$188.6 million as at March 31, 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 $33.0 million as at March 31, 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 the additional quota share cessions totwo of our retrocessionaires.

 

Deferredacquisition costs decreased from $40.3 million at December 31, 2001 to $38.1million at March 31, 2002, as unearned premium declines over the period, afactor of reduced premium writings and earnings.

 

AtDecember 31, 2001, reserves for unpaid losses and loss expenses were $146.4million and at March 31, 2002, reserves for unpaid losses and loss expenseswere $143.6 million.  This decrease isalso a function of reduced underwritings in 2001.

 

AtMarch 31, 2002, unearned premium reserves were $94.3 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 March 31, 2002, acquisition costs payable were $44.0 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 contacts mature, we will berequired to pay out a 

 

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higherpercentage of incurred losses in loss payments, which may affect cashflows.  Additionally, although weprimarily invest in high quality assets, a diminution in the value of ourportfolio could hurt our ability to continue financing our own operations.

 

Asof March 31, 2002, we had the following material commitments for operatingleases and employment contracts:

 
|                          |   | **Total Commitments in US. Dollars (in thousands)** |   |
|-------------------------------|--------|-----------------------------------------------------|--------|
|                          |   |                                                |   | **Less** |   |   |   |   |   |   |   |
|                          |   | **Lease  & Other**                              |   | **Sublease** |   |   |   | **Employee** |   |   |   |
| **Years  ending December 31** |   | **Commitments**                                     |   | **Income** |   | **Net** |   | **Commitments** |   | **Total** |   |
|                          |   |                                                |   |   |   |   |   |   |   |   |   |
| 2002                          |   | $                                                   | 904    |   | $ | 148 |   | $ | 756 |   | $ | 463 |   | $ | 1,219 |   |
| 2003                          |   | 735                                                 |   | 36 |   | 699 |   | 67 |   | 766 |   |
| 2004                          |   | 514                                                 |   | 514 |   | 514 |   |   |   |   |   |
| 2005                          |   | 259                                                 |   | 259 |   | 259 |   |   |   |   |   |
| 2006                          |   | 181                                                 |   | 181 |   | 181 |   |   |   |   |   |
| 2007 to 2012                  |   | 825                                                 |   |   |   | 825 |   |   |   | 825 |   |
| Total                         |   | $                                                   | 3,418  |   | $ | 184 |   | $ | 3,234 |   | $ | 530 |   | $ | 3,764 |   |

 

 

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

 
|                          |   | **Total Commitments in US. Dollars (in thousands)** |   |
|-------------------------------|--------|-----------------------------------------------------|--------|
|                          |   |                                                |   | **Less** |   |   |   |   |   |   |   |
|                          |   | **Lease  & Other**                              |   | **Sublease** |   |   |   | **Employee** |   |   |   |
| **Years  ending December 31** |   | ** Commitments**                               |   | **Income** |   | **Net** |   | **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 |   |

 

Insupport of our business, we enter into Letters of Credit and Trust Accountarrangements with ceding companies.  Asat December 31, 2001, we had in total $91.0 million of outstanding Letters ofCredit and Trust Accounts of which $27.0 million related to Letters of Creditissued and $64.0 million was in Trust Accounts.  As of March 31, 2002, we had in total $90.9 million ofoutstanding Letters of Credit and Trust Accounts of which $27.3 million relatedto Letters of Credit issued and $63.6 million was in Trust Accounts.  These arrangements were secured against ourfixed maturity investment portfolio.

 

 

**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 exposures and up to $5,000,000 per person forMedical Expense exposure.

 

 

**Cautionary Statement Regarding Forward-Looking Statements**

 

                Certain statementsand information included in this Form 10-K constitute “forward-lookingstatements” within the meaning of the Private Securities Litigation Reform Actof 1995.  These statements express ourintentions, strategies, or predictions for the future.  In addition, from time to time, we may makeforward-looking statements, orally or in writing.  Forward-looking statements in this Form 10-Q include, amongothers, statements regarding:

 

•                                            the ongoing adequacy of our lossreserves;

 

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•                                            our continuing ability to increasepremium rates and strengthen terms of trade in the North and Latin Americanmarkets without major loss of business;

 

•                                            the anticipated growth in Direct businessin Asia and Europe; and

 

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

 

•                                            the outcome of our ongoing litigation.

 

 

These forward-looking statements involve known andunknown risks and uncertainties that may cause actual results to be materiallydifferent from the results expressed or implied by the forward-lookingstatements.  These factors include,among other things:

 

•**                                           ****Economic Recession. **An economic slowdown worldwide, or in any of our keymarkets, could reduce demand for our products and services.  If the general economic downturn continuesor worsens, the market for many insurance products may also diminish.  We obtain a significant portion of ourbusiness from selling reinsurance, and if the primary insurance marketdeclines, there could be an equal effect on the reinsurance market.

 

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

 

•**                                           ****Inadequate LossReserves. **We maintain reserves to cover theestimated liability for reported and unreported claims.  Inadequate reserves could be caused by ourfailure to value accurately the risks of certain business, inaccurateinformation 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 CostIncreases. **Our medical reinsurance premiums reflectcertain assumptions regarding increases in the cost of medical care.  Medical costs (particularly prescriptioncosts) are difficult to gauge, especially in the United States.  Changes or advances in medical technologycould increase our costs.  Legislativeor judicial developments that are adverse to medical providers also mightincrease costs.  An increase in coststhat eclipses the assumptions reflected in our premiums could result in lossesfor us.

 

•**                                           ****Credit Risks. **From time to time, we may cede a portion of ourreinsurance risk to other insurers or reinsurers.  If these companies do not fulfill their obligations to us, we maybe exposed to a greater risk than we had anticipated.

 

•                                            **Loss of Key Clients**. Our contracts with our customers are generally short term.  We can make no assurance that any customerwill retain our services after its contract has ended.  We have several customers that generate substantialrevenues, including the Companion Insurance Company account, which accountedfor 28% of our revenues in the three months ended March 31, 2002 and 17% of ourrevenues in the year ended December 31, 2001. The loss of this customer could adversely affect our revenues.  If one of our customers is acquired ormerges with another company, our contract may terminate early.

 

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

 

•**                                           ****Competition. **Our reinsurance business competes with otherinternational reinsurers, most notably American Re, Everest Re, Latin AmericaRe, Swiss Re, Hanover Re, and Lloyd’s. ESG Direct competes primarily with GE Capital, AIG, and ACE.  These competitors have greater financial 

 

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resources than we do, have been operating longer, andhave established long-term relationships with others in the industry, all ofwhich may be significant competitive advantages.

 

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

 

•**                                           ****Credit RatingDowngrade. **In our reinsurance and direct marketingbusinesses, the rating assigned to our credit by agencies such as Standard andPoor’s and Fitch can affect our business opportunities.  Any downgrade in our rating could make itmore difficult for us to attract and retain customers.

 

•                                            **Loss of Key Employees.** As a small company, our success is dependent on our ability to retainour existing executive officers and attract additional qualified personnel inthe future.  The loss of the services ofan executive officer would affect adversely our ability to conduct business.

 

•**                                           ****Interest RateFluctuations. **We invest the majority of the money wereceive as premiums in fixed rate instruments such as government and corporatebonds.  Typically, the fair market valueof a fixed rate instrument varies inversely with the fluctuations in interestrates.  While our investments can fallin value, our liabilities tend to remain fixed.  Consequently, a decline in the value of our investment portfoliocould reduce our net income or lead to a loss.

 

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

 

•**                                           ****Foreign CurrencyExchange Risks. **Because we conduct business in numerousgeographic regions and currencies around the world, fluctuations in currencyexchange rates can affect our earnings. We maintain investments in currencies in which we will collect premiumsand pay claims, thus creating a partial natural hedge against exchange ratefluctuations.  While we do not expectour exposure to foreign currency risk to materially affect our profitability,volatility in exchange rates could affect our business adversely.

 

•**                                           ****Inflation. **We provide reinsurance in certain geographicalmarkets, such as Latin America, that have experienced sustained periods of highinflation.  In an inflationary cycle,there is a risk that the amounts we will owe on our coverage obligations willexceed the amounts we received as premiums.

 

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

 

•                                            **Tax Exposure. **For purposes of many countries, including the UnitedStates, ESG is not engaged in the conduct of any trade or business in suchcountry, and, as a result, is not subject to corporate income tax therein.  If, however, any country, including the U.S.were to contend successfully that our operations subject us to corporate incometax, we would be liable for tax on net income received by ESG to the extent ithad been received at a permanent place of business.  If corporate income taxes did apply to income received by ESG,they would reduce our net income, if any.

 

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

 

•                                            **Cyclical Changes in theMarket**.  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.

 

22

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                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.  Thesechanges may be due to fluctuations in interest rates or foreign currency rates,or both in the case of foreign currency investments.  We monitor our exposure to interest rate and currency rate riskon a quarterly basis and currently do not believe that the use of derivativesto manage such risk is necessary.  Weintend to reevaluate the need for a formal hedging strategy on a periodicbasis, and may determine that such a strategy, including the use of derivativeinstruments, is appropriate in the future.

 

**Interest Rate Risk**

 

Ourlargest source of market risk is interest rate risk on our portfolio of fixedmaturity investments, especially fixed rate instruments.  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.

 

**Foreign Currency Risk**

 

Ourfunctional currency is the U.S. Dollar. However, we write reinsurance business in numerous geographic regionsand currencies, giving rise to the risk that the ultimate settlement ofreceivables and payables on reinsurance transactions will differ from theamounts currently recorded as assets and liabilities in the financialstatements.  We generally do not hedgethe foreign currency exposure of its subsidiaries transacting business incurrencies other than their functional currency (transaction exposure).  The primary functional currency exposuresare European Euro, Norwegian Kroner, Australian Dollar, Hong Kong Dollar andGreat Britain Pound.  We believe thatour foreign currency transaction exposure is immaterial to our consolidatedresults of operations due to the partial natural hedge produced by normal cashflow operations.

 

**Inflation**

 

Inflationhas not had a material impact on our operations for any of the three yearspresented.  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**

 

**Item1.    Legal Proceedings**

 

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

 

**Item 2.    Changes in Securities**

Notapplicable.

 

**Item 3.    Defaults Upon Senior Securities**

Notapplicable.

 

**Item4.    Submission of Matters to a Vote ofSecurities Holders**

None.

 

**Item5.    Other Information**

Notapplicable.

 

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

 

(a)                                  Exhibit Index

 

Exhibit 11.1            Computationof Earnings Per Share

 

Exhibit 15.1            AwarenessLetter of Deloitte & Touche

 

 

(b)           During the three months ended March31, 2002, ESG filed the following Reports on Form 8-K:

 

•                  Form 8-K dated January 31, 2002, Item 5, containing anannouncement regarding ESG taking a reserve of $8 million against itsinvestment in 4Sigma Ltd.

 

•                  Form 8-K dated February 8, 2002, Item 5, containing anannouncement of Steven H. Debrovner’s resignation, effective January 4, 2002.

 

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**SIGNATURES**

 

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

 

 
|                      |   |                             | ESG RE LIMITED |   |
|---------------------------|--------|----------------------------------|----------------|--------|
|                      |   |                             |           |
| Date:  May  14, 2002 |   | /s/ Alasdair P. Davis            |           |
|                      |   | Alasdair P. Davis                |           |
|                      |   | Chief Executive Officer          |           |
|                      |   |                             |           |
| Date:  May  14, 2002 |   | /s/ Joe Quinn                    |           |
|                      |   | Joe Quinn                        |           |
|                      |   | Acting Senior Financial  Officer |           |

 

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