** **

**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

**WASHINGTON, D.C. 20549**

 

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**FORM 10-Q/A**

**AMENDMENT NO.1**

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

 

OR

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

 

 

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

**Commission File Number 000-23481**

 

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**ESG RE LIMITED**

(Exactname of registrant as specified in its charter)

 

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

 

 

**16 Church Street**

**Hamilton HM11, Bermuda**

(Addressof executive offices, zip code)

 

**(441) 295-2185**

(Registrant’stelephone number, including area code)

 

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Indicate by check mark whether the Registrant (1) has filedall reports required to be filed by Section 13 or 15(d) of the SecuritiesExchange Act of 1934 during the preceding 12 months (or for such shorter periodthat the Registrant was required to file such reports), and (2) has been subjectto such filing requirements for the past 90 days. Yes: ý  No o

 

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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**EXPLANATORY STATEMENT:**

 

This amendment onForm 10-Q/A amends Item 1 of Part I of the Quarterly Report for ESG Re Limited(the “Company”) on Form 10Q previously filed for the quarter ended March 31,2002.  This Quarterly Report on Form10-Q is filed in connection with the Company’s restatement of its financialstatements for the year ended December 31, 2001.  The adjustment and restatement has had the following impact onour consolidated statement of operations and consolidated balance sheet, forthe year ended December 31, 2001:

 

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

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

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

•                  Foreign currency translation adjustments, included in accumulated othercomprehensive income, has changed from $4,193 thousand to $201 thousand

•                  Foreign currency translation adjustment, in consolidated statements ofcomprehensive income has changed from $1,138 thousand to $5,130 thousand

 

The adjustment and restatement has had the following impact on ourcondensed consolidated balance sheet for March 31, 2002:

•                  Foreign currency translation adjustments has changed to $57 thousandfrom $(3,935) thousand

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

 

 

No attempt has been made in this Form 10-Q/A to modify orupdate other disclosures as presented in the original Form 10-Q except asrequired to reflect the effects of restatement.

 

 

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**TABLE OF CONTENTS**

 
| ITEM     |                                         |   |
|----------|----------------------------------------------|--------|
|     | **PART I**                                   |   |
|     |                                         |   |
| Item  1. | Financial  Statements and Supplementary Data |   |
|     |                                         |   |
|     | **PART II**                                  |   |
|     |                                         |   |
| Item 6.  | Awareness Letter of Deloitte & Touche    |   |

 

#  

# 3

# 

#  

# **PARTI — 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)**

 
|                                                                                                                                                                                                       |   | **(Restated)    March 31, 2002** |    | **(Restated)  December 31, 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 (as restated) (See Note  6)                                                                                 |   | 57                               |    | (201                              | )      |
| Unrealized gains on securities, net of tax                                                                                                                                                                 |   | (1,539                           | )       |  (1,525                      | )      |
| Accumulated other comprehensive income                                                                                                                                                                     |   | (1,482                           | )       | (1,726                            | )      |
| Retained (deficit) (as restated) (See Note 6)                                                                                                                                                              |   | (128,452                         | )       | (122,923                          | )      |
| Total shareholders’ equity                                                                                                                                                                            |   | 89,847                           |    | 95,070                            |   |
|                                                                                                                                                                                                       |   |                             |    |                              |   |
| TOTAL  LIABILITIES AND SHAREHOLDERS’ EQUITY                                                                                                                                                           |   | $                                | 439,352 |                              | $      | 455,529 |   |

#####  

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

#####  

 

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# **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                                   |   | 11,831,068              |   | 11,782,500 |   |
| Diluted                                 |   | 11,831,068              |   | 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 | ) |

 

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

 

 

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

 

**1.  BASIS OFPRESENTATION**

 

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 audited consolidatedfinancial statements, and related notes thereto, included in ESG’s 2001 AnnualReport 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 and geographicarea, therefore the actual ultimate premium written may not be known withcertainty for prolonged periods, following the expiration of the reinsurancecontract.  Differences between suchestimates and actual amounts as reported by ceding companies are recorded inthe 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 the liabilitiesexceed the amount paid the excess is deferred and amortized into income overthe 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 availableinformation, 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 

 

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exercisesignificant influence are accounted for under the equity method.  Otherwise these investments are accountedfor at cost.  Unrealized investmentgains and losses on investments available for sale, net of applicable deferredincome tax, are reported as a separate component of “accumulated othercomprehensive income”.  Realized gainsor losses on sale of investments are determined on the basis of averagecost.  The carrying values ofinvestments available for sale and other investments are adjusted forimpairments in value that are considered to be other than temporary.

 

(D)          DEFERRED ACQUISITION COSTS

 

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

 

Reinsurancepremiums ceded are reported as prepaid reinsurance premiums and amortized overthe respective contract or policy periods in proportion to the amount ofinsurance protection provided.  Commissions on reinsurance ceded are deferred over the terms ofthe contracts of reinsurance to which they relate and amortized in proportionto the amount of insurance protection 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 andliabilities and disclosure of contingent assets and liabilities at the date ofthe financial statements and the reported amounts of revenues and expensesduring the reporting period as well as the disclosure of such amounts.  Actual results, particularly for premiumswritten, premiums earned and loss reserves could materially differ from thoseestimates and assumptions.

 

(H)          FAIR VALUE OF 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.

 

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**3.  ACCOUNTING PRONOUNCEMENTS**

 

In June 2001, theFASB 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.

 

In June 2001, FASBissued Statement of Financial Accounting Standard (SFAS) No. 142, *Goodwill and Other Intangible Assets*.  SFAS No. 142 addresses the initial recognitionand measurement of intangible assets acquired outside of a business combinationand the accounting for goodwill and other intangible assets subsequent to theiracquisition.  SFAS No. 142 provides thatintangible assets with finite useful lives be amortized and that goodwill andintangible assets with indefinite lives not be amortized, but rather be testedat least annually for impairment. Management does not expect the adoption of SFAS No. 142 to have an impacton our financial position, results of operations, or cash flows.

 

In October 2001,the FASB issued SFAS No. 144, *Accounting forthe 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:

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

 

 

*(B)  LETTERS 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 the amountof the outstanding Trust Accounts.  Asof December 31, 2001, Secured Letters of Credit and Trust Accounts in theamount of $91.0 million were issued in favor of ceding companies.

 

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*(C)  PENSION OBLIGATIONS*

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 Odyssey Re instituted in New York over1997 and 1998 business.  This treatyterminated as of December 31, 1998, but we renewed our participation for 1999directly with one of those ceding companies. In December 1999, we gave notice to rescind our contract with Odyssey Re(UK) for misrepresentation and failure to disclose material facts.  On November 29, 2000, we filed suit in theHigh Court to seek a judicial confirmation of our rescission.  On February 5, 2001, Odyssey Re filed aresponse.  On March 21, 2001, we filed amotion for summary judgment.  The motionwas substantially based on an admission by Odyssey Re (UK) that amisrepresentation had been made to us in connection with the quota share, andwas supported by evidence from fact and expert witnesses.  Our intention was to re-evaluate the motionif Odyssey Re (UK) served any evidence. Subsequently, Odyssey Re (UK) withdrew their admission, and, less than aweek before the date scheduled for the hearing, and in violation of theapplicable rules of court, they served their evidence, in which they made itclear, for the first time, that they intended to plead a positive case that therepresentation was true.  Odyssey Re’sevidence also raised other factual issues by way of defense, which had not beencontained 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 summaryjudgment at any time if justified by the state of the evidence and thepleadings.  This matter is now set forarbitration in early 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 $0.8million 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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**6.  PRIOR PERIOD ADJUSTMENT**

 

During the second quarter of 2002, ESG determined that foreign currencytranslation adjustments, included in accumulated other comprehensive income,had been misstated by $3,992 thousand due to an error in the internal systemthat consolidates the financial results of ESG subsidiaries with functionalcurrencies other than U.S. dollars.  Tocorrect this error, ESG has restated its financial statements for the fiscalyear December 31, 2001 in order to reflect a fourth quarter adjustment toforeign currency translation adjustments of $3,992 thousand.  ESG is also restating its financialstatements for the quarter ended March 31, 2002, in order to bring forward therestated balances in foreign currency translation adjustments and in retaineddeficit.

 

The effect on shareholders’ equity in ESG’s condensed consolidatedbalance sheets as of March 31, 2002, and December 31, 2001, is as follows:

 
|                                                 |   | **March 31,  2002** |              | **December  31, 2001**       |   |
|------------------------------------------------------|--------|---------------------|-------------------|------------------------------|--------|
|                                                 |   | **As  Restated**    |              | **As  Previously  Reported** |   | **As  Restated** |   | **As  Previously  Reported** |   |
| Foreign currency translation adjustments, net of tax |   | $                   | 57  thousand      |                         | $      | (3,935)  thousand |   | $ | (201)  thousand |   | $ | (4,193)  thousand |   |
| Retained deficit                                     |   | $                   | 128,452  thousand |                         | $      | 124,460  thousand |   | $ | 122,923  thousand |   | $ | 118,931  thousand |   |

 

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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, and August 19, 2002 (as to Note20), we expressed an unqualified opinion on those consolidated financialstatements.  In our opinion, theinformation set forth in the accompanying condensed consolidated balance sheetas of December 31, 2001, is fairly stated, in all material respects, inrelation to the consolidated balance sheet from which it has been derived,after giving effect to the restatement discussed in the following paragraph.

 

The condensed consolidated balance sheets as at December 31, 2001 andMarch 31, 2002 reflect the restatement of foreign currency translationadjustments, included in accumulated other comprehensive income, and ofretained deficit.  The effect of thisrestatement is set out in Note 6 to the unaudited condensed consolidatedfinancial statements.

 

Deloitte & Touche

Chartered Accountants

Dublin, Ireland

**May15, 2002**

**August19, 2002 (as to Note 6)**

 

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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:  August  22, 2002 |   | /s/ Alasdair P. Davis     |
|                         |   | Alasdair P. Davis         |
|                         |   | Chief Executive Officer   |
|                         |   |                      |
| Date:  August  22, 2002 |   | /s/ Joe A. Quinn          |
|                         |   | Joe A. Quinn              |
|                         |   | Senior Financial  Officer |

 

 

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