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**UNITED STATESSECURITIES AND EXCHANGE COMMISSION****Washington,D.C. 20549**

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**FORM 10-Q**

**QUARTERLY REPORTPURSUANT TO SECTION 13 OR 15(d)OF THE SECURITIES EXCHANGE ACT OF 1934**

**For the quarterlyperiod ended June 30, 2001Commission file number 000-23481**

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**ESGRE LIMITED**(Exact name of Registrant as specified in its charter)

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

 

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Indicate by check mark whether theRegistrant (1) has filed all reports required to be filed by Section 13 or15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (orfor such shorter period that the Registrant was required to file such reports,and (2) has been subject to such filing requirements for the past 90 days. Yes ýNo o

The number of the Registrant's commonshares (par value $1.00 per share) outstanding as of August 7, 2001, was11,787,725.

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**ESG RE LIMITED1.1 Index to the Condensed Consolidated Financial Statements**

 

|                                                                                                                                            |   |
|-------------------------------------------------------------------------------------------------------------------------------------------------|--------|
| Condensed  Consolidated Balance Sheets as of June 30, 2001 (unaudited) and December 31,  2000                                                   |   |
| Condensed  Consolidated Statements of Operations for the three months and six months  ended June 30, 2001 and 2000 (unaudited)                  |   |
| Condensed  Consolidated Statements of Cash Flows for the six months ended June 30, 2001  and 2000 (unaudited)                                   |   |
| Condensed  Consolidated Statements of Comprehensive Income (Loss) for the three months  and six months ended June 30, 2001 and 2000 (unaudited) |   |
| Notes  to the Condensed Consolidated Financial Statements (unaudited)                                                                           |   |
| Independent  Accountants’ Review Report                                                                                                    |   |

 

**PART I– FINANCIAL INFORMATION****ITEM 1.FINANCIAL STATEMENTS AND SUPPLEMENTARY DATAESG RE LIMITEDCondensed Consolidated BalanceSheets**(U.S. dollars in thousandsexcept share data)

|                                                 | June  30,  2001                                                                                                                                                                  |     | December  31,  2000 |     |
|------------------------------------------------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|----------|---------------------|----------|
|                                                 |                                                                                                                                                                                  |     |                     |     |
| **ASSETS**                                           | (Unaudited)                                                                                                                                                                      |     |                |     |
|                                                 | Investments –  available for sale, at fair value (cost: $160,701 and $166,513)                                                                                              | $        | 164,094             |     | $ | 168,478 |   |
|                                                 | Cash and cash  equivalents                                                                                                                                                       | 16,668   |                | 26,032   |   |
|                                                 | Other investments                                                                                                                                                                | 14,252   |                | 17,736   |   |
|                                                 |                                                                                                                                                                             |          |                |          |   |
|                                                 | Total  investments and cash                                                                                                                                                      | 195,014  |                | 212,246  |   |
|                                                 | Accrued investment income                                                                                                                                                        | 2,947    |                | 3,240    |   |
|                                                 | Management fees  receivable                                                                                                                                                      | 531      |                | 713      |   |
|                                                 | Reinsurance balances  receivable                                                                                                                                                 | 175,768  |                | 241,587  |   |
|                                                 | Reinsurance  recoverable on incurred losses                                                                                                                                      | 20,232   |                | 15,633   |   |
|                                                 | Funds retained by  ceding companies                                                                                                                                              | 21,694   |                | 18,432   |   |
|                                                 | Prepaid reinsurance  premiums                                                                                                                                                    | 2,288    |                | 5,432    |   |
|                                                 | Deferred acquisition  costs                                                                                                                                                      | 44,061   |                | 46,611   |   |
|                                                 | Receivable for  securities sold                                                                                                                                                  | 770      |                | -        |   |
|                                                 | Other assets                                                                                                                                                                     | 6,590    |                | 6,281    |   |
|                                                 | Cash and cash  equivalents held in a fiduciary capacity                                                                                                                          | 1,872    |                | 4,619    |   |
|                                                 |                                                                                                                                                                                  |     |                     |     |
| **TOTAL ASSETS**                                     | $                                                                                                                                                                                | 471,767  |                | $        | 554,794 |   |
|                                                 |                                                                                                                                                                                  |     |                     |     |
| **LIABILITIES**                                      |                                                                                                                                                                             |     |                |     |
|                                                 | Unpaid losses and loss  expenses                                                                                                                                                 | $        | 158,788             |     | $ | 179,614 |   |
|                                                 | Unearned premiums                                                                                                                                                                | 128,745  |                | 148,124  |   |
|                                                 | Acquisition costs  payable                                                                                                                                                       | 47,210   |                | 64,604   |   |
|                                                 | Reinsurance balances  payable                                                                                                                                                    | 16,500   |                | 30,511   |   |
|                                                 | Accrued expenses, accounts  payable, and other liabilities ($53 and $85 due to related parties)                                                                                  | 13,141   |                | 13,756   |   |
|                                                 | Fiduciary liabilities                                                                                                                                                            | 1,872    |                | 4,619    |   |
|                                                 |                                                                                                                                                                                  |     |                     |     |
|                                                 | Total liabilities                                                                                                                                                                | 366,256  |                | 441,228  |   |
|                                                 |                                                                                                                                                                                  |     |                     |     |
| **SHAREHOLDERS’ EQUITY**                        |                                                                                                                                                                             |     |                |     |
|                                                 | Preference shares,  50,000,000 shares authorized; no shares issued and outstanding for 2001 and  2000                                                                            | —   |                | —   |   |
|                                                 | Class B common shares,  100,000,000 shares authorized; no shares issued and outstanding for 2001 and  2000                                                                       | —   |                | —   |   |
|                                                 | Common shares, par  value $1 per share; 100,000,000 shares authorized; 11,787,725 shares issued  and outstanding for 2001 and 11,777,086 shares issued and outstanding for  2000 | 11,788   |                | 11,777   |   |
|                                                 | Additional paid-in  capital                                                                                                                                                      | 207,717  |                | 207,646  |   |
|                                                 | Accumulated other  comprehensive income:                                                                                                                                         |     |                |     |   |
|                                                 | Foreign currency  translation adjustments                                                                                                                                        | (4,998   | )                   | (5,331   | ) |
|                                                 | Unrealized gains on  securities, net of tax                                                                                                                                      | 3,368    |                | 1,965    |   |
|                                                 |                                                                                                                                                                             |          |                |          |   |
|                                                 | Accumulated other  comprehensive income (loss)                                                                                                                                   | (1,630   | )                   | (3,366   | ) |
|                                                 |                                                                                                                                                                             |          |                |          |   |
|                                                 | Retained (deficit)                                                                                                                                                               | (112,364 | )                   | (102,491 | ) |
|                                                 |                                                                                                                                                                                  |     |                     |     |
|                                                 | Total shareholders’  equity                                                                                                                                                 | 105,511  |                | 113,566  |   |
|                                                 |                                                                                                                                                                                  |     |                     |     |
| **TOTAL LIABILITIES AND  SHAREHOLDERS’ EQUITY** | $                                                                                                                                                                                | 471,767  |                | $        | 554,794 |   |
|                                                 |                                                                                                                                                                                  |     |                     |     |
|                                                      |                                                                                                                                                                                  |          |                     |          |  |  |  |  |  |

The accompanying notes are an integral part of thecondensed consolidated financial statements.

**ESG RELIMITEDCondensed ConsolidatedStatements of Operations**(U.S. dollarsin thousands except share and per share data)(Unaudited)

 

|                                                | Three  Months Ended                                      |       | Six  Months Ended |       |
|-----------------------------------------------------|----------------------------------------------------------|------------|-------------------|------------|
|                                                | June  30, 2001                                           |       | June  30, 2000    |       | June  30, 2001 |   | June  30, 2000 |   |
|                                                |                                                          |       |                   |       |  |   |  |   |
| **REVENUES**                                        |                                                     |       |              |       |   |   |   |   |
|                                                | Net premiums written                                     | $          | 29,672            |       | $ | 44,675 |   | $ | 66,865 |   | $ | 149,154 |   |
|                                                | Change in unearned  premiums                             | 10,810     |              | 31,771     |   | 13,926 |   | (14,897 | ) |
|                                                |                                                     |            |              |            |   |  |   |  |   |
|                                                | Net premiums earned                                      | 40,482     |              | 76,446     |   | 80,791 |   | 134,257 |   |
|                                                | Management fee revenue                                   | 190        |              | 594        |   | 420 |   | 956 |   |
|                                                | Net investment income                                    | 3,326      |              | 3,165      |   | 6,734 |   | 6,091 |   |
|                                                | (Loss)/gain on equity  investments                       | —     |              | (48        | ) | (27 | ) | 286 |   |
|                                                | Net realized  investment (loss)/gain                     | (3,481     | )                 | 344        |   | (2,733 | ) | (1,071 | ) |
|                                                |                                                          |       |                   |       |  |   |  |   |
|                                                | 40,517                                                   |       | 80,501            |       | 85,185 |   | 140,519 |   |
| **EXPENSES**                                        |                                                          |       |                   |       |  |   |  |   |
|                                                | Losses and loss  expenses                                | 26,238     |              | 54,689     |   | 56,222 |   | 99,918 |   |
|                                                | Acquisition costs                                        | 13,070     |              | 23,444     |   | 25,003 |   | 38,123 |   |
|                                                | Operating expenses                                       | 7,124      |              | 8,681      |   | 13,818 |   | 16,097 |   |
|                                                |                                                          |       |                   |       |  |   |  |   |
|                                                | 46,432                                                   |       | 86,814            |       | 95,043 |   | 154,138 |   |
|                                                |                                                          |       |                   |       |  |   |  |   |
| **(LOSS) FROM CONTINUING  OPERATIONS BEFORE TAXES** | (5,915                                                   | )          | (6,313            | )          | (9,858 | ) | (13,619 | ) |
| Income tax expense                                  | —                                                   |       | —            |       | — |   | — |   |
|                                                |                                                          |       |                   |       |  |   |  |   |
| **(LOSS) FROM CONTINUING  OPERATIONS**              | (5,915                                                   | )          | (6,313            | )          | (9,858 | ) | (13,619 | ) |
|                                                |                                                     |       |              |       |   |   |   |   |
| Net Loss from  discontinued operations (Note 4)     | —                                                   |       | (3,008            | )          | — |   | (5,928 | ) |
|                                                |                                                          |       |                   |       |  |   |  |   |
| **NET (LOSS)**                                      | $                                                        | (5,915     | )                 | (9,321     | ) | $ | (9,858 | ) | (19,547 | ) |
|                                                |                                                          |       |                   |       |  |   |  |   |
| **PER SHARE DATA**                                  |                                                     | ** ** |              | ** ** |   | ** ** |   | ** ** |
|                                                | Basic net (loss) per  share from continuing operations   | $          | (0.50             | )          | $ | (0.53 | ) | $ | (0.84 | ) | $ | (1.16 | ) |
|                                                | Diluted net (loss) per  share from continuing operations | (0.50      | )                 | (0.53      | ) | (0.84 | ) | $ | (1.16 | ) |
|                                                |                                                     |            |              |            |   |  |   |  |   |
|                                                | Basic net (loss) per  share                              | $          | (0.50             | )          | $ | (0.79 | ) | $ | (0.84 | ) | $ | (1.67 | ) |
|                                                | Diluted net (loss) per  share                            | (0.50      | )                 | (0.79      | ) | (0.84 | ) | (1.67 | ) |
|                                                |                                                          |       |                   |       |  |   |  |   |
| **WEIGHTED AVERAGE SHARES  OUTSTANDING**            |                                                     |       |              |       |   |   |   |   |
|                                                | Basic                                                    | 11,787,725 |              | 11,836,585 |   | 11,785,000 |   | 11,706,242 |   |
|                                                | Diluted                                                  | 11,787,725 |              | 11,836,585 |   | 11,785,000 |   | 11,706,242 |   |
|                                                |                                                          |       |                   |       |  |   |  |   |
|                                                | Dividends declared per  share                            | —     |              | $          | 0.08 |   | — |   | $ | 0.16 |   |
|                                                |                                                          |       |                   |       |  |   |  |   |
|                                                     |                                                          |            |                   |            |  |  |  |  |  |  |  |  |  |  |

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

**ESG RELIMITED****Condensed Consolidated Statements ofCash Flows******(U.S. dollars in thousands)(Unaudited)

|                                                 | Six  Months Ended                                                           |     |
|------------------------------------------------------|-----------------------------------------------------------------------------|----------|
|                                                 |                                                                             |     |
|                                                 | June  30, 2001                                                              |     | June  30, 2000 |   |
|                                                 |                                                                             |     |  |   |
|                                                 |                                                                        |     |   |   |
| **CASH FLOWS FROM OPERATING  ACTIVITIES**            |                                                                        |     |   |   |
| Net cash (used in)  provided by operating activities | $                                                                           | (14,460  | ) | $ | 419 |   |
|                                                 |                                                                             |     |  |   |
| **CASH FLOWS FROM INVESTING  ACTIVITIES**            |                                                                        |     |   |   |
|                                                 | Cost of fixed maturity  investments acquired – available for sale      | (151,764 | ) | (99,816 | ) |
|                                                 | Proceeds from sale of  fixed maturity investments – available for sale | 158,530  |   | 100,267 |   |
|                                                 | Funding of other  investments                                               | (854     | ) | (740 | ) |
|                                                 | Proceeds from other  investments                                            | —   |   | 800 |   |
|                                                 | Purchases of fixed  assets                                                  | (758     | ) | (1,224 | ) |
|                                                 | Purchases of  intangible assets                                             | —   |   | (5,568 | ) |
|                                                 |                                                                             |     |  |   |
| Net cash provided by  investing activities           | 5,154                                                                       |     | (6,281 | ) |
|                                                 |                                                                             |     |  |   |
| **CASH FLOWS FROM FINANCING  ACTIVITIES**            |                                                                        |     |   |   |
|                                                 | Dividends paid                                                              | —   |   | (1,937 | ) |
|                                                 | Repurchase of common  shares                                                | (58      | ) | (2,138 | ) |
|                                                 |                                                                             |     |  |   |
| Net cash used in  financing activities               | (58                                                                         | )        | (4,075 | ) |
|                                                 |                                                                             |     |  |   |
| Net (decrease) in cash                               | (9,364                                                                      | )        | (9,937 | ) |
| Cash and cash  equivalents at January 1              | 26,032                                                                      |     | 28,278 |   |
|                                                 |                                                                             |     |  |   |
| Cash and cash  equivalents at June 30                | $                                                                           | 16,668   |   | $ | 18,341 |   |
|                                                 |                                                                             |     |  |   |

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

**ESG RELIMITEDCondensed ConsolidatedStatements of Comprehensive Income (Loss)**(U.S. dollarsin thousands)

|                                     | Three  Months Ended                                                         |   | Six  Months Ended |   |
|------------------------------------------|-----------------------------------------------------------------------------|--------|-------------------|--------|
|                                     | June  30, 2001                                                              |   | June  30, 2000    |   | June  30, 2001 |   | June  30, 2000 |   |
|                                     |                                                                             |   |                   |   |  |   |  |   |
| Net (loss)                               | $                                                                           | (5,915 | )                 | $      | (9,321 | ) | $ | (9,858 | ) | $ | (19,547 | ) |
|                                     |                                                                             |   |                   |   |  |   |  |   |
| Other comprehensive  income, net of tax: |                                                                        |   |              |   |   |   |   |   |
|                                     | Foreign currency  translation adjustments                                   | 23     |              | (1,288 | ) | 333 |   | (742 | ) |
|                                     | Unrealized gains on  securities:                                            |   |              |   |   |   |   |   |   |
|                                     | Unrealized holding  (losses)/gains arising during the period                | (2,095 | )                 | 678    |   | 1,403 |   | (1,212 | ) |
|                                     | Less reclassification  adjustment for losses/(gains) included in net income | — |              | (344   | ) | — |   | 1,071 |   |
|                                     |                                                                             |   |                   |   |  |   |  |   |
| Other comprehensive  (loss) income       | (2,072                                                                      | )      | (954              | )      | 1,736 |   | (883 | ) |
|                                     |                                                                        |   |              |   |   |   |   |   |
| Comprehensive income  (loss)             | $                                                                           | (7,987 | )                 | $      | (10,275 | ) | $ | (8,122 | ) | $ | (20,430 | ) |
|                                     |                                                                             |   |                   |   |  |   |  |   |
|                                          |                                                                             |        |                   |        |  |  |  |  |  |  |  |  |  |  |

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

**NOTES TO THE UNAUDITEDCONDENSED CONSOLIDATED FINANCIAL STATEMENTS**

**1.  BASIS OF PRESENTATION**

The accompanying unaudited consolidatedfinancial statements of ESG Re Limited (together with its subsidiaries, the“Company”) have been prepared in accordance with generally accepted accountingprinciples in the United States of America (“U.S. GAAP”) except pursuant to therules and regulations of the Securities and Exchange Commission which do notinclude all of the information and footnotes required by U.S.GAAP for completefinancial statements.  In the opinion ofmanagement, these unaudited financial statements reflect all adjustmentsconsidered necessary for a fair presentation of financial position, results ofoperations and comprehensive income (loss) as of and for the periodspresented.  The results of operationsfor any interim period are not necessarily indicative of the results for a fullyear.  These unaudited consolidatedfinancial statements should be read in conjunction with the auditedconsolidated financial statements, and related notes thereto, included in theCompany’s 2000 Annual Report on Form 10-K.

**2.  SUMMARY OFSIGNIFICANT ACCOUNTING POLICIES**

The Company’s condensed consolidatedfinancial statements have been prepared in accordance with U.S. GAAP.  The Company’s significant accountingpolicies include the following:

*(A)*       *PREMIUM REVENUES*

Premiums written are estimated andrecognized at the inception of the reinsurance contract, based upon informationreceived from intermediaries and ceding companies.  The Company compares estimated written premiums to actualpremiums 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, which means that the actual ultimate premium written may notbe known with certainty for prolonged periods. Differences between such estimates and actual amounts as reported byceding companies are recorded in the period in which the actual amounts aredetermined.

The reinsurance contacts entered into bythe Company are primarily of short duration. 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 for unpaid losses and lossadjustment expenses includes an estimate of reported case reserves and anestimate for losses incurred but not reported. Case reserves are estimated based on ceding company reports and otherdata considered relevant to the estimation process.  The liability for losses incurred but not reported is based to alarge extent on the expectations of ceding companies about ultimate loss ratiosat the inception of the contracts, supplemented by industry experience and theCompany’s specific historical experience where available.  As the Company has limited specifichistorical experience on a significant number of its programs on which to baseits estimate of losses incurred but not reported, its reliance on ceding companyexpectations and industry experience is necessarily increased, which increasesthe uncertainty involved in the loss estimation process

The reserves as established by managementare reviewed periodically, and adjustments are made in the periods in whichthey become known.  Although managementbelieves that an adequate provision has been made for the liability for lossesand loss expenses, based on all available information, there can be noassurance that the ultimate losses will not differ significantly from theamounts provided.

*(C)*       *INVESTMENTS*

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

Costs relating to the production of newbusiness (primarily commissions and certain costs of marketing) are deferredand included in the deferred acquisition cost asset to the extent that suchcosts are recoverable from future related policy revenues.  The deferred acquisition costs are beingamortized over the periods in which the related premiums are earned.  Such deferred costs are reviewed todetermine if they are recoverable from future income, including investmentincome and, if not considered recoverable, are charged to expense.

*(E)*       *REINSURANCEPREMIUMS CEDED*

Reinsurance premiums ceded are reportedas prepaid reinsurance premiums and amortized over the respective contract orpolicy periods in proportion to the amount of insurance protectionprovided.  Commissions on reinsuranceceded are deferred over the terms of the contracts of reinsurance to which theyrelate and amortized in proportion to the amount of insurance protectionprovided.

*(F)*       *FOREIGNCURRENCY TRANSLATION*

The functional and reporting currency ofthe Company is U.S. dollars.  Foreigncurrency receivables or payables that are denominated in a currency other thanU.S. dollars are translated into U.S. dollars at the rates of exchange ineffect at the balance sheet date.  Theresulting exchange gains or losses are included in the results of operations.  Exchange gains and losses related to thetranslation of investments available for sale are included in the netunrealized appreciation (depreciation) of investments, net of deferred incometaxes, as a separate component of “accumulated other comprehensive income(loss)”.  Assets and liabilities relatedto foreign operations are translated into U.S. dollars at the exchange rate ineffect at the balance sheet date; revenues and expenses are translated intoU.S. dollars using weighted average rates for the period.  Gains and losses resulting from translatingforeign currency financial statements, net of deferred income taxes, areexcluded from income and included as a separate component of “accumulated othercomprehensive income (loss)”.

*(G)*       *USE OF ESTIMATES*

The preparation of financial statementsin accordance with U.S. GAAP requires management to make estimates andassumptions that affect the reported amounts of assets and liabilities anddisclosure of contingent assets and liabilities at the date of the financialstatements and the reported amounts of revenues and expenses during thereporting 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 value of the Company’sinvestments approximates their fair value and is based on quoted marketprices.  Due to the uncertainty withrespect to both the timing and amount of the proceeds to be realized from theCompany’s other investments, it is not practicable to determine the fair valueof these other investments.  Thecarrying value of other financial instruments, including cash and cashequivalents, accrued investment income, and other receivables and payablesapproximate their estimated fair value due to the short-term nature of thebalances.

**3.  COMMITMENTS ANDCONTINGENCIES**

*             (A)  EMPLOYMENT CONTRACTS*

The Company has entered into employmentcontracts with several employees for terms of one to five years, which havetotal minimum commitments of $1.3 million excluding any performance bonusesthat are determined by the Board of Directors of the Company as at June 30,2001.  The contracts include variousnon-compete clauses following termination of employment.
*             (B)  LEASE COMMITMENTS*

The Company and its subsidiaries havevarious obligations under operating leases.The future minimum commitments under lease and employment agreements are asfollows:

 
U.S. dollars in  thousandsEmployment  Commitments Lease  Commitments Total    Years Ending December  31,       2001$700 $494 $1,194  2002508 846 1,354  200377 755 832  2004— 558 558  2005— 353 353  Thereafter— 654 654     Total$1,285 $3,660 $4,945     
*             (C)  LETTERS OF CREDIT*

As of June 30, 2001, Secured Letter ofCredit and Trust Accounts in the aggregate amount of $102.6 million have beenissued in favor of ceding companies with $56.4 million related to Letters ofCredit issued and $46.2 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 110% of the amount of the outstanding Letter of Credit, and 102% of theamount of the outstanding Trust Accounts. As of December 31, 2000, Secured letters of Credit and Trust Accounts inthe amount of $95.8 million were issued in favor of ceding companies.

*             (D)  PENSION OBLIGATIONS*

Certain subsidiaries of the Company areobligated to make defined contributions to pension plans for theiremployees.  As of June 30, 2001, therewere outstanding liabilities for pension contributions of  $533 thousand.

             *(E)         CONTINGENCIES*

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

In February 2000, Odyssey Re institutedan action in England against a broker, Stirling Cooke Brown, alleging fraud andconspiracy on the reinsurance placement of 1997 and 1998 personal accident andworkers compensation “carve out” business with Odyssey Re.  These proceedings mirror earlier proceedingscommenced in New York, which were dismissed on jurisdictional grounds.  During 1998, ESG accepted a 25% quota sharereinsurance treaty with Odyssey Re (UK) retroactive to January 1, 1998.  This treaty covers various insurance companiesinvolved in the litigation Odyssey Re instituted in New York over 1997 and 1998business.  This treaty terminated as ofDecember 31, 1998 but ESG renewed its participation for 1999 directly to one ofthose ceding companies.  In December1999, the Company gave notice to rescind its contract with Odyssey Re (UK) formisrepresentation and failure to disclose material facts.  On November 29, 2000 the company filed suitin the High Court to seek judicial confirmation of its rescission.  On February 5, 2001 Odyssey Re filed aresponse.  On March 21, 2001, theCompany filed a motion for summary judgment. The motion was substantially based on an admission by Odyssey Re (UK) thata misrepresentation had been made to the Company in connection with the quotashare, and was supported by evidence from fact and expert witnesses.  The Company’s intention was to re-evaluatethe motion if Odyssey Re (UK) served any evidence.  Subsequently, Odyssey Re (UK) withdrew their admission, and, lessthan a week 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 defence, which had not beencontained in their initial pleading.
The Company has now recognized that thecourt would be very unlikely to give a summary judgment on the evidence as itstands, and has accordingly withdrawn its motion.  This withdrawal is in no way an acknowledgement that thecompany’s prospects of success in its litigation with Odyssey Re (UK) are anyless good than they were, but simply an acceptance that the issues, which havebeen raised, require a trial.  Indeed,the Company remains confident that it will prevail in that litigation, andintends to pursue the litigation aggressively. The Company may reissue its motion for summary judgment at any time ifjustified by the state of the evidence and the pleadings.

The company has also given notice torescind the 1999 account.  The Companyis now in arbitration regarding the 1999 account.  It is currently expected that both these matters will be heard inthe mid to late 2002 timeframe.  At thistime, the Company is unable to determine the amount of its exposure and thepossible effect upon the Company’s business, financial condition or results ofoperation from these two contracts.

**4.          DISCONTINUEDOPERATIONS**

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

The operations of 4Sigma have enteredinto a strategic partnership with Bertelsmann/Springer for the marketing of itsservices to German health insurers. Although 4Sigma is being successful in writing new business, the volumeof business needed to cover operating costs has currently not beenachieved.  As a result, 4Sigma iscurrently re-evaluating its current business model and assessing itsoptions.  To support immediate cashneeds and to preserve its equity participation in 4Sigma, in the secondquarter, the Company participated in a rights offering by 4Sigma forconvertible preferred debt totaling $0.8 million.

For the three months ended June 30, 2000,the Healthcare Division reported revenue of $0.3 million and a net loss of $2.8million, or $0.26 per share.  For thesix months ended June 30, 2000, similar results were $0.3 million and $5.7million, or $0.51 per share, respectively.

Additionally on August 10, 2000 the Boardof Directors approved a plan to liquidate its majority-owned subsidiary inIndonesia.  This operation reported anet loss of $0.2 million on revenues of $0.4 million in the first half of 2000.

**5.   RELATED PARTIES**

Included in net investment income for thethree months and six months ended June 30, 2000 were related party investmentexpenses of $88 thousand and $129 thousand, respectively.

**6.   NEW ACCOUNTING PRONOUNCEMENTS**

In June 2001, the Financial AccountingStandards Board issued Statement of Financial Accounting Standard (SFAS) No.142, *Goodwilland 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 will not beamortized, but will rather be tested at least annually for impairment.  The Company will adopt SFAS No. 142 for itsfiscal year beginning January 1, 2002. The Company will evaluate goodwill under the SFAS 142 transitionalimpairment test and has not yet determined whether or not there is animpairment loss.  Any transitionalimpairment loss will be recognized as a change in accounting principle.

In June 2001, the Financial AccountingStandards Board issued Statement of Financial Accounting Standard (SFAS) No.141, *BusinessCombinations.*  SFAS No. 141 requires that allbusiness combinations initiated after June 30, 2001 be accounted for under thepurchase method and addresses the initial recognition and measurement ofgoodwill and other intangible assets acquired in a business combination.  Management does not expect the adoption ofSFAS 141 to have an impact on the financial position, results of operations or cashflows of the Company.
**INDEPENDENT ACCOUNTANTS’ REVIEW REPORT**

To the Board of Directors andShareholders of ESG Re Limited

We have reviewed the accompanyingcondensed consolidated balance sheet of ESG Re Limited and subsidiaries as ofJune 30, 2001 and the related condensed consolidated statements of operations,comprehensive income (loss) and cash flows for the three month and six monthperiods ended June 30, 2001 and 2000. These financial statements are the responsibility of the Company’smanagement.

We conducted our review in accordance withstandards established by the American Institute of Certified PublicAccountants.  A review of interimfinancial information consists principally of applying analytical procedures tofinancial data and of making inquiries of persons responsible for financial andaccounting matters.  It is substantiallyless in scope than an audit conducted in accordance with auditing standardsgenerally accepted in the United States of America, the objective of which isthe expression of an opinion regarding the financial statements taken as awhole.  Accordingly, we do not expresssuch an opinion.

Based upon our review, we are not awareof any material modifications that should be made to such condensedconsolidated financial statements for them to be in conformity with accountingprinciples generally accepted in the United States of America.

We have previously audited, in accordancewith auditing standards generally accepted in the United States, theconsolidated balance sheet of ESG Re Limited and subsidiaries as of December31, 2000 and the related consolidated statements of operations, comprehensiveincome, changes in shareholders’ equity and cash flows for the year then ended(not presented herein); and in our report dated April 2, 2001, we expressed anunqualified opinion on those consolidated financial statements.  In our opinion, the information set forth inthe accompanying condensed consolidated balance sheet as of December 31, 2000is fairly stated, in all material respects, in relation to the consolidatedbalance sheet from which it has been derived.

Deloitte & ToucheChartered AccountantsDublin, IrelandAugust 13, 2001
**ITEM 2.   MANAGEMENTDISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF   OPERATIONS.**

*The following is a discussion and analysis of the financialcondition as of June 30, 2001 and the results of operations of ESG Re Limitedand subsidiaries (the “Company” or “ESG”) for the three months and six monthsended June 30, 2001 as compared to the three months and six months ended June30, 2000.  This discussion and analysisshould be read in conjunction with the attached unaudited condensedconsolidated financial statements and notes thereto and the auditedconsolidated financial statements of the Company as of and for the year endedDecember 31, 2000 and notes thereto included in the Company’s Annual Report onForm 10-K for the fiscal year ended December 31, 2000.  The unaudited condensed consolidatedfinancial statements as of and for the three months and six months ended June30, 2001 and for the three months and six months ended June 30, 2000 and notesthereto have been reviewed by independent accountants in accordance withstandards established by the American Institute of Certified PublicAccountants.*

*The results of operations and cash flows for any interimperiod are not necessarily indicative of results for the full year.  In addition, this quarterly report containsforward-looking statements regarding future profit levels, premium growth, cashflows and other matters, which involve risks and uncertainties that may affectthe actual results of operations of the Company.  The following important factors, among others, could cause actualresults to differ materially from those set forth in the forward-lookingstatements: claims frequency, claims severity, economic activity, competitivepricing and the regulatory environment in which the Company operates.*

**GENERAL**

Effective with the divestiture of thehealth care business in June, 2000, the Company now considers its reinsuranceactivities to constitute a single operating segment on the basis that suchactivities are monitored and evaluated primarily on a company-wide basis.  The major lines of business of the Company’sreinsurance operations include medical expense, personal accident and disability,credit, life and other special risk reinsurance.  The results from the Health Care division are reported in priorperiods as discontinued operations.

**RESULTS OF OPERATIONS**

For the three months ended June 30, 2001,the Company had a net loss of $5.9 million compared to a net loss of $9.3million for the second quarter of 2000. The net loss per share for the three months ended June 30, 2001 was$0.50 compared with a net loss per share of $0.79 for the second quarter2000.  Included in last year’s resultswas a loss from discontinued operations of $3.0 million or $0.26 per sharerepresenting the results from the divested non-core health careoperations.  The net operating loss forsecond quarter 2001, excluding realized investment gains and losses, was $0.21per share.  Net operating loss for thesecond quarter 2000, which excludes realized investment gains and losses andloss on equity investments, was $0.81 per share.

For the quarter ended June 30, 2001, anunderwriting profit (before operating expenses) of $1.2 million, management feerevenue of $0.2 million and investment income of $3.3 million were offset byoperating expenses of $7.1 million (including a provision of $0.9 million tothe Company’s legal reserve for contingent matters) and realized losses frominvestments of $3.5 million (including a write-down of other investments of$4.2 million).

For the six months ended June 30, 2001,the Company had a net loss of $9.9 million, compared to a net loss of $19.5million for the same period in 2000. Net loss per share for the six months ended June 30, 2001 was $0.84compared to net loss per share of $1.67 for the six months ended June 30, 2000.

Total revenues for the three months endedJune 30, 2001 were $40.5 million, consisting of net premiums earned of $40.5million, net investment income of $3.3 million, realized investment losses of$3.5 million, and management fee revenue of $0.2 million.  For the three months ended June 30, 2000total revenues were $80.5 million consisting of net premiums earned of $76.5million, net investment income of $3.2 million, realized investment gains of$0.3 million, loss on equity investments of $0.1 million and management fee revenue of $0.6 million.
Total revenues for the six months endedJune 30, 2001 were $85.2 million, consisting of net earned premiums of $80.8million, net investment income of $6.7 million, realized investments losses of$2.7 million, and management fee revenue of $0.4 million.  For the six monthsended June 30, 2000 total revenues were $140.5 million consisting of netpremiums earned of $134.2 million, net investment income of $6.1 million,realized investment losses of $1.1 million, gain on equity investments of $0.3million and management fee revenue of $1.0 million.

For the three months ended June 30, 2001ESG’s expenses were $46.4 million, consisting of $26.2 million of losses andloss expense, $13.1 million of acquisition costs, and $7.1 million of operatingexpenses.  Total expenses for the threemonths ended June 30, 2000 were $86.8 million, consisting of $54.7 million oflosses and loss expenses, $23.4 million of acquisition costs, and $8.7 millionof operating expenses.

Total expenses for the six months endedJune 30, 2001 were $95.0 million, consisting of $56.2 million of losses andloss expense, $25.0 million of acquisition costs, and $13.8 million ofoperating expenses.  For the six monthsended June 30, 2000 total expenses were $154.1 million consisting of $99.9million of losses and loss expense, $38.1 million of acquisition costs, and $16.1million of operating expenses.

**NET UNDERWRITING INCOME**

Gross premiums written decreased by $16.7million, or 34.5%, for the three months ended June 30, 2001, compared to thecorresponding prior year period.  Forthe six months ended June 30, 2001, gross premiums written decreased by $85.0million, or 53.1% when compared with the same prior year period.  The reduction, for the most part, is areflection of the Company’s stated objective to reduce premium writings,concentrating on those markets that offer the best profit opportunities.  In addition, the Company rescinded onemedical treaty underwritten in 1999 in the first quarter of this year, whichresulted in a reduction in Gross Written and Net Earned Premium of $9.5million, respectively.

An underwriting profit (before operatingcosts) of $1.3 million and $2.6 million was posted in the quarter and sixmonths ended June 30, 2001, respectively, in respect of the 2001 underwritingyear reflecting primarily the growth in the partnership enterprise division ofthe business.  Through the first sixmonths of 2001, over 82% of the premium earned came from business underwrittenduring the 1999 and 2000 underwriting years, prior to the Company’simplementation of stricter, centralized underwriting controls.  This element of the business contributed anunderwriting loss before operating costs of $0.1 million in the second quarterand an underwriting loss before operating costs of $3.2 million year todate.  The year to date results werenegatively impacted by the cost of $2.2 million incurred in the first quarterto exit certain unprofitable books of business that automatically would haverenewed.  Rate increases being effectedon premiums written in respect of the 2001 underwriting year are having amarginal effect on underwriting results to date, but are expected to contributesignificantly more in ensuing quarters as that premium is earned.  Looking forward, little to no underwritingprofit is expected from premiums being earned from business written in prior years.
Underwriting results for the three monthsended June 30, 2001 and 2000, by line of business and in total were as follows:
Three months ended  June 30, 2001  U.S. dollars in thousandsMedical Personal  Accident Credit Life Other Total       Gross premiums written$30,076 $5,791 $(5,620)$(215)$1,717 $31,749        Net premiums written28,267 6,430 (5,531)(1,162)1,666 29,671        Net premiums earned31,412 9,364 (738)(1,202)1,646 40,482 Losses and loss  expenses22,416 4,739 (1,615)(1,045)1,743 26,238 Acquisition costs10,668 2,871 117 (336)(250)13,070 Operating costs5,467 1,630 (129)(209)287 7,046        Net underwriting  income (loss)$(7,139)$124 $889 $388 $(134)$(5,872)       
 
Three months ended  June 30, 2000  U.S. dollars in thousandsMedical Personal  Accident Credit Life Other Total       Gross premiums written$31,189 $14,871 $213 $1,346 $873 $48,492        Net premiums written29,847 13,156 203 1,264 205 44,675        Net premiums earned52,741 16,917 4,235 1,251 1,302 76,446 Losses and loss  expenses39,126 11,780 2,285 640 858 54,689 Acquisition costs15,296 5,327 1,664 450 707 23,444 Operating costs5,200 1,721 431 127 495 7,974        Net underwriting  income (loss)$(6,881)$(1,911)$(145)$34 $(758)$(9,661)       
For the quarter ended June 30, 2001, asmentioned previously, overall gross written premiums declined from prior yearlevels.  The majority of the decline inpersonal accident writings is a function of the company’s not renewing orotherwise exiting certain books of business previously underwritten out of itsnow dormant Hamburg office.  Inaddition, the second quarter includes a premium reduction of $15.0 million inestimated premiums from the North American medical book of businessunderwritten in 2000.

The decline in the Life and Credit booksof business in the second quarter when compared with the second quarter of 2000is also a function of adjusting estimated written premium to actual as currentinformation is received from cedants.

It is important to note that thesignificant loss reserve increase recorded in the third quarter of last yearcontinues to prove adequate.
Underwriting results for the six monthsended June 30, 2001 and 2000, by line of business and in total were as follows:
Six months ended June  30, 2001  U.S. dollars in thousandsMedical Personal  Accident Credit Life Other Total       Gross premiums written$46,053 $19,133 $9,223 $(1,392)$1,957 $74,974        Net premiums written41,437 16,468 9,447 (2,285)1,797 66,865        Net premiums earned44,663 35,509 (763)(515)1,897 80,791 Losses and loss  expenses33,634 24,500 (1,698)(1,376)1,162 56,222 Acquisition costs14,176 11,111 28 106 (418)25,003 Operating costs7,634 5,906 (133)(97)327 13,637        Net underwriting  income (loss)$(10,781)$(6,007)$1,040 $851 $826 $(14,071)       
 
Six months ended June  30, 2000  U.S. dollars in thousandsMedical Personal  Accident Credit Life Other Total       Gross premiums written$101,243 $46,221 $4,021 $4,621 $3,829 $159,935        Net premiums written95,354 42,543 3,856 4,263 3,138 149,154        Net premiums earned91,433 30,920 6,216 3,305 2,383 134,257 Losses and loss  expenses70,549 23,044 2,542 1,643 2,140 99,918 Acquisition costs24,663 8,411 2,894 1,037 1,118 38,123 Operating costs9,557 3,385 667 371 623 14,603        Net underwriting  income (loss)$(13,336)$(3,920)$113 $254 $(1,498)$(18,387)       
For the six months ended June 30, 2001,gross written premiums are less than half of last year’s level, again, in linewith the Company’s stated objectives. The net underwriting loss for the six months ended June 30, 2001approximated total operating costs as the majority of earned premium from priorunderwriting years is contributing little in the way of underwriting income,again in line with expectations. Improvement in net underwriting income will be a function of operatingresults from the 2001 underwriting year, as those premiums are earned, andmanagement of operating costs in line with reduced premium writings.
**Operating Ratios**

The operating ratios for the three monthsended June 30, 2001 and 2000, by line of business and in total were as follows:
Three months ended  June 30, 2001Medical Personal  Accident Credit Life Other Total       Loss ratio71.4%50.6%n/m 86.9%105.9%64.8%Acquisition expense  ratio34.0%30.7%n/m 27.9%(15.2%)32.3%       Loss and acquisition  expense Ratio105.4%81.3%n/m 114.8%90.7%97.1%       Operating expense  ratio          17.4%            Combined ratio          114.5%            
 
Three months ended  June 30, 2000Medical Personal  Accident Credit Life Other Total       Loss ratio74.2%69.6%54.0%51.1%65.9%71.5%Acquisition expense  ratio29.0%31.5%39.3%36.0%54.3%30.7%       Loss and acquisition  expense Ratio103.2%101.1%93.3%87.1%120.2%102.2%       Operating expense  ratio          10.4%            Combined ratio          112.6%            
The operating ratios for the six monthsended June 30, 2001 and 2000, by line of business and in total were as follows:
Six months ended June  30, 2001Medical Personal  Accident Credit Life Other Total       Loss ratio75.3%69.0%n/m n/m 61.3%69.6%Acquisition expense  ratio31.7%31.3%n/m n/m (22.0%)30.9%       Loss and acquisition  expense Ratio107.0%100.3%n/m n/m 39.3%100.5%       Operating expense  ratio          16.9%            Combined ratio          117.4%            
 
Six months ended June  30, 2000Medical Personal  Accident Credit Life Other Total       Loss ratio77.1%74.5%40.9%49.7%89.8%74.4%Acquisition expense  ratio27.0%27.2%46.6%31.4%46.9%28.4%       Loss and acquisition  expense Ratio104.1%101.7%87.5%81.1%136.7%102.8%       Operating expense  ratio          10.9%            Combined ratio          113.7%            
 

The operating expense ratios for thethree months and six months ended June 30, 2001 and 2000, respectively, werecalculated by expressing total administrative expenses net of corporate officeexpenses as a percentage of net premiums earned.  Total operating expenses for the three months ended June 30, 2001represent 23.7% of net premiums written and 17.4% of net premiums earned,compared to 17.8% and 10.4%, respectively, for the three months ended June 30,2000. Total operating expenses for the six months ended June 30, 2001 represent20.4% of net premiums written and 16.9% of net premiums earned, compared to9.8% and 10.9%, respectively, for the prior year period.  Savings currently being generated from therationalization of the company’s traditional reinsurance business are beinginvested in the expansion of its partnership enterprise division.

**Geographical Distribution**

The distribution of gross writtenpremiums for the three months ended June 30, 2001 and 2000 and for the yearended December 31, 2000, is as follows:
 Three  months ended  June 30, 2001 Three  months ended  June 30, 2000 Year  ended  December 31, 2000     Western Europe(8.9%)28.7%18.4%North America77.6%58.5%53.8%Latin America25.9%9.7%15.7%Asia4.5%5.2%5.6%Other0.9%(2.1%)6.5%    Total100.0%100.0%100.0%    
The Company wrote a number of medicalcontracts in North America during the quarter, which accounted for 79.7% of thetotal gross written premium for the quarter. The Company has been able toincrease premium rates and strengthen terms of trade in the North and LatinAmerican business without major loss of business.  The Company is in the process of securing additional co-reinsuranceof up to 50% of its North American portfolio to limit its net retention whilstcontinuing to write profitable business. The reduction of writings in Western Europe reflects the Company’scurrent exit of that market given the lack of business opportunities that meetthat Company’s goals.

The distribution of gross writtenpremiums for the six months ended June 30, 2001 and 2000 and for the year endedDecember 31, 2000, is as follows:
 Six  months ended  June 30, 2001 Six  months ended  June 30, 2000 Year  ended  December 31, 2000     Western Europe27.6%23.2%18.4%North America48.7%50.0%53.8%Latin America13.9%23.5%15.7%Asia8.8%2.0%5.6%Other1.0%1.3%6.5%    Total100.0%100.0%100.0%    
 

**Product Mix**

The distribution of gross premiumswritten by line of business for the three months ended June 30, 2001 and 2000,and for the year ended December 31, 2000 was as follows:
 Three  months ended  June 30, 2001 Three  months ended  June 30, 2000 Year  ended  December 31, 2000     Medical94.7%64.3%71.0%Personal Accident18.2%30.7%22.0%Credit(17.7%)0.4%1.4%Life(0.7%)2.8%3.7%Other5.5%1.8%1.9%    Total100.0%100.0%100.0%    
The distribution of gross premiumswritten by line of business for the six months ended June 30, 2001 and 2000,and for the year ended December 31, 2000 was as follows:
 Six  months ended  June 30, 2001 Six  months ended  June 30, 2000 Year  ended  December 31, 2000     Medical61.4%63.3%71.0%Personal Accident25.5%28.9%22.0%Credit12.3%2.5%1.4%Life(1.9%)2.9%3.7%Other2.7%2.4%1.9%    Total100.0%100.0%100.0%    
Through co-reinsurance of the NorthAmerican medical portfolio and the expansion of credit and life programs, theCompany expects to continue to reduce the proportion of medical business in theportfolio going forward.

**Exposure Management**

The Company manages its underwriting riskexposures through geographic distribution, an excess of loss reinsuranceprogram, and co-reinsurance.  TheCompany’s excess liability insurance policy generally provides limits up to amaximum of $30 million per occurrence, with a minimum attachment pointgenerally of $1 million.

**Management Fee Revenue**

Management fee revenue for the threemonths ended June 30, 2001 was $190 thousand, a reduction of $404 thousand fromthe corresponding prior period due to the Company retaining more business forits own account.

For the six months ended June 30, 2001,management fee revenue was $420 thousand, a reduction of $536 thousand from thecorresponding period in 2000, due to the Company retaining more business forits own account.
**OperatingExpenses**

Total operating expenses for the threemonths ended June 30, 2001 were $7.1 million, compared to $8.7 million for thethree months ended June 30, 2000 and $6.7 million for the three months endedMarch 31, 2001. The increase in the quarter when compared to the first quarterof this year was the result of adding $0.9 million to the company’s legalreserve to cover estimated costs associated with resolving disputes involvingcertain reinsurance contracts. When compared with the second quarter of lastyear, the reduction in expense is a function of savings being generated fromthe closure of some parts of the operation, net of the Company’s investment inthe Partnership Enterprise division as the Company effects its strategy toexpand those operations into Southern Europe.

**INVESTMENT RESULTS**

The investment results for the threemonths ended June 30, 2001 and 2000 were as follows:
Three Months ended  June 30, 2001  U.S dollars in thousandsAverage  Investments Net  Investment  Income (1) Annualized  Effective Yield Net  Realized  Investment  Gains (Losses)     Investments –  available for sale$164,094 $2,970 7.2%$719 Other investments14,252 274 7.7%(4,200)Cash and cash  equivalents16,668 205 4.9%—      Total$195,014 $3,449 6.6%$(3,481)     
 
Three Months ended  June 30, 2000  U.S dollars in thousandsAverage  Investments Net  Investment  Income (1) Annualized  Effective Yield Net  Realized  Investment  Gains      Investments –  available for sale$176,637 $2,847 6.4%$344 Other investments10,723 128 4.8%— Cash and cash  equivalents22,004 190 3.4%—      Total$209,364 $3,165 6.0%$344      
The investment results for the six monthsended June 30, 2001 and 2000 were as follows:
Six Months ended June  30, 2001  U.S dollars in thousandsAverage  Investments Net  Investment Income(1) Annualized  Effective Yield Net  Realized Investment Gains (Losses)     Investments –  available for sale$171,064 $6,934 8.1%$1,467 Other investments15,498 362 4.7%(4,200)Cash and cash  equivalents20,532 597 5.8%—      Total$207,094 $7,893 6.2%$(2,733)     
 
Six Months ended June  30, 2000  U.S dollars in thousandsAverage  Investments Net  Investment Income(1) Annualized  Effective Yield Net  Realized Investment Losses     Fixed maturity  investments$178,143 $5,506 6.2%$(1,071)Other investments11,187 256 4.6%— Cash and cash  equivalents24,248 330 2.7%—      Total$213,578 $6,092 5.7%$(1,071)     
 

(1)  Netinvestment income is net of investment-related expenses
Following the work done late last year tofully address the underwriting issues of the past, the Company initiated a fullreview and audit of all entities where it holds a minority shareholdinginterest.  Based on the initial resultsof this exercise, it adjusted its carrying value of these investments by $4.2million in the quarter ended June 30, 2001. This provision is included in NetRealized Investment Losses.  The currentrealizable value for these investments is reported at $14.8 million at June 30,2001.

**Liquidity and Capital Resources**

As of June 30, 2001, total investmentsand cash were $195.0 million compared to $212.2 million at December 31,2000.  Cash flow from operatingactivities for the six months ended June 30, 2001 was $(14.5) million.  All fixed maturity securities in theCompany’s investment portfolio are classified as available for sale and arecarried at fair value.  The fixedmaturity investment portfolio as of June 30, 2001 and December 31, 2000, wereas follows:
As at June 30, 2001  U.S. dollars in thousandsFair  Value Duration  (Years) Market  Yield Average  Credit  Rating     Corporate securities$71,718 3.3 6.1%AA U.S. treasury  securities and obligations of U.S. government corporations and agencies37,260 4.0 6.2%AAA Mortgage & Asset  backed securities31,130 2.8 7.7%AAA Obligations of states  and political subdivisions18,334 2.6 6.1%AAA Foreign currency debt  securities5,652 1.2 4.0%AAA      Total$164,094 2.8 6.0%AA      
 
As at December 31,  2000  U.S. dollars in thousandsFair  Value Duration  (Years) Market  Yield Average  Credit  Rating     Corporate securities$71,382 3.0 6.6%A+ U.S. treasury  securities and obligations of U.S. government corporations and agencies38,127 2.4 6.1%AAA Mortgage & Asset  backed securities33,771 3.0 8.1%AAA Obligations of states  and political subdivisions18,753 3.0 7.3%AA+ Foreign currency debt  securities6,445 1.6 4.5%AAA      Total$168,478 2.6 6.5%AA      
The Company’s investment policy objectiveis to maximize long-term investment returns while maintaining a liquid,high-quality portfolio.  To this end,the investment policy requires that the portfolio have an average creditquality rating of AA, no more than 3% of the portfolio invested in thesecurities of a single issuer (other than issues of sovereign governments witha rating of AA or better), and a target duration of 2.75 years.  The Company’s investment portfolio reflectsits investment policy and guidelines.
The Company expects that its financialand operational needs for the foreseeable future will be met by funds generatedfrom operations and from liquidating a small percentage of its investmentportfolio.  The Company expects toremain highly capitalized after any near-term investment portfolio liquidation.

Shareholders’ equity as of June 30, 2001was $105.5 million compared to $113.6 million at December 31, 2000.  Book value per common share decreased to$8.95 as of June 30, 2001 from $9.64 as of December 31, 2000.

**CURRENT DEVELOPMENTS**

MARKET RISK

The Company is subject to market riskarising from the potential change in value of its various financialinstruments.  These changes may be dueto fluctuations in interest rates or foreign exchange rates, or both in thecase of foreign currency investments. The Company monitors its exposure to interest rate and currency raterisk on a quarterly basis and currently does not believe that the use ofderivatives to manage such risk is necessary. The Company intends to re-evaluate the need for a formal hedgingstrategy on a periodic basis, and may determine that such a strategy, includingthe use of derivative instruments, is appropriate in the future.

INTEREST RATE RISK

The largest source of market risk for theCompany is interest rate risk on its portfolio of fixed maturity investments,especially fixed rate instruments.  Inaddition, the credit worthiness of the issuer, relative values of alternativeinvestments, liquidity and general market conditions may affect fair values ofinterest rate sensitive instruments.

The Company’s general strategy withrespect to fixed maturity securities is to invest in high quality securitieswhile maintaining diversification and to avoid significant concentrations inindividual issuers’ industry segments or countries.

FOREIGN CURRENCY RISK

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

INFLATION

Inflation has not had a material impacton the Company’s operations for the periods presented.  The Company has commenced writing reinsurancebusiness in Latin America, which has experienced periods of highinflation.  However, it is possible thatfuture inflationary conditions may impact subsequent accounting periods.

THE EURO

On January 1, 1999, a single currency,the “euro” was adopted as the national currency of the 11 participatingcountries in the European Monetary Union, including Ireland, where the Companyoperates and in which the Company maintains a significant presence.  The Company’s Irish subsidiaries will not berequired to use the euro for accounting purposes prior to January 1, 2002.  Currently, the Company expects that theimpact of the conversion will have no material impact on the Company’soperations, accounting systems or financial reporting.
**PART II   OTHERINFORMATION**

**ITEM 1. LEGAL PROCEEDINGS**

There are no lawsuits pending, or to theknowledge of the Company threatened, to which the Company or any of itssubsidiaries or affiliates is a party or of which any of their properties issubject other than the routine litigation incidental to the business.

**ITEM 2. CHANGES IN SECURITIES**

Not applicable.

**ITEM 3. DEFAULTS UPON SENIORSECURITIES**

Not applicable.

**ITEM 4. SUBMISSION OF MATTERSTO A VOTE OF SECURITIES HOLDERS**

Not Applicable.

**ITEM 5. OTHER TRANSACTIONS**

Not applicable.

**ITEM 6. EXHIBITS AND REPORT ONFORM 8-K**

(a)         Exhibits

Exhibit10.1       Agreements relating to thetransfer of certain assets and liabilities to, and subsequent sale of, VBB(Bermuda) Limited.

             Exhibit11.1       Computation of Earnings PerShare

             Exhibit15.1       Consent of Deloitte &Touche

(b)        Reporton Form 8-K

Not Applicable.
**SIGNATURES**

Pursuant to the requirements of theSecurities Exchange Act of 1934, the Company has duly caused this report to besigned on its behalf by the undersigned thereunto duly authorized.

 

August 13, 2001
 ESG  RE LIMITED   By:   /s/ Mark E. Oleksik   Name:  Mark E. Oleksik Title:  Senior Financial Officer & Controller