-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, FcSJBsz2fzAdDKcE1FVaIvBR4s9m93+oO7LySV37wQn9tQnfETbam/bu3gLkhOHq TsXdoRPPfy2dv2kbvRgl8g== 0000912057-01-515928.txt : 20010516 0000912057-01-515928.hdr.sgml : 20010516 ACCESSION NUMBER: 0000912057-01-515928 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 20010331 FILED AS OF DATE: 20010515 FILER: COMPANY DATA: COMPANY CONFORMED NAME: ESG RE LTD CENTRAL INDEX KEY: 0001049624 STANDARD INDUSTRIAL CLASSIFICATION: LIFE INSURANCE [6311] IRS NUMBER: 000000000 FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-23481 FILM NUMBER: 1637567 BUSINESS ADDRESS: STREET 1: SKANDIA INTERNATIONAL HOUSE STREET 2: 16 CHURCH STREET, HAMILTON CITY: BERMUDA STATE: D0 BUSINESS PHONE: 4412952185 MAIL ADDRESS: STREET 1: SKANDIA INTERNATIONAL HOUSE STREET 2: 16 CHURCH STREET CITY: BERMUDA 10-Q 1 a2049566z10-q.txt 10-Q ================================================================================ UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 ----------------- FORM 10-Q QUARTERLY REPORT PURSUANT TO SECTION 12 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended MARCH 31, 2001 Commission file number 000-23481 ----------------- ESG RE 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) ----------------- Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for 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 {X} No {_} The number of the Registrant's common shares (par value $1.00 per share) outstanding as of May 08, 2001, was 11,787,725. ================================================================================ ESG RE LIMITED 1.1 INDEX TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
PAGE Condensed Consolidated Balance Sheets as of March 31, 2001 (unaudited) and December 31, 1 2000 Condensed Consolidated Statements of Operations for the three months ended March 31, 2001 and 2000 (unaudited) 2 Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2001 and 2000 (unaudited) 3 Condensed Consolidated Statements of Comprehensive Income for the three months ended March 31, 2001 and 2000 (unaudited) 4 Notes to the Condensed Consolidated Financial Statements (unaudited) 5 Independent Accountants' Review Report 9
PART I - FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA ESG RE LIMITED CONDENSED CONSOLIDATED BALANCE SHEETS (U.S. dollars in thousands except share and per share data)
March 31, December 31, 2001 2000 ------------------------------------- (Unaudited) ASSETS Investments - available for sale, at fair value (cost: $163,409 and $166,513) $ 168,872 $ 168,478 Cash and cash equivalents 22,788 26,032 Other investments 17,973 17,736 ------------------------------------- Total investments and cash 209,633 212,246 Accrued investment income 2,739 3,240 Management fees receivable 379 713 Reinsurance balances receivable 226,591 241,587 Reinsurance recoverable on incurred losses 15,855 15,633 Funds retained by ceding companies 19,436 18,432 Prepaid reinsurance premiums 3,974 5,432 Deferred acquisition costs 46,324 46,611 Other assets 6,149 6,281 Cash and cash equivalents held in a fiduciary capacity 4,780 4,619 ------------------------------------- TOTAL ASSETS $ 535,860 $ 554,794 ===================================== LIABILITIES Unpaid losses and loss expenses $175,754 $179,614 Unearned premiums 141,825 148,124 Acquisition costs payable 58,575 64,604 Reinsurance balances payable 28,053 30,511 Accrued expenses, accounts payable, and other liabilities ($85 and $85 due to related parties) 13,359 13,756 Fiduciary liabilities 4,780 4,619 ------------------------------------- Total liabilities 422,346 441,228 ------------------------------------- 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, net of tax (5,021) (5,331) Unrealized gains on securities, net of reclassification adjustments and tax 5,463 1,965 ------------------------------------- Accumulated other comprehensive income 442 (3,366) ------------------------------------- Retained (deficit) (106,433) (102,491) ------------------------------------- Total shareholders' equity 113,514 113,566 ------------------------------------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 535,860 $ 554,794 =====================================
The accompanying notes are an integral part of the consolidated financial statements. 1 ESG RE LIMITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (U.S. dollars in thousands except share and per share data) (Unaudited)
Three Months Ended ------------------------------------ March 31, 2001 March 31, 2000 ------------------------------------ REVENUES Net premiums written $37,193 $104,479 Change in unearned premiums 3,116 (46,668) ------------------------------------ Net premiums earned 40,309 57,811 Management fee revenue 230 362 Net investment income 3,408 2,926 Gain (loss) on equity investments (27) 334 Net realized investment gains (losses) 748 (1,415) ------------------------------------ 44,668 60,018 ------------------------------------ EXPENSES Losses and loss expenses 29,985 45,229 Acquisition costs 11,934 14,679 Administrative expenses 6,692 7,416 ------------------------------------ 48,611 67,324 ------------------------------------ NET (LOSS) INCOME FROM CONTINUING OPERATIONS BEFORE TAXES (3,943) (7,306) Income tax expense - - ------------------------------------ NET (LOSS) INCOME FROM CONTINUING OPERATIONS (3,943) (7,306) Net loss from discontinued operations (Note 4) - (2,920) ------------------------------------ NET (LOSS) INCOME $ (3,943) $ (10,226) ==================================== PER SHARE DATA Basic net loss per share from continuing operations $ (0.33) $ (0.63) Diluted net loss per share from continuing operations $ (0.33) $ (0.63) ==================================== Basic net loss per share $ (0.33) $ (0.88) Diluted net loss per share $ (0.33) $ (0.88) ==================================== Weighted average shares outstanding Basic 11,782,500 11,575,898 Diluted 11,782,500 11,575,898 ==================================== Dividends declared per share $ --- $ 0.08 ====================================
The accompanying notes are an integral part of the consolidated financial statements. 2 ESG RE LIMITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (U.S. dollars in thousands) (Unaudited)
Three Months Ended ------------------------------------- March 31, 2001 March 31, 2000 ------------------------------------- CASH FLOWS FROM OPERATING ACTIVITIES - ------------------------------------ Net cash provided by (used in) operating activities $ (6,476) $ 2,084 ------------------------------------- CASH FLOWS FROM INVESTING ACTIVITIES - ------------------------------------ Cost of fixed maturity investments acquired - available for sale (115,573) (50,086) Proceeds from sale of fixed maturity investments - available for sale 119,141 53,821 Funding of strategic investments -- (4,340) Purchases of fixed assets (278) (450) Purchases of intangible assets -- (690) ------------------------------------- Net cash provided by (used in) investing activities 3,290 (1,745) ------------------------------------- CASH FLOWS FROM FINANCING ACTIVITIES - ------------------------------------ Dividends paid -- (1,009) Repurchase of common shares (58) (1,940) ------------------------------------- Net cash used in financing activities (58) (2,949) ------------------------------------- Net decrease in cash (3,244) (2,610) Cash and cash equivalents at January 1 26,032 28,278 ------------------------------------- Cash and cash equivalents at March 31 $ 22,788 $ 25,668 =====================================
The accompanying notes are an integral part of the consolidated financial statements. 3 ESG RE LIMITED CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (U.S. dollars in thousands) (Unaudited)
Three Months Ended MARCH 31, 2001 MARCH 31, 2000 ------------------------------------- Net (loss) income $ (3,943) $ (10,226) ------------------------------------- Other comprehensive income, net of tax: Foreign currency translation adjustments 310 546 Unrealized losses on securities: Unrealized holding (losses)/gains arising during the period 3,498 (1,890) Less reclassification adjustment for losses included in net income -- 1,415 ------------------------------------- Other comprehensive income 3,808 71 Comprehensive (loss) income $ (135) $ (10,155) =====================================
The accompanying notes are an integral part of the consolidated financial statements. 4 NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 1. BASIS OF PRESENTATION The accompanying unaudited consolidated financial statements of ESG Re Limited (together with its subsidiaries, the "Company") have been prepared in accordance with generally accepted accounting principles in the United States of America ("U.S. GAAP") except pursuant to the rules and regulations of the Securities and Exchange Commission which do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, these unaudited financial statements reflect all adjustments considered necessary for a fair presentation of financial position, results of operations and comprehensive income as of and for the periods presented. The results of operations for any interim period are not necessarily indicative of the results for a full year. These unaudited consolidated financial statements should be read in conjunction with the audited consolidated financial statements, and related notes thereto, included in the Company's 2000 Annual Report on Form 10-K. The preparation of financial statements in accordance with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period as well as the disclosure of such amounts. Actual results could materially differ from those estimates and assumptions. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The Company's condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America ("U.S GAAP"). The Company's significant accounting policies include the following: (A) PREMIUM REVENUES Premiums written are estimated and recognized at the inception of the reinsurance contract, based upon information received from intermediaries and ceding companies. The Company compares estimated written premiums to actual premiums as reported by ceding companies on a periodic basis. The timeliness and frequency of ceding company reports vary considerably by ceding company, line of business and geographic area, which means that the actual ultimate premium written may not be known with certainty for prolonged periods. Differences between such estimates and actual amounts as reported by ceding companies are recorded in the period in which the actual amounts are determined. The reinsurance contracts entered into by the Company are primarily of short duration. Premiums written are recognized as earned over the coverage period in proportion to the amount of protection provided. Unearned premium reserves are established to cover the unexpired contract period. (B) RESERVE FOR LOSSES AND LOSS EXPENSES The reserve for unpaid losses and loss adjustment expenses includes an estimate of reported case reserves and an estimate for losses incurred but not reported. Case reserves are estimated based on ceding company reports and other data considered relevant to the estimation process. The liability for losses incurred but not reported is based to a large extent on the expectations of ceding companies about ultimate loss ratios at the inception of the contracts, supplemented by industry experience and the Company's specific historical experience where available. As the Company has limited specific historical experience on a significant number of its programs on which to base its estimate of losses incurred but not reported, its reliance on ceding company expectations and industry experience is necessarily increased, which increases the uncertainty involved in the loss estimation process. The reserves as established by management are reviewed periodically, and adjustments are made in the periods in which they become known. Although management believes that an adequate provision has been made for the liability for losses and loss expenses, based on all available information, there can be no assurance that the ultimate losses will not differ significantly from the amounts provided. 5 (C) INVESTMENTS Fixed maturity securities are classified as available for sale and are reported at estimated fair value. Investments that are available for sale are expected to be held for an indefinite period but may be sold depending on interest rates and other considerations. Other investments over which the Company exercises significant influence are accounted for under the equity method . Other investments are accounted for at the lower of cost or estimated realizable value. Unrealized investment gains and losses on investments available for sale, net of applicable deferred income tax, are reported as a separate component of "accumulated other comprehensive income". Realized gains or losses on sale of investments are determined on the basis of average cost. The carrying values of investments available for sale and other investments are adjusted for impairments in value that are considered to be other than temporary. (D) DEFERRED ACQUISITION COSTS Cost relating to the production of new business (primarily commissions and certain costs of marketing) are deferred and included in the deferred acquisition cost asset to the extent that such costs are recoverable from future related policy revenues. The deferred acquisition costs are being amortized over the periods in which the related premiums are earned. Such deferred costs are reviewed to determine if they are recoverable from future income, including investment income and, if not considered recoverable, are charged to expense. (E) REINSURANCE PREMIUMS CEDED Reinsurance premiums ceded are reported as prepaid reinsurance premiums and amortized over the respective contract or policy periods in proportion to the amount of insurance protection provided. Commissions on reinsurance ceded are deferred over the terms of the contracts of reinsurance to which they relate and amortized in proportion to the amount of insurance protection provided. (F) FOREIGN CURRENCY TRANSLATION The functional and reporting currency of the Company is U.S. dollars. Foreign currency receivables or payables that are denominated in a currency other than U.S. dollars are translated into U.S. dollars at the rates of exchange in effect at the balance sheet date. The resulting exchange gains or losses are included in the results of operations. Exchange gains and losses related to the translation of investments available for sale are included in the net unrealized appreciation (depreciation) of investments, net of deferred income taxes, as a separate component of "accumulated other comprehensive income". Assets and liabilities related to foreign operations are translated into U.S. dollars at the exchange rate in effect at the balance sheet date; revenues and expenses are translated into U.S. dollars using weighted average exchange rates for the period. Gains and losses resulting from translating foreign currency financial statements, net of deferred income taxes, are excluded from income and included as a separate component of "accumulated other comprehensive income." (G) USE OF ESTIMATES The preparation of financial statements in accordance with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period as well as the disclosure of such amounts. Actual results, particularly for premiums written, premiums earned and loss reserves could materially differ from those estimates and assumptions. (H) FAIR VALUE OF FINANCIAL INSTRUMENTS The carrying value of the Company's investments approximates their fair value and is based on quoted market prices. Due to the uncertainty with respect to both the timing and amount of the proceeds to be realized from the Company's other investments, it is not practicable to determine the fair value of these other investments. The carrying value of other financial instruments, including cash and cash equivalents, accrued investment income, and other receivables and payables approximate their estimated fair value due to the short term nature of the balances. 3. COMMITMENTS AND CONTINGENCIES (A) EMPLOYMENT CONTRACTS 6 The Company had entered into employment contracts with several employees for original terms of one to five years which have total minimum commitments of $2.8 million excluding any performance bonuses that are determined by the Board of Directors of the Company as at March 31, 2001. The contracts include various non-compete clauses following termination of employment. (B) LEASE COMMITMENTS The Company and its subsidiaries have various obligations under operating leases. The future minimum commitments under operating leases and employment contracts are as follows:
Employment Lease U.S. dollars in thousands Commitments Commitments Total - ----------------------------------------------------------------------------------------- Years Ending December 31, 2001 1,835 987 2,822 2002 897 845 1,742 2003 117 755 872 2004 -- 558 558 2005 -- 353 353 Over five years -- 654 654 ------------------------------------------------- Total $ 2,849 $ 4,152 $ 7,001 =================================================
(C) LETTERS OF CREDIT As of March 31, 2001, Secured Letters of Credit and Trust Accounts in the aggregate amount of $102.2 million have been issued in favor of ceding companies with $58.0 million related to Letters of Credit issued and $44.2 million related to Trust Accounts in force. The Letters of Credit and Trust Accounts are secured by a lien on the Company's fixed maturities investment portfolio, equal to 110% of the amount of the outstanding Letters of Credit, and 102% of the amount of the outstanding Trust Accounts. As of December 31, 2000, Secured Letters of Credit and Trust Accounts in the amount of $95.8 million were issued in favor of ceding companies. (D) PENSION OBLIGATIONS Certain subsidiaries of the Company are obligated to make contributions to defined contribution pension plans for employees. As of March 31, 2001, there were outstanding liabilities for pension contributions of $448 thousand. (E) CONTINGENCIES ESG and its subsidiaries, in common with the insurance industry in general, are subject to litigation, including claims for punitive damages, in the normal course of their business. ESG does not believe that such litigation will have a material adverse effect on its financial condition, future operating results or liquidity. In February 2000, Odyssey Re instituted an action in England against a broker, Stirling Cooke Brown, alleging fraud and conspiracy on the reinsurance placement of 1997 and 1998 Personal Accident and Workers Compensation "carve out" business with Odyssey Re. These proceedings mirror earlier proceedings commenced in New York which were dismissed on jurisdictional grounds. During 1998, ESG accepted a 25% quota share reinsurance treaty with Odyssey Re (UK) retroactive to January 1, 1998. This treaty covers various insurance companies involved in the litigation Odyssey Re instituted in New York over 1997 and 1998 business. This treaty terminated as of December 31, 1998 but ESG renewed its participation for 1999 directly to one of those ceding companies. In December 1999, the Company gave notice to rescind its contract with Odyssey Re (UK) for misrepresentation and failure to disclose material facts. On November 29, 2000 the Company filed suit in the High Court to seek judicial confirmation of its rescission. On February 5, 2001, Odyssey Re filed a response. On March 21, 2001, the Company filed a motion for summary judgment. The company has also given notice to rescind the 1999 account. At this time, the Company is unable to determine the amount of its exposure and the possible effect upon the Company's business, financial condition or results of operation from these two contracts. 7 4. DISCONTINUED OPERATIONS On August 10, 2000, the Board of Directors approved a plan for the divestiture of its Health Care Division. Implementation of that plan resulted in the divestiture of 4Sigma (formerly VVB Bermuda Limited) effective June 30, 2000, to affiliates of the Chairman and senior management of the Health Care Division. The investors in 4Sigma include the Company, affiliates of the Chairman of the Company ("Chairman"), Dr. Gerald Moeller, previously a member of the board of ESG Re Limited and Chief Executive-Healthcare Division and former management of the Health Care Division. Terms comparable to those offered to the affiliates of the Chairman were offered to non-related parties. The Company owns 8,000,000 convertible preference shares in 4Sigma. The book value of $8.0 million for the Company's equity position is included in other investments. The operations of 4Sigma have entered into a strategic partnership with Bertelsmann/Springer for the marketing of its services to German health insurers. Currently, sales proposals have been made to three of the largest insurers with decisions due in the second quarter. The expectation is that the group will be successful on at least one of the proposals. In the event none of the proposals are accepted, then the group will be in a position to revisit its business model and the Company would revalue its investment in 4Sigma. Shareholders, including the Company, may be required to further fund 4Sigma's operating cash requirements until decisions on the sales proposals have been received. For the three months of March 31, 2000, the Healthcare Division reported revenue of $8 thousand and a net loss of $2,915 thousand, or $0.25 per share. Additionally on August 10, 2000 the Board of Directors approved a plan to liquidate its majority-owned subsidiary in Indonesia. This operation reported a net loss of $5 thousand on revenues of $0.3 million in the first quarter of 2000. 5. RELATED PARTIES Included in net investment income for the three months ended March 31, 2001, were related party investment expenses of $41 thousand. 8 INDEPENDENT ACCOUNTANTS' REVIEW REPORT To the Board of Directors and Shareholders of ESG Re Limited We have reviewed the accompanying condensed consolidated balance sheet of ESG Re Limited and subsidiaries as of March 31, 2001, and the related condensed consolidated statements of operations, comprehensive income and cash flows for the three month period ended March 31, 2001. These financial statements are the responsibility of the Company's management. We conducted our review in accordance with standards established by the American Institute of Certified Public Accountants. A review of interim financial information consists principally of applying analytical procedures to financial data and of making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with generally accepted auditing standards, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion. Based upon our review, we are not aware of any material modifications that should be made to such condensed consolidated financial statements for them to be in conformity with accounting principles generally accepted in the United States. We have previously audited, in accordance with auditing standards generally accepted in the United States, the consolidated balance sheet of ESG Re Limited and subsidiaries as of December 31, 2000, and the related consolidated statements of operations, comprehensive income, 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 an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying condensed consolidated balance sheet as of December 31, 2000, is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived. Deloitte & Touche Chartered Accountants Dublin, Ireland May 15, 2001 9 ITEM 2. MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. THE FOLLOWING IS A DISCUSSION AND ANALYSIS OF THE FINANCIAL CONDITION AS OF MARCH 31, 2001 AND THE RESULTS OF OPERATIONS OF ESG RE LIMITED AND SUBSIDIARIES (THE "COMPANY" OR "ESG") FOR THE THREE MONTHS ENDED MARCH 31, 2001 AS COMPARED TO THE THREE MONTHS ENDED MARCH 31, 2000. THIS DISCUSSION AND ANALYSIS SHOULD BE READ IN CONJUNCTION WITH THE ATTACHED UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS AND NOTES THERETO AND THE AUDITED CONSOLIDATED FINANCIAL STATEMENTS OF THE COMPANY AS OF AND FOR THE YEAR ENDED DECEMBER 31, 2000 AND NOTES THERETO INCLUDED IN THE COMPANY'S ANNUAL REPORT ON FORM 10-K FOR THE FISCAL YEAR ENDED DECEMBER 31, 2000. THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS AS OF AND FOR THE THREE MONTHS ENDED MARCH 31, 2001 AND FOR THE THREE MONTHS ENDED MARCH 31, 2000 AND NOTES THERETO HAVE BEEN REVIEWED BY INDEPENDENT ACCOUNTANTS IN ACCORDANCE WITH STANDARDS ESTABLISHED BY THE AMERICAN INSTITUTE OF CERTIFIED PUBLIC ACCOUNTANTS. THE RESULTS OF OPERATIONS AND CASH FLOWS FOR ANY INTERIM PERIOD ARE NOT NECESSARILY INDICATIVE OF RESULTS FOR THE FULL YEAR. IN ADDITION, THIS QUARTERLY REPORT CONTAINS FORWARD-LOOKING STATEMENTS REGARDING FUTURE PROFIT LEVELS, PREMIUM GROWTH, CASH FLOWS AND OTHER MATTERS, WHICH INVOLVE RISKS AND UNCERTAINTIES THAT MAY AFFECT THE ACTUAL RESULTS OF OPERATIONS OF THE COMPANY. THE FOLLOWING IMPORTANT FACTORS, AMONG OTHERS, COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM THOSE SET FORTH IN THE FORWARD-LOOKING STATEMENTS: CLAIMS FREQUENCY, CLAIMS SEVERITY, ECONOMIC ACTIVITY, COMPETITIVE PRICING AND THE REGULATORY ENVIRONMENT IN WHICH THE COMPANY OPERATES. GENERAL Effective with the divestiture of the health care business in June, 2000, the Company now considers its reinsurance activities to constitute a single operating segment on the basis that such activities are monitored and evaluated primarily on a company-wide basis. The major lines of business of the Company's reinsurance 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 prior periods as discontinued operations. RESULTS OF OPERATIONS For the three months ended March 31, 2001, the Company posted a net loss of $3.9 million, compared to a net loss of $10.2 million for the first quarter of 2000. The net loss per share for the three months ended March 31, 2001 was $0.33 compared to a net loss per share of $0.88 for the first quarter of 2000. Included in last year's first quarter results was a loss from discontinued operations of $2.9 million or $0.25 per share representing the results from the divested non-core health care operations. For the three months ended March 31, 2001, gross premiums written declined in line with the Company's strategy on select underwriting. For the three months ended March 31, 2001, the Company wrote $43.2 million of gross written premiums, compared to $111.8 million for the three months ended March 31, 2000. Total revenues for the three months ended March 31, 2001 were $44.7 million, consisting of net premiums earned of $40.3 million, net investment income of $3.4 million, realized investment gains of $0.7 million, loss on equity investments of less than $0.1 million and management fee revenue of $0.2 million. Total revenues for the three months ended March 31, 2000 were $60.0 million, consisting of net premiums earned of $57.8 million, net investment income of $2.9 million, realized investment loses of $1.4 million, gain from equity investments of $0.3 million and management fee revenue of $0.4 million. For the three months ended March 31, 2001, ESG's expenses totaled $48.6 million, consisting of $30.0 million of losses and loss expenses, $11.9 million of acquisition costs, and $6.7 million of operating expenses. Total expenses for the three months ended March 31, 2000 were $67.3 million, consisting of $45.2 million of losses and loss expenses, $14.7 million of acquisition costs, and $7.4 million of other operating expenses. 10 NET UNDERWRITING INCOME Gross premiums written decreased by $68.6 million, or 61%, for the three months ended March 31, 2001, compared to the corresponding prior year period. The reduction is a reflection of the Company's stated objective to reduce writings, concentrating on those key markets that offer the best profit opportunities. An underwriting profit (before operating costs) of $1.3 million was posted in the quarter ended March 31, 2001 in respect of the 2001 underwriting year reflecting primarily the growth in the partnership enterprise division of the business. Over 85% of the premium earned in the first quarter came from business written during the 1999 and 2000 underwriting years, prior to the Company's implementation of stricter, centralized underwriting controls. This business contributed an underwriting loss of $2.9 million before operating expenses in the quarter, of which $2.2 million is represented by the cost to exit certain unprofitable books that automatically would have renewed. Rate increases being effected on year 2001 written premium had little impact on first quarter results but are expected to contribute significantly more in ensuing quarters as that premium is earned. Underwriting results for the three months ended March 31, 2001 and 2000, by line of business and in total were as follows:
Three months ended March 31, 2001 Personal U.S. dollars in thousands Medical Accident Credit Life Other Total - ---------------------------------------------------------------------------------------------------------------- Gross premiums written $ 15,977 $ 13,342 $ 14,843 $ (1,177) $ 240 $ 43,225 ======================================================================= Net premiums written 13,170 10,038 14,978 (1,123) 130 37,193 ======================================================================= Net premiums earned 13,251 26,145 (25) 687 251 40,309 Losses and loss expenses (11,218) (19,761) 83 331 580 (29,985) Acquisition costs (3,508) (8,240) 89 (442) 167 (11,934) Operating costs (2,167) (4,276) 4 (112) (41) (6,592) ----------------------------------------------------------------------- Net underwriting income (loss) $ (3,642) $ (6,171) $ 151 $ 464 $ 957 $ (8,262) =======================================================================
Three months ended March 31, 2000 Personal U.S. dollars in thousands Medical Accident Credit Life Other Total - ---------------------------------------------------------------------------------------------------------------- Gross premiums written $ 70,379 $ 31,350 $ 3,808 $ 3,275 $2,956 $ 111,768 ======================================================================= Net premiums written 65,676 29,387 3,653 2,999 2,764 104,479 ======================================================================= Net premiums earned 38,692 14,003 1,981 2,054 1,081 57,811 Losses and loss expenses (31,423) (11,264) (257) (1,003) (1,282) (45,229) Acquisition costs (9,367) (3,084) (1,230) (587) (411) (14,679) Operating costs (4,357) (1,664) (236) (244) (128) (6,629) ----------------------------------------------------------------------- Net underwriting income (loss) $ (6,455) $ (2,009) $ 258 $ 220 $ (740) $ (8,726) =======================================================================
For the quarter ended March 31, 2001, as mentioned previously, overall Gross Written Premiums declined from prior year levels. Both Medical and Personal Accident premium writings have been reduced in-line with the Company's stated objective to only write business that clearly meets its underwriting criteria. In addition, the Company rescinded one Medical treaty underwritten in 1999, which resulted in a reduction in Gross Written and Net Earned Premium of $9.5million in the quarter. The significant increase in Credit business is a function of the writing of approximately $12.0 million of Bancassurance premium in the Partnership Enterprise division in the quarter. This premium will be earned over the next three to four years. 11 OPERATING RATIOS The operating ratios for the three months ended March 31, 2001 and 2000, by line of business and in total were as follows:
Personal Three months ended March 31, 2001 Medical Accident Credit Life Other Total - ------------------------------------------ ------------ ------------ ----------- ----------- ---------- ----------- Loss ratio 84.7% 75.6% n/m% (48.2)% n/m% 74.4% Acquisition expense ratio 26.5% 31.5% n/m% 64.3% n/m% 29.6% - ------------------------------------------ ------------ ------------ ----------- ----------- ---------- ----------- Loss and acquisition expense ratio 111.2% 107.1% n/m% n/m% n/m% 104.0% - ------------------------------------------ ------------ ------------ ----------- ----------- ---------- ----------- Operating expense ratio 16.4% ----------- Combined ratio 120.4% ===========
Personal Three months ended March 31, 2000 Medical Accident Credit Life Other Total - ------------------------------------------ ------------ ----------- ----------- ------------ ---------- ----------- Loss ratio 81.2% 80.4% 13.0% 48.8% 118.6% 78.2% Acquisition expense ratio 24.2% 22.0% 62.1% 28.6% 38.0% 25.4% - ------------------------------------------ ------------ ----------- ----------- ------------ ---------- ----------- Loss and acquisition expense ratio 105.4% 102.4% 75.1% 77.4% 156.6% 103.6% - ------------------------------------------ ------------ ----------- ----------- ------------ ---------- ----------- Operating expense ratio 11.5% ----------- Combined ratio 115.1 % ===========
The increase in combined ratio in the first quarter 2001 was a function of operating costs being reflected as a percentage of a declining premium. GEOGRAPHICAL DISTRIBUTION The distribution of gross written premiums for the three months ended March 31, 2001 and 2000 and for the year ended December 31, 2000, was as follows:
Three months ended Three months ended Year ended March 31, 2001 March 31, 2000 December 31, 2000 - ------------------------------------- ------------------------- ------------------------ ------------------------- Western Europe 13.4% 20.9% 18.4% North America 63.3% 46.3% 53.8% Latin America 3.5% 29.5% 15.7% Asia 10.1% 0.7% 5.6% Other 9.7% 2.6% 6.5% - ------------------------------------- ------------------------- ------------------------ ------------------------- Total 100.0% 100.0% 100.0% - ------------------------------------- ------------------------- ------------------------ -------------------------
The increase in Asia is a reflection of the growing nature of the Company's direct marketing business. The decrease in Latin America is primarily timing, as the Company continues to focus its attention in this key market. PRODUCT MIX The distribution of gross premiums written by line of business for the three months ended March 31, 2001 and 2000, and for the year ended December 31, 2000 was as follows:
Three months ended Three months ended Year ended March 31, 2001 March 31, 2000 December 31, 2000 - -------------------------------------- ------------------------ ------------------------- ----------------------- Medical 50.9% 63.0% 71.0%
12 Personal Accident 11.8% 28.0% 22.0% Credit 40.3% 3.4% 1.4% Life (3.0)% 2.9% 3.7% Other --% 2.7% 1.9% - -------------------------------------- ------------------------ ------------------------- ----------------------- Total 100.0% 100.0% 100.0% - -------------------------------------- ------------------------ ------------------------- -----------------------
MANAGEMENT FEE REVENUE Management fee revenue for the quarter was $230 thousand, a reduction of $132 thousand from the corresponding prior period due to the Company retaining more business for its own account. OPERATING EXPENSES Total operating expenses for the three months ended March 31, 2001 were $6.7 million, compared to $7.4 million for the three months ended March 31, 2000 and $7.4 million for the three months ended December 31, 2000. Administrative expenses in the quarter compare favourably with that reported in the fourth quarter last year. The reduction in the "run rate" is more a function of one-off items in the fourth quarter last year not repeating, as savings being generated from the actions taken in that quarter are being re-invested in the Partnership Enterprise division. EXPOSURE MANAGEMENT The Company manages its underwriting risk exposures primarily through an excess of loss reinsurance program. This program generally provides limits up to a maximum of $30 million per occurrence, with a minimum attachment point generally of $250 thousand. 13 INVESTMENT RESULTS For the three months ended March 31, 2001, net investment income totaled $3.4 million and net realized investment gains totaled $0.7 million. For the three months ended March 31, 2000, net investment income totaled $2.9 million and net realized investment losses totaled $1.4 million. First quarter investment income results were favourably impacted by the upward movement of bond prices with $0.7 million of investment gains realized. The investment results for the three months ended March 31, 2001 and 2000 were as follows:
Net Annualized Net Realized March 31, 2001 Average Investment Effective Investment U.S dollars in thousands Investments Income(1) Yield Gains/(Losses) - ------------------------------------------- -------------- ---------------- ---------------- --------------- Investments - available for sale $ 168,675 $ 3,065 7.3% $ 748 Other investments 17,855 88 2.0% -- Cash and cash equivalents 24,030 255 4.2% -- - ------------------------------------------- -------------- ---------------- ---------------- --------------- Total $210,560 $ 3,408 6.5% $ 748 - ------------------------------------------- -------------- ---------------- ---------------- ---------------
Net Annualized Net Realized March 31, 2000 Average Investment Effective Investment U.S dollars in thousands Investments Income(1) Yield Gains/(Losses) - ------------------------------------------- -------------- ---------------- --------------- ---------------- Fixed maturity investments $ 177,926 $ 2,659 6.0% $ (1,415) Other investments 11,851 128 4.3% -- Cash and cash equivalents 26,973 139 2.1% -- - ------------------------------------------- -------------- ---------------- --------------- ---------------- Total $ 216,750 $ 2,926 5.4 % $ (1,415) - ------------------------------------------- -------------- ---------------- --------------- ----------------
(1) Net investment income is net of investment-related expenses LIQUIDITY AND CAPITAL RESOURCES As of March 31, 2001, total investments and cash were $209.6 million compared to $212.2 million at December 31, 2000. All fixed maturity securities in the Company's investment portfolio are classified as available for sale and are carried at fair value. The fixed maturity investment portfolio as of March 31, 2001, and December 31, 2000, were as follows:
Average March 31, 2001 Fair Duration Market Credit U.S. dollars in thousands Value (Years) Yield Rating - ------------------------------------------------ -------------- --------------- ------------- ------------- Corporate securities $78,334 3.6 6.7% AA U.S. treasury securities and obligations of U.S. government corporations and agencies 30,902 2.9 5.9% AAA Mortgage & Asset backed securities 35,419 2.6 8.1% AAA Obligations of states and political subdivisions 18,360 2.8 6.8% AAA Foreign currency debt securities 5,857 2.9 4.9% AAA - ------------------------------------------------ -------------- --------------- ------------- ------------- Total $ 168,872 3.0 6.5% AA - ------------------------------------------------ -------------- --------------- ------------- -------------
14
Average December 31, 2000 Fair Duration Market Credit U.S. dollars in thousands Value (Years) Yield Rating - ------------------------------------------------ -------------- --------------- -------------- ------------ Corporate securities $71,382 3.0 6.6% AA U.S. treasury securities and obligations of U.S. government corporations and agencies 38,127 2.4 6.1% AAA Mortgage & Asset backed securities 33,771 3.0 8.1% AAA Obligations of states and political subdivisions 18,753 3.0 7.3% AAA Foreign currency debt securities 6,445 1.6 4.5% AAA - ------------------------------------------------ -------------- --------------- ------------- ------------- Total $168,478 2.6 6.5% AA - ------------------------------------------------ -------------- --------------- ------------- -------------
The Company's investment policy objective is to maximize long-term investment returns while maintaining a liquid, high-quality portfolio. To this end, the investment policy requires that the portfolio have an average credit quality rating of AA, no more than 3% of the portfolio invested in the securities of a single issuer (other than issues of sovereign governments with a rating of AA or better), and a target duration of 2.75 years. The Company's investment portfolio as of March 31, 2001 and December 31, 2000 complies with the adopted investment policy and guidelines. The Company expects that its financial and operational needs for the foreseeable future will be met by funds generated from operations and from liquidating a small percentage of its investment portfolio. The Company expects to remain highly capitalized after any near-term investment portfolio liquidation. Shareholders' equity is largely unchanged from that reported in the Company's 10-K. As of March 31, 2001 it was $113.5 million compared to $113.6 million at December 31, 2000. Book value per common share was $9.63 per share, as compared to $9.64 per share at December 31, 2000. 15 CURRENT DEVELOPMENTS On May 10, 2001 the Board of Directors of ESG Re Limited announced that Mr. Alasdair Davis has been elected Chief Executive Officer of the company. Mr. John C Head III, who was Chairman of the Board of Directors and Chief Executive Officer will remain as Chairman. The employment agreement with John C Head III as Chief Executive Officer was terminated according to its terms on May 8, 2001. The agreement was filed as an exhibit to the Company's Annual Report on Form 10-K filed with the Securities and Exchange Commission on April 2, 2001. Mr Head will continue as Chairman of the Board at an annual salary of $250,000. MARKET RISK The Company is subject to market risk arising from the potential change in value of its various financial instruments. These changes may be due to fluctuations in interest rates or foreign currency rates, or both in the case of foreign currency investments. The Company monitors its exposure to interest rate and currency rate risk on a quarterly basis and currently does not believe that the use of derivatives to manage such risk is necessary. The Company intends to reevaluate the need for a formal hedging strategy on a periodic basis, and may determine that such a strategy, including the use of derivative instruments, is appropriate in the future. INTEREST RATE RISK The largest source of market risk for the Company is interest rate risk on its portfolio of fixed maturity investments, especially fixed rate instruments. In addition, the credit worthiness of the issuer, relative values of alternative investments, liquidity and general market conditions may affect fair values of interest rate sensitive instruments. The Company's general strategy with respect to fixed maturity securities is to invest in high quality securities while maintaining diversification and to avoid significant concentrations in individual issuers' industry segments or countries. FOREIGN CURRENCY RISK The Company's functional currency is the U.S. dollar. However, the Company writes reinsurance business in numerous geographic regions and currencies, giving rise to the risk that the ultimate settlement of receivables and payables on reinsurance transactions will differ from the amounts currently recorded as assets and liabilities in the financial statements. The Company intends to hold investments in currencies in which it will collect premiums and pay claims, thus creating a partial natural hedge against exchange rate fluctuations. The Company believes that its exposure to foreign currency risk is not material. INFLATION Inflation has not had a material impact on the Company's operations for the periods presented. The Company writes reinsurance in Latin America which has experienced periods of high inflation. However, it is possible that future 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 participating countries in the European Monetary Union, including Germany and Ireland, two of the countries in which the Company operates and in which the Company maintains a significant presence. ESG's German and Irish subsidiaries will not be required to use the Euro for accounting purposes prior to January 1, 2002. Currently, the Company expects that the impact of the conversion will have no material impact on the Company's operations, accounting systems or financial reporting. 16 PART II OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS No material litigation is pending, to which the Company or any of its subsidiaries or affiliates is a party or of which any of their properties is subject other than the routine litigation incidental to the business. ITEM 2. CHANGES IN SECURITIES Not applicable. ITEM 3. DEFAULTS UPON SENIOR SECURITIES Not applicable. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS The Annual General Meeting of Shareholders was held pursuant to notice on May 7, 2001, at 9:00 a.m. local time, at Pedro Alvares Cabral Room, Four Seasons Hotel The Ritz, Rua Rodrigo da Foneca, 88, Lisbon 1093, Portugal. There were present at the meeting, in person or represented by proxy, the holders of 10,034,395 shares of the outstanding common stock of the Company, which represented approximately 85 % of the outstanding shares as at March 15, 2001, the date of record. The matters voted on at the meeting and the votes cast were as follows: Proposal 1. Election of Directors John C Head III was re-elected as a Class 1 director to serve until the 2004 Annual General Meeting of Shareholders and Alasdair P. Davis was elected as a Class 2 director to serve until the 2002 Annual General Meeting of Shareholders.
FOR ABSTAIN John C Head III 7,437,667 2,596,728 Alasdair P. Davis 7,526,662 2,507,733
Proposal 2. Ratification of the Appointment of Independent Auditors The selection of Deloitte & Touche as independent auditors for the fiscal year ending December 31, 2001 was ratified with 8,801,595 shares voting in favor of such proposal and 3,500 shares abstaining from voting. ITEM 5. OTHER TRANSACTIONS Not applicable. ITEM 6. EXHIBITS AND REPORT ON FORM 8-K (a) Exhibits Exhibit 11.1 Computation of Earnings Per Share Exhibit 15.1 Consent of Deloitte & Touche (b) Report on Form 8-K The Company filed two reports on Form 8-K during the reporting period. The first report was filed on January 31, 2001, with regard to the appointment of Alasdair P. Davis to the Board of Directors, effective February 1, 2001. The second report was filed on April 9, 2001 and included the Company's response to a letter sent by a shareholder and addressed to each member of the Board of Directors. As requested by the shareholder, the Company was making its response public through the filing of the 8-K. 17 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Company has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. May 15, 2001 ESG RE LIMITED By: /s/ MARK E OLEKSIK ------------------------------------------ Name: Mark E Oleksik Title: SENIOR FINANCIAL OFFICER AND CONTROLLER EX-11.1 2 a2049566zex-11_1.txt EX-11.1 EXHIBIT 11.1 COMPUTATION OF EARNINGS PER SHARE The following is a reconciliation of the numerators and denominators of the basic and diluted earnings per share computations for income from continuing operations:
Income Shares Per Share U.S. dollars in thousands except share and per (Numerator) (Denominator) Amount share data - ---------------------------------------------------------------------------------------------------- Three Months Ended March 31, 2001 - -------------------------------------------------- BASIC LOSS PER SHARE Loss available to common shareholders $ (3,943) 11,782,500 $(0.33) Effect of Dilutive Securities: Class A Warrants -- -- -- Director and Employee Options -- -- -- Class B Warrants -- -- -- -------------------------------------------------- DILUTED LOSS PER SHARE Loss available to common shareholders $ (3,943) 11,782,500 $(0.33) ================================================== Three Months Ended March 31, 2000 - -------------------------------------------------- BASIC LOSS PER SHARE Loss available to common shareholders $(10,226) 11,575,898 $(0.88) Effect of Dilutive Securities: Class A Warrants -- -- -- Director and Employee Options -- -- -- Class B Warrants -- -- -- -------------------------------------------------- DILUTED EARNINGS PER SHARE Loss available to common shareholders $(10,226) 11,575,898 $(0.88) ==================================================
EX-15.1 3 a2049566zex-15_1.txt EX-15.1 EXHIBIT 15.1 CONSENT OF DELOITTE & TOUCHE May 15, 2001 ESG Re Limited Skandia International House 16 Church Street Hamilton, Bermuda We have made a review, in accordance with standards established by the American Institute of Certified Public Accountants, of the unaudited interim financial information of ESG Re Limited and subsidiaries for the periods ended March 31, 2001 and 2000, as indicated in our report dated May 15, 2001; because we did not perform an audit, we expressed no opinion on that information. We are aware that our report referred to above, which is included in your Quarterly Report on Form 10-Q for the quarter ended March 31, 2001 is incorporated by reference in Registration Statement No. 333-40107 on Form S-8, in Registration Statement No. 333-76983 on Form S-3 and Registration Statement No. 333-32302 on Form S-8. We are also aware that the aforementioned report, pursuant to Rule 436(c) under the Securities Act of 1933, is not considered a part of the Registration Statement prepared or certified by an accountant or a report prepared or certified by an accountant within the meaning of Sections 7 and 11 of that Act. /s/ Deloitte & Touche - ---------------------- Deloitte & Touche Dublin, Ireland -----END PRIVACY-ENHANCED MESSAGE-----