UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

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

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

For the quarterly period ended March 31, 2002

Commission File Number 000-23481

ESG RE LIMITED

(Exact name of registrant as specified in its charter)

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

16 Church Street

Hamilton HM11, Bermuda

(Address of executive offices, zip code)

(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: ý No o

The number of the Registrant’s common shares (par value $1.00 per share) outstanding as of May 9, 2002 was 11,831,063.

TABLE OF CONTENTS

ITEM
	PART I

Item 1.	Financial Statements and Supplementary Data
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations

Item 3.	Quantitative and Qualitative Disclosures about Market Risk

	PART II

Item 1.	Legal Proceedings
Item 2.	Changes in Securities and Use of Proceeds
Item 3.	Defaults Upon Senior Securities
Item 4.	Submission of Matters to a Vote of Security Holders
Item 5.	Other Information
Item 6.	Exhibits and Reports on Form 8-K

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

2 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,
	2002			2001
ASSETS	(Unaudited)
Investments available for sale, at fair value (cost: $133,665 and $146,369)	$	132,126		$	144,844
Cash and cash equivalents	4,641			3,915
Other investments	6,689			6,172
Total investments and cash	143,456			154,931
Accrued investment income	1,940			2,028
Management fees receivable	470			296
Reinsurance balances receivable	188,646			190,526
Reinsurance recoverable on incurred losses	33,045			28,630
Funds retained by ceding companies	22,131			24,629
Prepaid reinsurance premiums	1,400			1,523
Deferred acquisition costs	38,074			40,308
Receivable for securities sold	—			2,318
Deferred tax asset	1,349			1,339
Other assets	8,003			7,277
Cash and cash equivalents held in a fiduciary capacity	838			1,724

TOTAL ASSETS	$	439,352		$	455,529

LIABILITIES
Unpaid losses and loss expenses	$	143,613		$	146,383
Unearned premiums	94,286			104,395
Acquisition costs payable	44,023			43,110
Reinsurance balances payable	55,377			51,927
Payable for securities purchased	70			—
Accrued expenses, accounts payable, and other liabilities ($85 and $85 due to related parties)	11,298			12,920
Fiduciary liabilities	838			1,724
Total liabilities	349,505			360,459

SHAREHOLDERS’ EQUITY
Preference shares, 50,000,000 shares authorized; no shares issued and outstanding as of March 31, 2002 and December 31, 2001	—			—
Class B common shares, 100,000,000 shares authorized; no shares issued and outstanding as of March 31, 2002 and December 31, 2001	—			—
Common shares, par value $1 per share; 100,000,000 shares authorized; 11,831,063 shares issued and outstanding as of March 31, 2002 and 11,831,063 shares issued and outstanding as of December 31, 2001	11,831			11,831
Additional paid-in capital	208,221			208,221
Unearned compensation	(271		)	(333		)
Accumulated other comprehensive income:
Foreign currency translation adjustments, net of tax	(3,935		)	(4,193		)
Unrealized gains on securities, net of tax	(1,539		)	(1,525		)
Accumulated other comprehensive income	(5,474		)	(5,718		)
Retained (deficit)	(124,460		)	(118,931		)
Total shareholders’ equity	89,847			95,070

TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY	$	439,352		$	455,529

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

3

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, 2002			March 31, 2001
REVENUES
Net premiums written	$	25,907		$	37,193
Change in unearned premiums	9,864			3,116

Net premiums earned	35,771			40,309
Management fee revenue	507			230
Net investment income	1,848			3,408
Loss on equity investments	—			(27		)
Net realized investment gains (losses)	(1,077		)	748
	37,049			44,668
EXPENSES
Losses and loss expenses	23,157			29,985
Acquisition costs	12,176			11,934
Administrative expenses	7,245			6,692
	42,578			48,611
NET (LOSS) INCOME BEFORE TAXES	(5,529		)	(3,943		)
Income tax expense	—			—
NET (LOSS) INCOME AFTER TAXES	$	(5,529	)	$	(3,943	)

PER SHARE DATA
Basic net loss per share	$	(0.47	)	$	(0.33	)

Diluted net loss per share	$	(0.47	)	$	(0.33	)
Weighted average shares outstanding
Basic	11,831,063			11,782,500
Diluted	11,831,063			11,782,500

Dividends declared per share	$	—		$	—

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

ESG RE LIMITED

Condensed Consolidated Statements of Cash Flows

(U.S. dollars in thousands)

(Unaudited)

	Three Months Ended
	March 31, 2002			March 31, 2001

CASH FLOWS FROM OPERATING ACTIVITIES
Net cash used in operating activities	$	(11,040	)	$	(6,476	)

CASH FLOWS FROM INVESTING ACTIVITIES
Cost of fixed maturity investments acquired — available for sale	(82,963		)	(115,573		)
Proceeds from sale of fixed maturity investments — available for sale	96,798			119,141
Funding of strategic investments	(540		)	—
Purchases of fixed assets	(1,529		)	(278		)
Net cash provided by investing activities	11,766			3,290

CASH FLOWS FROM FINANCING ACTIVITIES
Repurchase of common shares	—			(58		)
Net cash used in financing activities	—			(58		)

Net increase/(decrease) in cash	726			(3,244		)
Cash and cash equivalents at January 1	3,915			26,032

Cash and cash equivalents at March 31	$	4,641		$	22,788

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

ESG RE LIMITED

Condensed Consolidated Statements of Comprehensive Income

(U.S. dollars in thousands)

(Unaudited)

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

Comprehensive (loss) income	$	(5,285	)	$	(135	)

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

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

1. BASIS OF PRESENTATION

The accompanying unaudited condensed consolidated financial statements of ESG Re Limited 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 condensed consolidated 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 condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements, and related notes thereto, included in ESG’s 2001 Annual Report on Form 10-K.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Our condensed consolidated financial statements have been prepared in accordance with U.S GAAP. Our significant accounting policies include the following:

(A) PREMIUM REVENUES

We estimate and recognize premiums written at the inception of the reinsurance contract based upon information received from intermediaries and ceding companies. We compare 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, therefore the actual ultimate premium written may not be known with certainty for prolonged periods, following the expiration of the reinsurance contract. 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 which we enter are primarily of short duration. For retroactive contracts the amount by which the amount paid for reinsurance coverage exceeds the recorded liabilities is charged to earnings. If the liabilities exceed the amount paid the excess is deferred and amortized into income over the remaining settlement period. 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. We have some specific historical experience on a significant number of our programs on which to base our estimate of losses incurred but not reported. There is a reliance on the expectations of ceding companies about ultimate loss ratios at the inception of the contracts, supplemented by industry experience, which increases the uncertainty involved in the loss estimation process. The reserves as established by management are reviewed quarterly 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.

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 we exercise significant influence are accounted for under the equity method. Otherwise these investments are accounted for at cost. 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

We defer costs relating to the production of new business, primarily commissions and telemarketing costs in respect of our Direct business, and include them in the deferred acquisition cost asset to the extent that they are recoverable from future related policy revenues. We amortize the deferred acquisition costs in respect of commissions over the periods in which the related premiums are earned. We amortize the deferred acquisition costs in relation to telemarketing over the expected life of the policies. We review our deferred costs to determine if they are recoverable from future income, including investment income, and, if they are not, we charge them as an 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

Our functional and reporting currency is the U.S. dollar. 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. Revenues and expenses are translated into U.S. dollars using weighted average exchange rates for the period. 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. GAAP 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 our 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 our other investments, it is not practicable to determine the fair value of these other investments. The carrying values 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. ACCOUNTING PRONOUNCEMENTS

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

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

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

In October 2001, the FASB issued SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets (SFAS No. 144). SFAS No. 144 supersedes SFAS No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of, and some provisions of Accounting Principles Board Opinion 30. SFAS No. 144 sets new criteria for determining when an asset can be classified as held-for-sale as well as modifying the financial statement presentation requirements of operating losses from discontinued operations. SFAS No. 144 is effective for fiscal years beginning after December 15, 2001. We evaluated the provisions of SFAS No. 144 and management does not expect the adoption of SFAS No. 144 to have an impact on our financial position, results of operations, or cash flows.

4. COMMITMENTS AND CONTINGENCIES

(A) EMPLOYMENT CONTRACTS AND LEASE COMMITMENTS

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

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

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

(B) LETTERS OF CREDIT

As of March 31, 2002, Secured Letters of Credit and Trust Accounts in the aggregate amount of $90.9 million have been issued in favor of ceding companies with $27.3 million related to Letters of Credit issued and $63.6 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 120% of the amount of the outstanding Letters of Credit, and 102% of the amount of the outstanding Trust Accounts. As of December 31, 2001, Secured Letters of Credit and Trust Accounts in the amount of $91.0 million were issued in favor of ceding companies.

(C) PENSION OBLIGATIONS

A subsidiary company is obligated to make contributions to defined contribution pension plans for employees. As of March 31, 2002 and December 31, 2001, there were outstanding liabilities for pension contributions of $659 thousand and $645 thousand respectively.

(D) COMMITMENTS & CONTINGENCIES

LITIGATION

We and our 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. We do not believe that such litigation will have a material adverse effect on our financial condition, future operating results, or liquidity.

In February 2000, Odyssey Re instituted an action in 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 we renewed our participation for 1999 directly with one of those ceding companies. In December 1999, we gave notice to rescind our contract with Odyssey Re (UK) for misrepresentation and failure to disclose material facts. On November 29, 2000, we filed suit in the High Court to seek a judicial confirmation of our rescission. On February 5, 2001, Odyssey Re filed a response. On March 21, 2001, we filed a motion for summary judgment. The motion was substantially based on an admission by Odyssey Re (UK) that a misrepresentation had been made to us in connection with the quota share, and was supported by evidence from fact and expert witnesses. Our intention was to re-evaluate the motion if Odyssey Re (UK) served any evidence. Subsequently, Odyssey Re (UK) withdrew their admission, and, less than a week before the date scheduled for the hearing, and in violation of the applicable rules of court, they served their evidence, in which they made it clear, for the first time, that they intended to plead a positive case that the representation was true. Odyssey Re’s evidence also raised other factual issues by way of defense, which had not been contained in their initial pleading.

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

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

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

STRATEGIC INVESTMENTS

5. RELATED PARTIES

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

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, 2002, and the related condensed consolidated statements of operations, comprehensive income and cash flows for the three month period ended March 31, 2002 and March 31, 2001. These financial statements are the responsibility of the Company’s management.

We conducted our review in accordance with auditing standards generally accepted in the United States of America. 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 of America.

We have previously audited, in accordance with auditing standards generally accepted in the United States of America, the consolidated balance sheet of ESG Re Limited and subsidiaries as of December 31, 2001, 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 March 29, 2002, 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, 2001, 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 14, 2002

ITEM 2. MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

The following discussion and analysis addresses the financial condition of ESG as of March 31, 2002 compared with December 31, 2001 and our results of operation for the three months ended March 31, 2002, compared with the same period last year. You should read this discussion and analysis with our unaudited condensed consolidated financial statements and related notes included in Item 1 of this Form 10-Q, and our audited financial statements and related notes contained in our 2001 Annual Report on Form 10-K. Our independent accountants have reviewed our unaudited condensed consolidated financial statements for the three months ended March 31, 2001 and 2002 in accordance with auditing standards generally accepted in the United States of America. The results of our operations for the period ended March 31, 2002 are not necessarily indicative of our results for the full year.

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

Principal Activities and Sources of Revenue

Our principal activities include providing accident, health, credit, life, and special risk reinsurance and related product marketing and development services. We also manage premiums on behalf of co-reinsurers on North American business written in 2001 and 2002. We report the results of our business activities under two segments: ESG Reinsurance and ESG Direct. We evaluate the results of these segments based on business writings out of each of our producing offices. ESG Reinsurance provides traditional reinsurance products, primarily in the U.S. medical insurance market, and ESG Direct provides direct marketing services, bancassurance services, and supporting technologies, as well as targeted reinsurance products for credit life and other special risks.

We derive our revenues principally from:

• premiums for reinsurance products,

• fees for direct marketing services,

• management fees, and

• investment income.

Results of Operations

Total Revenues

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

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

Net Underwriting Income

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

late 2001, thereby not materially impacting the result in the quarter. The decrease was also affected by a change in the basis of estimation used to recognize premium on the Bancassurance business, written by our ESG Direct segment.

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

Gross and net premiums written and net premiums earned for the three months ended March 31, 2002 and 2001 were as follows:

	Three months ended March 31
ESG Reinsurance	2002		2001
	U.S. dollars in millions
Total premiums managed	15.7		23.4
Amount placed with co-reinsurers	8.5		(2.1	)
Gross premiums written	24.2		21.3
Retroceded	(4.0	)	(6.0	)
Net premiums written	20.2		15.3

Net premiums earned	30.6		34.3

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

Net premiums earned	5.2	6.0

Total premiums that we manage on our behalf and on behalf of our co-reinsurers for the three months ended March 31, 2002, consisted of the following:

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

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

Underwriting Results

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

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

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

The operating ratios for the three months ended March 31, 2002 and 2001, by line of business and in total, for the ESG Reinsurance segment were as follows:

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

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

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

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

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

Three months ended
March 31, 2002	Accident			Credit			Total

Gross premiums written	$	4,808		$	844		$	5,652
Net premiums written	4,808			844			5,652
Net premiums earned	4,830			372			5,202
Losses and loss expenses	455			46			501
Acquisition costs	2,986			202			3,188
Operating costs	1,748			734			2,482
Net underwriting income/(loss)	$	(359	)	$	(610	)	$	(969	)

Three months ended
March 31, 2001	Accident			Credit		Total

Gross premiums written	$	5,939		$	16,001	$	21,940
Net premiums written	5,939			16,001		21,940
Net premiums earned	5,834			170		6,004
Losses and loss expenses	2,187			34		2,221
Acquisition costs	2,228			6		2,234
Operating costs	2,116			17		2,133
Net underwriting income/(loss)	$	(697	)	$	113	$	(584	)

The operating ratios for the three months ended March 31, 2002 and 2001, by line of business and in total, for the ESG Direct segment were as follows:

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

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

We commenced the ESG Direct business during 2000 by writing business in the Asia region, expanding into Europe in early 2001. The above results reflect the early development of both lines of business. The change in the loss and acquisition expense ratios, when comparing to the corresponding period last year, is primarily due to obtaining additional information, over the previous twelve months, as the business develops. Initial set-up costs together with low premium volumes contribute to the high expense ratio.

Geographic Spread

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

Three months ended March 31	2002		2001
ESG Reinsurance

Western Europe	18.4	%	(48.1	)%
North America	62.1	%	128.8	%
Latin America	17.5	%	7.1	%
Asia	(0.1	)%	(7.5	)%
Other	1.9	%	19.7	%
Total	100.0	%	100.0	%

Three months ended March 31	2002		2001
ESG Direct

Western Europe	14.9	%	72.9	%
Asia	85.1	%	27.1	%
Total	100.0	%	100.0	%

Product Mix

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

Three months ended March 31,	2002		2001
ESG Reinsurance

Medical	60.3	%	75.1	%
Personal Accident	38.3	%	34.8	%
Credit	(1.0%	)	(5.4%	)
Life	1.1	%	(5.6%	)
Other	1.3	%	1.1	%
Total	100.0	%	100.0	%

Three months ended March 31,	2002		2001
ESG Direct

Personal Accident	85.1	%	27.1	%
Credit	14.9	%	72.9	%
Total	100.0	%	100.0	%

In respect of the Direct segment, the significant change in the geographic and product split relates to the recognition of premium on the Bancassurance credit line of business, written out of the Western European region. The change in the basis of estimation used to recognize the premium on Bancassurance business gives rise to a disproportionate split between Western Europe and Asia, on a geographic spread basis, and Credit and Personal Accident, on a product mix basis. This change does not have a material impact on the reported result for the quarter.

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

Management Fee Revenue

For the three months ended March 31, 2002, we earned $0.5 million in management fee revenue. This figure represents a 150.0% increase from the $0.2 million management fees earned in the three months ended March 31, 2001. The majority of management fee revenue in 2002 and 2001 consists of fees earned on those premiums managed on behalf of our co-reinsurers. Management fees increased in the first quarter of 2002, primarily due to the recognition of fees earned on business co-reinsured on our North American book of business.

Net Investment Income

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

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

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

			Net		Annualized		Net Realized
	Average		Investment		Effective		Investment
	Investments		Income(1)		Yield		Gains
	U.S dollars in thousands

Investments	$	137,081	$	1,684	4.9	%	$	(1,077	)
Other investments	6,431		130		8.1	%	—
Cash and cash equivalents	4,278		34		3.2	%	—
Total	$	147,790	$	1,848	5.0	%	$	(1,077	)

(1) Net investment income is net of investment-related expenses and income on premium receivable and funds held by ceding companies.

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

			Net		Annualized		Net Realized
	Average		Investment		Effective		Investment
	Investments		Income(1)		Yield		Gains
	U.S dollars in thousands

Investments	$	168,675	$	3,065	7.3	%	$	748
Other investments	17,855		88		2.0	%	—
Cash and cash equivalents	24,030		55		4.2	%	—
Total	$	210,560	$	3,408	6.5	%	$	748

(1) Net investment income is net of investment-related expenses and income on premium receivable and funds held by ceding companies.

Investment Portfolio

Maturity and Duration of Portfolio

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

Quality of Debt Securities in Portfolio

The minimum average credit quality of our investment portfolio is AA.

Equity Securities and Real Estate

Our investment policy is to allow up to 10% of our investment assets to be held in equity securities. We do not intend to invest in real estate other than for our own use.

Diversification and Liquidity

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

As of March 31, 2002, total investments and cash were $143.5 million, compared to $209.6 million at March 31, 2001. All fixed maturity securities in our investment portfolio are classified as available for sale and are carried at fair value.

The fixed maturity investment portfolios as of March 31, 2002 and 2001 were as follows:

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

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

In 2002, we will continue to follow our investment policy and guidelines while seeking to improve long-term value by continuing to invest in selected strategic investments in accordance with our current commitments as set out in “Strategic Investments” below. A strategic investment is defined as an investment in a reinsurance-related enterprise, ceding company or distribution channel that is expected to generate or secure additional profitable business for us.

Related Party Transactions

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

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

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

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

The Audit Committee of our Board of Directors periodically reviews our investment policies and arrangements to ensure that they are consistent with our overall goals, strategies and objectives. Overall investment guidelines are approved by the Audit Committee to ensure appropriate levels of portfolio liquidity, credit quality, diversification and volatility. In addition, the Audit Committee has now reviewed our investment advisory relationship with Head Asset Management LLC in the context of our other banking relationships to determine whether changes should be made to any of these relationships.

Administrative Expenses

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

Strategic Investments

From December 1998 through June 2000, we operated IPT GmbH and later VBB Bermuda Limited, subsidiaries that provided disease management services in Germany. These services, which included physician referrals, a medical information hotline, second opinion services, cardiac rehabilitation and access to disease management advisors, comprised the health care segment of our business.

Effective as of June 30, 2000, we transferred all the assets of our health care segment to 4Sigma. These assets had a book value of $8 million at the time of transfer. In exchange for the transferred assets, we received 8,000,000 shares of Series A preferred stock, representing a 69% equity interest in 4 Sigma. In addition, affiliates of John C Head III, the Chairman of our Board of Directors, invested $3.0 million in cash in exchange for a 28% equity interest in 4Sigma. Dr. Gerald Moeller, a director of ESG from July 1999 to August 2000 and the president of our health care division from July 1999 to June 2000, also invested $400,000 in cash in exchange for a minority equity interest in 4Sigma. The board members of 4Sigma include John C Head III, Dr. Gerald Moeller and Dr. Herbert Palmberger, who also serves as outside counsel to ESG in Germany. During the fourth quarter 2001, ESG took a reserve of $8.0 million against its investment in 4Sigma Ltd.

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

In November 2001, we committed to make an additional capital infusion in 4Sigma of $1.8 million, in increments of $100,000 as funds are needed by 4Sigma, in exchange for 1.8 million shares of Series E preferred stock. As at March 31, 2002 we had invested $1.7 million of this commitment. Mr. Head has also committed to invest an additional $1.2 million in cash in 4Sigma on these same terms and conditions. We evaluate our investment in 4Sigma periodically.

Liquidity and Capital Resources

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

Reinsurance balances receivable decreased from $190.5 million as at December 31, 2001 to $188.6 million as at March 31, 2002. We recognize premiums receivable at the inception of the reinsurance contract, based upon information received from intermediaries and ceding companies. Every quarter we compare estimated written premiums to actual premiums, as reported by ceding companies and revise our estimates of written premiums if appropriate. Any change in these estimates will impact the premiums receivable balance.

Reinsurance funds recoverable on incurred losses increased from $28.6 million as at December 31, 2001 to $33.0 million as at March 31, 2002. This increase was due to additional losses being incurred above our net retention levels that enable us to make recoveries from our excess of loss reinsurers, plus the additional quota share cessions to two of our retrocessionaires.

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

At December 31, 2001, reserves for unpaid losses and loss expenses were $146.4 million and at March 31, 2002, reserves for unpaid losses and loss expenses were $143.6 million. This decrease is also a function of reduced underwritings in 2001.

At March 31, 2002, unearned premium reserves were $94.3 million compared to $104.4 million at December 31, 2001. Unearned premium reserves are established to cover the unexpired period of contracts of reinsurance that we have underwritten. At March 31, 2002, acquisition costs payable were $44.0 million compared to $43.1 million at December 31, 2001. The balance represents acquisition expenses due on gross reinsurance premiums that we have written.

We expect that our financial and operational needs for the foreseeable future will be met by funds generated from operations and the proceeds from the sale of investments. As we rely on cash flows from operations, a reduction in the demand for our services could reduce the availability of funds. Cash flows from operations in future years may differ substantially from net income. As reinsurance contacts mature, we will be required to pay out a

higher percentage of incurred losses in loss payments, which may affect cash flows. Additionally, although we primarily invest in high quality assets, a diminution in the value of our portfolio could hurt our ability to continue financing our own operations.

As of March 31, 2002, we had the following material commitments for operating leases and employment contracts:

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

2002	$	904	$	148	$	756	$	463	$	1,219
2003	735		36		699		67		766
2004	514		514		514
2005	259		259		259
2006	181		181		181
2007 to 2012	825				825				825
Total	$	3,418	$	184	$	3,234	$	530	$	3,764

As of December 31, 2001, we had the following material commitments for operating leases and employment contracts:

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

2002	$	1,743	$	200	$	1,543	$	563	$	2,106
2003	745		36		709		80		789
2004	523		523		523
2005	263		263		263
2006	184		184		184
2007 to 2012	839				839				839
Total	$	4,297	$	236	$	4,061	$	643	$	4,704

In support of our business, we enter into Letters of Credit and Trust Account arrangements with ceding companies. As at December 31, 2001, we had in total $91.0 million of outstanding Letters of Credit and Trust Accounts of which $27.0 million related to Letters of Credit issued and $64.0 million was in Trust Accounts. As of March 31, 2002, we had in total $90.9 million of outstanding Letters of Credit and Trust Accounts of which $27.3 million related to Letters of Credit issued and $63.6 million was in Trust Accounts. These arrangements were secured against our fixed maturity investment portfolio.

Exposure Management

We manage our underwriting risk exposures primarily through an excess of loss reinsurance program. For 2002, this program provides reinsurance protection up to a known accumulation of $5,000,000 for Personal Accident exposures and up to $5,000,000 per person for Medical Expense exposure.

Cautionary Statement Regarding Forward-Looking Statements

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

• the ongoing adequacy of our loss reserves;

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

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

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

• the outcome of our ongoing litigation.

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

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

• Insurance Industry Volatility. The September 11, 2001, terrorist attacks in the United States (and their aftermath) may increase volatility in insurance and reinsurance markets. That volatility could adversely affect market participants, like ESG, whose direct exposure to the terrorist attacks is limited.

• Inadequate Loss Reserves. We maintain reserves to cover the estimated liability for reported and unreported claims. Inadequate reserves could be caused by our failure to value accurately the risks of certain business, inaccurate information from ceding clients, or extraordinary events. If our reserves prove insufficient to cover the actual losses we incur, we would have to increase our reserves and incur a charge to our earnings.

• Medical Cost Increases. Our medical reinsurance premiums reflect certain assumptions regarding increases in the cost of medical care. Medical costs (particularly prescription costs) are difficult to gauge, especially in the United States. Changes or advances in medical technology could increase our costs. Legislative or judicial developments that are adverse to medical providers also might increase costs. An increase in costs that eclipses the assumptions reflected in our premiums could result in losses for us.

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

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

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

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

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

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

• Credit Rating Downgrade. In our reinsurance and direct marketing businesses, the rating assigned to our credit by agencies such as Standard and Poor’s and Fitch can affect our business opportunities. Any downgrade in our rating could make it more difficult for us to attract and retain customers.

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

• Interest Rate Fluctuations. We invest the majority of the money we receive as premiums in fixed rate instruments such as government and corporate bonds. Typically, the fair market value of a fixed rate instrument varies inversely with the fluctuations in interest rates. While our investments can fall in value, our liabilities tend to remain fixed. Consequently, a decline in the value of our investment portfolio could reduce our net income or lead to a loss.

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

• Foreign Currency Exchange Risks. Because we conduct business in numerous geographic regions and currencies around the world, fluctuations in currency exchange rates can affect our earnings. We maintain investments in currencies in which we will collect premiums and pay claims, thus creating a partial natural hedge against exchange rate fluctuations. While we do not expect our exposure to foreign currency risk to materially affect our profitability, volatility in exchange rates could affect our business adversely.

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

• Legislative and Regulatory Changes. Legislators and regulators could introduce new laws and regulations that affect the manner in which we conduct our business. Our direct marketing business, for example, could be affected by new laws or regulations limiting the use of personal data for direct marketing efforts. New occupational safety legislation in the countries where we reinsure these risks could increase our costs. Additional unexpected regulatory burdens could increase our compliance costs and lower our profit margins.

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

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

• Cyclical Changes in the Market. The reinsurance market is affected by fluctuations in the investment environment and extraordinary events. If we fail to anticipate these cyclical trends, we may incur losses in our contracts.

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

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Market Risk

We are subject to market risk arising from the potential change in value of our 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. We monitor our exposure to interest rate and currency rate risk on a quarterly basis and currently do not believe that the use of derivatives to manage such risk is necessary. We intend 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

Our largest source of market risk is interest rate risk on our 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.

Our general strategy with respect to fixed maturity securities is to invest in high quality securities while maintaining diversification to avoid significant concentrations in individual issuers’ industry segments or countries.

Foreign Currency Risk

Our functional currency is the U.S. Dollar. However, we write 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. We generally do not hedge the foreign currency exposure of its subsidiaries transacting business in currencies other than their functional currency (transaction exposure). The primary functional currency exposures are European Euro, Norwegian Kroner, Australian Dollar, Hong Kong Dollar and Great Britain Pound. We believe that our foreign currency transaction exposure is immaterial to our consolidated results of operations due to the partial natural hedge produced by normal cash flow operations.

Inflation

Inflation has not had a material impact on our operations for any of the three years presented. We write reinsurance in Latin America, which has experienced periods of high inflation. However, it is possible that future inflationary conditions may impact subsequent accounting periods.

PART II

Item 1. Legal Proceedings

See the description of our pending lawsuit involving Odyssey Re in our Annual Report on Form 10-K for the fiscal year ended December 31, 2001.

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

None.

Item 5. Other Information

Not applicable.

Item 6. Exhibits and Reports on Form 8-K

(a) Exhibit Index

Exhibit 11.1 Computation of Earnings Per Share

Exhibit 15.1 Awareness Letter of Deloitte & Touche

(b) During the three months ended March 31, 2002, ESG filed the following Reports on Form 8-K:

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

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

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

		ESG RE LIMITED

Date: May 14, 2002	/s/ Alasdair P. Davis
	Alasdair P. Davis
	Chief Executive Officer

Date: May 14, 2002	/s/ Joe Quinn
	Joe Quinn
	Acting Senior Financial Officer

2

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)

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

3

ESG RE LIMITED

Condensed Consolidated Statements of Operations

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

(Unaudited)

PER SHARE DATA

ESG RE LIMITED

Condensed Consolidated Statements of Cash Flows

ESG RE LIMITED

Condensed Consolidated Statements of Comprehensive Income

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

U.S. dollars in millions

U.S dollars in thousands

U.S dollars in thousands