UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10–K/A

AMENDMENT NO. 3

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2001

Commission file number 000–2348

ESG RE LIMITED

(Exact name of registrant as specified in its charter)

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

16 Church Street

Hamilton HM11, Bermuda

(Address of executive offices, zip code)

(441) 295–2185

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:

Title of each class

Common Shares, $1.00 par value

Name of each exchange on which registered

Nasdaq National Market

Securities registered pursuant to Section 12(g) of the Act: None

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

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S–K is not contained herein, and will not be contained, to the best of Registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10–K or any amendment to this Form 10–K. Yes ý No o

The aggregate market value of the voting stock held by non–affiliates of the Registrant, as of March 15, 2002, was $33,365,143 based on the closing price of $3.85 on that date.

The number of the Registrant’s common shares (par value $1.00 per share) outstanding as of March 15, 2002, was 11,831,818.

EXPLANATORY STATEMENT:

Pursuant to this Form 10-K/A (Amendment No. 3) ("Amendment No. 3"), ESG Re Limited ("ESG") amends and restates in its entirety Items 6, 7 and 8 of Part II of the Form 10-K and Item 14 of Part IV of the Form 10-K (Amendments No. 1 and No. 2).

The purpose of this Amendment No. 3 is to reflect the correction of errors, generated by ESG’s internal consolidation system, which led to misstatements in the foreign currency translation adjustments, included in accumulated other comprehensive income, and other expenses. ESG’s consolidated financial statements (Original Consolidated Financial Statements) and related disclosures for 2001 have been restated from amounts previously reported. The adjustment and restatement has had the following impact on our consolidated statement of operations and consolidated balance sheet, for the year ended December 31, 2001:

•		Net loss has increased from $16,440 thousand, to $20,432 thousand
•		Other expenses have increased from $9,116 thousand to $13,108 thousand
•		Net loss per share has increased from $1.39 to $1.73 per share
•		Foreign currency translation adjustments, included in accumulated other comprehensive income, has changed from $4,193 thousand to $201 thousand
•		Foreign currency translation adjustment, in consolidated statements of comprehensive income has changed from $1,138 thousand to $5,130 thousand

For purposes of this Form 10-K/A, and in accordance with Rule 12b-15 under the Securities Exchange Act of 1934, as amended, each item of the Form 10-K for the year ended December 31, 2001 as originally filed on April 1, 2002 that was affected by the restatement has been amended to the extent affected and restated in its entirety. NO ATTEMPT HAS BEEN MADE IN THIS FORM 10-K/A TO MODIFY OR UPDATE OTHER DISCLOSURES AS PRESENTED IN THE ORIGINAL FORM 10-K EXCEPT TO REFLECT THE EFFECTS OF THE RESTATEMENT.

TABLE OF CONTENTS

Item
		PART II
Item 6.		Selected Financial Data
Item 7.		Management’s Discussion and Analysis of Financial Condition and Results of Operations
Item 8.		Financial Statements and Supplementary Data
		PART IV
Item 14.		Exhibits, Financial Statement Schedules, and Reports on Form 8-K

PART II.

ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA

The following table sets forth the selected consolidated financial data for ESG and its subsidiaries. The financial statements included in this periodic report represent the financial performance and results of ESG as an insurer and a reinsurer for the years ended December 31, 2001, 2000, 1999 and 1998 and as a reinsurer and reinsurance management company for the year ended December 31, 1997.

	Years Ended December 31,
	2001			2000			1999			1998			1997
	As Restated
	U.S. dollars in thousands except per share data
CONSOLIDATED OPERATING DATA
Gross managed premium	$	181,710		$	254,996		$	347,900		$	224,204		$	100,000
Net premiums written	113,593			211,886			313,210			195,578			25,392
Net premiums earned	153,220			236,620			249,125			98,841			13,411
Investment income	12,177			12,924			13,515			12,930			598
Total revenues	160,533			249,032			262,589			115,827			17,839
Losses and loss expenses	104,566			187,241			199,031			61,364			7,449
Acquisition costs	45,840			78,566			66,296			26,714			4,693
Class B Warrants expense	—			—			—			—			3,626
Administrative expenses (2)	31,521			37,119			26,490			11,965			7,736
Total expenses (2)	182,304			305,650			290,996			100,043			23,504
Net underwriting income/(loss) (2)	(24,713		)	(66,306		)	(39,045		)	1,961			1,269
Loss expense ratio	68.2		%	79.1		%	79.9		%	62.1		%	55.5		%
Acquisition expense ratio	29.9		%	33.2		%	26.6		%	27.0		%	35.0		%
Loss and acquisition expense ratio	98.1		%	112.3		%	106.5		%	89.1		%	90.5		%
Net income/(loss) before taxes (2)	(21,771		)	(56,618		)	(28,407		)	15,784			(5,665		)
Income tax benefit/(charge)	1,339			—			(815		)	(1,262		)	569
Net income/(loss) from continuing operations (2)	(20,432		)	(56,618		)	(29,222		)	14,522			(5,096		)
Net loss from discontinued operations (3)	—			(5,178		)	(12,772		)	—			—
Net income/(loss) (2)	(20,432		)	(61,796		)	(41,994		)	14,522			(5,096		)
Basic net income/(loss) per share from continuing operations (2)	(1.73		)	(4.79		)	(2.20		)	1.04			(4.11		)
Diluted net income/(loss) per share from continuing operations (2)	(1.73		)	(4.79		)	(2.20		)	1.03			(4.11		)
Basic net income/(loss) per share (2)	(1.73		)	(5.23		)	(3.17		)	1.04			(4.11		)
Diluted net income/(loss) per share (2)	(1.73		)	(5.23		)	(3.17		)	1.03			(4.11		)
Dividends declared per share	$	—		$	0.24		$	0.32		$	0.30		$	—
CONSOLIDATED BALANCE SHEET DATA
Investments and cash	$	154,931		$	212,246		$	221,549		$	235,246		$	236,976
Reinsurance balances receivable	190,526			241,587			276,112			168,274			25,785
Total assets	455,529			554,794			605,684			466,373			283,553
Unpaid losses and loss expenses	146,383			179,614			136,935			44,379			7,846
Unearned premiums	104,395			148,124			181,127			111,884			12,168
Total shareholders’ equity	95,070			113,566			176,815			244,841			234,375
Book value per share	8.03			9.64			15.24			17.58			16.83
COMMON STOCK PRICE RANGE
High	$	5.39		$	6.52		$	22.25		$	28.75		$	23.88	(1)
Low	$	1.97		$	1.72		$	5.13		$	12.75		$	21.50	(1)

(1)		1997 stock prices are for the period from December 12, 1997, the date of the initial public offering, to December 31, 1997. The initial public offering price was $20.00 per share.
(2)		A description of the restatement adjustment is set out in Note 20 of the financial statements and supplementary data in Item 8.
(3)		Refer to "Discontinued Operations" in Item 7. Management's Discussion and Analysis of Financial Conditions and Results of Operations.

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND RESULTS OF OPERATIONS

The following is a discussion and analysis of the financial condition, results of operations, liquidity and capital resources of ESG Re Limited and its subsidiaries. This discussion and analysis should be read in conjunction with our consolidated financial statements and related notes.

Principal Activities and Sources of Revenue

Our principal activities include providing accident, health, credit, life, special risk reinsurance, direct insurance and related product marketing and development services. We also manage premiums on behalf of co-reinsurers on North American medical contracts. 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 written by 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.

Overview

Restatement of Financial Statements

During the second quarter of 2002, ESG determined that foreign currency translation adjustments, included in other comprehensive income and other expenses included in net loss, had been misstated by $3,992 thousand due to an error in the internal system that consolidates the financial results of ESG subsidiaries with functional currencies other than U.S. dollars. We have now replaced and upgraded our internal consolidation system. For further discussion of this adjustment and restatement, see note 20 to our consolidated financial statements.

The foreign currency translation account includes adjustments arising from the process of translating the financial statements of non U.S. dollar subsidiaries into U.S. dollars. Assets and liabilities of these subsidiaries are translated into U.S. dollars at the exchange rate in effect at the balance sheet date. Revenues and expenses (“statement of operations”) for these subsidiaries are translated into U.S. dollars using weighted average exchange rates for the period. Translation adjustments arising are included in the equity section of the balance sheet.

The adjustment and restatement has the following impact on our consolidated statement of operations, consolidated balance, and consolidated statements of changes in shareholders’ equity, for the year ended December 31, 2001:

•		Net loss has increased from $16,440 thousand, to $20,432 thousand
•		Other expenses have increased from $9,116 thousand to $13,108 thousand
•		Net loss per share has increased from $1.39 to $1.73 per share
•		Foreign currency translation adjustments, included in accumulated other comprehensive income, has changed from $4,193 thousand to $201 thousand
•		Foreign currency translation adjustments, in consolidated statements of comprehensive income, has changed from $1,138 thousand to $5,130 thousand
•		Retained deficit changed from $118,931 thousand to $122,923 thousand

We are also filing restated financial statements for the quarter ended March 31, 2002 as an amendment to our quarterly report on Form 10-Q/A.

Recent Developments

Credit Ratings. On March 8, 2002, Fitch Ratings has assigned Insurer Financial Strength Ratings of BB+ to ESG Reinsurance Bermuda Ltd., ESG Reinsurance Ireland Ltd. and European Specialty Ruckversicherung AG, with a Rating Outlook of Stable. In November 2001, Standard and Poor’s increased its counterparty credit and insurer financial strength rating for ESG from “B+” to “BB-” with a change in the rating outlook from “Stable” to “Positive.” “Positive” means that the rating may be raised. According to S&P, its capital adequacy model placed us at the high end of the “BBB” rating but that it would like evidence of continued progress in fiscal year 2002 before adjusting the rating further. There can be no assurance that we will continue to maintain either of these ratings.

Effect of Terrorist Attacks. We previously reported that our estimated total exposure related to the September 11, 2001 terrorist attacks would be less than $1 million. Additional information regarding an outstanding claim, which we received in December 2001, increased our estimated gross exposure to approximately $1.2 million, before taking account of recoveries from our reinsurers. We review our exposures and liabilities as a result of the events of September 11, 2001 on an ongoing basis. We may have additional liabilities based on these events if additional claims are made.

Departure of Senior Financial Officer. Our Senior Financial Officer, Mark E. Oleksik, a U.S. citizen, decided to return to the U.S. for personal reasons at the end of March 2002. The Board of Directors has appointed Joe A. Quinn as Acting Senior Financial Officer until such time as a permanent Senior Financial Officer is named. In addition, our Controller, Conor Heery, was promoted to Chief Accounting Officer. Both of these appointments were effective March 15, 2002.

Critical Accounting Policies

Our critical accounting policies are:

• recognition of premium revenues,

• reserves for losses and loss expenses,

• investments,

• deferred acquisition costs,

• reinsurance premiums ceded, and

• foreign currency translation.

Recognition of Premium Revenues

We estimate and recognize premiums 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, which means that the actual ultimate premium written may not be known with certainty for prolonged periods following the expiration of the reinsurance contracts. We record the differences between our estimates and actual amounts as reported by ceding companies 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.

Reserves 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.

Investments

We classify fixed maturity securities as available for sale, and we report them at estimated fair value. We expect to hold investments available for sale for an indefinite period but may sell them depending on interest rates and other considerations. We account for other investments at the lower of cost or estimated realizable value. We report unrealized investment gains and losses on investments available for sale, net of applicable deferred income tax, as a separate component of “accumulated other comprehensive income.” We determine realized gains or losses on the sale of investments on the basis of average cost. We adjust the costs of both investments available for sale and other investments by any impairment in value that we consider to be other than temporary.

Deferred Acquisition Costs

We defer costs relating to the production of new business, primarily commissions for all business and telemarketing costs from our ESG 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.

Reinsurance Premiums Ceded

We report reinsurance premiums ceded as prepaid reinsurance premiums and amortize them over the respective contract or policy periods in proportion to the amount of insurance protection provided. We defer commissions on reinsurance ceded over the duration of the contracts of reinsurance to which they relate and amortize them in proportion to the amount of insurance protection provided.

Foreign Currency Translation

Our functional and reporting currency is the U.S. Dollar. We translate foreign currency receivables or payables denominated in a currency other than U.S. dollars into U.S. dollars at the rates of exchange in effect at the balance sheet date. We include the resulting exchange gains or losses in the results of operations. We include exchange gains and losses related to the conversion of investments available for sale in the net unrealized appreciation or depreciation of the investments, net of deferred income taxes, and list them as a separate component of “accumulated other comprehensive income.” We translate assets and liabilities related to foreign operations into U.S. dollars at the exchange rate in effect at the balance sheet date; we convert revenues and expenses into U.S. dollars using weighted average rates for the period. We exclude from income gains and losses that result from translating foreign currency financial statements, net of deferred income taxes, and include them as a separate component of “accumulated other comprehensive income.”

Results of Operations

We reported a net loss of approximately $20.4 million for 2001, compared to a net loss of approximately $61.8 million for 2000. Included in the 2000 results were net losses of approximately $5.2 million from discontinued operations, which are described more fully under the caption “Discontinued Operations” and in Note 11 to our Consolidated Financial Statements.

The nature of our business has meant that we have continued exposure to underwriting decisions made in the years 1997, 1998, 1999, and early 2000. Since those years, we have gained valuable underwriting and industry experience that has helped us to better estimate potential losses and the adequacy of our reserves. In the second half of 2000, we reviewed all of our major contracts for adequacy of reserves and related profitability. After this review, we centralized our underwriting operations in Dublin and increased our loss reserves by $21.7 million. To date, these reserves have been adequate.

YEAR ENDED DECEMBER 31, 2001 COMPARED WITH YEAR ENDED DECEMBER 31, 2000

Total Revenues

Our total revenues for 2001 were $160.5 million, compared with total revenues of $249.0 million for 2000. The reduction in revenues reflects our new focus on improved underwriting and a greater selectivity in our assumption of risk.

Net Underwriting Income

For the year ended December 31, 2001, we managed, on our own behalf and on behalf of our co-reinsurers, total gross premiums of $181.7 million, of which we placed $47.3 million with co-reinsurers and retroceded $20.8 million, resulting in $113.6 million net premiums written. For the year ended December 31, 2000, we managed, on our own behalf and on behalf of our co-reinsurers, total premiums of $255.0 million, of which we placed $10.0 million with co-reinsurers and retroceded $33.1 million, resulting in $211.9 million net premiums written. The 29% decrease in gross premiums and 46% decrease in net premiums written during 2001 is a result of our strategy to become more selective with our underwriting.

The amount placed with co-reinsurers increased to 26.0% of total premiums managed in 2001 from 3.9% in 2000. This is the result of a 50% co-reinsurance arrangement with ACE for all North American medical business that we entered into, from January 2001. We expect to keep this arrangement in place throughout 2002. Reinsurance of risks related to the U.S. medical markets continues to be the largest portion of our total managed premiums. We receive a management fee for the premiums we manage on behalf of ACE under our co-reinsurance agreement, in respect of business managed in the 2001 financial year, but only to the extent ACE earns the premiums in the 2002 and 2003 financial years. We do not receive a management fee under the ACE co-reinsurance agreement for any premium earned in 2001.

Of $113.6 million net premiums written in 2001, $89.0 million was attributable to the ESG Reinsurance segment, and $24.6 million was attributable to the ESG Direct segment. For the year ended December 31, 2000, net premiums written was $211.9 million, of which $205.9 million was attributable to the ESG Reinsurance segment, and $6.0 million was attributable to the ESG Direct segment.

Gross and net premiums written and net premiums earned during 2001 and 2000 were as follows:

	Years ended December 31,
	2001			2000
	U.S. dollars in millions
ESG Reinsurance
Total premiums managed	$	157.1		$	249.0
Amount placed with co-reinsurers	(47.3		)	(10.0		)
Gross premiums written	109.8			239.0
Retroceded	(20.8		)	(33.1		)
Net premiums written	89.0			205.9
Net premiums earned	$	135.1		$	230.8

	Years ended December 31,
	2001		2000
	U.S. dollars in millions
ESG Direct
Total premiums managed	$	24.6	$	6.0
Amount placed with co-reinsurers	—		—
Gross premiums written	24.6		6.0
Retroceded	—		—
Net premiums written	24.6		6.0
Net premiums earned	$	18.1	$	5.8

Total premiums that we manage on our behalf and on behalf of our co-reinsurers during 2001 consisted of the following:

•		New Business. Approximately $46.5 million, or 25.6%, of total premiums managed was generated from new business.

•		Renewal Business. Approximately $135.2 million, or 74.4% of total premiums managed was generated from renewal business.

Underwriting Results

Underwriting results for 2001 and 2000, by line of business and in total, for the ESG Reinsurance segment were as follows:

	Year Ended December 31, 2001
	Medical			Accident			Credit			Life			Other			Total
	U.S. dollars in thousands
Gross premiums written	$	104,376		$	10,424		$	(5,865	)	$	(1,293	)	$	2,116		$	109,758
Net premiums written	88,899			5,850			(5,548		)	(2,307		)	2,086			88,980
Net premiums earned	101,985			33,054			(3,591		)	1,187			2,475			135,110
Losses and loss expenses	(66,008		)	(36,598		)	3,687			284			(3,410		)	(102,045		)
Acquisition costs	(28,769		)	(6,747		)	289			(642		)	936			(34,933		)
Operating costs	(21,054		)	(2,893		)	(71		)	(354		)	(454		)	(24,826		)
Net underwriting income/(loss).	$	(13,846	)	$	(13,184	)	$	314		$	475		$	(453	)	$	(26,694	)

	Year Ended December 31, 2000
	Medical			Accident			Credit			Life			Other			Total
	U.S. dollars in thousands
Gross premiums written	$	173,919		$	48,125		$	3,405		$	8,977		$	4,535		$	238,961
Net premiums written	148,285			43,014			3,162			7,845			3,565			205,871
Net premiums earned	161,772			51,771			6,588			6,127			4,513			230,771
Losses and loss expenses	(124,119		)	(51,153		)	(2,344		)	(5,291		)	(3,081		)	(185,988		)
Acquisition costs	(53,471		)	(15,594		)	(3,527		)	(1,622		)	(2,106		)	(76,320		)
Operating costs	(24,628		)	(6,712		)	(844		)	(1,044		)	(926		)	(34,154		)
Net underwriting income/(loss)	$	(40,446	)	$	(21,688	)	$	(127	)	$	(1,830	)	$	(1,600	)	$	(65,691	)

The operating ratios for 2001 and 2000, by line of business and in total, for the ESG Reinsurance segment were as follows:

	Year Ended December 31, 2001
	Medical		Accident		Credit		Life		Other		Total
Loss ratio	64.7	%	110.7	%	102.7	%	n/m		137.8	%	75.5	%
Acquisition expense ratio	28.2	%	20.4	%	8.0	%	54.1	%	n/m		25.9	%
Loss and acquisition expense ratio	92.9	%	131.1	%	110.7	%	30.2	%	100.0	%	101.4	%
Operating expense ratio											18.4	%
Combined ratio											119.8	%

	Year Ended December 31, 2000
	Medical		Accident		Credit		Life		Other		Total
Loss ratio	76.7	%	98.8	%	35.6	%	86.4	%	68.3	%	80.6	%
Acquisition expense ratio	33.1	%	30.1	%	53.5	%	26.4	%	46.6	%	33.1	%
Loss and acquisition expense ratio	109.8	%	128.9	%	89.1	%	112.8	%	114.9	%	113.7	%
Operating expense ratio											14.8	%
Combined ratio											128.5	%

We continue to implement stringent terms of trade, effect real rate increases, and are very selective on the business we underwrite. This is reflected in the improving loss and acquisition ratios in our medical reinsurance business from 109.8% in 2000 to 92.9% in 2001. In 2001, net earned premium in the medical line reduced by 37.0%, primarily as a result of our co-reinsurance arrangement with ACE. Net earned premium in respect of the accident line of business decreased by 36.2% as a result of adjustments to estimated premiums and more selective underwriting. Poor underwriting results on the accident account reflect adverse claims development, particularly on our Norwegian Portfolio, and this contributed to the loss and acquisition ratio of 131.1%.

Our 2001 underwriting results are comprised of four underwriting years, with the 2001 underwriting year contributing net earned premium of $26.2 million, carrying a loss and acquisition ratio of 89.2%. The 2000 underwriting year contributed $95.2 million of net earned premium, carrying a loss and acquisition ratio of 97.6%. The 1999 underwriting year contributed $8.9 million of net earned premium, carrying a loss and acquisition ratio of 190.4%. The 1998 underwriting year contributed $(1.1) million of net earned premium with a loss and acquisition ratio of (105.1)%.

We calculated the operating expense ratios for 2001 and 2000 by expressing total administrative expenses, net of corporate office expense, as a percentage of net premiums earned.

During 2001, we reduced gross premiums written for the 2000, 1999, and 1998 underwriting years by $105 million, a large portion of which relates to the 2000 underwriting year, on the business in Western Europe. Because we agree to reinsurance contracts with ceding companies before those companies know what their insurance premiums will be for that year, we must rely on estimates of the amount of premiums the ceding companies will write. The premiums we recognize from the ceding companies under our reinsurance contracts with them are dependent on the underlying premiums received by the ceding company. At the time we underwrite and record the contract, we include premium written on an estimated basis. We reassess our premium estimates as information becomes available, and adjust our written premium if appropriate.

Underwriting results for 2001 and 2000, by line of business and in total, for the ESG Direct segment were as follows:

	Year Ended December 31, 2001
	Accident			Credit			Total
	U.S. dollars in thousands
Gross premiums written	$	17,169		$	7,444		$	24,613
Net premiums written	17,169			7,444			24,613
Net premiums earned	17,153			957			18,110
Losses and loss expenses	(2,242		)	(278		)	(2,520		)
Acquisition costs	(10,395		)	(511		)	(10,906		)
Operating costs	(6,382		)	(313		)	(6,695		)
Net underwriting income/(loss)	$	(1,866	)	$	(145	)	$	(2,011	)

	Year Ended December 31, 2000
	Accident			Credit		Total
	U.S. dollars in thousands
Gross premiums written	$	6,015		$	—	$	6,015
Net premiums written	6,015			—		6,015
Net premiums earned	5,849			—		5,849
Losses and loss expenses	(1,253		)	—		(1,253		)
Acquisition costs	(2,246		)	—		(2,246		)
Operating costs	(2,965		)	—		(2,965		)
Net underwriting income/(loss)	$	(615	)	$	—	$	(615	)

The operating ratios for 2001 and 2000, by line of business and in total, for the ESG Direct segment were as follows:

	Year Ended December 31, 2001
	Accident		Credit		Total
Loss ratio	13.1	%	29.0	%	13.9	%
Acquisition expense ratio	60.6	%	53.4	%	60.2	%
Loss and acquisition expense ratio	73.7	%	82.4	%	74.1	%
Operating expense ratio					37.0	%
Combined ratio					111.1	%

	Year Ended December 31, 2000
	Accident		Credit	Total
Loss ratio	21.4	%	—	21.4	%
Acquisition expense ratio	38.4	%	—	38.4	%
Loss and acquisition expense ratio	59.8	%	—	59.8	%
Operating expense ratio				50.7	%
Combined ratio				110.5	%

The 2001 underwriting results for our Direct Segment are comprised of two underwriting years, with the 2001 underwriting year contributing net earned premium of $18.1 million, carrying a loss and acquisition ratio of 74.1%. The 2000 underwriting year contributed $5.8 million of earned premium, carrying a loss and acquisition ratio of 59.8%. The increase of $12.3 million in premiums earned in 2001 is a result of our increasing investment in the ESG Direct segment in both Asia and Continental Europe.

The 2001 results suffer because of the operating costs that reflect the investment into Continental Europe and new start up operations in Asia Pacific. As can be seen loss and acquisition costs are significantly lower than the reinsurance segment. Operating expense ratios will decrease as we write more premium and achieve operating economies of scale.

Geographic Spread

The distribution of gross written premiums for years ended December 31, 2001 and 2000, is as follows:

	Years ended December 31,
	2001		2000
ESG Reinsurance
Western Europe	(11.2	)%	18.9	%
North America	100.3	%	55.2	%
Latin America	17.8	%	16.1	%
Other	(6.9	)%	9.8	%
Total	100.0	%	100.0	%

	Years ended December 31,
	2001		2000
ESG Direct
Western Europe	30.2	%	0.0	%
Asia	69.8	%	100.0	%
Total	100.0	%	100.0	%

Product Mix

The distribution of gross premiums written by line of business for the years ended December 31, 2001 and 2000 is as follows:

	Years ended December 31,
	2001		2000
ESG Reinsurance
Medical	95.1	%	72.8	%
Personal Accident	9.5	%	20.1	%
Credit	(5.3	)%	1.4	%
Life	(1.2	)%	3.8	%
Other	1.9	%	1.9	%
Total	100.0	%	100.0	%

	Years ended December 31,
	2001		2000
ESG Direct
Personal Accident	69.8	%	100.0	%
Credit	30.2	%	0.0	%
Total	100.0	%	100.0	%

Management Fee Revenue

For the year ending December 31, 2001, we earned $874,000 in management fee revenue. This represents a 51.4% reduction from the $1.8 million in management fees earned in the year ending December 31, 2000. The majority of management fee revenue in 2001 and 2000 consists of fees earned on those premiums managed on behalf of our co-reinsurers. Management fees declined in 2001, primarily due to fee income not attaching to business earned during 2001 on the ACE co-reinsurance business replacing co-reinsurance agreements which expired in 2000. Under the ACE agreement, fee income will be recognized on risks attaching to the 2001 underwriting year, as it earns in the 2002 and 2003 financial years.

Net Investment Income

Net investment income on our invested assets constituted approximately 7.6%, 5.2%, and 5.1% of our revenues in 2001, 2000 and 1999, respectively. As of December 31, 2001, our cash and invested assets totaled approximately $154.9 million, compared with cash and invested assets of approximately $212.2 million as of December 31, 2000. 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 approximately $0.7 million from approximately $12.9 million in 2000 to approximately $12.2 million in 2001.

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 year ended December 31, 2001:

	Average Investments		Net Investment Income(1)		Annualized Effective Yield		Net Realized Investment Gains (Losses)
	U.S dollars in thousands
Investments	$	164,323	$	10,911	6.6	%	$	6,489
Other investments	13,705		700		5.1	%	(12,200		)
Cash and cash equivalents	12,226		566		4.6	%	—
Total	$	190,254	$	12,177	6.4	%	$	(5,711	)

(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 the investment results for the year ended December 31, 2000:

	Average Investments		Net Investment Income(1)		Annualized Effective Yield		Net Realized Investment Gains (Losses)
	U.S dollars in thousands
Investments	$	175,641	$	11,523	6.6	%	$	(2,538	)
Other investments	13,794		434		3.1	%	—
Cash and cash equivalents	23,430		967		4.1	%	—
Total	$	212,865	$	12,924	6.1	%	$	(2,538	)

(1)

Net investment income is net of investment–related expenses and income on premium receivable and funds held by ceding companies.

At December 31, 2001 and 2000, we had invested approximately $1.7 million and $12.7 million, respectively, primarily into companies with whom we have operating relationships. In addition, we have outstanding loans of approximately $4.5 million and $5.0 million with one of these related enterprises as of December 31, 2001 and 2000, respectively.

The Audit Committee of our Board of Directors reviews our investment policies and arrangements to ensure that they are consistent with our overall goals, strategies and objectives. Overall investment guidelines have been approved by the Audit Committee to ensure appropriate levels of portfolio liquidity, credit quality, diversification and volatility. In addition, the Audit Committee will review the portfolio’s exposure to capture any potential violations of investment guidelines.

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 December 31, 2001, total investments and cash were $154.9 million, compared to $212.2 million at December 31, 2000. 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 December 31, 2001 and 2000 were as follows:

	As at December 31, 2001
	Fair Value		Duration Years	Market Yield		Average Credit Rating
	U.S. dollars in thousands
Corporate securities	$	43,799	2.8	5.2	%	AA
U.S. treasury securities and obligations of U.S. Government corporations and agencies	53,466		3.6	4.6	%	AAA
Asset-backed securities/Mortgage-backed securities	25,599		2.5	7.3	%	AAA
Obligations of states and political subdivisions	16,505		2.7	5.7	%	AAA
Foreign currency debt securities	5,475		1.0	4.2	%	AAA
Total	$	144,844	2.7	5.4	%

	As at December 31, 2000
	Fair Value		Duration Years	Market Yield		Average Credit Rating
	U.S. dollars in thousands
Corporate securities	$	71,382	3.0	6.6	%	AA
U.S. treasury securities and obligations of U.S. Government corporations and agencies	38,128		2.4	6.1	%	AAA
Asset-backed securities/Mortgage-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	6,444		1.6	4.5	%	AAA

Total	$	168,478	2.6	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 Discontinued Operations 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 agreement upon 90 days written notice. We paid $321,637 in fees to Head Asset Management LLC in 2001, and $404,000 in 2000.

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, beginning in 2002, the Audit Committee will review the portfolio’s exposure to capture any potential violations of investment guidelines. The Audit Committee will also review 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 and Taxes

Total administrative expenses, include personnel costs, professional service fees, interest expense and other expenses. Other expenses include a restatement of $4.0 million relating to the correction of a mistatement in the foreign currency translation adjustments, as referred to in note 20 of the consolidated financial statements. Administrative expenses decreased by $7.9 million, or 19.8%, from $39.8 million in 2000 to $31.9 million in 2001. This decrease is primarily due to a legal reserve of $8.4 million which was established in 2000 for costs associated with resolving disputes in respect of

certain contracts. As related legal costs have been incurred in 2001, this reserve has reduced to $6.7 million at December 31, 2001. Management reviews this reserve for adequacy on a quarterly basis.

We made stringent efforts to reduce overheads in the year 2001. To that end, we made cost savings across all categories, but in particular in personnel costs, professional services and travel expenses. Personnel costs decreased by $1.2 million from $13.1 million in 2000 to $11.9 million in 2001. Although the number of full-time employees increased from 135 at December 31, 2000 to 162 at December 31, 2001, labor costs are on average lower due to the weighting of employees being greater now in lower operating-cost economies, than in prior years. We have also recognized economies of scale as a result of our centralized underwriting, claims and finance operations.

Professional service fees decreased by $3.4 million from $10.3 million in 2000 to $6.9 million in 2001. Professional fees included $3.2 million in legal fees in respect of corporate compliance, standardization of policy contracts and management agreements, acquisitions and forensic audits and legal disputes. Audit and accountancy costs of $1.4 million were incurred in audit, accounting, tax advisory and corporate reporting services. Consulting expenses of $2.6 million were incurred in actuarial support, computer systems improvements, recruitment, due diligence and corporate communications.

Foreign currency exchange losses in total were $4.3 million in 2001, compared to $1.3 million in 2000. These losses in 2001 include (i) the effect of $4.0 million restatement to the foreign currency translation adjustments and other expenses, referred to above, and (ii) $0.3 million unrealized losses, incurred on the revaluation of assets and liabilities denominated in foreign currencies for reporting purposes.

Under current Bermuda law, we are not required to pay taxes in Bermuda on either income or capital gains. Provision for income taxes consists of corporate and other applicable income taxes payable in the various jurisdictions in which we conduct our business including, but not limited to, Germany, Ireland, Canada and the United Kingdom. We have a tax credit of $1.3 million resulting from the recognition of a tax asset on the books of ESG Reinsurance Ireland Ltd., our principal underwriting entity. This is in relation to the expected use of carry forward losses in offsetting future taxable profits. Realization of the deferred tax asset is dependent on generating sufficient taxable income in the future. During 2001, a valuation allowance of $11.4 million to reduce the deferred tax asset was recorded in accordance with the provisions of SFAS109. The valuation allowance is necessary because of uncertainty regarding the realizability of certain net operating loss carryforwards. We have loss carryforwards of $57.0 million available to offset future foreign taxable income. Such tax loss carryforwards do not have an expiration date.

Discontinued Operations

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 serve as outside counsel to ESG in Germany.

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 December 31, 2001 we had invested $0.3 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.

On December 31, 2001, we wrote off the Series A preferred stock representing our initial $8.0 million investment in 4Sigma. For a further discussion of our investment in 4Sigma, see Note 11 to our 2001 Consolidated Audited Financial Statements.

YEAR ENDED DECEMBER 31, 2000 COMPARED WITH YEAR ENDED DECEMBER 31, 1999

We have restated all information for 2000 to conform to our new segment structure.

Net Underwriting Income

For the year ended December 31, 2000, we managed, on our own behalf and behalf of our co-reinsurers, total premiums of $255.0 million, of which we placed $10.0 million with co-reinsurers and retroceded $33.1 million, resulting in $211.9 million net premiums written. For the year ended December 31, 1999, we managed, on our own behalf and on behalf of our co-reinsurers, total premiums of $347.9 million, of which we placed $14.9 million with co-reinsurers and retroceded $19.8 million, resulting in $313.2 million net premiums written. The amount placed with co-reinsurers declined to 3.9% of total premiums managed in 2000 compared to 4.3% of total premiums managed in 1999. The ESG Direct segment did not operate during 1999.

Gross and net premiums written and net premiums earned for 2000 and 1999 were as follows:

	Years ended December 31,
	2000			1999
	U.S. dollars in millions
ESG Reinsurance
Total premiums managed	$	249.0		$	347.9
Amount placed with co-reinsurers	(10.0		)	(14.9		)
Gross premiums written	239.0			333.0
Retroceded	(33.1		)	(19.8		)
Net premiums written	205.9			313.2

Net premiums earned	$	230.8		$	249.1

	Years ended December 31,
	2000		1999
	U.S. dollars in millions
ESG Direct
Total premiums managed	$	6.0	$	0.0
Amount placed with co-reinsurers	0.0		0.0
Gross premiums written	6.0		0.0
Retroceded	0.0		0.0
Net premiums written	6.0		0.0

Net premiums earned	$	5.8	$	0.0

Total premiums managed for 2000 consisted of the following:

• New Business—approximately $130.5 million, or 51.2%, of total premiums managed was generated from new business.

• Renewal Business—approximately $124.5 million, or 48.8%, of total premiums managed was generated from renewal business.

During 2000, we had reductions in total premiums managed on the 1998 and 1999 underwriting years of $37.1 million, equivalent to 6.6% of gross premium written in these years. This represents differences between estimates made at the time contracts were written and actual amounts reported by ceding companies. Such changes are recorded in the period in which the actual amounts are determined.

Underwriting results for 2000 and 1999, by line of business and in total, for the ESG Reinsurance segment were as follows:

	Year Ended December 31, 2000
	Medical			Accident			Credit			Life			Other			Total
	U.S. dollars in thousands
Gross premiums written	$	173,919		$	48,125		$	3,405		$	8,977		$	4,535		$	238,961
Net premiums written	148,285			43,014			3,162			7,845			3,565			205,871
Net premiums earned	161,772			51,771			6,588			6,127			4,513			230,771
Losses and loss expenses	(124,119		)	(51,153		)	(2,344		)	(5,291		)	(3,081		)	(185,988		)
Acquisition costs	(53,471		)	(15,594		)	(3,527		)	(1,622		)	(2,106		)	(76,320		)
Operating costs	(24,628		)	(6,712		)	(844		)	(1,044		)	(926		)	(34,154		)

Net underwriting income/(loss)	$	(40,446	)	$	(21,688	)	$	(127	)	$	(1,830	)	$	(1,600	)	$	(65,691	)

	Year Ended December 31, 1999
	Medical			Accident			Credit			Life			Other			Total
	U.S. dollars in thousands
Gross premiums written	$	251,984		$	66,514		$	1,851		$	6,934		$	5,717		$	333,000
Net premiums written	240,314			61,549			714			5,550			5,083			313,210
Net premiums earned	188,016			42,443			3,933			9,593			5,140			249,125
Losses and loss expenses	(153,894		)	(33,001		)	(2,424		)	(8,015		)	(1,697		)	(199,031		)
Acquisition costs	(52,940		)	(9,287		)	(795		)	(1,516		)	(1,758		)	(66,296		)
Operating costs	(16,503		)	(4,393		)	(421		)	(976		)	(550		)	(22,843		)

Net underwriting income/(loss)	$	(35,321	)	$	(4,238	)	$	293		$	(914	)	$	1,135		$	(39,045	)

The operating ratios for 2000 and 1999, by line of business and in total, for the ESG Reinsurance segment were as follows:

	Year Ended December 31, 2000
	Medical		Accident		Credit		Life		Other		Total

Loss ratio	76.7	%	98.8	%	35.6	%	86.4	%	68.3	%	80.6	%
Acquisition expense ratio	33.1	%	30.1	%	53.5	%	26.4	%	46.6	%	33.1	%
Loss and acquisition expense ratio	109.8	%	128.9	%	89.1	%	112.8	%	114.9	%	113.7	%
Operating expense ratio											14.8	%
Combined ratio											128.5	%

	Year Ended December 31, 1999
	Medical		Accident		Credit		Life		Other		Total
Loss ratio	81.9	%	77.8	%	61.6	%	83.6	%	33.0	%	79.9	%
Acquisition expense ratio	28.2	%	21.9	%	20.2	%	15.8	%	34.2	%	26.6	%
Loss and acquisition expense ratio	110.1	%	99.7	%	81.8	%	99.4	%	67.2	%	106.5	%
Operating expense ratio											9.2	%
Combined ratio											115.7	%

After rapid growth in 1999 in our medical portfolio, we recognized in the second quarter of 2000 that much of this business was not profitable. We centralized underwriting, ceased writing North American medical business from our London office, strengthened our terms of trade, increased rates and became more selective on business accepted. As a result, gross premiums written on medical business declined 31% during the year.

Gross written premiums on accident business declined 27.6% to $48.1 million for the year ended December 31, 2000, in line with our selectivity on writing new and renewal business. Adverse claims development, particularly on our Norwegian portfolio, contributed to the increase in the loss and acquisition expense ratio from 99.7% in 1999 to 128.9% in 2000.

Poor underwriting results across the two major lines of business contributed to the increase in our loss and acquisition ratio from 106.5% in 1999 to 113.7% in 2000. The 2000 results are comprised of three underwriting years, with the 2000 underwriting year contributing earned premium of $106.5 million, carrying a loss and acquisition ratio of 104.1%. The 1999 underwriting year contributed $117.8 million of earned premium with a loss and acquisition ratio of 105.4%. The 1998 underwriting year contributed $3.7 million to net earned premium with $17.1 million of loss and acquisition expense attached.

The operating expense ratios for the years ended December 31, 2000 and 1999 were calculated by expressing total administrative expenses net of corporate office expense, as a percentage of net premiums earned. Included in the 2000 administrative expenses is an $8.4 million legal reserve for the expected costs associated with resolving disputes in respect of certain risks that we ceded to and in some cases rescinded.

Underwriting results for 2000, by line of business and in total, for the ESG Direct segment were as follows:

	Year Ended December 31, 2000
	Accident			Credit		Total
	U.S. dollars in thousands
Gross premiums written	$	6,015		$	—	$	6,015
Net premiums written	6,015			—		6,015
Net premiums earned	5,849			—		5,849
Losses and loss expenses	(1,253		)	—		(1,253		)
Acquisition costs	(2,246		)	—		(2,246		)
Operating costs	(2,965		)	—		(2,965		)
Net underwriting income/(loss)	$	(615	)	$	—	$	(615	)

The operating ratios for 2000 for the ESG Direct segment were as follows:

	Year Ended December 31, 2000
	Accident		Credit	Total
	U.S. dollars in thousands
Loss ratio	21.4	%	—	21.4	%
Acquisition expense ratio	38.4	%	—	38.4	%
Loss and acquisition expense ratio	59.8	%	—	59.8	%
Operating expense ratio				50.7	%
Combined ratio				110.5	%

We commenced the ESG Direct business during 2000 by writing business in the Asia region and the above results reflect the early development of this business. Initial set-up costs together with low premium volumes contributed to the high expense ratio.

Geographic Spread

As a consequence of a reduction in premiums written, selectivity in business being written, and growth in the ESG Direct segment, more business was being sourced outside of the North American market in 2000 when compared to 1999.

The distribution of gross written premiums for 2000 and 1999 is as follows:

	Years ended December 31,
	2000		1999

ESG Reinsurance
Western Europe	18.9	%	21.2	%
North America	55.2	%	63.5	%
Latin America	16.1	%	9.8	%
Other	9.8	%	5.5	%
Total	100.0	%	100.0	%

	Years ended December 31,
	2000		1999

ESG Direct
Asia	100.0	%	0.0	%
Total	100.0	%	0.0	%

Product Mix

The distribution of gross premiums written by line of business for the years ended December 31, 2000 and 1999 is as follows:

	Years ended December 31,
	2000		1999

ESG Reinsurance
Medical	72.8	%	75.7	%
Personal Accident	20.1	%	19.9	%
Credit	1.4	%	0.6	%
Life	3.8	%	2.1	%
Other	1.9	%	1.7	%
Total	100.0	%	100.0	%

	Years ended December 31,
	2000		1999

ESG Direct
Personal Accident	100.0	%	0.0	%
Total	100.0	%	0.0	%

Management Fee Revenue

The majority of management fee revenue in 2000 and 1999 consists of fees earned on those premiums managed for our co-reinsurers.

Net Investment Income

Net investment income decreased by $0.6 million from $13.5 million in 1999 to $12.9 million in 2000.

The following table reflects the investment results for the year ended December 31, 2000:

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

Investments	$	175,641	$	11,523	6.6	%	$	(2,538	)
Other investments	13,794		434		3.1	%	—
Cash and cash equivalents	23,430		967		4.1	%	—
Total	$	212,865	$	12,924	6.1	%	$	(2,538	)

(1)

Net investment income is net of investment–related expenses and income on premium receivable and funds held by ceding companies.

Our investment portfolio in 2000 was reduced, in part, as a result of the share buy back, and our investment results were negatively impacted by realized losses from the sale of bonds that fell outside our investment guidelines following their respective downgrade.

The following table reflects the investment results for the year ended December 31, 1999:

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

Investments	$	197,781	$	11,528	5.8	%	$	(1,960	)
Other investments	10,931		495		4.5	%	(14		)
Cash and cash equivalents	26,889		1,492		5.5	%	—
Total	$	235,601	$	13,515	5.7	%	$	(1,974	)

Net investment income is net of investment–related expenses and income on premium receivable and funds held by ceding companies.

(1)

Other investments include $7.8 million of equity investment and loans provided to three companies that we expect will generate or secure profitable reinsurance business for us.

Our investment portfolio in 1999 was hurt by a general decrease in prices in the U.S. bond markets, which resulted in investment losses on sales of fixed income securities during the year.

Administrative Expenses and Taxes

Total administrative expenses, which includes personnel costs, professional service fees, interest expense and other expenses, increased by $14.1 million, or 55%, from $25.7 million in 1999 to $39.8 million in 2000. The majority of the increase was due to a legal reserve of $8.4 million we established for costs associated with resolving disputes in respect of certain contracts and our investment in the Direct Response Marketing and Bancassurance lines of business.

We continued to incur significant expenses for professional services and for travel expenses in the development of our business. Personnel costs increased by $4.1 million from $9.0 million in 1999 to $13.1 million in 2000. The number of full time employees increased from 121 at December 31, 1999 to 135 at December 31, 2000. The increase in employees was primarily in Direct Marketing, Bancassurance and in the centralized underwriting and claims operations.

Professional service fees increased by $2.1 million from $8.2 million in 1999 to $10.3 million in 2000. Professional fees included $4.1 million in legal fees in respect of corporate compliance, standardization of policy contracts and management agreements, acquisitions, forensic audits and legal disputes. We incurred audit and accounting costs of $2.0 million. We incurred consulting expenses of $4.1 million in actuarial support, computer systems improvements, recruitment, due diligence and corporate communications.

Foreign exchange losses were $1.3 million in 2000 compared to foreign exchange losses of $11 thousand for 1999. These gains or losses are primarily unrealized and were incurred on the revaluation of assets and liabilities denominated in foreign currencies for reporting purposes. As we maintain a partial natural hedge, whereby foreign currency assets are held in the same currencies in which it must pay liabilities, the impact on cash flows from foreign exchange movements is reduced.

Tax expense was nil for the year reflecting the losses reported.

Discontinued Operations

Reference is made to Note 11 to our Consolidated Financial Statements concerning the divestiture, effective June 30, 2000, of our health care division.

LIQUIDITY AND CAPITAL RESOURCES

Operating activities contributed a net cash outflow of $42.5 million and $1.5 million for the years ended December 31, 2001 and 2000 respectively. Cash flows from operations in future years may differ substantially from net income. As reinsurance contracts mature, we will be required to pay out a higher percentage of incurred losses in loss payments, which may affect cash flows.

Reinsurance balances receivable decreased from $241.6 million as of December 31, 2000 to $190.5 million as of December 31, 2001 because we wrote less gross insurance premiums. We recognize these premiums 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 premium if appropriate.

Prepaid reinsurance premiums decreased from $5.4 million as at December 31, 2000 to $1.5 million as at December 31, 2001, a factor of lower premium writings. During the year, we retroceded 15.5% of our gross written premiums to reinsurers compared to 13.6% in 2000. We have maintained similar levels of excess of loss protection in 2001 as in 2000.

Reinsurance funds recoverable on incurred losses increased from $15.6 million as at December 31, 2000 to $28.6 million as at December 31, 2001. The 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 $46.6 million at December 31, 2000 to $40.3 million at December 31, 2001, which was a function of the decline in written premiums over the year.

At December 31, 2001, reserves for unpaid losses and loss expenses were $146.4 million compared to $179.6 million at December 31, 2000. This decrease is also a function of reduced underwritings in 2001.

At December 31, 2001, unearned premium reserves were $104.4 million compared to $148.1 million at December 31, 2000. Unearned premium reserves are established to cover the unexpired period of contracts of reinsurance that we have written. At December 31, 2001, acquisition costs payable were $43.1 million compared to $64.6 million at December 31, 2000. The balance represents acquisition expenses due on gross reinsurance premiums that we have written and is consistent with the decrease in written premiums.

Shareholders’ equity as of December 31, 2001 was $95.1 million, compared to $113.6 million at December 31, 2000. The major factor causing the reduction in shareholders’ equity in 2001 was our net operating loss. Book value per common share declined to $8.03 as of December 31, 2001 from $9.64 as of December 31, 2000.

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. Additionally, although we primarily invest in high quality assets, a diminution in the value of our portfolio could restrict our ability to continue financing our operations.

As of December 31, 2001, we had the following material commitments for operating leases, other commitments (4Sigma) and employment contracts:

	Total Commitments
Years ending December 31,	Lease & Other Commitments		Less Sublease Income		Net		Employee Commitments		Total
	U.S. dollars in thousands

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 in Trust Accounts. These arrangements were secured against our fixed maturity investment portfolio. Effective January 1, 2001, the total Letters of Credit issued was decreased from $73.4 million to $50.1 million due to historical Letters of Credit expiring December 31, 2000. Further, in accordance with local regulatory requirements in Ireland, we placed $20 million in a Trust Agreement in February 2001.

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.

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. We do 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, the Financial Accounting Standards Board (“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. We do 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 are currently evaluating the provisions of SFAS No. 144.

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 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-K 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 ESG Direct segment in Asia and Europe; and

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

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. Though our business does not depend solely on any one customer, we have several customers that generate substantial revenues, including the Companion Insurance Company account, which accounted for 17% of our total revenues in 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 with that customer 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 United States 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, it 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-K.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

ESG RE LIMITED

CONSOLIDATED BALANCE SHEETS

	As of December 31,
	2001			2000
	As Restated See Note 20
	U.S. dollars in thousands except share data
ASSETS
Investments available for sale, at fair value (cost: $146,369 and $166,513)	$	144,844		$	168,478
Cash and cash equivalents	3,915			26,032
Other investments	6,172			17,736
Total investments and cash	154,931			212,246
Accrued investment income	2,028			3,240
Management fees receivable	296			713
Reinsurance balances receivable	190,526			241,587
Reinsurance recoverable on incurred losses	28,630			15,633
Funds held by ceding companies	24,629			18,432
Prepaid reinsurance premiums	1,523			5,432
Deferred acquisition costs	40,308			46,611
Receivable for securities sold	2,318			—
Deferred tax asset	1,339			—
Other assets	7,277			6,281
Cash and cash equivalents held in a fiduciary capacity	1,724			4,619
TOTAL ASSETS	$	455,529		$	554,794

LIABILITIES
Unpaid losses and loss expenses	$	146,383		$	179,614
Unearned premiums	104,395			148,124
Acquisition costs payable	43,110			64,604
Reinsurance balances payable	51,927			30,511
Accrued expenses, accounts payable, and other liabilities ($80 and $85 due to related parties)	12,920			13,756
Fiduciary liabilities	1,724			4,619
Total liabilities	360,459			441,228
Commitments and contingencies (Note 11)
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; 11,831,063 shares issued and outstanding for 2001 and 11,777,086 shares issued and outstanding for 2000	11,831			11,777
Additional paid-in capital	208,221			208,539
Unearned compensation	(333		)	(893		)
Accumulated other comprehensive income:
Foreign currency translation adjustments	(201		)	(5,331		)
Unrealized (losses)/gains on securities	(1,525		)	1,965
Accumulated other comprehensive income	(1,726		)	(3,366		)
Retained deficit	(122,923		)	(102,491		)
Total shareholders’ equity	95,070			113,566
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY	$	455,529		$	554,794

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

ESG RE LIMITED

CONSOLIDATED STATEMENTS OF OPERATIONS

	Years Ended December 31,
	2001			2000			1999
	As Restated See Note 20
	U.S. dollars in thousands except share and per share data
REVENUES
Net premiums written	$	113,593		$	211,886		$	313,210
Change in unearned premiums	39,627			24,734			(64,085		)
Net premiums earned	153,220			236,620			249,125
Management fee revenue	874			1,846			2,128
Net investment income (includes expenses of $297, $397 and $495 for related parties)	12,177			12,924			13,515
(Loss)/gain on equity investments	(27		)	180			(205		)
Net realized investment losses	(5,711		)	(2,538		)	(1,974		)
	160,533			249,032			262,589

EXPENSES
Losses and loss expenses	$	104,566		$	187,241		$	199,031
Acquisition costs	45,840			78,566			66,296
Personnel costs	11,891			13,085			8,993
Professional service fees	6,899			10,268			8,166
Other expenses	13,108			16,490			8,510
	182,304			305,650			290,996

LOSS FROM CONTINUING OPERATIONS BEFORE TAXES	$	(21,771	)	$	(56,618	)	$	(28,407	)
Income tax benefit/(charge)	1,339			—			(815		)
LOSS FROM CONTINUING OPERATIONS	(20,432		)	(56,618		)	(29,222		)
Net loss from discontinued operations	—			(5,178		)	(12,772		)
NET LOSS	$	(20,432	)	$	(61,796	)	$	(41,994	)

PER SHARE DATA
Basic net loss per share from continuing operations	$	(1.73	)	$	(4.79	)	$	(2.20	)
Diluted net loss per share from continuing operations	$	(1.73	)	$	(4.79	)	$	(2.20	)

Basic net loss per share	$	(1.73	)	$	(5.23	)	$	(3.17	)
Diluted net loss per share	$	(1.73	)	$	(5.23	)	$	(3.17	)

WEIGHTED AVERAGE OF COMMON SHARES OUTSTANDING
Basic	11,795,034			11,809,000			13,260,214
Diluted	11,795,034			11,809,000			13,260,214

Dividends declared per share	$	0.00		$	0.24		$	0.32

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

ESG RE LIMITED

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY

	Years Ended December 31,
	2001			2000			1999
	As Restated See Note 20
	U.S. dollars in thousands except share data
COMMON SHARES (shares outstanding)
Balance at January 1	11,777,086			11,598,799			13,923,799
Shares retired during year	(62,973		)	(393,134		)	(2,334,000		)
Issuance of shares to employees	116,950			571,421			9,000
Balance at December 31	11,831,063			11,777,086			11,598,799
COMMON SHARES (PAR VALUE)
Balance at January 1	$	11,777		$	11,599		$	13,924
Shares retired during year	(63		)	(393		)	(2,334		)
Issuance of shares to employees	117			571			9
Balance at December 31	11,831			11,777			11,599
ADDITIONAL PAID-IN CAPITAL
Balance at January 1	208,539			211,225			226,216
Shares retired during year	(430		)	(1,643		)	(14,195		)
Directors’ fees taken as stock options	62			173			232
Dividends	—			(2,859		)	(1,072		)
Issuance of shares to employees	50			1,643			44
Balance at December 31	208,221			208,539			211,225
UNEARNED COMPENSATION
Balance at January 1	$	(893	)	$	—		$	—
Net decrease/(increase) during year	560			(893		)
Balance at December 31	$	(333	)	$	(893	)	$	—
ACCUMULATED OTHER COMPREHENSIVE INCOME
Balance at January 1	(3,366		)	(5,314		)	60
Foreign currency translation adjustments, net of tax	5,130			(3,629		)	(1,128		)
Unrealized (losses)/gains on securities, net of tax	(3,490		)	5,577			(4,246		)
Balance at December 31	(1,726		)	(3,366		)	(5,314		)

RETAINED (DEFICIT)/EARNINGS
Balance at January 1	(102,491		)	(40,695		)	4,641
Net loss	(20,432		)	(61,796		)	(41,994		)
Dividends	—			—			(3,342		)
Balance at December 31	(122,923		)	(102,491		)	(40,695		)
TOTAL SHAREHOLDERS’ EQUITY	$	95,070		$	113,566		$	176,815

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

ESG RE LIMITED

CONSOLIDATED STATEMENTS OF CASH FLOWS

	Years Ended December 31,
	2001			2000			1999
	As Restated See Note 20
	U.S. dollars in thousands
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss	$	(20,432	)	$	(61,796	)	$	(41,994	)
Adjustments to reconcile net loss to net cash provided by (used in) operating activities
Depreciation and amortization	1,761			1,642			1,773
Realized investment losses	5,738			2,805			1,974
Amortization of premiums and discounts	—			—			89
Bad debt provisions	—			740			3,416
Non-cash compensation expenses	428			1,506			285
Unrealized foreign exchange gains/losses	3,992			—			—
Changes in assets and liabilities:
Accrued investment income	1,212			127			262
Management fees receivable	417			590			1,861
Reinsurance balances receivable	51,061			34,525			(107,838		)
Reinsurance recoverable on incurred losses	(12,997		)	(4,171		)	(8,701		)
Funds held by ceding companies	(6,197		)	(2,891		)	(11,949		)
Prepaid reinsurance premiums	3,909			3,676			(6,832		)
Deferred acquisition costs	6,303			11,196			(20,182		)
Deferred tax asset	(1,339		)	—			843
Unpaid losses and loss expenses	(33,232		)	42,679			92,556
Unearned premiums	(43,729		)	(33,003		)	69,243
Acquisition costs payable	(21,494		)	(8,451		)	27,568
Reinsurance balances payable	21,416			4,485			18,911
Accrued expenses and accounts payable	(548		)	5,634			2,195
Other assets and liabilities	1,246			(816		)	(1,329		)

NET CASH (USED IN) PROVIDED BY OPERATING ACTIVITIES	$	(42,485	)	$	(1,523	)	$	22,151

CASH FLOWS FROM INVESTING ACTIVITIES
Cost of investments acquired—available for sale	$	(296,302	)	$	(209,647	)	$	(301,290	)
Proceeds from sale of investments—available for sale	318,705			223,084			325,129
Change in short-term investments	—			—			—
Purchases of fixed assets	(2,630		)	(1,314		)	(2,686		)
Purchases of intangible assets	—			—			(958		)
Funding of other investments	595			(7,940		)	(10,067		)
NET CASH PROVIDED BY INVESTING ACTIVITIES	$	20,368		$	4,183		$	10,128

CASH FLOWS FROM FINANCING ACTIVITIES
Repurchase of common shares	—			(2,036		)	(16,529		)
Dividends paid	—			(2,870		)	(4,414		)
NET CASH USED IN FINANCING ACTIVITIES	$	—		$	(4,906	)	$	(20,943	)

Net (decrease) increase in cash	(22,117		)	(2,246		)	11,336
Cash and cash equivalents at January 1	26,032			28,278			16,942
Cash and cash equivalents at December 31	$	3,915		$	26,032		$	28,278

SUPPLEMENTAL CASH FLOW INFORMATION
Cash transactions:
Interest paid	$	—		$	—		$	17
Income taxes paid	$	65		$	87		$	496

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

ESG RE LIMITED

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

	Years Ended December 31,
	2001			2000			1999
	As Restated See Note 20
	U.S. dollars in thousands
Net loss	$	(20,432	)	$	(61,796	)	$	(41,994	)
Other Comprehensive income, net of tax:
Foreign currency translation adjustments	5,130			(3,629		)	(1,128		)
Unrealized (losses)/gains on securities (net of tax of $— , $160 and $—)	(3,490		)	3,039			(6,220		)
Less reclassification adjustment for losses/(gains) included in net income	—			2,538			1,974
Other comprehensive income/(loss)	1,640			1,948			(5,374		)
Comprehensive loss	$	(18,792	)	$	(59,848	)	$	(47,368	)

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

ESG RE LIMITED

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

For the three years ended December 31, 2001, 2000, 1999

1. ORGANIZATION AND BUSINESS

We were incorporated under the laws of Bermuda on August 21, 1997. Our principal activities conducted through our subsidiaries, are to provide accident, health, credit, life and special risk reinsurance and to provide underwriting management services for these lines.

Our consolidated financial statements include both our accounts and those of the following majority owned subsidiaries: European Specialty Reinsurance (Bermuda) Limited, ESG Reinsurance Ireland Limited, Accent Europe Insurance Company Limited, European Specialty Group (United Kingdom) Limited, ESG Re London Limited, ESG (London) Limited, ESG Direct Italy, ESG Direct Spain, European Specialty Latin America Inc., ESG Re North America Limited, European Specialty Group Holding AG, European Specialty Group Management GmbH, European Specialty Group Underwriting Management GmbH, Sportsecure AG, European Specialty Ruckversicherung AG, IPT GmbH, Health Benefits Consultants Company Limited, ESG Direct Hong Kong Limited, ESG Direct Asia Pte Limited, ESG Direct Australia Pty Limited, Imedi-L Holding Georgia and IMEDI L International Insurance Company Limited.

All material intercompany balances and transactions have been eliminated in consolidation.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Our consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“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.

(B) RESERVE FOR LOSSES AND LOSS EXPENSES

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 costs 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) MANAGEMENT FEE REVENUE

Management fee revenue consists primarily of fees earned as compensation for underwriting and managing the reinsurance portfolio on behalf of our co-reinsurers. These fees are estimated and recognized at the inception of the contracts with the co-reinsurers and amortized over the life of the contracts.

(G) INCOME TAXES

We and our subsidiaries file income tax returns as required by the laws of each country in which it has operations. We account for income tax expenses and liabilities under the asset and liability method in accordance with Statement of Financial Accounting Standards Board (“SFAS”) No. 109, “Accounting for Income Taxes.” Deferred income taxes arise from the recognition of temporary differences between income reported for financial statement purposes and income for income tax purposes. These deferred taxes are measured by applying currently enacted tax rates. In addition, SFAS No. 109 requires the recognition of future benefits, such as for net operating loss carryforwards, to the extent that realization of such benefits is more likely than not.

(H) 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.”

(I) EARNINGS PER SHARE

Basic earnings per share are computed by dividing net income by the weighted average number of common shares outstanding. Diluted earnings per common share reflect the maximum dilution that would have resulted from the exercise of stock options and warrants to purchase common shares. Diluted earnings per common share are computed by dividing net income by the weighted average number of common shares outstanding and the dilutive potential common shares outstanding during the period of calculation.

(J) STOCK-BASED COMPENSATION

SFAS No. 123, “Accounting for Stock-Based Compensation” defines a fair value based method of accounting for stock-based employee compensation plans. Under SFAS No. 123, companies are encouraged, but are not required, to adopt the fair value method for all employee awards granted. Companies are permitted to account for such transactions under Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees,” but must disclose in a note to the financial statements, pro forma net income and earnings per share as if SFAS No. 123 had been applied. We account for stock–based compensation under APB No. 25 and provides the fair value method disclosures required by SFAS No. 123.

(K) CASH AND CASH EQUIVALENTS

For purposes of the consolidated statement of cash flows, we consider all time deposits and commercial paper with original maturity dates of 90 days or less to be cash equivalents.

(L) 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.

(M) 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.

(N) 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, the Financial Accounting Standards Board (“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.

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 are currently evaluating the provisions of SFAS No. 144. Management does not expect the adoption of SFAS No. 144 to have an impact on our financial position, results of operations, or cash flows.

3. INVESTMENTS

Our investment portfolio at December 31, 2001 and 2000 is comprised of the following:

	As at December 31,
	2001		2000
	U.S. dollars in thousands

Fixed maturities available for sale	$	144,844	$	168,478
Total	$	144,844	$	168,478

(A) FIXED MATURITIES AND EQUITIES

The amortized cost, fair value and gross unrealized gains and losses of fixed maturities as of December 31, 2001 and 2000 are presented in the tables below:

As at December 31, 2001	Cost or Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Estimated Fair Value
	U.S. dollars in thousands

Corporate securities	$	44,581	$	230	$	1,012	$	43,799
U.S. treasury securities	54,000		24		558		53,466
Asset-backed securities/Mortgage-backed securities	25,741		241		383		25,599
Obligations of states and political subdivisions	16,612		171		278		16,505
Foreign currency debt securities	5,435		40		—		5,475
Total	$	146,369	$	706	$	2,231	$	144,844

As at December 31, 2000	Cost or Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Estimated Fair Value
	U.S. dollars in thousands

Corporate securities	$	70,003	$	1,562	$	183	$	71,382
U.S. treasury securities	37,402		726		—		38,128
Asset-backed securities/Mortgage-backed securities	33,722		89		40		33,771
Obligations of states and political subdivisions	18,263		490		—		18,753
Foreign currency debt securities	7,123		—		679		6,444
Total	$	166,513	$	2,867	$	902	$	168,478

(B) MATURITY DISTRIBUTION

The amortized cost and fair value of fixed maturities by contractual maturity are shown in the following table:

As at December 31, 2001	Amortized Cost		Fair Value
	U.S. dollars in thousands

Fixed maturities available for sale
Due in one year or less	$	11,590	$	11,138
Due after one year through five years	85,436		84,657
Due after five years through ten years	23,602		23,450
Due after ten years	—		—
Mortgage-backed securities /Asset-backed securities	25,741		25,599
Total	$	146,369	$	144,844

Proceeds from the sales of investments available for sale for the years ended December 31, 2001 and 2000 were $318.7 million and $223.1 million, respectively. Realized investment gains and losses for the years ended December 31, 2001 and 2000 were as follows:

	Years ended December 31,
	2001			2000
	U.S. dollars in thousands

Gross realized gains	$	8,642		$	779
Gross realized losses	(14,353		)	(3,317		)
Total net realized gains/(losses)	$	(5,711	)	$	(2,538	)

	As of December 31,
	2001			2000		1999
	U.S. dollars in thousands

Change in unrealized gains on investments, net of deferred taxes, included in other comprehensive income:
Fixed maturities	$	(3,490	)	$	5,577	$	(6,220	)
Total	$	(3,490	)	$	5,577	$	(6,220	)

(D) NET INVESTMENT INCOME

The components of net investment income are presented in the table below:

	Years Ended December 31,
	2001			2000			1999
	U.S. dollars in thousands

Interest on fixed maturities	$	11,245		$	11,966		$	12,335
Interest on other investments	700			434			495
Interest on cash and cash equivalents	450			654			1,274
Other	116			313			218
Total investment income	12,511			13,367			14,322
Investment expenses	(334		)	(443		)	(807		)
Total	$	12,177		$	12,924		$	13,515

4. OTHER INVESTMENTS

Other investments represents equity investments in, and loans to, reinsurance–related enterprises, ceding companies or distribution channels that are expected to generate or secure additional profitable business for us. The loans bear interest at rates between 6% and 9% and are repayable between one and five years. There was a write-down in our investment in 4Sigma Limited of $8 million in 2001, leaving a net written down value of $1.2 million as at December 31, 2001.

	As of December 31,
	2001		2000
	U.S. dollars in thousands

Equity investments	$	1,672	$	10,736
Loans	4,500		7,000
	$	6,172	$	17,736

5. MANAGEMENT FEES RECEIVABLE

Management fees receivable represents management fee and related revenues that are primarily due from co-reinsurers and quota share retrocessionnaires to whom a portion of our gross managed premium is allocated. Management fees receivable at December 31, 2001, and 2000 consist of the following:

	As of December 31,
	2001		2000
	U.S. dollars in thousands

Fees from co-reinsurers	$	296	$	582
Other fees	—		131
Total	$	296	$	713

6. DEFERRED ACQUISITION COSTS

Activity in deferred acquisition costs for the years ended December 31, 2001, and 2000 is summarized as follows:

	Years Ended December 31,
	2001			2000
	U.S. dollars in thousands

Balance at January 1	$	46,611		$	57,807
Acquisition costs incurred	39,537			67,370
Amortization of acquisition costs	(45,840		)	(78,566		)
Net change in deferred acquisition costs	(6,303		)	(11,196		)
Balance at December 31	$	40,308		$	46,611

7. LOSSES AND LOSS EXPENSES

Activity in the reserve for unpaid losses and loss expenses for the years ended December 31, 2001 and 2000 is summarized as follows:

	Years Ended December 31,
	2001			2000
	U.S. dollars in thousands

Balance at January 1	$	179,614		$	136,935
Less reinsurance recoverable	(15,633		)	(11,462		)
Net balance at January 1	163,981			125,473
Incurred related to:
Current year	124,275			133,574
Prior years	(19,709		)	53,667
Total incurred losses and loss expenses	104,566			187,241
Paid related to:
Current year	54,109			41,470
Prior years	96,685			107,263
Total paid losses and loss expenses	150,794			148,733
Net balance at December 31	117,753			163,981
Plus reinsurance recoverable on incurred losses	28,630			15,633
Balance at December 31	$	146,383		$	179,614

The negative prior year movement in incurred losses is as a result of a reduction in estimated loss reserves arising from write–downs in estimated written premiums of $105 million in 2001, with an equivalent reduction in net earned premiums of $30.3 million.

8. INCOME TAXES

	Years Ended December 31,
	2001			2000		1999
	U.S. dollars in thousands

Current tax expense
Bermuda	$	—		$	—	$	—
Foreign	—			—		(28		)
Total current tax expense	—			—		(28		)
Total deferred tax expense (benefit)	(1,339		)	—		843
Total income tax expense (benefit)	$	(1,339	)	$	—	$	815

The actual income tax expense attributable to income for the three years in the period ended December 31, 2001 differed from the amount computed by applying the combined effective rate of 0% under Bermuda law for 2001 and 1999 to income before income taxes, as a result of the following:

	Years Ended December 31,
	2001			2000		1999
	U.S. dollars in thousands

Computed “expected tax expense”	$	—		$	—	$	—
Tax effect of foreign taxes	(1,339		)	—		815
Total income tax expense (benefit)	$	(1,339	)	$	—	$	815

Deferred income taxes reflect the tax effect of the temporary differences between the value of assets and liabilities for financial statement purposes and such values as measured by the tax laws and regulations. The principal items in the net deferred income tax asset (liability) are as follows:

	As of December 31,
	2001			2000
	U.S. dollars in thousands

Deferred tax assets
Net operating loss carryforward	$	12,147		$	11,246
Other assets	1,368			1,105
Gross deferred tax assets	13,515			12,351
Less: valuation allowance	(11,387		)	(11,444		)
Deferred tax assets after valuation allowance	$	2,128		$	907

Deferred tax liabilities
Unrealized investment gains	—			(157		)
Other liabilities	(789		)	(750		)
Total deferred tax liabilities	$	(789	)	$	(907	)
Net deferred tax asset	$	1,339		$	—

Realization of the deferred tax asset is dependent on generating sufficient taxable income in the future. During both 2001 and 2000, a valuation allowance of $11.4 million was recorded to reduce the deferred tax asset in accordance with the provisions of SFAS109. The valuation allowance is necessary because sufficient uncertainty exists regarding the realizability of certain net operating loss carryforwards. We have loss carryforwards of $57.0 million and $65.0 million, available to offset future foreign taxable income, as of December 2001 and 2000, respectively. Such tax loss carryforwards do not have an expiration date.

9. RETROCESSIONS

We utilize retrocessional agreements to reduce our exposure to large claims and catastrophic loss occurrences. These agreements provide for recovery from retrocessionaires of a portion of our losses and loss expenses under certain circumstances. They do not discharge our primary liability. In the event retrocessionaires were unable to meet their obligations under the retrocession agreements, we would be liable for such defaulted amounts. We believe that we have minimized our credit risk with respect to our reinsurance by monitoring our retrocessionaires and avoiding concentrations with any single company.

Losses and loss expenses incurred and earned premiums as reported in the statement of operations are after deduction for retrocessions. Written and earned premiums and losses incurred for the years ended December 31, 2001, 2000 and 1999 are comprised of the following:

	Years Ended December 31,
	2001			2000			1999
	U.S. dollars in thousands

Premiums written:
Assumed	$	134,372		$	244,976		$	333,000
Ceded	(20,779		)	(33,090		)	(19,790		)
Net premiums written	$	113,593		$	211,886		$	313,210
Premiums earned:
Assumed	$	178,101		$	260,469		$	262,451
Ceded	(24,881		)	(23,849		)	(13,326		)
Net premiums earned	$	153,220		$	236,620		$	249,125
Losses and loss expenses:
Assumed	$	121,902		$	209,224		$	211,645
Ceded	(17,336		)	(21,983		)	(12,614		)
Net losses and loss expenses	$	104,566		$	187,241		$	199,031

10. 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:

	Year Ended December 31, 2001
	Loss (Numerator)			Shares (Denominator)	Per Share Amount
	U.S. dollars in thousands except share and per share data

BASIC EARNINGS PER SHARE
Net loss allocable to common shareholders (as restated)	$	(20,432	)	11,795,034	$	(1.73	)
Effect of dilutive securities:
Class A warrants	—			—	—
Class B warrants	—			—	—
Director and employee options	—			—	—
Employee share grant	—			—	—
Repurchase of common shares	—			—	—
DILUTED EARNINGS PER SHARE
Net loss allocable to common shareholders (as restated)	$	(20,432	)	11,795,034	$	(1.73	)

	Year Ended December 31, 2000
	Loss (Numerator)			Shares (Denominator)	Per Share Amount
	U.S. dollars in thousands except share and per share data

BASIC EARNINGS PER SHARE
Net loss allocable to common shareholders	$	(61,796	)	11,809,000	$	(5.23	)
Effect of dilutive securities:
Class A warrants	—			—	—
Class B warrants	—			—	—
Director and employee options	—			—	—
Employee share grant	—			—	—
Repurchase of common shares	—			—	—
DILUTED EARNINGS PER SHARE
Net loss allocable to common shareholders	$	(61,796	)	11,809,000	$	(5.23	)

Class A warrants to purchase 1,381,200 common shares at $20 per share were outstanding as of December 31, 2000 and 2001. Options to purchase up to 1,680,328 common shares, issued at exercise prices between $2.01 and $26.00, were outstanding as of December 31, 2000. Options to purchase up to 2,315,409 common shares, issued at exercise prices between $2.01 and $26.00, were outstanding as of December 31, 2001. The incremental shares from assumed exercise of options and warrants have not been included in the above computation for 2001 and 2000 as they have an anti-dilutive effect on the net loss per common share.

11. COMMITMENTS AND CONTINGENCIES

(A) EMPLOYMENT CONTRACTS

We have entered into various employment contracts with fixed terms of up to three years that have total minimum commitments of $0.6 million, excluding any performance bonuses that are determined by our Board of Directors. The contracts include various non-compete clauses following termination of employment. As of December 31, 2000, the minimum employee commitments were $3.1 million.

(B) LEASE AND OTHER COMMITMENTS

We and our subsidiaries have various lease obligations. Rental expenses are amortized on the straight-line basis over the term of the lease. Total rental expense was approximately $1.4 million, $1.5 million and $0.9 million for the years ended December 31, 2001, 2000 and 1999, respectively. We have leased premises in Bermuda, Ireland, United Kingdom, Portugal, Hong Kong, Australia, Thailand, United States, Canada, Italy and Spain.

The future minimum commitments under operating leases, employment contracts and other commitments are as follows:

Year Ended December 31,	Lease and other Commitments		Employment Commitments		Total
	U.S. dollars in thousands

2002	$	1,543	$	563	$	2,106
2003	709		80		789
2004	523		—		523
2005	263		—		263
2006	184		—		184
Over five years	839		—		839
Total	$	4,061	$	643	$	4,704

In November 2001, we committed to make an additional capital infusion in 4Sigma of $1.8 million, as funds are needed by 4Sigma, in exchange for 1.8 million shares of Series E preferred stock. As at December 31, 2001 we had invested $0.3 million of this commitment.

As of December 31, 2001, Secured Letters of Credit and Trust Accounts in the aggregate amount of $91.0 million have been issued in favor of ceding companies with $27.0 million related to Letters of Credit issued and $64.0 million related to Trust Accounts in force. The Letters of Credit and Trust Accounts are secured by a lien on our 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, 2000, Secured Letters of Credit and Trust Accounts in the aggregate amount of $95.8 million have been issued in favor of ceding companies with $73.4 million related to Letters of Credit issued and $22.4 million related to Trust Accounts in force.

(D) PENSION OBLIGATIONS

Certain subsidiaries of ours are obligated to make defined contributions to pension plans for their employees. As of December 31, 2001 and 2000, there were outstanding liabilities for pension contributions of $294 thousand and $568 thousand respectively. Pension contribution expenses were $760 thousand, $732 thousand, and $590 thousand, for the years ended December 31, 2001, 2000, and 1999, respectively.

(E) DISCONTINUED OPERATIONS
HEALTH CARE DIVISION

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 4Sigma. 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.

As of December 31, 2001, we had written off the Series A preferred stock representing our initial $8.0 million investment in 4Sigma.

(F) CONTINGENCIES

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 will be heard no earlier than early 2003.

We have also given notice we intend to rescind the 1999 account. This matter is now set for arbitration in early 2003.

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.

12. FIDUCIARY ASSETS AND LIABILITIES

As part of our prior underwriting pool management services, we collect premiums and pay claims on behalf of the pool participants. In addition to fees received for the underwriting services, we also earn interest income on funds we are authorized to hold in accordance with the underwriting management agreements between us and the pool participants. We are authorized to retain 25% of gross premiums as a claims fund held in bank accounts having trustee status.

13. WARRANTS

In connection with the Direct Sales (the private sale of securities—Common, A Warrants and B Warrants), we issued Class A Warrants to purchase up to 1,381,200 common shares and Class B Warrants to purchase up to 1,381,200 common shares if certain performance criteria are satisfied. The Class A Warrants are vested and are exercisable at $20 per share at any time prior to December 2007.

Twenty percent of the Class B Warrants are available for vesting during each of the first five years following the closing date of the IPO of the Company in December 1997, and will vest only if, for any 20 consecutive trading days during the one-year vesting period, the percentage change in the market price of the common shares since the closing date of the IPO exceeds the percentage change in the Wilshire 5000 Stock Price Index by at least 500 basis points. The Class B Warrants are exercisable for a period of 10 years from the date of vesting. The exercise price per Common Share was originally $20 and was reduced by $1.50 on September 1, 2001 under the terms of the original Warrant. As of December 31, 2001 and 2000, 276,240 of the Class B Warrants are vested and are exercisable.

14. STOCK–BASED COMPENSATION

(A) EMPLOYEE STOCK OPTION PLAN

We have adopted the 1997 Stock Option Plan (the “Stock Option Plan”) under which our employees and employees of our subsidiaries are eligible to participate. The Stock Option Plan is administered by the Compensation Committee of our Board of Directors. Subject to the provisions of the Stock Option Plan, the Board of Directors has sole discretionary authority to interpret the Stock Option Plan and to determine the terms and conditions of the awards. The Stock Option Plan was approved by shareholders in December 1997.

The exercise price of an option is determined by the Compensation Committee when the options are granted. The vesting schedule of an option is determined by the Compensation Committee when an option is granted. The most common vesting schedule calls for an option to vest 25% at the date of grant and 25% on each of the second, third and fourth anniversaries of the date of grant. All options are exercisable at the fair market value of the stock at the date of the grant and expire 10 years after the date of the grant. Options granted under the Stock Option Plan are assignable subject to certain limitations. We have reserved 2,000,000 common shares for issuance under the Stock Option Plan.

As of December 31, 2001, options to purchase a total of 1,565,694 shares of common stock had been granted, net of forfeitures, of which options for 656,975 shares were vested and exercisable, and 166,139 shares had been issued upon exercise. As of December 31, 2000, options to purchase a total of 1,057,900 shares of common stock had been granted, net of forfeitures, of which options for 679,648 shares were vested and exercisable, and no shares had been issued upon exercise.

(B) DIRECTORS’ STOCK OPTION PLAN

We have adopted the ESG Re Limited Non-Management Directors’ Compensation and Option Plan (the “Directors’ Plan”), under which non-management directors are compensated for their service on the Board. Each non-management director receives fees for services as a member of the Board of Directors and its committees, in amounts determined by the Board of Directors, to be paid in a combination of cash and common shares, as determined by the Board. A Director may elect to receive all or a portion of such fees in the form of options to purchase common shares equal to two times the fees that would otherwise be payable. A director may also elect to defer receipt of the fees, and if so deferred, will receive deferred compensation indexed to the greater of (i) the total return on the common shares; or (ii) the one-year U.S. Treasury bill rate. If a director does not elect the payment in options or deferred compensation alternatives, the fees will be paid in a combination of cash and shares as determined by the Board. Shares granted under the Directors’ Plan will not be transferable for six months after receipt. We have reserved 1,000,000 common shares for issuance under the Directors’ Plan. The Directors’ Plan was approved by shareholders in December 1997.

To date all non-management directors have elected to receive their fees as options to purchase shares. Options granted under the Directors’ Plan vest 100% at the date of grant. All options are exercisable at fair market value of the stock at the date of grant and expire 10 years after the date of grant. As of December 31, 2001, options to purchase a total of 754,428 shares of common stock had been granted, net of forfeitures, of which options for 754,428 shares were vested and exercisable, and no shares had been issued upon exercise. As of December 31, 2000, options to purchase a total of 622,128 shares of common stock had been granted, net of forfeitures, of which options for 622,128 shares were vested and exercisable, and no shares had been issued upon exercise.

Compensation expense related to these grants of $62 thousand, $173 thousand and $232 thousand were recognized for the years ending December 31, 2001, 2000 and 1999, respectively.

A summary of the status of our outstanding stock options under both plans as of December 31, 2001, 2000 and 1999 is presented below:

	2001				2000				1999
	Shares		Weighted Average Exercise Price		Shares		Weighted Average Exercise Price		Shares		Weighted Average Exercise Price

Outstanding at January 1	1,680,328		$	9.33	1,440,503		$	15.20	815,428		$	21.90
Granted	1,239,096		$	2.40	858,700		$	5.07	1,033,500		$	11.68
Exercised	(166,139	)	$	2.62	—		—		—		—
Forfeited	(437,876	)	$	15.02	(618,875	)	$	17.08	(408,425	)	$	19.66
Outstanding at December 31	2,315,409		$	6.47	1,680,328		$	9.33	1,440,503		$	15.20
Options exercisable at December 31	1,411,403		$	8.70	1,302,076		$	9.89	1,005,378		$	13.54
Average fair value of options granted during the year			$	0.74			$	2.95			$	0.88

The fair value of each option grant was estimated using the Black/Scholes option pricing model with the following assumptions: (i) dividend yield of 0.0%; (ii) expected volatility of 28.1%; (iii) risk-free rate of 4.5%; and (iv) expected life of 4.7 years.

We apply APB Opinion 25 and Related Interpretations in accounting for stock based compensation. Had the compensation expense for our stock–based compensation plans been determined based on the fair value at the grant dates for awards under those plans consistent with the method described in SFAS No. 123, our net loss and earnings per share would have been adjusted to the pro forma amounts indicated below:

	Years Ended December 31,
	2001			2000			1999
	U.S. dollars in thousands, except share and per share data

Net loss
As reported (basic and diluted) (as restated)	$	(20,432	)	$	(61,796	)	$	(41,994	)
Pro forma (as restated)	(21,851		)	(63,224		)	(42,311		)
Net loss per share
As reported (basic and diluted) (as restated)	$	(1.73	)	$	(5.23	)	$	(3.17	)
Pro forma (as restated)	$	(1.85	)	$	(5.35	)	$	(3.19	)

The weighted average remaining contractual life of options outstanding at December 31, 2001, is presented below:

Range	Number of Options Outstanding	Number of Options Exercisable	Weighted Average Remaining Contractual Life

$0.00 to $2.65	971,437	262,307	9.6 years
$2.66 to $5.30	255,082	228,082	8.6 years
$5.31 to $7.95	705,412	543,936	7.6 years
$7.96 to $10.60	0	0	0.0 years
$10.61 to $13.25	0	0	0.0 years
$13.26 to $15.90	4,000	3,000	6.8 years
$15.91 to $18.55	160,050	155,650	7.1 years
$18.56 to $21.20	104,714	104,714	5.8 years
$21.21 to $23.85	0	0	0.0 years
$23.86 to $26.50	114,714	113,714	6.3 years

On February 25, 2000, the Board of Directors approved the 2000 Restricted Stock Plan (the “RSA Plan”). The purpose of the RSA Plan is to promote the interests of the Company and its shareholders by (i) enhancing our ability and our affiliates’ ability to attract and retain qualified individuals upon whom, in large measure, our progress, growth and profitability depend and (ii) providing an incentive to these individuals to encourage them to contribute to our future success and prosperity by enabling such individuals to participate in the long-term growth and financial success of the Company through stock ownership. This is a broad–based plan under which grants can be made to employees at most levels. The Compensation Committee has discretionary authority to interpret the RSA Plan and to determine the terms of any awards, when, if and to whom awards are granted, and the number of common shares covered by each award. An S-8 Registration Statement was filed and effective on March 13, 2000 covering this Plan.

Upon issuance of restricted shares, unearned compensation is charged to shareholders’ equity for the cost of the restricted stock and is amortized to expense over the vesting period. The amount of earned compensation recognized as expense with respect to restricted stock awards was $0.6 million and $1.1 million for 2001 and 2000, respectively. No expense was recognized in 1999.

Restricted Stock Awards	2001	2000

Shares Outstanding at January 1	420,450	0
Total Shares Granted	40,000	616,400
Shares Forfeited	62,950	50,500
Shares Released upon Vesting	140,400	145,450
Shares Outstanding & Subject to Forfeiture	257,100	420,450
Shares Remaining available for Grant	1,457,050	1,434,100

15. RELATED PARTIES

In 1997, we entered into several agreements with Head Asset Management L.L.C. (“Head Asset Management”), an affiliate of Head & Company L.L.C. (“Head Company”), relating to the provision of investment management services. The Chairman of our Board of Directors and Chief Executive Officer is a Managing Member of Head Company. Under these agreements, which we amended July 1, 2000, and which are subject to our investment guidelines and other restrictions, we will pay Head Asset Management a fee equal to the sum of (i) 0.20% per annum of the first $150 million of assets under management, and (ii) 0.15% per annum of assets under management in excess of $150 million. We incurred expenses of $297 thousand, $397 thousand and $495 thousand under this agreement for the years ended December 31, 2001, 2000 and 1999, respectively.

16. SEGMENT INFORMATION

SFAS No. 131, “Disclosures about Segments of an Enterprise and Related Information,” requires that an enterprise disclose information about its operating segments. During 2001, our operations consisted of two segments—ESG

Reinsurance and ESG Direct. ESG Reinsurance, provides medical, personal accident, credit, life, disability, and special risks reinsurance to insurers and selected reinsurers. ESG Direct provides direct marketing services, expertise in the development of reinsurance and insurance products, and supporting technology to financial institutions in Asia, Europe and Australia. Management monitors and evaluates the financial performance of each segment based on their underwriting profit or loss. The accounting policies for each of the operating segments are the same as those described in Note 2 Summary of Significant Accounting Policies.

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 tables provide summary financial information by our lines of business of the reinsurance segment.

	Year Ended December 31, 2001
	Medical			Accident			Credit			Life			Other			Total
	U.S. dollars in thousands

Gross premiums written	$	104,376		$	10,424		$	(5,865	)	$	(1,293	)	$	2,116		$	109,758
Net premiums written	88,899			5,850			(5,548		)	(2,307		)	2,086			88,980
Net premiums earned	101,985			33,054			(3,591		)	1,187			2,475			135,110
Losses and loss expenses	(66,008		)	(36,598		)	3,687			284			(3,410		)	(102,045		)
Acquisition costs	(28,769		)	(6,747		)	289			(642		)	936			(34,933		)
Operating costs (as restated)	(21,054		)	(2,893		)	(71		)	(354		)	(454		)	(24,826		)
Net underwriting (loss)/income	$	(13,846	)	$	(13,184	)	$	314		$	475		$	(453	)	$	(26,694	)

	Year Ended December 31,2000
	Medical			Accident			Credit			Life			Other			Total
	U.S. dollars in thousands

Gross premiums written	$	173,919		$	48,125		$	3,405		$	8,977		$	4,535		$	238,961
Net premiums written	148,285			43,014			3,162			7,845			3,565			205,871
Net premiums earned	161,772			51,771			6,588			6,127			4,513			230,771
Losses and loss expenses	(124,119		)	(51,153		)	(2,344		)	(5,291		)	(3,081		)	185,988
Acquisition costs	(53,471		)	(15,594		)	(3,527		)	(1,622		)	(2,106		)	(76,320		)
Operating costs	(24,628		)	(6,712		)	(844		)	(1,044		)	(926		)	(34,154		)

Net underwriting (loss)/income	$	(40,446	)	$	(21,688	)	$	(127	)	$	(1,830	)	$	(1,600	)	$	(65,691	)

	Year Ended December 31, 1999
	Medical			Accident			Credit			Life			Other			Total
	U.S. dollars in thousands

Gross premiums written	$	251,984		$	66,514		$	1,851		$	6,934		$	5,717		$	333,000
Net premiums written	240,314			61,549			714			5,550			5,083			313,210
Net premiums earned	188,016			42,443			3,933			9,593			5,140			249,125
Losses and loss expenses	(153,894		)	(33,001		)	(2,424		)	(8,015		)	(1,697		)	(199,031		)
Acquisition costs	(52,940		)	(9,287		)	(795		)	(1,516		)	(1,758		)	(66,296		)
Operating costs	(16,503		)	(4,393		)	(421		)	(976		)	(550		)	(22,843		)
Net underwriting (loss)/income	$	(35,321	)	$	(4,238	)	$	293		$	(914	)	$	1,135		$	(39,045	)

The following tables provide summary financial information of earned premiums of the ESG Reinsurance segment, on the basis of where the underlying risk is located

	Years ended December 31,
	2001		2000		1999

Western Europe	(0.7	)%	17.9	%	33.0	%
North America	79.6	%	57.1	%	55.3	%
Latin America	19.9	%	16.8	%	10.9	%
Other	1.2	%	8.2	%	0.8	%
Total	100.0	%	100.0	%	100.0	%

The following tables provide summary financial information by our lines of business of the direct segment. The ESG Direct segment did not operate during 1999.

	Year Ended December 31, 2001
	Accident			Credit			Total
	U.S. dollars in thousands

Gross premiums written	$	17,169		$	7,444		$	24,613
Net premiums written	17,169			7,444			24,613
Net premiums earned	17,153			957			18,110
Losses and loss expenses	(2,242		)	(278		)	(2,520		)
Acquisition costs	(10,395		)	(511		)	(10,906		)
Operating costs	(6,382		)	(313		)	(6,695		)
Net underwriting loss	$	(1,866	)	$	(145	)	$	(2,011	)

	Year Ended December 31, 2000
	Accident			Credit		Total
	U.S. dollars in thousands

Gross premiums written	$	6,015		$	—	$	6,015
Net premiums written	6,015			—		6,015
Net premiums earned	5,849			—		5,849
Losses and loss expenses	(1,253		)	—		(1,253		)
Acquisition costs	(2,246		)	—		(2,246		)
Operating costs	(2,965		)	—		(2,965		)
Net underwriting loss	$	(615	)	$	—	$	(615	)

The following tables provide summary financial information of earned premiums of the ESG Direct segment, on the basis of where the underlying risk is located

	Years ended December 31,
	2001		2000

Western Europe	33.9	%	0.0	%
Asia	66.1	%	100.0	%
Total	100.0	%	100.0	%

17. SIGNIFICANT CLIENTS

For the year ended December 31, 2001, one significant client contributed $27.9 million to total revenue. For the year ended December 31, 2000 no client contributed more than 10% of total revenue. For the year ended December 31, 1999, one significant client relationship contributed $64.1 million to total revenue.

18. STATUTORY REQUIREMENTS AND DIVIDEND RESTRICTIONS

Under Bermuda law, we are prohibited from declaring or paying a dividend if such payment would reduce the realizable value of our assets to an amount less than the aggregate value of our liabilities, issued share capital (common share capital) and share premium (additional paid-in capital) accounts.

Under the Bermuda Insurance Act, 1978, amendments thereto and Related Regulations, European Specialty Reinsurance (Bermuda) Limited is required to maintain certain measures of solvency and liquidity. For the years ended December 31, 2001 and 2000, these requirements have been met. The statutory capital and surplus of European Specialty Reinsurance (Bermuda) Limited was $68.6 million and $76.6 million and the minimum required statutory capital and surplus was $8.1 million and $8.5 million as of December 31, 2001 and 2000, respectively. The minimum required level of liquid assets was $63.2 million and $80.1 million with actual liquid assets of $95.6 million and $143.7 million as of December 31, 2001 and 2000, respectively.

Under the regulations in force in Ireland, Accent is required to maintain a minimum solvency margin. As at December 31, 2001, and 2000, the minimum solvency requirement was $1.7 million and $2.2 million respectively. In addition, the company is required to maintain a trust account of $20 million.

19. UNAUDITED QUARTERLY FINANCIAL DATA

2001 Operating Data	First Quarter			Second Quarter			Third Quarter			Fourth Quarter
										As Restated
	U.S. dollars in thousands except per share data
Net Premiums written	$	37,193		$	29,672		$	8,898		$	37,830
Net Premiums earned	40,309			40,482			27,232			45,197
Management fee revenue	230			190			(132		)	586
Net investment income	3,408			3,326			2,512			2,931
Losses and loss expenses	29,985			26,238			14,762			33,581
Acquisition costs	11,934			13,070			8,561			12,275
Underwriting (loss)/profit	(1,610		)	1,174			3,909			(659		)
(Loss)/income from continuing operations before tax	(3,943		)	(5,915		)	97			(12,010		)
Net (loss)/income	(3,943		)	(5,915		)	97			(10,671		)
Earnings per common share:
Basic net (loss)/income from continuing operations per share	(0.33		)	(0.50		)	0.01			(0.90		)
Diluted net (loss)/income per share	(0.33		)	(0.50		)	0.01			(0.90		)
Weighted average shares outstanding (000’s):
Basic	11,783			11,788			11,788			11,809
Diluted	11,783			11,788			11,788			11,809

2000 Operating Data	First Quarter			Second Quarter			Third Quarter			Fourth Quarter
	U.S. dollars in thousands except per share data

Net Premiums written	$	104,479		$	44,675		$	16,010		$	46,722
Net Premiums earned	57,811			76,446			39,756			62,607
Management fee revenue	362			594			224			667
Net investment income	2,926			3,165			3,600			3,233
Losses and loss expenses	45,229			54,689			44,477			42,846
Acquisition costs	14,679			23,444			18,264			22,179
Underwriting loss	(2,097		)	(1,687		)	(22,985		)	(2,417		)
Net loss from continuing operations	(7,306		)	(6,313		)	(35,048		)	(7,951		)
(Loss)/income from discontinued operations	(2,920		)	(3,008		)	750			—
Net loss	(10,226		)	(9,321		)	(34,298		)	(7,951		)
Earnings per common share:
Basic net loss from continuing operations per share	(0.63		)	(0.53		)	(2.97		)	(0.67		)
Diluted net loss from continuing operations per share	(0.88		)	(0.79		)	(2.90		)	(0.67		)
Weighted average shares outstanding (000’s):
Basic	11,576			11,837			11,817			11,822
Diluted	11,576			11,837			11,817			11,822

20. RESTATEMENT OF FINANCIAL STATEMENTS

During the second quarter of 2002, subsequent to the issue of the financial statements, ESG determined that foreign currency translation adjustments, included in accumulated other comprehensive income and other expenses, had been misstated by $3,992 thousand due to an error in the internal system that consolidates the financial results of ESG subsidiaries with functional currencies other than U.S. dollars. To correct this error, ESG is restating its financial statements for the fiscal year December 31, 2001 in order to reflect a fourth quarter adjustment to foreign currency translation adjustments, included in accumulated other comprehensive income, other expenses, and consolidated statements of changes in shareholders’ equity, of $3,992 thousand. The adjustment and restatement has had the following impact on our consolidated statement of operations and consolidated balance sheet for the year ended December 31, 2001:

	December 31, 2001
	As Restated			As Previously Reported
Other expenses	$	13,108 thousand		$	9,116 thousand
Loss from continuing operations before taxes	$	21,771 thousand		$	17,779 thousand
Loss from continuing operations and net loss	$	20,432 thousand		$	16,440 thousand
Net loss per share	$	1.73 per share		$	1.39 per share
Foreign currency translation adjustments, in accumulated other comprehensive income	$	(201 thousand	)	$	(4,193 thousand	)
Foreign currency translation adjustments, in consolidated statements of comprehensive income	$	5,130 thousand		$	1,138 thousand
Retained deficit	$	122,923 thousand		$	118,931 thousand

ESG RE LIMITED

INDEPENDENT AUDITORS’ REPORT

To the Board of Directors and Shareholders of ESG Re Limited

We have audited the accompanying consolidated balance sheets of ESG Re Limited and subsidiaries as of December 31, 2001 and 2000, and the related consolidated statements of operations, changes in shareholders’ equity, cash flows and comprehensive income for each of the three years in the period ended December 31, 2001. Our audits also included the financial statements schedules listed in the index at Item 14. These financial statements and financial statements schedules are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of the Company and its subsidiaries as of December 31, 2001 and 2000, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2001, in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, such financial statements schedules when considered in relation to the basic consolidated financial statements, taken as a whole, present fairly in all material respects the information set forth therein.

The consolidated financial statements and financial statements schedules, as of December 31, 2001, reflect the restatement of foreign currency translation adjustments included in accumulated other comprehensive income, and of other expenses included in net loss for the period. The effect of the restatement is set out in note 20 to the financial statements.

DELOITTE & TOUCHE

Chartered Accountants

Dublin, Ireland

March 29, 2002

August 19, 2002 (as to Note 20)

PART IV.

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K

Schedules, other than those listed, are omitted from this filing because they are not applicable, or not required, or because the required information is included in the consolidated financial statements or notes thereto.

		Page
•	Schedule II — Condensed Balance Sheet	53
•	Schedule II — Condensed Statement of Operations	54
•	Schedule II — Condensed Statement of Cashflows	55
•	Schedule IV — Reinsurance	56
•	Notes to the Consolidated Financial Statements Schedules	57

ITEM 14. SCHEDULE II — CONDENSED FINANCIAL INFORMATION OF THE REGISTRANT

CONDENSED BALANCE SHEET

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

	December 31, 2001			December 31, 2000
	As Restated Note 1
ASSETS
Investments — available for sale, at fair value (cost: $5,661 and $7,909)	$	5,592		$	7,762
Cash and cash equivalents	851			239
Investments in subsidiaries, at equity in the underlying net assets	87,088			85,541
Other investments	4,831			16,310
Total investments and cash	98,362			109,852

Accrued investment income	57			564
Intangible assets	—			1,355
Due from affiliates	—			2,438
Other assets	1,226			146

TOTAL ASSETS	$	99,645		$	114,355

LIABILITIES
Due to affiliates	2,854			—

Other liabilities	1,721			789
Total liabilities	4,575			789

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; 11,831,063 shares issued and outstanding for 2001 and 11,777,086 shares issued and outstanding for 2000	11,831			11,777
Additional paid-in capital	208,221			208,539
Unearned compensation	(333		)	(893		)
Accumulated other comprehensive income:
Foreign currency translation adjustments	(201		)	(5,331		)
Unrealized gains on securities, net of tax	(1,525		)	1,965

Accumulated other comprehensive income	(1,726		)	(3,366		)

Retained (deficit)	(122,923		)	(102,491		)
Total shareholders’ equity	95,070			113,566

TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY	$	99,645		$	114,355

CONDENSED STATEMENT OF OPERATIONS

(U.S. dollars in thousands)

	For Years Ended December 31,
	2001			2000			1999
	As Restated Note 1
REVENUES
Net investment income	724			1,097			3,978
Gain/(loss) on equity investments	(2,682		)	181			(205		)
Net realized investment gain/(loss)	(12,274		)	(938		)	(526		)
Equity in undistributed change in retained earnings of subsidiaries	5,244			—			—
	(8,988)			340			3,247
EXPENSES
Other expenses	11,444			12,951			20,919
Equity in undistributed change in retained earnings of subsidiaries	—			49,185			24,322
INCOME (LOSS) BEFORE TAXES	(20,432		)	(61,796		)	(41,994		)
Income tax expense	—			—			—
NET INCOME (LOSS)	$	(20,432	)	$	(61,796	)	$	(41,994	)

ESG RE LIMITED

SCHEDULE II — CONDENSED FINANCIAL INFORMATION OF THE REGISTRANT

CONDENSED STATEMENT OF CASHFLOWS

(U.S. dollars in thousands)

	For Years Ended December 31,
	2001			2000			1999
CASH FLOWS FROM OPERATING ACTIVITIES
Net cash used by operating activities	$	(3,667	)	$	(8,991	)	$	(7,145	)

CASH FLOWS FROM INVESTING ACTIVITIES
Cost of fixed maturity investments acquired — available for sale	(10,718		)	(4,476		)	(45,635		)
Proceeds from sale of fixed maturity investments — available for sale	13,142			23,883			79,834
Funding of other investments	—			(6,345		)	(4,678		)
Proceeds from other investments	500			800			—
Disposals/(purchases) of intangible assets	1,355			(1,355		)	—
Net cash provided by investing activities	4,279			12,507			29,521

CASH FLOWS FROM FINANCING ACTIVITIES
Dividends paid	—			(2,870		)	(4,414		)
Grant/(repurchase) of common shares	—			(2,036		)	(16,529		)
Net cash used in financing activities	—			(4,906		)	(20,943		)

Net increase/(decrease) in cash	612			(1,390		)	1,433
Cash and cash equivalents at January 1	239			1,629			196

Cash and cash equivalents at December 31	$	851		$	239		$	1,629

ESG RE LIMITED

SCHEDULE IV — REINSURANCE

(Dollars in thousands)

	Gross amount			Ceded to other companies		Assumed from other companies		Net amount		Percentage of amount assumed to net
As at December 31, 2001
Total accident and health insurance earned premium	$		8,699	$	24,881	$	169,402	$	153,220	110.6	%
As at December 31, 2000
Total accident and health insurance earned premium	$	25,662		$	23,849	$	234,807	$	236,620	99.2	%
As at December 31, 1999
Total accident and health insurance earned premium	$	7,701		$	13,326	$	254,750	$	249,125	102.3	%

ESG RE LIMITED

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS SCHEDULES

1. RESTATEMENT OF FINANCIAL STATEMENTS

During the second quarter of 2002, subsequent to the issue of the financial statements, ESG determined that foreign currency translation adjustments, included in other comprehensive income and other expenses, had been misstated by $3,992 thousand due to an error in the internal system that consolidates the financial results of ESG subsidiaries with functional currencies other than U.S. dollars. To correct this error, ESG is restating its financial statements for the fiscal year December 31, 2001 in order to reflect a fourth quarter adjustment to foreign currency translation adjustments, included in accumulated other comprehensive income and other expenses, of $3,992 thousand. The adjustment and restatement has had the following impact on our condensed balance sheet and statement of operations for the year ended December 31, 2001.

	December 31, 2001
	As Restated			As Previously Reported
Other expenses	$	11,444 thousand		$	7,452 thousand
Loss before taxes	$	20,432 thousand		$	16,440 thousand
Net loss	$	20,432 thousand		$	16,440 thousand
Foreign currency translation adjustments, in accumulated other comprehensive income	$	(201 thousand	)	$	(4,193 thousand	)
Retained (deficit)	$	(122,923 thousand	)	$	(118,931 thousand	)

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

Dated: August 22, 2002

ESG Re Limited

BY:	/s/ Joe A. Quinn	.
Name: Joe A. Quinn
Title: Senior Financial Officer