UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q/A

AMENDMENT NO.1

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

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

For the quarterly period ended March 31, 2002

Commission File Number 000-23481

ESG RE LIMITED

(Exact name of registrant as specified in its charter)

Bermuda
(State or other jurisdiction of Incorporation of organization)

Not Applicable
(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)

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

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

EXPLANATORY STATEMENT:

This amendment on Form 10-Q/A amends Item 1 of Part I of the Quarterly Report for ESG Re Limited (the “Company”) on Form 10Q previously filed for the quarter ended March 31, 2002. This Quarterly Report on Form 10-Q is filed in connection with the Company’s restatement of its financial statements for the year ended December 31, 2001. 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

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

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

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

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

TABLE OF CONTENTS

ITEM
	PART I

Item 1.	Financial Statements and Supplementary Data

	PART II

Item 6.	Awareness Letter of Deloitte & Touche

3 PART I — FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

ESG RE LIMITED

Condensed Consolidated Balance Sheets

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

	(Restated) March 31, 2002			(Restated) December 31, 2001
ASSETS	(Unaudited)
Investments available for sale, at fair value (cost: $133,665 and $146,369)	$	132,126		$	144,844
Cash and cash equivalents	4,641			3,915
Other investments	6,689			6,172
Total investments and cash	143,456			154,931
Accrued investment income	1,940			2,028
Management fees receivable	470			296
Reinsurance balances receivable	188,646			190,526
Reinsurance recoverable on incurred losses	33,045			28,630
Funds retained by ceding companies	22,131			24,629
Prepaid reinsurance premiums	1,400			1,523
Deferred acquisition costs	38,074			40,308
Receivable for securities sold	—			2,318
Deferred tax asset	1,349			1,339
Other assets	8,003			7,277
Cash and cash equivalents held in a fiduciary capacity	838			1,724

TOTAL ASSETS	$	439,352		$	455,529

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

SHAREHOLDERS’ EQUITY
Preference shares, 50,000,000 shares authorized; no shares issued and outstanding as of March 31, 2002 and December 31, 2001	—			—
Class B common shares, 100,000,000 shares authorized; no shares issued and outstanding as of March 31, 2002 and December 31, 2001	—			—
Common shares, par value $1 per share; 100,000,000 shares authorized; 11,831,063 shares issued and outstanding as of March 31, 2002 and 11,831,063 shares issued and outstanding as of December 31, 2001	11,831			11,831
Additional paid-in capital	208,221			208,221
Unearned compensation	(271		)	(333		)
Accumulated other comprehensive income: Foreign currency translation adjustments, net of tax (as restated) (See Note 6)	57			(201		)
Unrealized gains on securities, net of tax	(1,539		)	(1,525		)
Accumulated other comprehensive income	(1,482		)	(1,726		)
Retained (deficit) (as restated) (See Note 6)	(128,452		)	(122,923		)
Total shareholders’ equity	89,847			95,070

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

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

ESG RE LIMITED

Condensed Consolidated Statements of Operations

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

(Unaudited)

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

Net premiums earned	35,771			40,309
Management fee revenue	507			230
Net investment income	1,848			3,408
Loss on equity investments	—			(27		)
Net realized investment gains (losses)	(1,077		)	748
	37,049			44,668

EXPENSES
Losses and loss expenses	23,157			29,985
Acquisition costs	12,176			11,934
Administrative expenses	7,245			6,692
	42,578			48,611

NET (LOSS) INCOME BEFORE TAXES	(5,529		)	(3,943		)
Income tax expense	—			—
NET (LOSS) INCOME AFTER TAXES	$	(5,529	)	$	(3,943	)

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

Diluted net loss per share	$	(0.47	)	$	(0.33	)
Weighted average shares outstanding
Basic	11,831,068			11,782,500
Diluted	11,831,068			11,782,500

Dividends declared per share	$	—		$	—

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

ESG RE LIMITED

Condensed Consolidated Statements of Cash Flows

(U.S. dollars in thousands)

(Unaudited)

	Three Months Ended
	March 31, 2002			March 31, 2001
CASH FLOWS FROM OPERATING ACTIVITIES
Net cash used in operating activities	$	(11,040	)	$	(6,476	)

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

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

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

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

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

ESG RE LIMITED

Condensed Consolidated Statements of Comprehensive Income

(U.S. dollars in thousands)

(Unaudited)

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

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

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

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

1. BASIS OF PRESENTATION

The accompanying unaudited condensed consolidated financial statements of ESG Re Limited have been prepared in accordance with generally accepted accounting principles in the United States of America (“U.S. GAAP”) except pursuant to the rules and regulations of the Securities and Exchange Commission which do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, these unaudited condensed consolidated financial statements reflect all adjustments considered necessary for a fair presentation of financial position, results of operations and comprehensive income as of and for the periods presented. The results of operations for any interim period are not necessarily indicative of the results for a full year. These unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements, and related notes thereto, included in ESG’s 2001 Annual Report on Form 10-K.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

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

(A) PREMIUM REVENUES

We estimate and recognize premiums written at the inception of the reinsurance contract based upon information received from intermediaries and ceding companies. We compare estimated written premiums to actual premiums as reported by ceding companies on a periodic basis. The timeliness and frequency of ceding company reports vary considerably by ceding company, line of business and geographic area, therefore the actual ultimate premium written may not be known with certainty for prolonged periods, following the expiration of the reinsurance contract. Differences between such estimates and actual amounts as reported by ceding companies are recorded in the period in which the actual amounts are determined.

The reinsurance contracts which we enter are primarily of short duration. For retroactive contracts the amount by which the amount paid for reinsurance coverage exceeds the recorded liabilities is charged to earnings. If the liabilities exceed the amount paid the excess is deferred and amortized into income over the remaining settlement period. Premiums written are recognized as earned over the coverage period in proportion to the amount of protection provided. Unearned premium reserves are established to cover the unexpired contract period.

(B) RESERVE FOR LOSSES AND LOSS EXPENSES

The reserve for unpaid losses and loss adjustment expenses includes an estimate of reported case reserves and an estimate for losses incurred but not reported. Case reserves are estimated based on ceding company reports and other data considered relevant to the estimation process. We have some specific historical experience on a significant number of our programs on which to base our estimate of losses incurred but not reported. There is a reliance on the expectations of ceding companies about ultimate loss ratios at the inception of the contracts, supplemented by industry experience, which increases the uncertainty involved in the loss estimation process. The reserves as established by management are reviewed quarterly and adjustments are made in the periods in which they become known. Although management believes that an adequate provision has been made for the liability for losses and loss expenses based on all available information, there can be no assurance that the ultimate losses will not differ significantly from the amounts provided.

Fixed maturity securities are classified as available for sale and are reported at estimated fair value. Investments that are available for sale are expected to be held for an indefinite period but may be sold depending on interest rates and other considerations. Other investments over which we

exercise significant influence are accounted for under the equity method. Otherwise these investments are accounted for at cost. Unrealized investment gains and losses on investments available for sale, net of applicable deferred income tax, are reported as a separate component of “accumulated other comprehensive income”. Realized gains or losses on sale of investments are determined on the basis of average cost. The carrying values of investments available for sale and other investments are adjusted for impairments in value that are considered to be other than temporary.

(D) DEFERRED ACQUISITION COSTS

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

(E) REINSURANCE PREMIUMS CEDED

Reinsurance premiums ceded are reported as prepaid reinsurance premiums and amortized over the respective contract or policy periods in proportion to the amount of insurance protection provided. Commissions on reinsurance ceded are deferred over the terms of the contracts of reinsurance to which they relate and amortized in proportion to the amount of insurance protection provided.

(F) FOREIGN CURRENCY TRANSLATION

Our functional and reporting currency is the U.S. dollar. Foreign currency receivables or payables that are denominated in a currency other than U.S. dollars are translated into U.S. dollars at the rates of exchange in effect at the balance sheet date. Revenues and expenses are translated into U.S. dollars using weighted average exchange rates for the period. The resulting exchange gains or losses are included in the results of operations. Exchange gains and losses related to the translation of investments available for sale are included in the net unrealized appreciation (depreciation) of investments, net of deferred income taxes, as a separate component of “accumulated other comprehensive income.” Assets and liabilities related to foreign operations are translated into U.S. dollars at the exchange rate in effect at the balance sheet date; revenues and expenses are translated into U.S. dollars using weighted average exchange rates for the period. Gains and losses resulting from translating foreign currency financial statements, net of deferred income taxes, are excluded from income and included as a separate component of “accumulated other comprehensive income.”

(G) USE OF ESTIMATES

The preparation of financial statements in accordance with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period as well as the disclosure of such amounts. Actual results, particularly for premiums written, premiums earned and loss reserves could materially differ from those estimates and assumptions.

(H) FAIR VALUE OF FINANCIAL INSTRUMENTS

The carrying value of our investments approximates their fair value and is based on quoted market prices. Due to the uncertainty with respect to both the timing and amount of the proceeds to be realized from our other investments, it is not practicable to determine the fair value of these other investments. The carrying values of other financial instruments, including cash and cash equivalents, accrued investment income, and other receivables and payables approximate their estimated fair value due to the short term nature of the balances.

3. ACCOUNTING PRONOUNCEMENTS

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

In June 2001, FASB issued Statement of Financial Accounting Standard (SFAS) No. 142, Goodwill and Other Intangible Assets. SFAS No. 142 addresses the initial recognition and measurement of intangible assets acquired outside of a business combination and the accounting for goodwill and other intangible assets subsequent to their acquisition. SFAS No. 142 provides that intangible assets with finite useful lives be amortized and that goodwill and intangible assets with indefinite lives not be amortized, but rather be tested at least annually for impairment. Management does not expect the adoption of SFAS No. 142 to have an impact on our financial position, results of operations, or cash flows.

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

4. COMMITMENTS AND CONTINGENCIES

(A) EMPLOYMENT CONTRACTS AND LEASE COMMITMENTS

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

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

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

(B) LETTERS OF CREDIT

As of March 31, 2002, Secured Letters of Credit and Trust Accounts in the aggregate amount of $90.9 million have been issued in favor of ceding companies with $27.3 million related to Letters of Credit issued and $63.6 million related to Trust Accounts in force. The Letters of Credit and Trust Accounts are secured by a lien on the Company’s fixed maturities investment portfolio, equal to 120% of the amount of the outstanding Letters of Credit, and 102% of the amount of the outstanding Trust Accounts. As of December 31, 2001, Secured Letters of Credit and Trust Accounts in the amount of $91.0 million were issued in favor of ceding companies.

(C) PENSION OBLIGATIONS

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

(D) COMMITMENTS & CONTINGENCIES

LITIGATION

We and our subsidiaries, in common with the insurance industry in general, are subject to litigation, including claims for punitive damages, in the normal course of their business. We do not believe that such litigation will have a material adverse effect on our financial condition, future operating results, or liquidity.

In February 2000, Odyssey Re instituted an action in England against a broker, Stirling Cooke Brown, alleging fraud and conspiracy on the reinsurance placement of 1997 and 1998 Personal Accident and Workers Compensation “carve out” business with Odyssey Re. These proceedings mirror earlier proceedings commenced in New York, which were dismissed on jurisdictional grounds. During 1998, ESG accepted a 25% quota share reinsurance treaty with Odyssey Re (UK) retroactive to January 1, 1998. This treaty covers various insurance companies involved in the litigation Odyssey Re instituted in New York over 1997 and 1998 business. This treaty terminated as of December 31, 1998, but we renewed our participation for 1999 directly with one of those ceding companies. In December 1999, we gave notice to rescind our contract with Odyssey Re (UK) for misrepresentation and failure to disclose material facts. On November 29, 2000, we filed suit in the High Court to seek a judicial confirmation of our rescission. On February 5, 2001, Odyssey Re filed a response. On March 21, 2001, we filed a motion for summary judgment. The motion was substantially based on an admission by Odyssey Re (UK) that a misrepresentation had been made to us in connection with the quota share, and was supported by evidence from fact and expert witnesses. Our intention was to re-evaluate the motion if Odyssey Re (UK) served any evidence. Subsequently, Odyssey Re (UK) withdrew their admission, and, less than a week before the date scheduled for the hearing, and in violation of the applicable rules of court, they served their evidence, in which they made it clear, for the first time, that they intended to plead a positive case that the representation was true. Odyssey Re’s evidence also raised other factual issues by way of defense, which had not been contained in their initial pleading.

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

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

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

STRATEGIC INVESTMENTS

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 of March 31, 2002 we had invested $0.8 million of this commitment.

5. RELATED PARTIES

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

6. PRIOR PERIOD ADJUSTMENT

During the second quarter of 2002, ESG determined that foreign currency translation adjustments, included in accumulated other comprehensive income, 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 has restated its financial statements for the fiscal year December 31, 2001 in order to reflect a fourth quarter adjustment to foreign currency translation adjustments of $3,992 thousand. ESG is also restating its financial statements for the quarter ended March 31, 2002, in order to bring forward the restated balances in foreign currency translation adjustments and in retained deficit.

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

March 31, 2002

December 31, 2001

As Restated

As Previously
Reported

As Restated

As Previously
Reported

Foreign currency translation adjustments, net of tax

57 thousand

(3,935) thousand

(201) thousand

(4,193) thousand

Retained deficit

128,452 thousand

124,460 thousand

122,923 thousand

118,931 thousand

INDEPENDENT ACCOUNTANTS’ REVIEW REPORT

To the Board of Directors and Shareholders of ESG Re Limited

We have reviewed the accompanying condensed consolidated balance sheet of ESG Re Limited and subsidiaries as of March 31, 2002, and the related condensed consolidated statements of operations, comprehensive income and cash flows for the three month period ended March 31, 2002 and March 31, 2001. These financial statements are the responsibility of the Company’s management.

We conducted our review in accordance with auditing standards generally accepted in the United States of America. A review of interim financial information consists principally of applying analytical procedures to financial data and of making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with generally accepted auditing standards, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion.

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

We have previously audited, in accordance with auditing standards generally accepted in the United States of America, the consolidated balance sheet of ESG Re Limited and subsidiaries as of December 31, 2001, and the related consolidated statements of operations, comprehensive income, changes in shareholders’ equity and cash flows for the year then ended (not presented herein) and in our report dated March 29, 2002, and August 19, 2002 (as to Note 20), we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying condensed consolidated balance sheet as of December 31, 2001, is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived, after giving effect to the restatement discussed in the following paragraph.

The condensed consolidated balance sheets as at December 31, 2001 and March 31, 2002 reflect the restatement of foreign currency translation adjustments, included in accumulated other comprehensive income, and of retained deficit. The effect of this restatement is set out in Note 6 to the unaudited condensed consolidated financial statements.

Deloitte & Touche

Chartered Accountants

Dublin, Ireland

May 15, 2002

August 19, 2002 (as to Note 6)

SIGNATURES

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

		ESG RE LIMITED

Date: August 22, 2002		/s/ Alasdair P. Davis
		Alasdair P. Davis
		Chief Executive Officer

Date: August 22, 2002		/s/ Joe A. Quinn
		Joe A. Quinn
		Senior Financial Officer