UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K/A

AMENDMENT NO. 4

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:

None

Name of each exchange on which registered

None

Securities registered pursuant to Section 12(g) of the Act

Title of each class

Common Shares, $1.00 par value (See Explanatory Statement)

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:

We are filing this Form 10-K/A (Amendment No. 4) to restate in their entirety Items 6, 7, 8 and 9 of Part II and Item 14 of Part IV of our Annual Report on Form 10-K for the year ended December 31, 2001. For completeness purposes, the full Form 10-K is filed within, however, no other parts have been amended.

As previously disclosed, Deloitte & Touche resigned as independent auditors effective November 22, 2002 and subsequently withdrew its audit report related to the year ended December 31, 2001 and review reports for the quarters ended September 30, 2001, March 31, 2002 and June 30, 2002. We subsequently retained BDO International as our new auditors.

We have restated our Financial Statements for the year ended December 31, 2001 to reflect the correct accounting treatment of the co-reinsurance contract with ACE Capital Re Overseas Ltd (“ACE”). We have also restated our Financial Statements for the years ended December 31, 2001, 2000 and 1999 and our financial statements for the three and nine months ended September 30, 2000 to correct an error in our Foreign Currency Translation Account. For further discussion of these restatements, please refer to Management’s Discussion and Analysis of Financial Condition and Results of Operations and Notes 20 and 21 of the Consolidated Financial Statements.

The restated numbers for the years ended December 31, 2000 and 1999, resulting from the correction to the Foreign Currency Translation Account, have not been audited. As a result, the Consolidated Balance Sheet as at December 31, 2000 and Consolidated Statements of Operations, Cash Flows and Comprehensive Income/(Loss) for the years ended December 31, 2000 and 1999 are presented herein on an unaudited basis; however, management believes that the unaudited financial statements include all adjustments necessary for a fair presentation of our financial position as of December 31, 2000 and 1999.

Unless otherwise noted, all of the information in this Form 10-K/A is as of December 31, 2001 and does not reflect any subsequent information or events other than this restatement.

For a discussion of our recent deregistration of our Common Stock under the Securities Exchange Act of 1934, and the related delisting of our Common Stock by The Nasdaq Stock Market, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Recent Developments”.

TABLE OF CONTENTS

ITEM

PART I

Item 1.	Business	4
Item 2.	Properties	14
Item 3.	Legal Proceedings	14
Item 4.	Submission of Matters to a Vote of Security Holders	14

PART II

Item 5.	Market for the Registrant’s Common Equity and Related Stockholder Matters	15
Item 6.	Selected Financial Data	16
Item 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	17
Item 7A.	Quantitative and Qualitative Disclosures about Market Risk	42
Item 8.	Financial Statements and Supplementary Data	44
Item 9.	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure	68

PART III

Item 10.	Directors and Executive Officers of the Registrant	69
Item 11.	Executive Compensation	69
Item 12.	Security Ownership of Certain Beneficial Owners and Management	69
Item 13.	Certain Relationships and Related Transactions	69

PART IV

Item 14.	Exhibits, Financial Statement Schedules, and Reports on Form 8-K	70

PART I.

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

ITEM 1. BUSINESS

General Development of ESG’s Business

We provide traditional reinsurance, insurance products and insurance product marketing and development services to insurers and financial institutions worldwide. We operate two complementary business segments, ESG Reinsurance and ESG Direct. Our larger segment, ESG Reinsurance, provides medical, personal accident, credit life, disability, and special risks reinsurance to insurers and selected reinsurers. The current focus of our reinsurance segment is reinsuring medical risks in the United States. ESG Direct is a smaller but growing segment of our business. Through ESG Direct, we provide direct marketing services, expertise in the development of reinsurance and insurance products, and supporting technology to financial institutions in Asia, Europe and Australia.

Our principal executive and underwriting offices are located in Dublin, Ireland. Through our support center in Dublin, we provide centralized global support for underwriting, claims, systems and technology, finance and accounting, legal, human resources and policy administration.

We were formed on August 21, 1997, as an exempted company limited by shares under the laws of Bermuda and completed an initial public offering of our stock in December 1997. Prior to 1997, our predecessor operated a reinsurance management business through European Specialty Group Holding AG, a German subsidiary.

ESG Reinsurance

Reinsurance Industry Overview

Reinsurance is a form of insurance in which a reinsurance company, the reinsurer, agrees to indemnify another insurance company, the ceding company, against all or part of the liability underwritten by the ceding company under one or more insurance contracts. Reinsurance can provide a ceding company with several major benefits, including:

• a reduction in net liability on individual risks,

• protection against catastrophic losses,

• reduction of financial leverage, and

• stabilization of operating results.

Reinsurance may also provide a ceding company with the ability to increase its underwriting capacity by allowing the insurer to accept larger risks and write more business than would be possible without a corresponding increase in its capital and surplus position. Reinsurance does not, however, discharge the ceding company from its liability to policyholders.

Reinsurers indemnify ceding companies on either a pro rata basis or an excess of loss basis. Under pro rata reinsurance, the ceding company and the reinsurer share the premiums as well as the losses and expenses in an agreed proportion. Under excess of loss reinsurance, the reinsurer indemnifies the ceding company against all or a specified portion of losses in excess of a specified dollar amount, known as the ceding company’s “retention” or “attachment point,” which is generally subject to a negotiated reinsurance contract limit.

Premiums payable to the reinsurer by the ceding company for excess of loss coverage are not directly proportional to the premiums the ceding company receives because the reinsurer does not assume a proportionate risk. Under pro rata reinsurance, the reinsurer generally pays the ceding company a commission. This ceding company commission generally is based on the ceding company’s costs of acquiring the business being reinsured, including commissions, premium taxes, assessments and administrative expenses. There is normally no ceding company commission on excess of loss reinsurance.

Reinsurers may purchase reinsurance to cover their own risk exposure. Reinsurance of a reinsurer’s business is called a retrocession or “outward risk” reinsurance. Reinsurance companies cede risks under retrocessional agreements to other reinsurers, known as retrocessionaires, for reasons similar to those that cause insurers to purchase reinsurance: to reduce net liability on individual risks, protect against catastrophic losses, obtain underwriting capacity, reduce financial leverage and stabilize operating results.

Reinsurance can be written through professional reinsurance brokers or directly with ceding companies. From a ceding company’s perspective, both the broker market and the direct market have advantages and disadvantages. A ceding company’s decision to select one channel market over the other will be influenced by its perception of such advantages and disadvantages relative to the reinsurance coverage being placed.

ESG Reinsurance Operations

The major lines of business of our reinsurance operations are:

• medical expense,

• personal accident and disability,

• credit, and

• life.

Medical Expense

Medical expense reinsurance consists primarily of reinsuring medical expense reimbursement plans, specific and aggregate, short-term travel, defined illnesses and dread diseases, as well as medical expense add-on coverages and top-up benefits. To properly evaluate these reinsurance risks, we rely on our detailed knowledge of the underlying insurance product, active risk management and actuarial rating manuals.

We encourage our ceding clients through regular client meetings and audits to employ stringent cost control and loss prevention measures, such as managing a patient’s choice of doctors and hospital networks, reducing benefit utilization and claims frequency.

Our largest medical reinsurance operation, ESG Re North America Limited, is based in Toronto, Ontario, Canada. Our Toronto office is responsible for generating reinsurance business in the U.S. medical market. We have committed significant resources and capital to this operation to take advantage of current opportunities in the U.S. medical market. In order to reduce the earnings volatility that may result from such a concentrated investment, we have co-reinsured 50% of our U.S. medical portfolio with another reinsurer. This co-reinsurance arrangement was in effect during 2001, and we expect it to be in effect throughout 2002. In addition, we are pursuing opportunities to create partnerships with leading insurers to develop and market a critical illness product in the United States.

Personal Accident and Disability

Our personal accident reinsurance covers:

• accidental death,

• dismemberment,

• permanent, temporary, partial or total disability,

• loss of occupational license, and

• occupational accident.

By acquiring direct knowledge of the underlying business through personal relationships with cedants and producers in the country of origin, we attempt to differentiate our products and services from other reinsurers.

Credit Life

We reinsure the risk arising from defaults on credit card repayments or loan agreements following death, accident or involuntary unemployment. We have considerable expertise in the production, underwriting and

administering this class of business in Portugal, which is the primary geographic focus of our credit reinsurance business. We also conduct credit life operations elsewhere in Europe and Australia.

Life

We write a small book of both term and sub-standard life reinsurance using a consultant actuary to ensure sound underwriting practices.

Primary Insurance Operations Under ESG Reinsurance

In addition to ESG’s reinsurance operations, we have two subsidiaries that write primary insurance policies as well as, to a lesser extent, reinsurance policies. One of these companies is based in the former Soviet State of Georgia, and the other in Ireland. The Georgian company, IMEDI L Insurance Company Limited (IMEDI), sells property and casualty insurance to individuals and companies seeking to insure themselves against these risks. We have recently made changes to our underwriting policies at IMEDI to limit our underwriting exposure. The Irish company, Accent Europe Insurance Company, Ltd., offers accident and health insurance products.

ESG Direct

Through ESG Direct, we offer marketing, product development, and technology expertise from a team of experienced professionals in Asia, Europe and Australia. In 2001, we initiated a direct marketing operation in Europe to expand our European operations. We also opened a Representative office in Portugal to develop bancassurance business in that market. Bancassurance is a form of insurance in which a bank or other lender sells insurance to a customer to protect against risk of default due to death, accident, involuntary unemployment or other sudden event.

ESG Direct complements our core reinsurance business by providing our customers with product development and direct marketing strategies, as well as the technological infrastructure necessary to run an expanding insurance business. For most of ESG Direct’s customers, we market insurance products on behalf of the customer, and the customer purchases reinsurance from us to cover its insurance risks on the insurance product once it is sold. The bancassurance component of our ESG Direct business segment focuses on assisting banks, lenders, finance houses, credit unions, credit card issuers and other financial institutions in the marketing of their credit insurance products. We will continue to invest in and expand on these direct marketing and bancassurance operations in 2002.

We also offer assistance to ceding companies and other partners in the areas of underwriting, actuarial systems, product design, and marketing. We hope to expand this business by capitalizing on our experience as a reinsurer and a primary insurer to sell these customers packages of services that will improve the quality of insurance products they are able to market.

Gross Premiums for Major Lines of Business

Our gross premiums written in 2001 totaled approximately $134.4 million compared to approximately $245.0 million in 2000 and approximately $333.0 million in 1999. The breakdown of gross premiums written for the years ended December 31, 2001, 2000 and 1999 by major lines of business was as follows:

	2001		2000		1999

Medical Expense	77.7	%	71.0	%	75.7	%
Personal Accident and Disability	20.5	%	22.0	%	19.9	%
Credit Life	1.2	%	1.4	%	0.6	%
Life	(1.0	)%	3.7	%	2.1	%
Other	1.6	%	1.9	%	1.7	%
Total	100.0	%	100.0	%	100.0	%

For a breakdown of our products by business segment, refer to the product mix table under “Management’s Discussion and Analysis of Financial Conditions and Results of Operations.”

Business by Geographic Area

We conduct our business in four principal geographic areas defined on the basis of where the underlying risk is located:

• Western Europe

• North America

• Latin America

• Other (primarily Asia)

For a more detailed discussion of the geographic areas where we conduct our business, see Note 16 to our Consolidated Financial Statements.

Discontinued Operations

Effective as of June 30, 2000, as described below, we divested our health care operations in accordance with a plan approved by our Board of Directors and now report the results from our former health care segment as discontinued operations. In 2000, we restated prior periods to reflect the status of this segment as a discontinued operation. For a more complete discussion of our discontinued health care operations, see “Management’s Discussion and Analysis of Operations” and Note 11 to our Consolidated Financial Statements.

Market Growth

Our long-term business strategy is to achieve underwriting profits and provide value to our clients by expanding our core reinsurance and direct marketing businesses on a selective basis, and increasing the quality of our underwriting. Although we have scaled back our traditional reinsurance business in less profitable areas, the primary area where we continue to offer reinsurance, the U.S. medical market, still provides growth opportunities because of our expertise, experience and existing relationships. We are well positioned to benefit from ESG Direct’s growth, which we believe will lead to new reinsurance partnerships with providers of bancassurance, life, and accident insurance.

We intend to develop those reinsurance products and services necessary to meet the demands of an evolving insurance market. Where insurers develop new types of insurance, or where new types of institutions enter the insurance market, we will offer them our reinsurance services if we believe that opportunities for profit exist. We believe that our flexibility will enable us to take advantage of new opportunities if and when they present themselves.

Underwriting

In early 2000, we centralized our underwriting operations in Dublin, Ireland. We employ a disciplined and centralized approach to underwriting, designed to maximize our underwriting profitability. Our emphasis is now on the profitability of risks rather than premium volume and, accordingly, our gross premiums written declined from $245.0 million in 2000 to $134.4 million in 2001. We concentrate our resources in those areas and on those products which indicate the greatest potential for profit. We have not renewed contracts with ceding companies when underwriting results were not in line with our expectations.

We protect our portfolio by effecting non-proportional reinsurance coverage in various layers to defend against large individual and aggregate losses and risks of known and unknown concentration. We intend to continue to effect proportional coverage on underwritten risks that might have fluctuating results.

As part of our underwriting process, we focus on the experience and reputation of the proposed ceding company, the likelihood of establishing a long-term relationship, the geographic area in which the ceding company conducts business and the ceding company’s market share. We also review historical loss data in order to compare the ceding company’s historical loss experience to industry averages, as well as the perceived financial strength of the ceding company. In addition, when appropriate, we conduct underwriting and claim audits at the offices of ceding companies to ensure that they operate within our guidelines. Underwriting audits focus on the quality of the underwriting staff, the selection and pricing of risks and the capability of monitoring price levels over time. Claim audits are performed in order to evaluate the client’s claims handling abilities and practices.

We have developed corporate underwriting manuals, guidelines and procedures which govern all of our underwriting evaluations, including our North American, Latin American, European, Asian and other international operations, subject to further refinement in the divisional underwriting guidelines due to applicable local political, economic and other factors. We have structured our reinsurance underwriting operations according to business lines and geographic regions. Specific underwriters in Ireland are responsible for underwriting the business according to internal guidelines and procedural and underwriting manuals.

Together with co-reinsurers, we provide the following gross underwriting capacities for 2002:

Medical Expense		$5 million per person per annum
Personal Accident and Disability		$250,000 any one person and $5 million known accumulation
Credit Life		$1 million any one person

Our co-reinsurance agreement with ACE Capital Re Overseas Limited (ACE) allows us to share risks of medical expense and personal accident reinsurance coverage on a 50:50 basis. For risks attaching during 2001, we were not exposed to liabilities in excess of $250,000 per person, on medical expense business, and in excess of $1,000,000 per person, on personal accident business.

We protect our risk exposures by placing a percentage of our business with high quality retrocessionaires. We adhere to strict guidelines about the retention levels that we hold, and the quality of retrocessionaires with which we retrocede business.

Claims

We operate an internal claims management, support and payment function. Unlike many other reinsurers, in many instances we are involved in claims administration with our ceding clients either directly or through third party claims administrators as soon as the insured makes a claim against its policy. Many of our reinsurance treaties contain either “claims control” or “claims co-operation” clauses that permit us to maintain this involvement from the first dollar level. Claims control clauses allow us to determine the extent to which our ceding client will pay an initial claim, and claims co-operation clauses allow us to make this determination jointly with the ceding client.

We believe that this pro-active approach of claims management may improve the claims performance of our ceding clients, and thereby reduce our reinsurance claim costs, particularly in the area of medical reinsurance. In addition, our early involvement in the claims process allows us to be constantly aware of claims development so we can establish reserves earlier and more accurately.

Our professional claims staff, based in Dublin, Ireland:

• review initial loss reports and coverage issues,

• monitor claims handling activities of ceding companies,

• establish and adjusts proper case reserves, and

• approve the payment of claims.

In addition to claims assessment, processing and payment, our claims staff itself or through external auditors selectively conduct claims audits of both specific claims and overall claims procedures at the offices of selected ceding clients and their managing general underwriting agents. In most instances, insurance claims are handled by third-party claims service providers which have limited authority and are subject to oversight by our claims staff. These audits may include underwriting, claims, financial and systems audits. These audits test compliance and discover weaknesses in the reporting and reserving system of a ceding client and help the ceding client to arrive at a realistic and timely methodology to evaluate risk exposure. We rely upon our ability to effectively monitor the claims handling and claims reserving practices of our ceding clients in order to establish the proper reinsurance premiums for reinsurance agreements and to establish proper loss reserves.

Reserves

We establish reserves for unpaid losses and loss expenses, which are estimates of future payments of reported and unreported claims for losses and related expenses, with respect to insured events that have occurred. The process of establishing reserves can be a complex and imprecise process, requiring the use of informed estimates and judgments. We sometimes revise our estimates and judgments when additional information becomes available, as new and improved methodologies are developed, or as current laws change. Any such revisions could result in future changes in estimates and losses, which would be reflected in our results of operations in the period in which the estimates are changed.

We expect that, due to the short-tail nature of most of our lines of business, most claims under our treaties will generally become known and ascertainable within approximately 12 to 36 months from the date the insurance policy is written.

In accordance with U.S. GAAP, we also maintain reserves for claims incurred but not reported. We establish these reserves to provide for future case reserves and loss payments on incurred claims that have not yet been reported to our ceding clients. In calculating these reserves, we use generally accepted reserving techniques that take into account quantitative loss experience data, together with, where appropriate, qualitative factors. These reserves are based on claim experience and are grouped both by class of business and by accident year. These reserves are adjusted to take into account additional factors that can be expected to affect our liability for claims over time, such as changes in the volume of business written, reinsurance contract terms and conditions, the mix of business, claims processing and inflation.

Although we believe that adequate reserves have been made for the liability of losses and loss expenses based on all available information, there can be no assurance that ultimate losses will not differ significantly from the amounts provided.

Competition

The reinsurance industry is highly competitive. Many factors affect competition in the reinsurance market, including the perceived overall financial strength of the reinsurer, the credit rating of the reinsurer, underwriting expertise, the jurisdictions where the reinsurer is licensed or otherwise authorized, premiums charged, other terms and conditions of the reinsurance business offered, contract terms and conditions, services offered, speed of claims payment, reputation and experience. We compete in the North American, Latin American, European and other international reinsurance markets. Our competitors include independent reinsurance companies, subsidiaries or affiliates of established international reinsurance companies, reinsurance departments of primary insurance companies and underwriting syndicates, including those at Lloyd’s of London. Some of these competitors have greater financial resources than we do and have established long-term and continuing business relationships throughout the industry, which can be a significant competitive advantage. We also compete with providers of alternative forms of risk transfer such as investment banks, which offer capital market mechanisms such as the securitization of reinsurance risks, for primary insurers to transfer such risks directly to investors.

Some of our competitors attempt to expand their market share by selling reinsurance products and services based solely on cost trends in that market. We do not intend to compete based solely on cost trends in a particular market if doing so requires us to price our products at unprofitable levels. If our competitors employ this strategy in any of the markets in which we operate, we could lose many or all of our customers and be unable to attract new customers in that market.

Our competitors for ESG Reinsurance differ by market. In North America, our primary competitors are American Re Corporation and Everest Re Group, Ltd. In Latin America, our primary competitors are Latin America Re and Swiss Reinsurance Company. In Europe, our primary competitors are Munich Re, Swiss Re, Hanover Re and Lloyd’s of London.

ESG Direct also faces competition from companies that provide direct marketing, product development, and technology services comparable to ours. These companies can compete with ESG Direct on price and range of services. There are also companies that specialize in one or two of the services that ESG Direct offers who can compete with us on price and depth of knowledge in those areas.

The primary competitors for ESG Direct are American International Group, Inc. and the ACE Group, both of which provide a full range of services similar to those that we offer. Other competitors of ESG Direct, including General Electric Capital, J.C. Penney and Remark, are experienced insurers and offer some of the same expertise we do in direct marketing and systems integration. Consulting and technology firms also compete with ESG Direct to provide financial institutions with technology and systems integration expertise.

Significant Customers

For the year ended December 31, 2001, one customer, the Companion Insurance Company, accounted for approximately 20% of the net premiums earned of our ESG Reinsurance segment. For the year ended December 31, 2000 no one customer accounted for more than 10% of net premiums earned for the ESG Reinsurance segment.

For the year ended December 31, 2001, National Financial Management, Metropolitan Life, Prudential Assurance and Cardif Life, accounted for approximately 17%, 29%, 18% and 29% respectively of the net premiums earned of our ESG Direct segment. For the year ended December 31, 2000 National Financial Management and Cardif Life, accounted for approximately 40% and 47% respectively of the net premiums earned of our ESG Direct segment

Employees

As of March 15, 2002, we had 162 full time employees. None of these employees is represented by a labor union. We do not expect to add significant additional marketing or administrative staff. We believe that our employee relations are generally good.

Regulation

Our principal reinsurance and insurance companies are:

• European Specialty Reinsurance (Bermuda) Limited - located in Bermuda

• European Specialty Ruckversicherung AG – located in Germany

• ESG Reinsurance Ireland Limited – located in Ireland

• Accent Europe Insurance Company Limited – located in Ireland

• IMEDI L International Insurance Company Limited – located in the former Soviet State of Georgia

Bermuda

The Companies Act 1981 (as amended) and Related Regulations. The Bermuda Companies Act of 1981 regulates the business of both ESG Re Limited and European Specialty Reinsurance (Bermuda) Limited.

The Insurance Act 1978 (as amended) and Related Regulations. The Bermuda Insurance Act 1978, as amended, and related regulations from time to time in force, regulate the business of ES Bermuda and provide that no person shall carry on an insurance business in or from within Bermuda unless registered as an insurer under the Insurance Act by the Bermuda Monetary Authority. The Bermuda Monetary Authority, in deciding whether to grant registration, has broad discretion to act as it thinks fit in the public interest. The Bermuda Monetary Authority is required by the Insurance Act to determine whether the applicant is a fit and proper body to be engaged in insurance business and, in particular, whether it has, or has available to it, adequate knowledge and expertise. In connection with registration, the Bermuda Monetary Authority may impose conditions relating to the writing of some types of insurance.

An Insurance Advisory Committee and related sub-committees, which are appointed by the Bermuda Monetary Authority, advises the Authority on matters connected with the discharge of its functions and supervises and reviews the law and practice of insurance in Bermuda, including reviews of accounting and administrative procedures. In addition, the Insurance Advisory Committee may advise the Bermuda Monetary Authority on any matter relating to the development of the insurance industry in Bermuda.

The Insurance Act imposes solvency and liquidity standards and auditing and reporting requirements on Bermuda insurance companies and grants to the Bermuda Monetary Authority powers to supervise, investigate and

intervene in the affairs of insurance companies. Significant aspects of the Bermuda insurance regulatory framework are set out below.

Cancellation of Insurer’s Registration. The Bermuda Monetary Authority may cancel an insurer’s registration on the grounds specified in the Insurance Act, including failure of the insurer to comply with its obligations under the Insurance Act or if, in the opinion of the Bermuda Monetary Authority, the insurer has not been carrying on business in accordance with sound insurance principles.

Independent Approved Auditor. Every registered insurer must appoint an independent auditor who will annually audit and report on the statutory financial statements and the statutory financial return of the insurer. The insurance company is required to file these financial statements and return annually with the Bermuda Monetary Authority. The auditor must be approved by the Bermuda Monetary Authority as the independent auditor of the insurer. The approved auditor may be the same person or firm which audits the insurer’s financial statements and reports for presentation to its shareholders.

Statutory Financial Statements. An insurer must prepare annual statutory financial statements. The Insurance Act prescribes rules for the preparation and substance of these statutory financial statements. These financial statements include, in statutory form, a balance sheet, income statement, statement of capital and surplus and detailed notes. The insurer is required to give detailed information and analyses regarding premiums, claims, reinsurance and investments. The statutory financial statements are not prepared in accordance with U.S. GAAP and are distinct from the financial statements prepared for presentation to the insurer’s shareholders under The Companies Act 1981 of Bermuda, which may be prepared in accordance with U.S. GAAP. Copies of ESG Bermuda’s statutory financial statements must be filed annually together with its statutory financial return. The statutory financial statements must be maintained at the principal office of the insurer for a period of five years.

Minimum Capital and Surplus. Under the Insurance Act, ES Bermuda has been designated as a Class 3 composite insurer. The Insurance Act requires $1.25 million minimum capital and surplus for Class 3 composite insurers with a minimum paid up share capital of $370,000. Class 3 composite insurers are insurers that write both general business and long-term business.

Minimum Solvency Margin. The Insurance Act provides that the statutory assets of a Class 3 composite insurer writing general business must exceed its statutory liabilities by an amount equal to or greater than the applicable minimum solvency margin for that class. The applicable minimum solvency margin for a Class 3 composite insurer is 20% of net premiums written for the first $6 million of net premiums written plus 15% of net premiums written in excess of $6 million or 15% of the aggregate loss and loss expense provisions, whichever is greater. The minimum solvency margin for writers of long-term business is $250,000.

Minimum Liquidity Ratio. The Insurance Act provides a minimum liquidity ratio for insurers that write general business. An insurer engaged in general business is required to maintain the value of its relevant assets at not less than 75% of the amount of its relevant liabilities. Relevant assets include cash and time deposits, quoted investments, unquoted bonds and debentures, first liens on real estate, investment income due and accrued, accounts and premiums receivable, reinsurance balances receivable and funds held by ceding reinsurers. There are categories of assets which, unless specifically permitted by the Bermuda Monetary Authority, do not automatically qualify as relevant assets, such as unquoted equity securities, investments in and advances to affiliates, real estate and collateral loans. The relevant liabilities are total general business insurance reserves and total other liabilities less deferred income tax and sundry liabilities (by interpretation, those not specifically defined) and letters of credit and guarantees.

Statutory Financial Return. A Class 3 composite insurer is required to file with the Bermuda Monetary Authority an annual statutory financial return at the same time as it files its statutory financial statements but, in any event, no later than four months from the insurer’s financial year end, unless specifically extended. The annual statutory financial return includes, among other matters, a report of the approved independent auditor on the insurer’s statutory financial statements, an annual actuarial opinion on loss reserves prepared by the approved loss reserve specialist, a declaration of the statutory ratios and a solvency certificate.

Supervision, Investigation and Intervention. The Bermuda Monetary Authority may appoint an inspector with extensive powers to investigate the affairs of an insurer if the Bermuda Monetary Authority believes that an investigation is required in the interest of the insurer’s policyholders or persons who may become policyholders. In

order to verify or supplement information otherwise provided to it, the Bermuda Monetary Authority may direct an insurer to produce documents or information relating to matters connected with the insurer’s business.

If it appears to the Bermuda Monetary Authority that there is a risk of the insurer becoming insolvent, the Bermuda Monetary Authority may direct the insurer not to:

• take on any new insurance business;

• not to vary any insurance contract if the effect would be to increase the insurer’s liabilities;

• not to make or realize specific investments;

• to maintain in Bermuda or transfer to the custody of a Bermuda bank, certain assets; and

• to limit its premium income.

An insurer is required to maintain a principal office in Bermuda and to appoint and maintain a principal representative in Bermuda to oversee the insurer’s business and to report to the Bermuda Monetary Authority and the Registrar of Companies in connection with specific events. Unless the insurance has obtained the Bermuda Monetary Authority’s approval, an insurer may not terminate the appointment of its principal representative, and the principal representative may not cease to act as the insurer’s principal representative, unless the insurer gives 30 days written notice to the Bermuda Monetary Authority of its intention to terminate the appointment of its principal representative. It is the principal representative’s duty, within 30 days of his reaching the view that there is a likelihood of the insurer, for which he acts, becoming insolvent or its coming to his knowledge, or his having reason to believe, that an “event” has occurred, to make a written report to the Bermuda Monetary Authority describing all of the particulars of the case that are available to him. Examples of an “event” include failure by the insurer to comply substantially with a condition imposed upon the insurer by the Bermuda Monetary Authority relating to a solvency margin or a liquidity or other ratio.

Dividends. The Bermuda Companies Act 1981 allows dividend payments when there are reasonable grounds for believing that an insurer would be able to pay its debts as they fall due after payment of a dividend, and the realizable value of the insurer’s assets would exceed the aggregate value of its liabilities and its issued share capital and premium accounts. The Bermuda Insurance Act 1978 requires ES Bermuda to meet the minimum solvency margin and a minimum liquidity ratio before declaring a dividend.

Reduction of Statutory Capital. Approval is needed from the Bermuda Monetary Authority for any reduction in total statutory capital of an insurance company of 15% or more. Applicants are required to show that the proposed reduction of capital will not cause ES Bermuda to fail to meet applicable statutory margin requirements in Bermuda.

Compliance. We are in compliance with all applicable Bermudan statutes and regulations.

Germany

The German regulatory framework for the insurance industry is provided by the Insurance Supervisory Authority Law (Versicherungsaufsichtsgesetz, VAG). The supervision of all insurance companies domiciled in Germany - except those which function as providers of the Social Security Insurance - is the responsibility of the German Insurance Supervisory Authority (Bundesaufsichtramt fur das Versicherungawesen, BAV). The BAV is a supreme Federal Authority which is supervised by the Federal Ministry of Finance.

The regulation of reinsurance has been largely liberalized. Consequently, except as set forth below, there are no detailed regulations for reinsurers under the law of the European Union or Germany.

An insurance company engaged exclusively in the reinsurance business requires no license from the BAV. Reinsurance companies must make a summary filing with the BAV, setting forth the domicile and corporate form of the reinsurance company and the members of the executive and supervisory boards. The BAV encourages reinsurers to submit the names of the company’s shareholders with its filing, and also to include the qualification of the members of the executive and supervisory boards. The submission of a business plan is not necessary.

The applicability of the VAG is restricted to:

• accounting and auditing procedures (§§ 55-59 VAG);

• information and examination rights of the BAV (§ 83 VAG);

• the provision on the effect of legal remedies (§ 89a);

• the provision on how to enforce the BAV’s powers (§ 93);

• the provision on fees, publications and statistical data (§§ 101-103);

• the criminal and administrative penalty provision regarding

the false report by auditors (§ 137)

the breach of secrecy (§ 138) and

• the concluding provision on the reporting requirements to the BAV (§ 150)

Although many provisions of the VAG and the Capitalization Law (Kapitalausstattung VO) do not apply to reinsurers such as ES Rückversicherung AG, the BAV prefers that reinsurance companies have the same level of capitalization as primary insurers (approximately 16-18% of net premiums).

Generally, the supervision by the BAV is designed primarily for the protection of the policyholders of direct insurers. Such policyholder protection intends to give the policyholder the security she needs as a potential creditor of direct insurance companies.

Sections 55 - 59 of the VAG, which pertain to accounting and auditing of insurance companies, are also applicable to reinsurance companies.

Compliance. We are in compliance with all applicable German statutes and regulations.

Ireland

Irish law directly regulates only two of our subsidiaries, ESG Reinsurance Ireland Limited and Accent Europe Insurance Company Limited (Accent).

Regulation. Direct insurance companies in Ireland, such as Accent are regulated by an extensive list of acts and regulations from the Assurance Companies Act 1909 to the Insurance Act 1989, as amended by The Insurance Act 2000, and the European Communities (Non Life Insurance) Regulations 1976 to the European Communities (Non Life Insurance) Framework Regulations 1994. Direct insurance companies must be authorized by the Minister for Enterprise, Trade, and Employment before commencing business. These companies are subject to solvency requirements under the applicable regulations.

Reinsurance companies incorporated in Ireland such as ESG Reinsurance Ireland Ltd, are not subject to authorization by the Irish Government. They are, however, required under section 22 of the Insurance Act 1989, to notify the Minister for Enterprise, Trade and Employment that they carry on the business of reinsurance and to provide information to the Minister regarding ownership, share capital, directors, senior management, accountants, auditors and solicitors as well as risks to be covered and related policy and other arrangements.

Auditor’s Report and Duties. The Companies Act 1963 to 2001 requires all companies incorporated in Ireland to prepare and have audited annual accounts for their shareholders. Section 22(1) Insurance Act 1989 requires reinsurance companies to prepare their accounts in such form as the Minister may specify and such audited accounts are required to be filed in the Companies Registration Office and are available for public inspection.

Compliance. We are in compliance with all applicable Irish statutes and regulations.

The Former Soviet State of Georgia

Georgia law directly regulates only one of our subsidiaries, IMEDI.

Regulation. The Georgian Parliament adopted an Insurance Regulation in 1996 regarding foreign ownership and capitalization requirements. Specific laws governing automobile third-party liability insurance and compulsory fire insurance were introduced in 1997 and 1999, respectively. Regulation is carried out by the Insurance State Supervision Service.

Minimum Capital Requirements. The minimum capital requirement for an insurance company to underwrite most lines of insurance is GEL500 thousand ($242 thousand). For a company carrying out life insurance, the

requirement is increased to GEL600 thousand ($290 thousand) and to GEL1 million ($484thousand) for a company carrying out pension insurance.

Compliance. We are in compliance with all the statutes and regulations of Georgia that govern us.

United States and Other Countries

We currently do not write insurance or reinsurance business in any jurisdiction except Bermuda, Ireland, Germany and the former Soviet State of Georgia. We have applied for authorization to do reinsurance business in Hong Kong. The insurance laws of each state of the United States and of many foreign countries regulate the sale of insurance within their jurisdictions by alien insurers, like ESG, who are not admitted to do business within these jurisdictions. With some exceptions, the sale of insurance within a jurisdiction where the insurer is not admitted to do business is prohibited. We do not intend to maintain an office or to solicit, advertise, settle claims or conduct other insurance activities in any jurisdiction where the conduct of these activities would require that we be so admitted and we are not so admitted.

ITEM 2. PROPERTIES

We and our subsidiaries lease office space in Bermuda, Dublin, London, Lisbon, Toronto, Miami, Hong Kong, Rome, Madrid, Sydney and Bangkok and own an office located in the former Soviet State of Georgia. The owned property is currently valued at $290,000. We believe that our space is adequate to meet our current and expected needs.

ITEM 3. LEGAL PROCEEDINGS

We and our subsidiaries, in common with the insurance industry in general, are exposed to litigation, including claims for punitive damages, in the normal course of business. We do not believe that any of the litigation that we are involved in will have a material adverse effect on our financial condition, future operating results or liquidity. For a discussion of a pending lawsuit involving Odyssey Re, see Note 11 to our Consolidated Financial Statements.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

No matters were submitted to a vote of security holders during the fourth quarter of fiscal 2001.

PART II.

ITEM 5. MARKET FOR COMPANY’S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

Market Information

Since December 12, 1997, our common stock has been traded on NASDAQ under the symbol ESREF. The highest and lowest sales prices of our common stock for each fiscal quarter since December 31, 1999 were as follows:

	High		Low

From January 1 to March 31, 2000	$	6.52	$	2.97
From April 1 to June 30, 2000	$	4.53	$	3.46
From July 1 to September 30, 2000	$	4.01	$	2.43
From October 1 to December 31, 2000	$	4.00	$	1.72
From January 1 to March 31, 2001	$	2.69	$	1.97
From April 1 to June 30, 2001	$	3.71	$	2.02
From July 1 to September 30, 2001	$	3.74	$	2.58
From October 1 to December 31, 2001	$	5.30	$	2.50

Number of Record Holders of Common Stock

As of March 15, 2002, the number of record holders of our common stock was 145.

Dividend History and Restrictions

Our dividend history for each fiscal quarter since December 31, 1999 is as follows:

Dividend Declared		Date Declared	Record Date of Shareholders	Date Paid

$	0.08	February 25, 2000	March 15, 2000	March 30, 2000
$	0.08	May 9, 2000	June 15, 2000	June 29, 2000
$	0.08	August 10, 2000	September 15, 2000	September 28, 2000

We have not declared or paid any dividends since September 2000. Our Board of Directors reviews our dividend policy quarterly. Under Bermuda law, we are not permitted to pay dividends unless we meet required solvency tests. For a further discussion of the restrictions on dividends under Bermuda law, see the discussion titled Dividends under the caption “Regulation-Bermuda” above and Note 18 to our Consolidated Financial Statements.

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
	U.S. dollars in thousands except per share data
	As Restated			As Restated			As Restated
				Unaudited			Unaudited
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	156,897			236,620			249,125			98,841			13,411
Investment income	12,177			12,924			13,515			12,930			598
Total revenues	164,210			249,032			262,589			115,827			17,839
Losses and loss expenses	107,088			187,241			199,031			61,364			7,449
Acquisition costs	46,995			78,566			66,296			26,714			4,693
Class B Warrants expense	—			—			—			—			3,626
Administrative expenses(2)	27,339			43,914			26,157			11,965			7,736
Total expenses(2)	181,422			309,721			291,484			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)	(17,212		)	(60,689		)	(28,895		)	15,784			(5,665		)
Income tax benefit/(charge)	1,339			—			(815		)	(1,262		)	569
Net income/(loss) from continuing operations(2)	(15,873		)	(60,689		)	(29,710		)	14,522			(5,096		)
Net loss from discontinued operations(3)	—			(5,178		)	(12,772		)	—			—
Net income/(loss)(2)	(15,873		)	(65,867		)	(42,482		)	14,522			(5,096		)
Basic net income/(loss) per share from continuing operations(2)	(1.35		)	(5.14		)	(2.24		)	1.04			(4.11		)
Diluted net income/(loss) per share from continuing operations(2)	(1.35		)	(5.14		)	(2.24		)	1.03			(4.11		)
Basic net income/(loss) per share(2)	(1.35		)	(5.58		)	(3.20		)	1.04			(4.11		)
Diluted net income/(loss) per share(2)	(1.35		)	(5.58		)	(3.20		)	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	454,107			554,794			605,684			466,373			283,553
Unpaid losses and loss expenses	148,905			179,614			136,935			44,379			7,846
Unearned premiums	100,718			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	$	5.30		$	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 Notes 20 and 21 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.

This discussion and analysis has been modified to reflect the restatement of our financial statements for the years ended December 31, 2001, 2000 and 1999. A summary of the effects of the restatement on our consolidated financial statements for 2001 are set forth in notes 20 and 21 to the financial statements included herein in Item 8 of Part 2 of this report.

Recent Developments

From December 12, 1997 to November 20, 2002, our common stock was traded on NASDAQ under the symbol ESREF. On November 20, 2002, the trading symbol was changed to ESREE to reflect the unfiled status of our Quarterly Report on Form 10-Q for the quarter ended September 30, 2002.

On November 25, 2002, the Company received a Nasdaq Staff Determination letter indicating that, as a result of the Company’s failure to timely file its Report on Form 10-Q for the period ended September 30, 2002, the Company’s securities would be delisted from the Nasdaq Stock Market, effective at the opening of business on December 3, 2002. The Company requested an oral hearing before a Nasdaq Listing Qualifications Panel (the “Panel”) to review the Staff Determination, which request stayed the delisting of the Company’s securities. Thereafter, on December 17, 2002, the Company was notified that it failed to maintain a closing bid price of at least $1.00 per share for 30 consecutive trading days, and that it should discuss its plan to remedy that additional deficiency at the hearing. The hearing was held on December 20, 2002. By letter dated January 31, 2003, the Company was advised that the Panel had determined that the Company’s securities would be delisted from The Nasdaq Stock Market effective with the opening of business on Tuesday, February 4, 2003. The reason given for the decision was the failure to timely file the Company’s quarterly report on Form 10-Q for the quarter ended September 30, 2002. In addition, the Panel cited as a reason for its delisting decision, the Company’s failure to file any of the amendments to previously filed reports under the Securities Exchange Act of 1934, as amended, for any of the anticipated restatements of certain information in its financial statements. Nasdaq’s delisting decision will not be appealed.

On March 17, 2003 we filed with the SEC our certification on Form 15 to deregister our common stock under the Securities Exchange Act of 1934, as amended (“the Exchange Act”). Upon filing, our obligations to file reports Form 10-K, Form 10-Q and other periodic reports that were not yet due were immediately suspended. Our certification to deregister is expected to become final within 90 days of filing. If the SEC determines to deny our certification within such 90 day period, we would have 60 days to bring all periodic reports due current.

We intend to continue to make available to our shareholders quarterly and annual financial information in substantially the same form as presently made available. We also intend to generally comply with the corporate governance regulations and guidelines that would be applicable if our common stock was still registered under the Exchange Act and listed on Nasdaq.

The Company’s securities are being quoted through the Pink Sheets stock quotation service. We anticipate (although there is no assurance), that Carr Securities Corp., Port Washington, NY, and Morgan Keegan & Co., Inc., Birmingham, AL, will continue to quote our common stock. There is no assurance that a trading market will develop.

Credit Ratings

On November 26, 2002, Standard and Poor’s lowered its counterparty credit and insurer financial strength rating for ESG and its subsidiaries (the “Group”) from BB- to B with a negative outlook. According to S&P, the downgrade reflects the group’s weakened capital adequacy, the continuing volatility in reported earnings, limited ability to access external sources of finance and marginal business position. We believe these reasons have been mitigated by recent actions over the past two years on improving underwriting and implementation of risk management processes. The ratings on the Group were then withdrawn at our request.

On December 4, 2002, Fitch Ratings lowered its counterparty credit and insured financial strength ratings of the Group from BB- to B and remaining on negative ratings watch. The Fitch rating action reflects the negative impact that the resignation of Deloitte & Touche and the highlighted accounting disagreements are likely to have on our business relationships over the short-term. Fitch feels that uncertainties surrounding our financial condition will inevitably impact on premium volumes, particularly at this critical time in the year when a large portion of inwards and outwards reinsurance contracts are renegotiated.

On February 5, 2003, following our delisting from The Nasdaq Stock Market, Fitch confirmed that no other rating action will result as the current rating already reflects the delisting. Fitch will remain in close contact with us, with a view to reviewing BDO International’s audit conclusions as they become available. We remain on Rating Watch Negative pending resolution of this issue.

Legal Proceedings

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 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 (Sphere Drake) instituted an action in England against a broker, Stirling Cooke Brown and others, alleging fraud and conspiracy on the reinsurance placement of 1997 and 1998 Personal Accident and Workers Compensation “carve out” business with Odyssey Re (Sphere Drake). During 1998, ESG accepted a 25% quota share reinsurance treaty with Odyssey Re (Sphere Drake). This treaty terminated as of December 31, 1998, but we renewed our participation for 1999 directly with the underwriting agent involved in the 1998 year. 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 (Sphere Drake) filed a response. In December 2002, Odyssey Re (Sphere Drake) accepted our rescission of this treaty in return for a contribution to its legal fees. Therefore, we have no further liability on this contract.

We have also given notice we intend to rescind the 1999 account. This matter is in discovery and is now set for arbitration in late 2003. We believe the outcome of the pending litigation between Odyssey Re (Sphere Drake) and Stirling Cooke Brown and others will have an impact on this arbitration.

Restatement of Financial Statements

We have restated our financial statements for the year ended December 31, 2001 due to the incorrect accounting treatment for a co-reinsurance contract entered into with ACE INA Overseas Insurance Company Ltd. (“ACE”) and for the years ended December 31, 2001, 2000 and 1999 for an error in our Foreign Currency Translation account. The following table summarizes the financial effects of these restatements for the 2001 financial year:

	As previously reported			Foreign Currency Translation Restatement		ACE Contract Restatement			As Restated
	U.S. dollars in thousands (except per share data)
Net premiums earned	$	153,220		—		$	3,677		$	156,897
Loss and loss expenses	104,566			—		2,522			107,088
Acquisition costs	45,840			—		1,155			46,995
Other expenses	13,108			(4,559	)	—			8,549

Net loss	(20,432		)	4,559		—			(15,873		)
Net loss per share	(1.73		)	0.38		—			(1.35		)

Total Assets	455,529			—		(1,422		)	454,107
Total Liabilities	360,459			—		(1,422		)	359,037
Shareholder’s Equity	95,070			—		—			95,070

Foreign Currency Translation

During the second quarter of 2002, we 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 our subsidiaries. At the time we were unable to determine the periods in which the original errors occurred and therefore to correct this error, we restated our financial statements for the fiscal year ended 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 restated accounts were filed in our 10-K (Amendment No. 3) filing of August 22, 2002. The restatement has the following impact on our consolidated statement of operations and consolidated balance sheet for the year ended December 31, 2001:

Following further investigation we have subsequently determined that the error of $3,992 thousand occurred in the following years:

	U.S. dollars in thousands
1999	$	488
2000	4,071
2001	(567		)
	$	3,992

We have further restated, in this Form 10-K/A, our financial statements for the fiscal years ended December 31, 2001, 2000 and 1999 in order to reflect the correct foreign currency translation adjustments, included in accumulated other comprehensive income, other expenses, and consolidated statements of changes in shareholders’ equity. The restatement has the following impact on our consolidated statement of operations and consolidated balance sheets for the years ended December 31, 2001, 2000 and 1999:

	December 31, 2001 U.S. dollars in thousands (except per share data)						December 31, 2000 U.S. dollars in thousands (except per share data) Unaudited						December 31, 1999 U.S. dollars in thousands (except per share data) Unaudited
	As Restated			As Previously Restated			As Restated			As Previously Reported			As Restated			As Previously Reported
Other expenses	$	8,549		$	13,108		$	20,561		$	16,490		$	8,998		$	8,510
Net loss	15,873			20,432			65,867			61,796			42,482			41,994
Net loss per share	1.35			1.73			5.58			5.23			3.20			3.17
Foreign currency translation adjustments, in accumulated other comprehensive income	(201		)	(201		)	(768		)	(5,331		)	(1,214		)	(1,702		)
Foreign currency translation adjustments, in consolidated statements of comprehensive income	567			5,130			442			(3,629		)	(640		)	(1,128		)
Retained deficit	122,923			122,923			107,050			102,491			41,183			40,695

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. Retained earnings, share capital and investments in subsidiaries are translated at historic rates. Translation adjustments arising are included in the equity section of the balance sheet.

Co-Reinsurance Agreement with ACE

We signed a co-reinsurance contract with ACE in November 2001 that became effective retroactively as of January 1, 2001. Under SFAS 113, the premiums written during the retroactive period were deemed to be written on our own account with the co-reinsurance to ACE treated as a retroactive retrocession arrangement. However, we did not show premiums earned, losses and loss adjustment expenses and acquisition costs in our reported revenues and expenses, in respect of the retroactive period, in the third and fourth quarters of 2001 and the first and second quarters of 2002. During the quarter ended September 30, 2002, we realized this error in our treatment of the ACE contract and restated our figures for the correct accounting treatment of this contract. In accordance with SFAS 113, we did not recognize any of the profits of the ACE share of the reinsurance contract in our statement of operations and hence, there was no impact on our reported net income or net loss in any affected period. The following table shows the impact that the correct accounting for this contract had on consolidated statement of operations and consolidated balance sheet for the year ended December 31, 2001:

	December 31, 2001
	U.S. dollars in thousands
	As Restated		As Previously Reported
Net Premiums earned	$	156,897	$	153,220
Loss & Loss expenses	107,088		104,566
Acquisition Costs	46,995		45,840
Deferred Acquisition Costs	38,886		40,308
Unpaid Loss & Loss expenses	148,905		146,383
Unearned premiums	100,718		104,395
Acquisition Costs Payable	42,843		43,110
Shareholders’ Equity	95,070		95,070

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.

Critical Accounting Policies

Our critical accounting policies are:

• recognition of premium revenues;

• reserves for losses and loss expenses;

• deferred acquisition costs; and

• investments.

Recognition of 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 contracts. Differences between such estimates and actual amounts as reported by ceding companies are recorded in the periods in which the actual amounts are determined.

The reinsurance contracts which we enter are primarily of short duration. Premiums written are recognized as earned over the coverage period in proportion to the amount of protection provided. Unearned premium reserves are established to cover the unexpired contract period.

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 and current legal interpretations of coverage and liability, 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.

Deferred Acquisition Costs

We defer costs relating to the production of new business, primarily commissions for all business and telemarketing costs in respect of 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.

Investments

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

RESULTS OF OPERATIONS

We reported a net loss of approximately $15.9 million for 2001, compared to a net loss of approximately $65.9 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 $164.2 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 28.7% 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	$	138.8		$	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	105,662			33,054			(3,591		)	1,187			2,475			138,787
Losses and loss expenses	(68,530		)	(36,598		)	3,687			284			(3,411		)	(104,568		)
Acquisition costs	(29,925		)	(6,747		)	289			(642		)	936			(36,089		)
Operating costs	(21,054		)	(2,893		)	(71		)	(354		)	(454		)	(24,826		)
Net underwriting income/(loss).	$	(13,847	)	$	(13,184	)	$	314		$	475		$	(454	)	$	(26,696	)


	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	64.9	%	110.7	%	102.7	%	n/m		137.8	%	75.3	%
Acquisition expense ratio	28.3	%	20.4	%	8.0	%	54.1	%	n/m		26.0	%
Loss and acquisition expense ratio	93.2	%	131.1	%	110.7	%	30.2	%	100.0	%	101.3	%
Operating expense ratio											17.9	%
Combined ratio											119.2	%


	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 93.2% in 2001. In 2001, net earned premium in the medical line reduced by 34.7%, 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.

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 52.6% 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 7.4%, 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		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	)

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		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	)

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 $333,564 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.

We have an investment in 4Sigma Limited, a company in which the affiliations of John C Head III, the Chairman of the Board of Directors also have an interest. Please refer to the Discontinued Operations section of the Management’s Discussion and Analysis of Financial conditions and Operations for the information.

Administrative Expenses and Taxes

Total administrative expenses include personnel costs, professional service fees, interest expense and other expenses. Administrative expenses decreased by $16.5 million, or 19.8%, from $43.9 million in 2000 to $27.4 million in 2001. This decrease is primarily due to (i) a legal reserve of $8.4 million which was established in 2000 for costs associated with resolving disputes in respect of certain contracts and (ii) restatement to administrative expenses of $4.0 million in 2000 relating to the correction of a misstatement in the foreign currency translation adjustments, as referred to in Note 20 of the Consolidated Financial Statements. As related legal costs have been incurred in 2001, the legal reserve has reduced to $6.8 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.

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 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 3.0 million shares of Series B and C preferred stock 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 voting common stock 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		$	—
Amount placed with co-reinsurers	—			—
Gross premiums written	6.0			—
Retroceded	—			—
Net premiums written	6.0			—

Net premiums earned	$	5.8		$	—

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	)

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

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 $17.6 million, or 67%, from $26.2 million in 1999 to $43.9 million in 2000. The increase resulted primarily from (i) restatement to administrative expenses of $4.0 million in 2000 ($0.5 million in 1999) relating to the correction of a misstatement in the foreign currency translation adjustments, as referred to in Note 20 of the Consolidated Financial Statements, (ii) the establishment of legal reserve of $8.4 million for costs associated with resolving disputes in respect of certain contracts and (iii) 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 $5.3 million in 2000 compared to foreign exchange losses of $0.5 million for 1999. These losses in 1999 and 2000 include the effect of a restatement to the foreign currency translation adjustments and other expenses of $4.0 million for 2000 and $0.5 million for 1999 as referred to above. The remaining 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 13.5% 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 $38.9 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 $148.9 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 $100.7 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 $42.8 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.

On July 30, 2002, the FASB issued SFAS No. 146, Accounting for Costs Associated with Exit or Disposal Activities. This statement requires costs associated with exit or disposal activities to be recognized when the costs are incurred, rather than at a date of commitment to an exit or disposal plan. SFAS 146 is effective for disposal activities after December 31, 2002. The adoption of SFAS 146 did not have an impact on our financial position, results of operations or cash flows.

On October 3, 2002 the FASB issued SFAS No. 147, Acquisitions of Certain Financial Institutions. This statement provides guidance on the accounting for the acquisition of a financial institution and requires that the excess of fair value of liabilities assumed over the fair value of tangible and intangible assets acquired in a business combination represents goodwill that should be accounted for under SFAS 142, Goodwill and other Tangible Assets. Thus, the specialized accounting guidance in paragraph 5 of Statement No. 72 will not apply after September 30, 2002. The adoption of SFAS 147 did not have an impact on our financial position, results of operations or cash flows.

In December 2002, the FASB issued SFAS No. 148, Accounting for Stock Based Compensation - Transition and Disclosure – an amendment of FASB 123. This statement provides alternative methods of transition for a voluntary change to the fair value based method of accounting for stock based employee compensation. In addition, this statement amends disclosure requirements of Statement 123 to ensure that fair value disclosures are prominent in both annual and interim financial statements. As discussed in note 2(k) we account for stock based compensation under APB No. 25 and provide the fair value method disclosures required by SFAS No. 123 and SFAS No. 148. The adoption of the provisions of SFAS 148 did not have a material effect on our financial position, operations or cash flows.

In November 2002, the FASB approved FASB Interpretation No. (“FIN”) 45, Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others. FIN 45 elaborates on the existing disclosure requirements for most guarantees, including loan guarantees such as standby letters of credit. It also clarifies that at the time a company issues a guarantee, the company must recognize an initial liability for the fair value, or market value, of the obligations it assumes under that guarantee and must disclose that information in its interim and annual financial statements. FIN 45 is effective on a prospective basis to guarantees issued or modified after December 31, 2002. The disclosure requirements of FIN 45 are effective for financial statements of interim or annual periods ending after

December 15, 2002. The Company is currently evaluating the impact of the application of this interpretation, but does not expect a material impact from the application of FIN 45 on our consolidated financial statements.

In January 2003, the FASB approved FASB Interpretation No. (“FIN”) 46, Consolidation of Variable Interest Entities. FIN 46 clarifies the application of Accounting Research Bulletin No. 51, “Consolidated Financial Statements,” to certain entities in which equity investors do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support from other parties. FIN 46 is applicable immediately for variable interest entities created after January 31, 2003. For variable interest entities created prior to January 31, 2003, the provisions of FIN 46 are applicable no later than July 1, 2003. The Company does not expect this Interpretation to have an material effect on the consolidated financial statements.

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;

• no further reduction of Fitch rating;

• our assumptions relating to foreign exchange adjustments, and the ACE contract;

• the impact of rate increases on premiums written over the 2002 underwriting year;

• a continuing market for our common shares; and

• recent communications with the SEC.

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 current military operation in Iraq and 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. The loss of these customers 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 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.

• Continuing Market for Common Shares. Our common shares are no longer listed on Nasdaq. Our shares are being quoted through the Pink Sheets stock quotation service. We anticipate that Carr Securities Corp., Port Washington, NY, and Morgan Keegan & Co., Inc., Birmingham, AL, will continue to quote the common stock but there is no assurance that any of them will continue to do so or that a trading market will develop or be sustained.

• SEC Communications. We have had recent discussions with the SEC regarding the handling of our foreign exchange restatement and the resignation and disagreements with Deloitte & Touche, which communications may continue.

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 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Market Risk

We are subject to market risk arising from the potential change in value of our various financial instruments. These changes may be due to fluctuations in interest rates or foreign currency rates, or both in the case of foreign currency investments. We monitor our exposure to interest rate and currency rate risk on a quarterly basis and currently do not believe that the use of derivatives to manage such risk is necessary. We intend to reevaluate the need for a formal hedging strategy on a periodic basis, and may determine that such a strategy, including the use of derivative instruments, is appropriate in the future.

Interest Rate Risk

Our largest source of market risk is interest rate risk on our portfolio of fixed maturity investments, especially fixed rate instruments. In addition, the credit worthiness of the issuer, relative values of alternative investments, liquidity and general market conditions may affect fair values of interest rate sensitive instruments.

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

Generally, we expect that an increase in market interest rates will cause a decline in the value of our investment portfolio, whereas a decrease in rates may cause an increase in value. The following table shows the approximate effect on the value of the our fixed maturities investment portfolio, based on hypothetical changes in market interest rates for the year ended December 31, 2001 and 2000:

	-150 Basis Points		-100 Basis Points		-50 Basis Points		Market Value		+50 Basis Points		+100 Basis Points		+150 Basis Points
	U.S. dollars in thousands

December 31, 2001	$	151,898	$	149,492	$	147,140	$	144,844	$	142,591	$	140,390	$	138,234
December 31, 2000	$	176,327	$	173,668	$	171,052	$	168,478	$	165,944	$	163,450	$	160,994

The changes in portfolio values shown were ascertained by calculating the market yield of each bond given its actual market price at December 31, 2001 and 2000, raising or lowering each bond’s yield by the hypothetical changes in market interest rates indicated above and, then calculating the resulting prices and the resulting aggregate market values. The modeled yield changes are assumed to occur instantaneously and equally across the yield curve. Price changes of floating rate bonds were calculated assuming coupons adjusted by the modeled amounts at their next scheduled reset date. Effects on portfolio value of prepayment related interest rate changes in the case of mortgage-backed securities are not significant. The values indicated above are estimates and are necessarily based on various assumptions that are subjective in nature. Accordingly, the actual impact of changes in market rates on our investment portfolio may be significantly greater or less than those indicated above.

Foreign Currency Risk

Our functional currency is the U.S. Dollar. However, we write reinsurance business in numerous geographic regions and currencies, giving rise to the risk that the ultimate settlement of receivables and payables on reinsurance transactions will differ from the amounts currently recorded as assets and liabilities in the financial statements. We generally do not hedge the foreign currency exposure of its subsidiaries transacting business in currencies other than their functional currency (transaction exposure). The primary functional currency exposures are European Euro, Norwegian Kroner, Australian Dollar, Hong Kong Dollar and Great Britain Pound. We believe that our foreign currency transaction exposure is immaterial to our consolidated results of operations due to the partial natural hedge produced by normal cash flow operations.

Inflation

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

The Euro

On January 1, 1999, a single currency, the “Euro,” was adopted as the national currency of the 11 participating countries in the European Monetary Union, including Germany and Ireland, two of the countries in which we operate and in which we maintain a significant presence. Our German and Irish subsidiaries now use the Euro for accounting purposes. To date, the impact of the conversion has had no material impact on our operations, accounting systems or financial reporting.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
ESG RE LIMITED
CONSOLIDATED BALANCE SHEETS

	As of December 31,
	2001			2000
	U.S. dollars in thousands except share data
	As Restated			As Restated
				Unaudited
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	38,886			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	$	454,107		$	554,794

LIABILITIES
Unpaid losses and loss expenses	$	148,905		$	179,614
Unearned premiums	100,718			148,124
Acquisition costs payable	42,843			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	359,037			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		)	(897		)
Accumulated other comprehensive income:
Foreign currency translation adjustments	(201		)	(768		)
Unrealized (losses)/gains on securities	(1,525		)	1,965
Accumulated other comprehensive income	(1,726		)	1,197
Retained deficit	(122,923		)	(107,050		)
Total shareholders’ equity	95,070			113,566
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY	$	454,107		$	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
	U.S. dollars in thousands except share and per share data
	As Restated			As Restated			As Restated
				Unaudited			Unaudited
REVENUES
Net premiums written	$	113,593		$	211,886		$	313,210
Change in unearned premiums	43,304			24,734			(64,085		)
Net premiums earned	156,897			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		)
	164,210			249,032			262,589

EXPENSES
Losses and loss expenses	107,088			187,241			199,031
Acquisition costs	46,995			78,566			66,296
Personnel costs	11,891			13,085			8,993
Professional service fees	6,899			10,268			8,166
Other expenses	8,549			20,561			8,998
	181,422			309,721			291,484

LOSS FROM CONTINUING OPERATIONS BEFORE TAXES	(17,212		)	(60,689		)	(28,895		)
Income tax benefit/(charge)	1,339			—			(815		)
LOSS FROM CONTINUING OPERATIONS	(15,873		)	(60,689		)	(29,710		)
Net loss from discontinued operations	—			(5,178		)	(12,772		)
NET LOSS	$	(15,873	)	$	(65,867	)	$	(42,482	)

PER SHARE DATA
Basic net loss per share from continuing operations	$	(1.35	)	$	(5.14	)	$	(2.24	)
Diluted net loss per share from continuing operations	$	(1.35	)	$	(5.14	)	$	(2.24	)

Basic net loss per share	$	(1.35	)	$	(5.58	)	$	(3.20	)
Diluted net loss per share	$	(1.35	)	$	(5.58	)	$	(3.20	)

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
	U.S. dollars in thousands except share data
	As Restated			As Restated		As Restated
				Unaudited		Unaudited
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

ESG RE LTD 10-K/A