- --------------------------------------------------------------------------------
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1997
Commission file number 000-23481
ESG RE LIMITED
(Exact name of Registrant as specified in its charter)
Bermuda Not Applicable
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation of organization)
16 Church Street
Hamilton HM11, Bermuda
(Address of executive offices, zip code)
(441) 295-2185
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
-------------------
Common Shares, $1.00 par value
Name of each exchange on which registered
-----------------------------------------
Nasdaq National Market
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes |x| No |_|
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. |X|
The aggregate market value of the voting stock held by non-affiliates of the
Registrant, as of March 20, 1998, was $316,396,896.70 based on the closing price
of $26.125 on that date.
The number of the Registrant's common shares (par value $1.00 per share)
outstanding as of March 20, 1998, was 13,923,799.
Documents Incorporated by Reference:
Certain portions of the Annual Report to Shareholders for 1997 (the "Annual
Report") are incorporated by reference in Parts II and IV of this Form 10-K.
Certain portions of the Definitive Proxy Statement in connection with the 1998
Annual General Meeting of Shareholders (the "Proxy Statement") which will be
filed with the Securities and Exchange Commission not later than 120 days after
the Registrant's fiscal year ended December 31, 1997, are incorporated by
reference in Part III of this Form 10-K.
<PAGE>
PART I.
Unless the context requires otherwise, references herein to the
"Company" or "ESG Re" include the Company's subsidiaries through which the
Company operates. All references to the Company prior to the closing of its
initial public offering on December 12, 1997, are to the Company's reinsurance
management business, which was conducted through its subsidiary, European
Specialty Group Holding AG ("ESG Germany") and its subsidiaries (together with
ESG Germany, "ES Management").
ITEM 1. BUSINESS
General
ESG Re Limited (the "Company" or "ESG Re") was formed on August 21,
1997, under the laws of Bermuda. The Company, through its wholly owned direct
and indirect subsidiaries, European Specialty Reinsurance (Bermuda) Limited ("ES
Bermuda"), European Specialty Reinsurance (Ireland) Limited ("ES Ireland") and
European Specialty Ruckversicherung AG ("ES Germany"), is a specialty reinsurer
providing innovative risk solutions and capacity on a global basis in the fields
of accident, health, life and special risk reinsurance to insurers and selected
reinsurers. On December 12, 1997, the Company raised gross proceeds of $257
million in a private placement and initial public offering (the "Offerings").
The net proceeds from the Offerings of the Company's common shares in December
1997 provided the capitalization for the Company to assume for its own account
risks that its wholly owned reinsurance management subsidiary, ES Management,
previously underwrote on behalf of unaffiliated reinsurance companies.
Subsequent to the Offerings, ESG Re assumed a 30% share of the pool business
which ES Management underwrote in 1997 on behalf of other reinsurance companies
(the "Pool Participants"). In addition, the Company separately negotiated
additional retrocessions with certain Pool Participants.
The Company distinguishes itself by offering "intelligent
reinsurance" products and services for particular underwriting problems
(including software developed by reinsurance and healthcare professionals to
predict the severity of medical conditions based on current diagnoses),
actuarial support, product design, and, in the field of medical expense
reinsurance, loss prevention and disease management. ESG Re believes that
"intelligent reinsurance" products combined with management's experience,
extensive relationships, market reputation, underwriting skills, and a strong
balance sheet will produce a solid book of business characterized by high
stability, above average performance, broad product and global diversity and
strong growth opportunities.
Market Growth
The Company believes that it is well positioned to benefit from
market growth developments because of its reputation as a recognized lead
underwriter, risk-oriented approach and far-ranging and well-established
relationship network. ESG Re believes that its reinsurance markets are currently
experiencing significant growth as a result of: (i) the worldwide trend of
transferring social security and national health responsibility to the private
sector, particularly in Western Europe; (ii) increasing insurance demand
accompanying economic growth in emerging markets in Eastern Europe, Asia and
Latin America; (iii) the deregulation of certain European markets as a
consequence of new trade directives from the European Union enabling the
introduction of new products; (iv) increasing individual morbidity and
decreasing mortality within large demographic segments of the population; and
(v) increased capacity requirements for the insurance of major global sports and
entertainment events.
Business Strategy
The Company's strategy places an emphasis on underwriting
profitability rather than market share. The Company intends to achieve its
growth objectives through the following strategic initiatives:
2
<PAGE>
Products and Services
Management believes that the Company is recognized by customers as a
provider of intelligent reinsurance through innovative insurance products and
services. ESG Re intends to maintain its competitive advantage by developing
reinsurance products and services that are tailored to the needs of particular
markets and working closely with primary insurers and insureds to implement loss
control techniques. The Company intends to (i) introduce and implement managed
care techniques in Germany, Spain, Italy and other European markets where these
techniques have been underutilized; (ii) create private medical care and
insurance products for emerging markets within Eastern Europe, Latin America and
Asia; (iii) expand occupational injury and health reinsurance programs in
Scandinavia; and (iv) continue to structure innovative special risk reinsurance
programs for major sporting events and performances such as World Cup Soccer,
and European Soccer Championships. Consistent with its practice and experience,
ESG Re offers reinsurance of health risks in conjunction with loss-reducing
products and services. The Company expects that its ceding clients will assist
with the use and implementation of such products and services because of their
favorable impact on claims expenses.
In support of its loss prevention programs, the Company intends to
assume responsibility for claims assistance services that were previously
provided by third parties. Assistance services include such functions as 24-hour
emergency evacuation and repatriation, medical treatment referrals and
supporting clinical services. In addition, the Company uses the European
Specialty Insurance Management Services software system developed by the Company
to assist ceding companies with portfolio and claims handling.
New Businesses and Markets
The Company entered the North American market in September 1997.
Ms. Renate M. Nellich, Chief Executive Officer of European Specialty (North
America) Limited ("ES North America"), has considerable experience in the North
American health business and is pursuing opportunities in this market. In
addition, access to specialized U.S. claims service providers and the
consummation of strategic alliances will enable the Company to import managed
care techniques that have proven successful in the United States to Europe and
other areas where they are currently underutilized by health care providers.
Standing as a Specialist Lead Reinsurer
The Company believes that its reputation as a specialist lead
reinsurer and its substantial capitalization will qualify it to be included on
the security lists of major reinsurance brokers and ceding clients and, as a
result, will be presented with lead and participation risk opportunities not
previously available to the Company in its previous function as a reinsurance
management company. Management expects that ES Management's profitable
underwriting history on behalf of unaffiliated reinsurance companies will give
ESG Re opportunities to participate in additional reciprocal reinsurance
programs with its current reinsurance partners as well as with new reinsurers in
strategic alliances. The Company generally showed operating losses in its
previous function as an underwriting management company as a result of the
expense of initial system development and, in 1996 and 1997, due to charges
relating to the Company's reorganization to become a reinsurer. The Company
believes that its losses as a reinsurance management company are not indicative
of its future performance as a reinsurer and will not adversely affect the
Company's ability to attract ceding clients.
Focus on High Growth Markets
ESG Re focuses its health insurance underwriting activities on
markets with high growth potential in developing areas such as Latin America,
Commonwealth of Independent States ("CIS"), Eastern Europe and Asia. The Company
also targets selected developed markets for the introduction of innovative
products. In Germany, for example, the public health sector is undergoing rapid
changes, attributable in part to health reform legislation recently enacted by
the German parliament. ESG Re believes these changes will lead to greater demand
for health reinsurance.
3
<PAGE>
Lines of Business
The Company's major lines of business include medical expense,
personal accident and disability, credit/life and special risk reinsurance. ESG
Re's gross premiums written for its own account in 1997 totaled $26.1 million.
The breakdown of gross premiums written for the year ended December 31, 1997 by
major lines of business was as follows:
1997 Gross
Premiums
Written
Medical Expense ................................. 38%
Personal Accident and Disability ................ 36
Credit/Life ..................................... 24
Special Risk .................................... 2
---
100%
===
Medical Expense
Medical expense reinsurance consists primarily of medical expense
reimbursement plans, short-term travel, defined illnesses and dread diseases, as
well as medical expense add-on coverages, top-up benefits and carve-out
programs. To properly evaluate these reinsurance risks, ESG Re relies on its
detailed knowledge of the underlying insurance product and active risk
management, instead of relying solely on past performance or general market
pricing. ESG Re usually underwrites risk only concurrently with the
implementation of the Company's loss control measures and underwriting support
systems. ESG Re focuses on underwriting high net worth individuals, frequent
travelers and expatriates, with less emphasis on underwriting volume group
business. The Company generally does not underwrite business where the insured
has no deductible or co-payment without being able to influence its loss ratios
(by applying cost containment measures whenever prudent). To this end, the
Company generally seeks to have insurers include deductibles and coinsurance
requirements in the primary insurance contracts. In developing countries, ESG Re
encourages ceding clients to develop adequate retention levels.
ESG Re requires its ceding clients 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 minimizing claims patterns.
The Company implements managed care concepts in Europe and emerging insurance
markets through intelligent reinsurance (i.e., the combination of capacity,
system and data management support and the application of preventative loss
control). The Company believes insurance companies in these markets are
receptive to managed care since they often have less experience with
contemporary cost-containment measures.
As part of the intelligent reinsurance concept, ESG Re has developed
a complete software package, which includes medical tarification, policy
issuance, portfolio management and claims handling. An advanced clinically
driven loss prevention and early warning software program called EcuQuest is
integrated into the Company's system. EcuQuest, for which ESG Re acquired the
license rights outside North America, was developed by a subsidiary of Swiss Re
Life & Health/The Mercantile & General Life Reinsurance Company Limited and
enables the Company to equip ceding clients with clinically driven data
management for the early identification of potential shock losses or disease
developments.
ESG Re believes that medical expense reinsurance is one of the
strongest growing classes in the insurance industry. The restructuring of social
security systems throughout numerous countries generates the need for private
insurance and, consequently, generates reinsurance demand. New markets have
emerged particularly in Eastern Europe, due to changes in laws that have
transferred insurance responsibility from government funds to private
institutions, such as trade unions.
In the area of health reinsurance, ESG Re has focused its
underwriting activities on both highly developed
4
<PAGE>
markets, like Germany, and less developed markets with high growth potential,
like Latin America, the CIS, Eastern Europe and Asia. In Bulgaria, ES Management
and Bulstrad, the leading Bulgarian insurer, created the first national health
care policy which is modeled on international private healthcare standards.
Personal Accident and Disability
Personal accident reinsurance covers death and dismemberment,
disability, loss of license and special coverages for credit card issuing
corporations relating to injuries to card holders. The reinsurance of
nontraditional risks, such as tailor-made coverage for occupational injuries,
also comprises an important part of ESG Re's personal accident reinsurance
business. The Company favors the "local approach" to personal accident
reinsurance (i.e., it acquires direct knowledge of the underlying business by
establishing personal relationships and transacting business directly with the
ceding clients or local brokers in the country of origin). ESG Re is reluctant
to solicit business through nonlocal brokers or to conduct business in areas in
which it does not have detailed knowledge of local culture, insureds' behavior,
market conditions and other risk elements, since such knowledge allows the
Company to assess and price risk appropriately.
Credit/Life
ESG Re provides reinsurance for credit/life, accident, disability
and unemployment insurance. In this market, the Company seeks to avoid single
premium coverage where it cannot vary terms annually. ES Management has
considerable experience underwriting credit/life reinsurance in the American,
French and Scandinavian markets. The Company will seek to enter the German and
selected European markets for credit/life reinsurance, applying the same
underwriting practice it has employed in its existing markets (with the
necessary adaptations for local markets). The Company has recently begun
underwriting activities in the area of traditional life reinsurance, initially
limited to the Eastern European and CIS markets. Because the Company does not
intend to compete with established insurers and reinsurers in long-term life
insurance or investment-related life products, it seeks to offer these products
in less established markets.
Special Risk
Special risk reinsurance includes insurance with unique risk
character, such as sports disabilities, sports and entertainment contingency,
non-appearance, cancellation and abandonment. For example, for the 1998 World
Cup Soccer Tournament, ES Management through its affiliate SportSecure GmbH
controlled the largest contingency insurance risk ever arranged in the global
market. ES Management has also covered the 1994 World Soccer Tournament, the
European Soccer Championships, the World Athletic Championship, the ATP finals,
the European Athletic Association Cups and numerous performances by
internationally renowned artists such as Ziegfried & Roy and the Holiday on Ice
events.
Underwriting
Consistent with ES Management's past practices, the Company employs
a disciplined, analytical and forward-looking approach to underwriting in order
to maximize underwriting profitability. The Company intends to construct a
portfolio of reinsurance contracts in the personal and special risk markets that
maximizes shareholders' return on equity, subject to prudent risk constraints.
ESG Re's continued success rests squarely on its ability to generate
consistent underwriting profits. Underwriting profits, not cash flow
underwriting or investment speculation, are the cornerstone of the Company's
profit strategy.
Management believes that its strategy of "intelligent reinsurance"
provides the appropriate tools for achieving the Company's mission. This has
been demonstrated to date by the Company's underwriting performance, with an
average pro forma combined loss and acquisition expense ratio of 91% over the
last four years. ESG Re's products and services also serve to enhance the
persistency of the portfolio, which in turn supports long-term profitability.
Persistency, as measured by renewal premium compared to the prior twelve months,
has been excellent, with an average of 86% for the last three renewal seasons.
With an emphasis on underwriting profitability, the Company has canceled
contracts with ceding companies when underwriting profits were not in line with
expectations.
5
<PAGE>
Underwriting new and renewal business is conducted on a risk-by-risk
basis, with consideration given to the general direction of rates, policy terms,
loss histories and future exposures, ESG Re's acceptance limits and general book
of business. As part of its underwriting process, the Company focuses on the
reputation of the proposed cedent, the likelihood of establishing a long-term
relationship with the cedent, the geographic area in which the cedent conducts
business and the cedent's market share. The Company reviews historical loss data
in order to compare the cedent's historical loss experience to industry
averages, as well as the perceived financial strength of the cedent. Over time,
the Company has developed its own underwriting manuals that serve as a detailed
guideline.
The Company protects its portfolio by effecting non-proportional
reinsurance coverage in various layers to protect against large individual
losses, serial losses and risk of known and unknown concentration. In addition,
the Company will continue to effect proportional coverage on underwritten risks
that might have fluctuating results.
The Company, together with co-reinsurers, provides initially the
following gross capacities:
Medical Expense $5 million life time benefit per
person
Personal Accident and Disability $5 million any one person and $30
million in accumulated losses from
any one known event
Credit/Life $1 million any one person
Special Risk $10 million any one event or series
of events
Initially, the Company does not intend to expose itself to risk for
any individual in excess of $500,000 for personal accident, special risk,
medical, life and credit/life reinsurance, $1 million for any one known
accumulation and $2,500,000 for contingency for major events, prior to
additional co-reinsurance.
Claims
Normally, a reinsurer is not actively involved in claims handling.
It is the task of the ceding client to adjust the original losses and settle
claims made by its direct insureds. To the extent possible, the Company's
approach differs from other reinsurers in that it actively seeks to reduce risks
in most of its medical expense reinsurance lines while its reinsurance policies
are in effect.
The Company's claims handling activities, particularly for
complicated cases, have proven to be successful in significantly reducing loss
ratios of ceding clients' portfolios in comparison to their loss ratios before
ESG Re's involvement. Involvement in claims handling also will allow the Company
to be constantly aware of claims development in the health care field and to
establish reserves more accurately at an early point in time. The Company,
therefore, believes that its exposure to incurred but not reported ("IBNR")
losses after it begins reinsuring for its own account should be less than that
of its competitors. These claims support techniques have also proven to be an
important tool in the acquisition of new business.
Depending on the experience and the retention of the ceding client
and the extent of non-proportional reinsurance made available through the
Company, it will require either claims control or claims cooperation clauses in
the reinsurance treaties it negotiates. Claims control clauses allow the
reinsurer to determine the extent to which a claim will be paid, whereas claims
cooperation clauses require the agreement of the insurer and reinsurer to
jointly determine the extent to which a claim will be paid. These clauses
improve the claims performance of a ceding client which might not always be
sufficiently experienced in dealing with complex issues.
The Company performs regular audits at its ceding clients where
deemed necessary. Such audits may include underwriting claims, financial, and
systems audits. Qualitatively, such audits do not serve solely to test
compliance, but to discover weaknesses in the reporting and reserving system of
a ceding client and thereby help the ceding client to arrive
6
<PAGE>
at a realistic and timely methodology to evaluate risk exposure. The Company has
begun to conduct a portion of the audits electronically by directly linking
EcuQuest technology into the Company's operations and expects to offer this
service to a majority of its customers in 1998.
Operations
The Company has structured its operations according to business
lines. Underwriters are responsible for underwriting the business according to
internal guidelines and procedural and underwriting manuals, as well as for
supervising claims and handling claims subsequent to entering into the
contracts. All business is continuously monitored. The Company's recently
introduced management and underwriting information system, Open Co, provides a
current database for individual and general risk assessment.
The Company has entered into agreements with various companies for
the provision of office space, certain administrative services, and accounting
and regulatory reporting support in Ireland and Bermuda.
Reserves
The Company expects that, due to the short-tail nature of personal
and special risk reinsurance claims, most claims under its treaties will
generally become known and ascertainable within approximately 12 to 24 months
from the date the insurance policy is written. However, a portion of the
Company's business, written and classified as typical "London market business,"
is generally longer-tail in nature. The majority of the Company's reinsurance
contracts permit annual adjustment of terms.
In its previous function as a reinsurance management company, the
Company had not been required to establish reserves for losses and loss expenses
to date, although it recommended appropriate levels for such reserves for its
reinsurance customers. The reserve for losses and loss expenses established by
the Company include reserves for unpaid reported losses and loss expenses and
for IBNR losses. Such reserves are estimated by management based upon reports
received from ceding clients, supplemented by the Company's estimates of
reserves for which ceding client reports have not been received and its
historical experience. To the extent that the Company's own historical
experience is not sufficient for estimating reserves, such estimates may be
actuarially determined based upon industry experience and management's judgment.
The estimates will be continually reviewed and reflected in current operations
as adjustments to reserves become necessary.
Loss reserves represent estimates of what an insurer or reinsurer
ultimately expects to pay on claims at a given time, based on facts and
circumstances then known, and it is possible that the ultimate liability may
exceed or be less than such estimates. The estimates are not precise in that,
among other things, they are based on predictions of future developments and
estimates of future trends in claim severity and other variable factors such as
inflation. During the loss settlement period, it often becomes necessary to
refine and adjust the estimates of liability on a claim either upward or
downward. Even after such adjustments, ultimate liability may exceed or be less
than the revised estimates. The estimation of reserves by new reinsurers, such
as the Company, may be inherently less reliable than the reserve estimations of
a reinsurer with a stable volume of business and an established loss history.
Investments
As of December 31, 1997, the Company's cash and invested assets
totaled $237.0 million. The Company has developed specific investment guidelines
for the management of its investment portfolio. Although these guidelines stress
diversification of risk, preservation of capital and market liquidity,
investments are subject to market risks and fluctuations, as well as to risks
inherent in particular securities. The Company's primary investment objective
for the portfolio is to preserve the capital assets of the Company while
achieving a total return commensurate with market conditions.
The Company has entered into an Investment Advisory Agreement with
Head Asset Management L.L.C. to supervise and direct the investment of the
Company's asset portfolio in accordance with, and subject to, the investment
7
<PAGE>
objectives and guidelines established by the Company. Pursuant to the terms of
the Investment Advisory Agreement, the Company will pay a fee, payable quarterly
in arrears, equal to 0.25% per annum of the first $200 million of assets under
its management declining to 0.15% per annum of the assets under its management,
in excess of $200 million. The Investment Advisory Agreement may be terminated
upon 90 days written notice by the Investment Advisor or by the Company on five
days notice or upon shorter notice upon mutual written agreement by the parties.
See "Certain Relationships and Related Transactions." The performance of, and
the fees paid to, the Investment Advisor will be reviewed periodically by the
Board of Directors.
Maturity and Duration of Portfolio
The maximum effective maturity for any single security in the
Company's 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 Company invests only in securities rated A or better. The
minimum average credit quality of the Company's investment portfolio is AA.
Equity Securities and Real Estate
The Company does not currently intend to invest any of its portfolio
in equity securities, although it may do so in the future in order to support
its core business with strategic investments. The Company does not intend to
invest in real estate other than for its own use.
Diversification and Liquidity
No more than 3% of the Company's 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.
Foreign Currency Exposures
The Company's investment portfolio is invested predominantly in
fixed income securities denominated in U.S. dollars and German Marks. The
Company's primary risk exposures and premiums receivable are denominated
predominantly in U.S. and Canadian dollars and European currencies. The Company
intends to hold investments in the currencies in which it will collect premiums,
pay claims and hold reserves thus creating a natural foreign exchange hedge so
that resulting foreign exchange rate gains and losses can be reduced to the
extent assets equal liabilities.
Competition
The reinsurance industry is highly competitive. The Company competes
with other reinsurers, some of which have substantially greater financial,
marketing, and management resources than the Company. It may also compete with
new market entrants in the future. Management believes that virtually all major
reinsurers write personal accident business, mainly through their property and
casualty departments. A smaller number engage also in the fields of health,
credit/life and special risks. On an international basis, excluding carriers
which are predominantly focused on the United States, few reinsurers are
considered lead reinsurers in the segments in which ESG Re is active. In other
markets, however, certain traditional or domestic reinsurers hold a dominant
position, creating highly competitive market conditions.
Most reinsurers provide capacities for the various classes of
personal reinsurance through discrete units or profit centers. ESG Re believes
that it will benefit from being a flexible, innovative specialty reinsurer with
its focus on
8
<PAGE>
personal and special risk reinsurance (allowing specialized risk solutions from
one source).
Employees
As of December 31, 1997, the Company had 39 employees. None of these
employees is represented by a labor union. The Company expects to add additional
underwriting, marketing and administrative staff consistent with the
implementation of the Company's business plan. The Company believes that its
employee relations are generally good.
Regulation
Bermuda
The Companies Act 1981 (as amended) and Related Regulations. The
Companies Act regulates the business of both the Company and ES Bermuda.
The Insurance Act 1978 (as amended) and Related Regulations. The
Insurance Act 1978 of Bermuda (as amended) and related regulations from time to
time in force (the "Act"), which regulates the business of ES Bermuda, provides
that no person shall carry on an insurance business in or from within Bermuda
unless registered as an insurer under the Act by the Minister of Finance. The
Minister of Finance, in deciding whether to grant registration, has broad
discretion to act as he thinks fit in the public interest. The Minister of
Finance is required by the 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 Minister of Finance may impose conditions relating to the
writing of certain types of insurance.
An Insurance Advisory Committee and sub-committees thereof appointed
by the Minister of Finance advises him on matters connected with the discharge
of his functions and supervise and review the law and practice of insurance in
Bermuda, including reviews of accounting and administrative procedures.
The Act imposes on Bermuda insurance companies solvency and
liquidity standards and auditing and reporting requirements and grants to the
Minister of Finance 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. An insurer's registration
may be canceled by the Minister of Finance on certain grounds specified in the
Act, including failure of the insurer to comply with its obligations under the
Act or if, in the opinion of the Minister of Finance, after consultation with
the Insurance Advisory Committee, 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, which
are required to be filed annually with the Registrar of Companies (the
"Registrar"), who is the chief administrative officer under the Act. The auditor
must be approved by the Minister of Finance 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 Act prescribes rules for the preparation and
substance of such statutory financial statements (which 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 financial
statements may be prepared in accordance with U.S. GAAP. Copies of the Company's
and ES 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.
9
<PAGE>
Minimum Capital and Surplus. Under the Act, ES Bermuda has been
designated as a Class 3 composite insurer. The Act requires $1.25 million
minimum capital and surplus for Class 3 composite insurers (i.e. insurers which
write both general business and long-term business) with a minimum paid up share
capital of $370,000.
Minimum Solvency Margin. The Act provides that the statutory assets
of a Class 3 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 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 loss and loss expense reserves, whichever is greater. The minimum solvency
margin for writers of long-term business is $250,000.
Minimum Liquidity Ratio. The Act provides a minimum liquidity ratio
for insurers which write general business. An insurer engaged in general
businesses 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 certain categories of assets which, unless specifically permitted by
the Minister of Finance, 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
certain letters of credit and guarantees.
Statutory Financial Return. A Class 3 insurer is required to file
with the Registrar 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
Statutory Financial Return includes, among other matters, a report of the
approved independent auditor on the Statutory financial statements of the
insurer, a schedule of ceded reinsurers, an annual actuarial opinion or loss
reserves prepared by the approved loss specialist and a declaration of the
statutory ratios and a solvency certificate.
Supervision, Investigation and Intervention. The Minister of Finance
may appoint an inspector with extensive powers to investigate the affairs of an
insurer if the Minister of Finance 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 him, the Minister of Finance may direct an insurer to produce documents or
information relating to matters connected with the insurer's business.
If it appears to the Minister of Finance that there is a risk of the
insurer becoming insolvent, the Minister of Finance 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 certain
investments; to realize certain 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
business of the Company and to report to the Minister of Finance and the
Registrar of Companies in respect of certain events. Unless the approval of the
Minister of Finance has been obtained, an insurer may not terminate the
appointment of its principal representative, and the principal representative
may not cease to act as such, unless 30 days notice in writing to the Minister
of Finance is given of the intention to do so. It is the duty of the principal
representative, 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 Minister of Finance setting out all the
particulars of the case that are available to him. Examples of such an "event"
include failure by the reinsurer to comply substantially with a condition
imposed upon the reinsurer by the Minister of Finance relating to a solvency
margin or a liquidity or other ratio.
Dividends. The Bermuda Companies Act 1981 would allow dividend
payments when there are reasonable grounds for believing that (i) ESG Re will be
able to pay its debts as they fall due after payment of a
10
<PAGE>
dividend and (ii) ESG Re's assets will exceed the aggregate value of its
liabilities and its issued share capital and premium accounts. The Bermuda
Insurance Act 1978 requires ES Bermuda to maintain a minimum solvency margin and
a minimum liquidity ratio.
Reduction of Statutory Capital. Approval is needed from the Minister
of Finance 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.
Germany
The German regulatory framework for the insurance industry is
provided by the Insurance Supervisory Law (Versicherungsaufsichtsgesetz, or
"VAG"). The supervision of all insurance companies domiciled in Germany is the
responsibility of the BAV, which is an agency of the Ministry of Finance.
Other than the area of primary insurance, reinsurance has been
largely liberalized. Consequently, except as set forth under "European Union"
below, there are no detailed regulations for reinsurers under the law of the
European Union or Germany.
A professional reinsurance company requires no license from the BAV.
Only a summary filing is required, 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 such filings, and also to include the qualifications of the
members of the executive and supervisory boards. The submission of a business
plan is not necessary.
Insurance and reinsurance companies are under the direct supervision
of the BAV. For reinsurers, however, the level of supervision is substantially
relaxed, and pertains primarily to the financial supervision of reinsurers,
requiring only submission of financial statements. Except as set forth above,
the provisions of the VAG and the Capitalization Law (Kapitalausstattungs VO) do
not apply to reinsurers. Reinsurance mutuals (Ruckversicherungsverein VVaG) are
subject to solvency controls. Reinsurance companies, such as ES Germany, are not
subject to capitalization requirements, but the BAV prefers that reinsurance
companies have the same level of capitalization as primary insurers
(approximately 16-18% of net premiums).
Sections 55-59 VAG, pertaining to accounting and auditing of
insurance companies, are also applicable to reinsurance companies.
Ireland
Irish law directly regulates only one of the Company's subsidiaries,
ES Ireland.
Regulation. Direct insurance business in Ireland is regulated by an
extensive list of acts and regulations from the Assurance Companies Act 1909 to
the Insurance Act 1989 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 (the "Minister") before commencing
business.
Specialist reinsurers incorporated in Ireland, such as ES Ireland,
are not subject to authorization by the Irish Government and are only required
to notify the Minister that they carry on the business of Reinsurance pursuant
to Section 22 of the Insurance Act 1989.
Auditor's Report and Duties. The Companies Act 1963 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.
11
<PAGE>
European Union
The European Communities (Insurance Undertakings: Accounts)
Regulations 1996 (the "1996 Regulations") apply both to direct insurance
companies and reinsurance companies (but not reinsurance management companies,
such as the Company in its previous function), and provide that reinsurers must
calculate their reserves and value the assets representing them on the same
basis as direct insurance underwriters. Technical reserves consist of the
aggregate provisions for outstanding claims (including those incurred but not
yet reported at the end of the Company's financial year). The 1996 Regulations
set out the detailed requirements for the preparation of the accounts of
insurance and reinsurance underwriters. The 1996 Regulations also require
insurance and reinsurance underwriters to demonstrate that they possess
sufficient free assets to cover a safety margin, that is financial resources
exceeding those necessary to cover the technical reserves.
United States and Other
The Company is not admitted to do business in any jurisdiction
except Bermuda, Ireland and Germany. 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, such as the Company, which are not
admitted to do business within such jurisdictions. With some exceptions, such
sale of insurance within a jurisdiction where the insurer is not admitted to do
business is prohibited. The Company does not intend to maintain an office or to
solicit, advertise, settle claims or conduct other insurance activities in any
jurisdiction where the conduct of such activities would require that the Company
be so admitted and the Company is not so admitted.
ITEM 2. PROPERTIES
ESG leases office space in Bermuda, Dublin, Hamburg, Toronto and
London. The Company does not own any real property. The Company believes its
space is adequate to meet its current and expected needs.
ITEM 3. LEGAL PROCEEDINGS
There are no lawsuits pending, or to the knowledge of the Company
threatened, to which the Company or any of its subsidiaries is a party or of
which any of their properties is subject other than routine litigation
incidental to the business.
PART II.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Prior to the initial public offering, the Company's shareholders
took action at two General Meetings of Shareholders and twice by written
resolution. The first Annual General Meeting of Shareholders of the Company was
held on August 21, 1997. The shareholders approved the bye-laws of the Company,
and John C Head III and Wolfgang M. Wand were elected to fill two directorships.
The shareholders appointed Deloitte & Touche, Bermuda, to serve as the Company's
auditors until the close of the next Annual General Meeting of Shareholders of
the Company.
A special meeting of the shareholders of the Company was held on
September 20, 1997. The shareholders resolved that the Company's authorized
share capital be increased to $250,000,000 consisting of: 100,000,000 Common
Shares, par value $1.00 per share; 100,000,000 Class B Common Shares, par value
$1.00 per share; and 50,000,000 Preference Shares, par value $1.00 per share.
On December 2, 1997, the shareholders acted by unanimous written
resolution to set the size of the Board of Directors between 5 and 15, as the
Board of Directors may from time to time determine. The shareholders elected, in
the classes set forth below, the following directors:
12
<PAGE>
Class 1 John C Head III, Wolfgang M. Wand
Class 2 Gerhard Jurk*, William J. Poutsiaka
Class 3 Edward A. Tilly, David L. Newkirk
* Mr. Jurk has since resigned his directorship.
On December 3, 1997, the shareholders took action by unanimous
written resolution. The shareholders resolved to purchase and cancel for nil
consideration the 12,000 common shares of the Company that were outstanding on
December 3, 1997. The shareholders adopted new bye-laws, providing for a
staggered Board of Directors divided into three classes and authorizing the
Board of Directors to fill any remaining vacancies on the Board. The
shareholders approved the Company's 1997 Stock Option Plan and the Company's
Non-Management Directors' Compensation and Option Plan.
ITEM 5. MARKET FOR COMPANY'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Sales of Unregistered Securities
The Company was incorporated in August 1997 under the laws of
Bermuda. On August 21, 1997, the Company issued 6,000 of its common shares to
ESG Partners (Bermuda) L.P. (then known as Head Insurance Investors IX (Bermuda)
L.P.), and 3,000 each to Gerhard Jurk and Wolfgang M. Wand. The General Partner
of ESG Partners (Bermuda) L.P. is an affiliate of Head & Company L.L.C. ("Head
Company"). Such securities were sold in a private placement outside the United
States and therefore are exempt from registration under the Securities Act
pursuant to Section 4(2) thereof. These securities were retired prior to
Formation.
On December 2, 1997, the Company issued 900,000 common shares in
exchange for all of the outstanding capital stock of European Specialty Group
(United Kingdom) Limited ("ESG UK"). Such securities were sold in a private
placement outside the United States and therefore are exempt from registration
under the Securities Act pursuant to Regulation S under the Securities Act. The
Company issued 900,000 Common Shares in exchange for all of the outstanding
capital stock of ESG UK. At the time of this exchange, European Specialty Group
Holding AG was a wholly owned subsidiary of ESG UK.
On December 3, 1997, certain affiliates of Head & Company L.L.C.
(the "Head Group") and certain other investors severally purchased for
investment directly from the Company (i) an aggregate of 2,673,799 Common
Shares, (ii) Class A Warrants to purchase up to 1,247,284 Common Shares, and
(iii) in the case of the Head Group, Class B Warrants to purchase up to
1,247,284 Common Shares (if certain performance criteria were satisfied), at an
aggregate price equal to 2,673,799 multiplied by the initial public offering
price per Common Share less the underwriting discounts and commissions.
Use of Proceeds
In December 1997 the Company was capitalized with gross proceeds of
$257 million from the Offerings. The proceeds were used to capitalize ES
Bermuda, ES Ireland and ES Germany with $55 million, $50 million, and $12
million, respectively. The Company also incurred expenses of the Offerings of
approximately $25 million and repaid its outstanding debt, principally loans
from shareholders and bank demand borrowings, of $3.5 million. The remainder of
the proceeds not allocated to the operating reinsurance subsidiaries is being
held until such time as the implementation of the Company's strategic plan
requires those funds.
Market Information
Since December 12, 1997, the common stock of the Company has been
traded on NASDAQ under the symbol ESREF. The high and low market prices of the
Company's common stock since December 12, 1997 were as follows:
13
<PAGE>
High Low
------ -----
From December 12 to December 31, 1997: $23.88 $21.50
Number of Record Holders of Common Stock
The number of record holders of the common stock of the Company as
of March 20, 1998 was 32.
Dividend History and Restrictions
On March 9, 1998, the Board of Directors declared a cash dividend of
$0.075 per share payable April 3, 1998 to Common shareholders of record on March
28, 1998. Restrictions on the payment of dividends is described in Item 1,
"Regulation."
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
Selected Consolidated Financial Data of the Company is contained in
the Annual Report and is incorporated herein by reference in response to this
item. Reference is made to Item 14(a) of this Form 10-K.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
"Management's Discussion and Analysis of Financial Condition and
Results of Operations" is contained in the Annual Report and is incorporated
herein by reference in response to this item. Reference is made to Item 14(a) of
this Form 10-K.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Company's consolidated financial statements are contained in the
Annual Report and are incorporated herein by reference in response to this item.
Reference is made to Item 14(a) of this Form 10-K for the Financial Statement
Schedules.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY
Executive Officers
The table below sets forth the names, ages and titles of the persons
who are executive officers of the Company and/or its principal operating
subsidiaries.
14
<PAGE>
Name Age Position
Wolfgang M. Wand................... 45 Managing Director and Chief
Executive Officer
Steven H. Debrovner................ 60 Chief Operating Officer
Gerhard Jurk....................... 49 Chief Financial Officer
Renate M. Nellich.................. 59 Chief Executive Officer of ES
North America
Anthony Parfitt.................... 31 Audit and Compliance Officer
Wolfgang M. Wand has been active in the insurance business for over
20 years, 17 of which were in the international insurance market. In 1983, Mr.
Wand founded a specialized health care insurance group in which Winterthur
Insurance Group acquired a majority interest in 1989 and a 100% interest in
1993. Later in 1993, Mr. Wand co-founded ESG Germany, through which the Company
operated its insurance businesses prior to the Offerings. Mr. Wand serves as a
member of the German delegation of the International Chamber of Commerce and is
a representative on the Chamber's Committee for insurance affairs in Eastern
Europe. Following the reunification of Germany, Mr. Wand served on behalf of the
German government's privatization agency, the Treuhandanstalt, in connection
with the privatization and restructuring of the East German economy, as Chairman
of the Board of Directors for certain segments of the German shoe manufacturing
industry from 1991 to 1992. Mr. Wand also acts as designated legal
representative of Les Mutuelles du Mans in Germany. Mr. Wand completed a degree
in economics in 1974 and studied at Cologne and Wuppertal Universities.
Steven H. Debrovner co-founded ESG Germany with Mr. Wand in 1993.
From 1987 to 1992, Mr. Debrovner served as the head of marketing for all
non-life business at CIGNA Worldwide headquarters in Philadelphia. In 1974, he
created the European accident and health activities for AFIA and, subsequently,
CIGNA. Mr. Debrovner received a bachelor's degree in history from Duke
University in 1959. Mr. Debrovner has more than 30 years of insurance
underwriting experience, having started with American International Group, Inc.
in 1967. He has also been both a student and lecturer in Harvard's Graduate
International Marketing Program.
Gerhard Jurk has been Chief Financial Officer of ES Management since
1996. From 1992 to 1996, Mr. Jurk was Chief Internal Auditor of the
Transatlantic Insurance Group. In this function, he was a member of the audit
team of Winterthur Insurance Group. Between 1993 and 1996, Mr. Jurk acted as
Chief Executive Officer for a Winterthur Group underwriting subsidiary. Prior to
that, from 1984 to 1992, Mr. Jurk was the Chief Officer of the Financial and
Investment Department of the Transatlantic Insurance Group, then a subsidiary of
ITT Corporation and subsequently a subsidiary of Winterthur Insurance Group. Mr.
Jurk has worked in the insurance industry for more than 25 years and is an
accountant certified by the German government.
Renate M. Nellich has been Chief Executive Officer of ES North
America since September 1997. Prior to that, Ms. Nellich was Chief Operating
Officer of Swiss Re Life and Health/Mercantile and General Life Reinsurance
Company Limited responsible for the Group Reinsurance Operation of the Americas
from 1985 to 1997. Between 1975 and 1985, Ms. Nellich served in various
capacities in the Mercantile and General's North American Group Division. Ms.
Nellich is a Director of Avandel Healthcare, Inc. Ms. Nellich has more than 25
years of experience in the North American life and health insurance industry.
Anthony Parfitt has been Assistant Managing Director of ESG Germany
since 1995 and was the
15
<PAGE>
technical account manager in 1994. From 1991 to 1994 Mr. Parfitt was the head of
the International Risk Placement Department of the predecessor of ESG Germany.
The information with respect to directors of the Company is
contained under the captions "Election of Directors" in the Proxy Statement and
is incorporated herein by reference in response to this item.
ITEM 11. EXECUTIVE COMPENSATION
The Information with respect to executive compensation is contained
under the caption "Executive Compensation" in the Proxy Statement and is
incorporated herein by reference in response to this item.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information with respect to security ownership of certain
beneficial owners and management is contained under the caption "Information
Regarding the Security Ownership of Certain Beneficial Owners, Management and
Directors" in the Proxy Statement and is incorporated herein by reference in
response to this item.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information with respect to certain relationships and related
transactions is contained under the caption "Certain Relationships and Related
Transactions" in the Proxy Statement and is incorporated herein by reference in
response to this item.
PART IV.
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS SCHEDULES AND REPORTS ON FORM 8-K
(a) 1. FINANCIAL STATEMENTS:
The Company has incorporated by reference from the 1997 Annual
Report to Shareholders the following consolidated financial statements of the
Company:
1997 Annual Report
to Shareholders
(Page)
------------------
Independent Auditors' Report 53
Consolidated Balance Sheets as of December 31, 28
1997 and 1996
Consolidated Statements of Operations for the years 29
ended December 31, 1997, 1996 and 1995
Consolidated Statements of Changes in 30
Shareholders' Equity for the years ended December
31, 1997, 1996 and 1995
Consolidated Statements of Cash Flows for the years 31
ended December 31, 1997, 1996 and 1995
16
<PAGE>
Consolidated Statements of Comprehensive Income 32
for the years ended December 31, 1997, 1996 and
1995
Notes to the Consolidated Financial Statements for
the years ended December 31, 1997, 1996 and 1995 33
In addition, "Management's Discussion and Analysis of Financial Condition
and Results of Operations" begins on page 21 of the 1997 Annual Report to
Shareholders.
2. FINANCIAL STATEMENT SCHEDULES:
The following Financial Statement Schedules are filed as part
of this Report.
Schedule I - Summary Of Investments Other Than Investments In Related Parties
(Dollars in thousands)
<TABLE>
<CAPTION>
Amount
Amortized Shown in
Type of investment Cost Fair Value Balance Sheet
- -------------------------------------------------------------------------------------
<S> <C> <C> <C>
Fixed maturities - available for sale
Bonds:
U.S. Government and government agencies $218,694 $218,867 $218,867
-----------------------------------
Total fixed maturities - available for sale 218,694 218,867 218,867
Short-term investments 11,913 11,913 11,913
Cash and cash equivalents 6,196 6,196 6,196
-----------------------------------
Total investments and cash $236,803 $236,976 $236,976
===================================
</TABLE>
Schedule III - Supplementary Insurance Information
(Dollars in thousands)
<TABLE>
<CAPTION>
Unpaid Paid Amortization
Deferred Losses and Net Net Losses of Deferred Other Net
Acquisition Loss Unearned Premiums Investment and Loss Acquisition Operating Premiums
Segment Costs Expenses Premiums Earned Income Expenses Costs Expenses Written
- ----------------- ---------- ---------- ---------- ---------- ----------- --------- ------------ --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
December 31, 1997
Bermuda $4,147 $7,846 $12,168 $13,411 $598 $ -- $4,693 $11,362 $25,392
----------------------------------------------------------------------------------------------------------
$4,147 $7,846 $12,168 $13,411 $598 $ -- $4,693 $11,362 $25,392
==========================================================================================================
</TABLE>
Schedule IV - Reinsurance
(Dollars in thousands)
Percentage of
Direct Ceded to Assumed Amount
Gross Other from Other Net Assumed to Net
Amount Companies Companies Amount Amount
--------------------------------------------------------
December 31, 1997
Total premiums earned $ -- $451 $13,862 $13,411 103%
========================================================
17
<PAGE>
The report of the Company's independent auditors with respect to the
above-listed Financial Statement Schedules is set forth in Exhibit 24.1(a) of
this report.
All other schedules are omitted because they are either inapplicable
for the required information or are presented in the Consolidated Financial
Statements of the Company or the Notes thereto, which are incorporated by
reference in this Annual Report on Form 10-K.
3. EXHIBITS:
2.1* Share Exchange Agreement between ESG Re Limited and
European Specialty Group (United Kingdom) Limited, dated as
of November 13, 1997.
2.2* Share Exchange Agreement between the shareholders of
European Specialty Group Holding AG and European Specialty
Group (United Kingdom) Limited, dated as of November 13,
1997.
3.1* Memorandum of Association
3.2* Bye-Laws
4.1* Specimen Common Share certificate
4.2* Form of Class A Warrant
4.3* Form of Class B Warrant
10.1* Form of Subscription Agreement, between ESG Re Limited and
certain Direct Purchasers, dated as of September 30, 1997
10.2* Employment Agreement between European Specialty Group
(United Kingdom) Limited, ESG Re Limited and Wolfgang M.
Wand, dated as of December 1, 1997
10.3* Employment Agreement between ESG Re Limited and Steven H.
Debrovner, dated as of December 1, 1997
10.4* Employment Agreement between European Specialty Group
Holding AG and Gerhard Jurk, dated as of December 1, 1997
10.5* Employment Agreement between European Specialty (North
America) Limited and Renate M. Nellich, dated as of
December 1, 1997
10.6* Investment Advisory Agreement between ESG Re Limited and
Head Asset Management L.L.C., dated as of December 1, 1997
10.7* Investment Advisory Agreement between European Specialty
Ruckversicherung AG and Head Asset Management L.L.C., dated
as of December 1, 1997
10.8* Form of Registration Rights Agreement between ESG Re
Limited and the Direct Purchasers named therein
10.9 Form of Non-Management Directors' Compensation and Option
Plan, approved on December 3, 1997 between ESG Re Limited
and non-employee director optionees
10.10 Form of 1997 Stock Option Plan, approved on December 3,
1997 between ESG Re Limited and certain optionees
13.1 1997 Annual Report to Shareholders
22.1* Subsidiaries of the Registrant
24.1(a) Independent Auditors' Report of Deloitte & Touche
24.1(b) Consent of Deloitte & Touche
27.1 Financial Data Schedule
- ----------
* Incorporated by reference to Amendment No. 1 to the Registration Statement
on Form F-1 of the Company, as filed with the Securities and Exchange
Commission on December 9, 1997 (registration No. 333-40341). The Consent
by the Company's independent auditors to incorporate by reference is set
forth in Exhibit 24.1(b) of this report.
(b) Reports on Form 8-K. The Company did not file any reports on Form
8-K during the period from August 21, 1997, to December 31, 1997.
18
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Company has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized, thereunto authorized,
on March 30, 1998.
ESG RE LIMITED
By: /s/ GERHARD JURK
---------------------
Name: Gerhard Jurk
Title: Chief Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Company has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Signature Title Date
--------- ----- ----
/s/ WOLFGANG M. WAND
- ---------------------------
Wolfgang M. Wand Managing Director and March 30, 1998
Chief Executive Officer
and Director
/s/ STEVEN H. DEBROVNER
- ---------------------------
Steven H. Debrovner Chief Operating Officer March 30, 1998
and Director
/s/ GERHARD JURK
- ---------------------------
Gerhard Jurk Chief Financial Officer March 30, 1998
/s/ JOHN C HEAD III
- ---------------------------
John C Head III Chairman of the Board March 30, 1998
/s/ KENNETH P. MORSE
- ---------------------------
Kenneth P. Morse Director March 30, 1998
/s/ DAVID L. NEWKIRK
- ---------------------------
David L. Newkirk Director March 30, 1998
/s/ WILLIAM J. POUTSIAKA
- ---------------------------
William J. Poutsiaka Director March 30, 1998
/s/ EDWARD A. TILLY
- ---------------------------
Edward A. Tilly Director March 30, 1998
19
Exhibit 10.9
Form of Non-Management Directors' Compensation and Option Plan
ESG Re Limited Non-Management
Directors' Compensation and Option Plan
Stock Option Agreement
STOCK OPTION AGREEMENT, dated as of December 12, 1997, between ESG Re
Limited (the "Company"), and [Optionee] (the "Optionee"), a non-employee
director of the Company.
The ESG Re Limited Non-Management Directors' Compensation and Option Plan
(the "Plan") provides for awards of options to directors of the Company who are
not full time employees of the Company and for such awards to be evidenced by an
individual agreement ("Agreement") with such terms and provisions not
inconsistent with the Plan as the Board of Directors (the "Board") shall
provide. Capitalized terms defined in the Plan and not otherwise defined herein
shall have the meaning given such terms in the Plan.
In consideration of the foregoing and of the mutual undertakings set forth
in this Agreement, the Company and the Optionee agree as follows:
SECTION 1. Grant of Option.
In accordance with Section 6 of the Plan, the Company hereby grants to the
Optionee an option (the "Option") to purchase a total of ___________ shares of
Common Stock, at an exercise price equal to $20.00 per share, on the terms and
conditions provided in the Plan and in this Agreement. The Company urges you to
consult with your own advisor as to the tax and other consequences of the
Option.
SECTION 2. Vesting and Exercisability.
2.1 The Option shall be 100% vested and exercisable the date of grant.
2.2 The Option may at any time and from time to time be exercised in whole
or in part for the shares of Common Stock subject thereto, within the
limitations on exercisability set forth herein.
2.3 Unless terminated earlier, the unexercised portion of the Option shall
automatically and without notice terminate and become null and void on the
expiration of 10 years from the date on which such Option was granted.
SECTION 3. Method of Exercise.
3.1 An Option granted under the Plan shall be deemed exercised when the
person entitled to exercise the option:
(i) delivers written notice to the Company, in the form attached as
Exhibit A hereto, at its principal business office, directed to the attention of
the Chairman of the Board, of the decision to exercise; and
<PAGE>
(ii) concurrently tenders to the Company full payment for the shares
to be purchased pursuant to such exercise.
3.2 Payment for shares with respect to which an Option is exercised may be
made in any combination of the following: (i) by certified or official bank
check payable to the Company (or the equivalent thereof acceptable to the
Board); (ii) with the consent of the Board in its sole discretion, by personal
check (subject to collection) and which may in the Board's discretion be deemed
conditional; and (iii) by delivery of previously-acquired shares of Common Stock
owned by the grantee for at least six months (or such longer or shorter period
as the Board of Directors may prescribe) having a fair market value (determined
as of the option exercise date) equal to the portion of the option exercise
price being paid thereby. In addition, subject to such rules as may be
established by the Board, payment may be deemed to be satisfied by delivery to
the Company of an assignment of a sufficient amount of the proceeds from the
sale of Common Stock acquired upon exercise to pay for all of the Common Stock
acquired upon exercise and an authorization to the broker or selling agent to
pay that amount to the Company, which sale shall be made at the Optionee's
direction at the time of exercise.
3.3 Options shall be granted to permit a Participant to reacquire any
Shares such Participant delivered to the Company as payment of the exercise
price in connection with the exercise of the Option hereunder or to reacquire
any Shares retained by the Company to satisfy the Participant's withholding
obligation in connection with the exercise of the Option hereunder (a "Reload
Option"). The terms of such Option shall be identical in all material respects
to the terms of this Option, provided, however, that the exercise price for each
Share granted under the Reload Option shall be the Fair Market Value of a Share
at the time such Reload Option is granted.
SECTION 4. Transferability.
(i) Subject to subsection (ii) below, each Option shall be
exercisable only by the Optionee during the Optionee's lifetime, or, if
permissible under applicable law, by the Optionee's legal guardian or
representative. No Option may be assigned, alienated, pledged, attached, sold or
otherwise transferred or encumbered by an Optionee otherwise than by will or by
the laws of descent and distribution and any such purported assignment,
alienation, pledge, attachment, sale, transfer or encumbrance shall be void and
unenforceable against the Company; provided that the designation of a
beneficiary shall not constitute an assignment, alienation, pledge, attachment,
sale, transfer or encumbrance.
(ii) Notwithstanding the foregoing, the Option may be transferred by
the Optionee without consideration, subject to such rules as the Board may adopt
to preserve the purposes of the Plan, to:
(A) the Optionee's spouse, children or grandchildren (including
adopted and stepchildren and grandchildren) (collectively, the
"Immediate Family");
(B) a trust solely for the benefit of the Optionee and his or her
Immediate Family; or
(C) a partnership, corporation or limited liability company whose
only partners, shareholders or members are the Optionee and
his or her Immediate Family members;
(each transferee described in clauses (A), (B) and (C) above is
hereinafter referred to as a "Permitted
2
<PAGE>
Transferee"); provided that the Optionee gives the Board advance written
notice describing the terms and conditions of the proposed transfer and
the Board notifies the grantee in writing that such a transfer would
comply with the requirements of the Plan and this Agreement.
The terms of the transferred option shall apply to the Permitted
Transferee and any reference in the Plan or this Agreement shall be deemed
to refer to the Permitted Transferee, except that (a) Permitted
Transferees shall not be entitled to transfer the Option, other than by
will or the laws of descent and distribution; (b) Permitted Transferees
shall not be entitled to exercise the transferred Option unless there
shall be in effect a registration statement on an appropriate form
covering the shares to be acquired pursuant to the exercise of such Option
if the Board determines that such a registration statement is necessary or
appropriate, and (c) the Board or the Company shall not be required to
provide any notice to a Permitted Transferee, whether or not such notice
is or would otherwise have been required to be given to the Optionee under
the Plan or this Agreement or otherwise.
SECTION 5. Right of Discharge Reserved.
Nothing in the Plan or this Agreement shall confer upon the Optionee the
right to continue in the service of the Company or affect any right that the
Company may have to terminate the service of the Optionee.
SECTION 6. No Stockholder Rights.
Neither the Optionee nor any person succeeding to the Optionee's rights
hereunder shall have any rights as a stockholder with respect to any shares
subject to the Option until the date of the issuance of a stock certificate or
certificates to him or her for such shares. Except for adjustments made pursuant
to section 7 of the Plan, no adjustment shall be made for dividends,
distributions or other rights (whether ordinary or extraordinary, and whether in
cash, securities or other property) for which the record date is prior to the
date such stock certificate is issued.
SECTION 7. Plan Provisions to Prevail.
This Agreement shall be subject to all of the terms and provisions of the
Plan, which are incorporated hereby and made a part hereof, including, without
limitation, the provisions of section 8 of the Plan (generally relating to
withholding tax obligations) and section 7 of the Plan (generally relating to
adjustments to the number of shares of Common Stock subject to the Option and
the Option price, upon certain changes in capitalization). If there is any
inconsistency between any of the provisions of the Agreement and the Plan, the
provisions of the Plan shall govern.
SECTION 8. Optionee's Acknowledgments.
By entering into this Agreement the Optionee agrees and acknowledges that
(a) the Optionee has received and read a copy of the Plan, and (b) neither the
Company nor the Board and its respective shareholders, officers, directors,
employees, agents and counsel shall be liable for any action or determination
with respect to the Plan or any award thereunder or this Agreement.
3
<PAGE>
SECTION 9. Successors and Assigns.
This Agreement shall be binding upon and inure to the benefit of the
parties hereto and the successors and assigns of the Company and, to the extent
set forth in Section 4, the heirs, personal representatives, conservator and
committee of the Optionee.
SECTION 10. Governing Law.
THIS AGREEMENT IS SHALL BE GOVERNED BY THE LAWS OF BERMUDA APPLICABLE TO
AGREEMENTS MADE AND TO BE PERFORMED ENTIRELY THEREIN.
SECTION 11. Notices.
All notices and other communications hereunder shall be given in writing,
shall be personally delivered against receipt or sent by registered or certified
mail, return receipt requested, shall be deemed given on the date of delivery or
of mailing, and if mailed, shall be addressed (a) to the Company, at its
principal business office, Attention: Chairman, and (b) to the Optionee, at the
Optionee's principal residential address last furnished to the Company. Either
party may, by notice, change the address to which notice to such party is to be
given.
SECTION 12. Section Headings.
The Section headings contained herein are for the purposes of convenience
only and are not intended to define or limit the contents of said Sections.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the date and year first above written.
ESG Re Limited
By
----------------------------
Name:
Title:
OPTIONEE:
----------------------------
Name:
4
<PAGE>
EXHIBIT A
EXERCISE NOTICE
[To be executed upon exercise of Stock Option]
ESG Re Limited:
The undersigned hereby irrevocably elects to exercise the right of
purchase represented by the attached Stock Option Agreement ("Agreement") dated
___________, 1997, for, and to purchase thereunder, ____________ shares of
Common Stock, par value $1.00 per share, of ESG Re Limited ("Common Stock"), as
provided for in such Agreement, and tenders herewith payment of the exercise
price in full in a form permitted under Section 3.2 of the Agreement.
Payment of the option exercise price is being made in full [Check
Applicable Item]:
________ in the form of a certified or official bank check or the
equivalent thereof acceptable to the Board;
________ by delivery to the Company of an assignment of the proceeds from
the sale of Common Stock acquired upon exercise and an authorization to the
broker or selling agent to pay that amount to the Company;
________ if so permitted by the Board, by personal check (subject to
collection); or
________ by delivery of shares of Common Stock already owned by the
undersigned for at least six months prior to such delivery.
The undersigned agrees and acknowledges that he has received a copy of the
current prospectus relating to the issuance of shares under the ESG Re Limited
Non-Management Directors' Compensation and Option Plan (the "Plan").
The undersigned hereby further agrees to be bound by the provisions of the
Plan and the Agreement.
5
<PAGE>
Please issue a certificate or certificates for such shares of Common
Stock, to me at the address set forth in the Agreement, or in the name of
____________________________ at the address listed below:
(Please Print)
Name of Optionee:____________________________________
Address:_____________________________________________
Signature:____________________________
Date:_____________
6
Exhibit 10.10
Form of Stock Option Agreement
ESG Re Limited 1997 Stock Option Plan
Stock Option Agreement
THIS AGREEMENT (the "Agreement") is made effective as of the __ day of
_____, 199_ (hereinafter called the "Date of Grant"), between ESG Re Limited
(hereinafter called the "Company"), and [Optionee] (hereinafter called the
"Participant" or the "Optionee"):
R E C I T A L S:
WHEREAS, the Company has adopted the ESG Re Limited 1997 Stock Option Plan
(the "Plan"), which Plan is incorporated herein by reference and made a part of
this Agreement. Capitalized terms not otherwise defined herein shall have the
same meanings as in the Plan; and
WHEREAS, the Committee has determined that it would be in the best
interests of the Company and its stockholders to grant the option provided for
herein (the "Option") to the Participant pursuant to the Plan and the terms set
forth herein.
NOW THEREFORE, in consideration of the mutual covenants hereinafter set
forth, the parties hereto agree as follows:
1. Grant of the Option. The Company hereby grants to the Participant the
right and option (the "Option") to purchase, on the terms and conditions
hereinafter set forth, all or any part of an aggregate of ___________ Shares,
subject to adjustment as set forth in the Plan. The purchase price of the Shares
subject to the Option shall be $20.00 per Share (the "Exercise Price").
2. Vesting.
(a) The Option will be 1/4 vested on the Date of Grant and, subject
to the Participant's continued employment with the Company, the remainder of the
option shall vest in 1/3 increments on each of the second, third and fourth
anniversaries of the Date of the Grant; provided, however, that the option shall
become 100% vested upon the death of the Optionee or upon a Change of Control
(as defined below).
At any given time, the portion of the Option which has become vested and
exercisable as described above is hereinafter referred to as the "Vested
Portion".
For purposes of this Agreement, "Change in Control" shall mean the
occurrence of any of the following: (i) the sale, lease, transfer or other
disposition, in one or a series of related transactions, of all or substantially
all of the assets of the Company other than to the Company or any of the
Affiliates, or (ii) a merger or sale of the Company pursuant to which the
shareholders of the Company immediately prior to such merger or sale do not own
a majority of the stock of the Company or the surviving corporation immediately
after such merger or sale.
<PAGE>
(b) If the Participant's employment with the Company is terminated
for any reason, the Option shall, to the extent not then vested, be canceled by
the Company without consideration and the Vested Portion of the Option shall
remain exercisable for the period set forth in Section 3(a).
3. Exercise of Option.
(a) Period of Exercise. Subject to the provisions of the Plan and
this Agreement, the Participant may exercise all or any part of the Vested
Portion of the Option at any time prior to the earlier of (i) six months
following the Participant's termination of employment other than by the Company
for Cause (as defined below) or, if so provided in the Participant's employment
agreement, by the Participant other than for Good Reason (as defined in the
Participant's employment agreement); (ii) termination of the Participant's
employment by the Company for Cause or, if so provided in a Participant's
employment agreement, by the Executive other than for Good Reason; or (iii) the
tenth anniversary of the Date of Grant; provided, however, that the Option shall
automatically terminate and expire upon violation of any non-competition,
non-solicitation or confidentiality provision in the Participant's employment
agreement, if any.
For purposes of this Agreement, "Cause" shall mean "Cause" as defined in
the Participant's employment agreement, or if no employment is in effect "Cause"
shall mean: (i) Participant's failure or refusal to perform his or her duties or
to perform specific directives of the Board, provided that such directives do
not violate any applicable law or industry standards; (ii) dishonesty of
Participant affecting the Company, or any affiliates; (iii) alcoholism or use of
drugs or any controlled substances which interferes with the performance of
Participant's duties and responsibilities; (iv) any gross or willful conduct of
Participant resulting in substantial loss to or theft from the Company or any of
its affiliates; or substantial damage to the Company or any of its affiliates'
reputation or theft from the Company or any of its affiliates; or (v)
Participant is charged with a felony or other serious crime, whether or not
related to the business of the Company or its affiliates, including but not
limited to, any crime related to tax evasion, bribery, theft, political payoffs,
etc.
(b) Method of Exercise.
(i) An option granted under the Plan shall be deemed exercised
when the person entitled to exercise the Option delivers written notice to
the Company, in the form attached as Exhibit A hereto, at its principal
business office, directed to the attention of the Chairman of the Board,
of the decision to exercise; and
(ii) concurrently tenders to the Company full payment for the
shares to be purchased pursuant to such exercise.
(c) Payment for shares with respect to which an Option is exercised
may be made in any combination of the following: (i) by certified or official
bank check payable to the Company (or the equivalent thereof acceptable to the
Board); (ii) with the consent of the Board in its sole discretion, by personal
check (subject to collection) and which may in the Board's discretion be deemed
conditional; and (iii) by delivery of previously-acquired shares of Common Stock
owned by the grantee for at least six months (or such longer or shorter period
as the Board of Directors may prescribe) having a fair market value (determined
as of the option exercise date) equal to the portion of the option exercise
price being paid thereby. In addition, subject to such rules as may be
established by the Board, payment may be deemed to
2
<PAGE>
be satisfied by delivery to the Company of an assignment of a sufficient amount
of the proceeds from the sale of Common Stock acquired upon exercise to pay for
all of the Common Stock acquired upon exercise and an authorization to the
broker or selling agent to pay that amount to the Company, which sale shall be
made at the Optionee's direction at the time of exercise.
4. Reload Options. Options shall be granted to permit a Participant to
reacquire any Shares such Participant delivered to the Company as payment of the
exercise price in connection with the exercise of the Option hereunder or to
reacquire any Shares retained by the Company to satisfy the Participant's
withholding obligation in connection with the exercise of the Option hereunder
(a "Reload Option"). The terms of such Option shall be identical in all material
respects to the terms of this Option, provided, however, that the exercise price
for each Share granted under the Reload Option shall be the Fair Market Value of
a Share at the time such Reload Option is granted.
5. No Right to Continued Employment. Neither the Plan nor this Agreement
shall be construed as giving the Participant the right to be retained in the
employ of, or in any consulting relationship to, the Company or any Affiliate.
Further, the Company or an Affiliate may at any time dismiss the Participant or
discontinue any consulting relationship, free from any liability or any claim
under the Plan or this Agreement, except as otherwise expressly provided herein.
6. Legend on Certificates. The certificates representing the Shares
purchased by exercise of the Option shall be subject to such stop transfer
orders and other restrictions as the Board may deem advisable under the Plan or
the rules, regulations, and other requirements of the United States Securities
and Exchange Commission, any stock exchange upon which such Shares are listed,
and any applicable Federal or state laws, and the Board may cause a legend or
legends to be put on any such certificates to make appropriate reference to such
restrictions.
7. Transferability.
(a) Subject to subsection (b) below, each Option shall be
exercisable only by the Optionee during the Optionee's lifetime, or, if
permissible under applicable law, by the Optionee's legal guardian or
representative. No Option may be assigned, alienated, pledged, attached, sold or
otherwise transferred or encumbered by an Optionee otherwise than by will or by
the laws of descent and distribution or, if inapplicable, transmission on death
in accordance with the Bye-Laws of the Company and any such purported
assignment, alienation, pledge, attachment, sale, transfer or encumbrance shall
be void and unenforceable against the Company; provided that the designation of
a beneficiary shall not constitute an assignment, alienation, pledge,
attachment, sale, transfer or encumbrance.
(b) Notwithstanding the foregoing, the Option may be transferred by
the Optionee without consideration, subject to such rules as the Board may adopt
to preserve the purposes of the Plan, to:
(i) the Optionee's spouse, children or grandchildren
(including adopted and stepchildren and grandchildren) (collectively, the
"Immediate Family");
(ii) a trust solely for the benefit of the Optionee and his or
her Immediate Family; or
(iii) a partnership, corporation or limited liability company
whose only partners,
3
<PAGE>
shareholders or members are the Optionee and his or her Immediate Family
members;
(each transferee described in clauses (A), (B) and (C) above is hereinafter
referred to as a "Permitted Transferee"); provided that the Optionee gives the
Board advance written notice describing the terms and conditions of the proposed
transfer and the Board notifies the grantee in writing that such a transfer
would comply with the requirements of the Plan and this Agreement.
The terms of the transferred option shall apply to the Permitted
Transferee and any reference in the Plan or this Agreement shall be deemed to
refer to the Permitted Transferee, except that (a) Permitted Transferees shall
not be entitled to transfer the Option, other than by will or the laws of
descent and distribution; (b) Permitted Transferees shall not be entitled to
exercise the transferred Option unless there shall be in effect a registration
statement on an appropriate form covering the shares to be acquired pursuant to
the exercise of such Option if the Board determines that such a registration
statement is necessary or appropriate, and (c) the Board or the Company shall
not be required to provide any notice to a Permitted Transferee, whether or not
such notice is or would otherwise have been required to be given to the Optionee
under the Plan or this Agreement or otherwise.
8. Securities Laws. Upon the acquisition of any Shares pursuant to the
exercise of the Option, the Participant will make or enter into such written
representations, warranties and agreements as the Board may reasonably request
in order to comply with applicable securities laws or with this Agreement.
9. Notices. Any notice necessary under this Agreement shall be addressed
to the Company in care of its Secretary at the principal executive office of the
Company and to the Participant at the address appearing in the personnel records
of the Company for the Participant or to either party at such other address as
either party hereto may hereafter designate in writing to the other. Any such
notice shall be deemed effective upon receipt thereof by the addressee.
10. Choice of Law. THE INTERPRETATION, PERFORMANCE AND ENFORCEMENT OF THIS
AGREEMENT SHALL BE GOVERNED BY THE LAWS OF BERMUDA WITHOUT REGARD TO PRINCIPLES
OF CONFLICTS OF LAW.
11. Option Subject to Plan/Optionees Acknowledgments. By entering into
this Agreement the Participant agrees and acknowledges that (a) the Participant
has received and read a copy of the Plan and (b) neither the Company nor the
Board and its respective shareholders, officers, directors, employees, agents
and counsel shall be liable for any action or determination with respect to the
Plan or any award thereunder or this Agreement. The agent shall be subject to
all the terms and provisions of the Plan which are incorporated hereby and made
a part hereof including the provisions of Section 8(d) of the Plan (generally
relating to withholding) and Section 7 (relating to amendments and adjustments).
In the event of a conflict between any term or provision contained herein and a
term or provision of the Plan, the applicable terms and provisions of the Plan
will govern and prevail.
12. Signature in Counterparts. This Agreement may be signed in
counterparts, each of which shall be an original, with the same effect as if the
signatures thereto and hereto were upon the same instrument.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement.
4
<PAGE>
Accepted ___________, 1997
ESG Re Limited
By:__________________________
Wolfgang M. Wand
Chief Executive Officer
Optionee
By:__________________________
Name:
5
<PAGE>
EXHIBIT A
EXERCISE NOTICE
[To be executed upon exercise of Stock Option]
ESG Re Limited:
The undersigned hereby irrevocably elects to exercise the right of
purchase represented by the attached Stock Option Agreement ("Agreement") dated
___________, 1997, for, and to purchase thereunder, ____________ shares of
Common Stock, par value $1.00 per share, of ESG Re Limited ("Common Stock"), as
provided for in such Agreement, and tenders herewith payment of the exercise
price in full in a form permitted under __________ of the Agreement.
Payment of the option exercise price is being made in full [Check
Applicable Item]:
_______ in the form of a certified or official bank check or the
equivalent thereof acceptable to the Board;
_______ by delivery to the Company of an assignment of the proceeds from
the sale of Common Stock acquired upon exercise and an authorization to the
broker or selling agent to pay that amount to the Company;
_______ if so permitted by the Board, by personal check (subject to
collection); or
_______ by delivery of shares of Common Stock already owned by the
undersigned for at least six months prior to such delivery.
The undersigned agrees and acknowledges that he has received a copy of the
current prospectus relating to the issuance of shares under the ESG Re Limited
1997 Stock Option Plan (the "Plan").
The undersigned hereby further agrees to be bound by the provisions of the
Plan and the Agreement.
6
<PAGE>
Please issue a certificate or certificates for such shares of Common
Stock, to me at the address set forth in the Agreement, or in the name of
________________________________ at the address listed below:
(Please Print)
Name of Optionee:___________________________________________________
Address:____________________________________________________________
Signature:_____________________________
Date:_________________
7
ESG [LOGO]
INTELLIGENT
REINSURANCE
ESG Re Limited
ANNUAL REPORT 1997
[PHOTO OMITTED]
<PAGE>
About the Children
To illustrate ESG Re Limited's commitment to the well-being of children,
we have selected Children as our theme for this report. The Company
provides innovative solutions to insurance problems that directly impact
the lives of children such as Children's Disability programs with Union
Nationale des Mutuelles Mieux-Etre in France and Consolidated Financial
Insurance in Denmark. ESG Re plans to expand this program globally.
[PHOTO OMITTED]
<PAGE>
ESG [LOGO]
TABLE OF CONTENTS
Company Profile 2
Financial Highlights 3
Letters to Shareholders 4
Operating Review 10
Selected Consolidated Financial Data 20
Management's Discussion and Analysis
of Financial Conditions and
Results of Operations 21
Consolidated Financial Statements 28
Independent Auditors' Report 53
Corporate Directory 54
Shareholder Information 56
<PAGE>
Company Profile
ESG Re Limited is a specialty reinsurance company providing accident, health,
life, and special risk reinsurance to insurers and selected reinsurers on a
worldwide basis. With three operating subsidiaries located in Bermuda, Germany,
and Ireland, and offices in ten cities, ESG Re writes reinsurance in more than
50 countries. ESG Refocuses on growing business lines in the personal and health
fields and specializes in applying "Intelligent Reinsurance"--a profitable and
analytical approach--to its ceding customers. ESG Re is dedicated to offering
creative risk solutions to reinsurance challenges in growing and emerging
markets.
2
<PAGE>
FINANCIAL HIGHLIGHTS
ESG Re began writing reinsurance for its own account in December 1997.
Comparative results from prior years, when the Company functioned as a managing
agent, are therefore not relevant.
The following highlights reflect operating data for the reinsurance
operations:
(U.S. dollars in thousands, except per share data) 1997
================================================================================
Operating Data
Net premiums written $ 25,392
Net premiums earned 13,411
Total revenues 13,868
Losses and loss expenses 7,449
Acquisition expenses 4,693
- --------------------------------------------------------------------------------
Total expenses 12,142
- --------------------------------------------------------------------------------
Net underwriting income 1,269
================================================================================
Loss ratio(2) 55.5%
- --------------------------------------------------------------------------------
Acquisition expense ratio(2) 35.0%
- --------------------------------------------------------------------------------
Loss and acquisition expense ratio(2) 90.5%
================================================================================
Consolidated Balance Sheet Data
Investments and cash $236,976
Total assets 273,068
Total shareholders' equity 234,375
Book value per share 16.83
Diluted book value per share 16.61
Common Stock Price Range (1)
High $ 23.88
Low $ 21.50
(1) 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) Ratios are calculated on U.S. GAAP basis.
3
<PAGE>
CHAIRMAN'S LETTER
[PHOTO OMITTED]
In December 1997, ESG Re Limited became an international reinsurer of health,
accident, life and sports/entertainment risks. ESG is now well capitalized,
highly regarded and moving forward to implement its business plan.
The Board of Directors, working with senior management, will provide
guidance and overall strategic input so that in 1998 ESG Re will:
o Expand its existing lines of business into more countries and
regions;
o Recruit, train and motivate the very best people in North America,
Europe and Asia;
o Underwrite profitable business and produce investment income to
provide shareholders with an acceptable return on equity; and
o Develop its standing in the reinsurance market as a company
operating to the highest standards and providing quality solutions
to customer problems.
To our fellow shareholders, your Board of Directors is committed to
achieving these objectives.
/s/ John C Head III
John C Head III
Chairman of the Board
4
<PAGE>
CHIEF EXECUTIVE OFFICER'S LETTER
[PHOTO OMITTED] ESG [LOGO]
We are delighted to welcome you to ESG Re Limited and our first annual report.
ESG Re's successful initial public offering in December 1997 raised over
$250 million. With this capital, ESG completed its transformation from a
reinsurance management company with a predominantly European focus, to a
specialty reinsurer underwriting for its own account on a global basis. Our
reinsurance focus is on people--their lives, health, and well-being.
In its former reinsurance management role, ESG produced exceptional
results. Premiums managed by us grew from $36 million in 1994 to $100 million in
1997, with combined loss and acquisition expense ratios averaging 91%. We
developed a reputation as a recognized lead reinsurer, and our partner
relationships include some of the world's strongest reinsurers.
Ceding clients and professional brokers demand the highest quality
financial security from their reinsurance partners. Standard and Poor's
Corporation has affirmed the strong financial position of ESG Re by rating us
A-.
ESG Re's seasoned management, motivated underwriting teams, and strong
capital base position the Company as a sophisticated specialty reinsurer in the
fields of health, personal accident, life, credit/life and disability
reinsurance, as well as the growing area of special risk in the sports and
entertainment industry.
ESG Re's unique concept of "Intelligent Reinsurance" provides value-added
solutions, as well as capacity to ceding companies and professional brokers. We
believe that "Intelligent Reinsurance" will become known as a standard of
excellence in the reinsurance community.
5
<PAGE>
GROWING MARKETS AND OPPORTUNITIES
Global reinsurance markets have changed significantly during the last several
years with the last two years being particularly difficult because of excess
capacity and competition. We are encouraged, however, by signs of a cyclical
upturn and some firming of prices in certain markets, particularly in North
America.
In addition, certain segments of the reinsurance market are experiencing
substantial growth--particularly our areas of strategic focus. Contributing to
this growth are the following factors:
o A worldwide trend of transferring social security and national
health responsibility to the private sector suggests that medical
expense reinsurance will be one of the fastest growing areas in the
insurance industry.
o Demand for new insurance products, particularly in the health care
area, is being generated as a result of economic growth in emerging
markets such as Eastern Europe, Asia, and Latin America.
o New trade directives from the European Union will cause certain
European countries to deregulate insurance markets, providing
opportunities for creative product solutions.
o As the world's population continues to live longer and require more
health care services, demand for health insurance will increase.
o Capacity requirements for the insurance of major global sports and
entertainment events continue to increase.
STRATEGIC DIRECTIONS
An improved industry environment combined with growing markets provides an
excellent opportunity for ESG Re to enter the market as a reinsurer for its own
account.
6
<PAGE>
ESG [LOGO]
During 1998, ESG Re intends to pursue the following strategic initiatives:
o Import and implement managed health care techniques that have proven
to be successful in the United States to Germany, Spain, Italy and
other European markets where these concepts have been underutilized.
o Create private medical care and insurance products for high growth
emerging markets such as Eastern Europe, the Commonwealth of
Independent States, Latin America and Asia.
o Expand occupational injury and health reinsurance programs in
Scandinavia.
o Continue to structure innovative special risk reinsurance programs
for major sporting events and performances such as World Cup Soccer
and the European Soccer Championships.
COMPETITIVE ADVANTAGES
To implement these strategies successfully, and to produce profitable results,
requires a strong capital base and balance sheet, specialized expertise, and
prudent underwriting discipline. In addition to these strengths, ESG Re has the
following competitive advantages:
o Far-ranging and well-established relationships with many of the
leading global insurance and reinsurance companies;
o Seasoned senior management with an average of 25 years of experience
in the insurance/reinsurance industry;
o Highly motivated employees--all shareholders;
o Flexible and efficient underwriting teams, strategically located in
key markets;
o A reputation for uncompromising service to ceding clients; and
o An organizational structure that provides the advantages of
favorable tax jurisdictions.
7
<PAGE>
RESULTS FOR 1997
ESG Re operated primarily as a reinsurance management company for all but the
final two weeks of the year. Therefore, underwriting premiums and earnings for
1997 are not indicative of future results.
For the year ended December 31, 1997, the Company reported a net loss of
$5.1 million, reflecting expenses incurred in its initial public offering and a
one-time accounting charge of $3.6 million for compensation-related expenses.
In its former function as a managing agent, the Company underwrote, on
behalf of various reinsurers, approximately $100.0 million of gross premiums in
1997, of which $60.0 million was managed in reinsurance pools for the Company's
reinsurance partners. In December 1997, the Company exercised its contractual
right to assume, for its own account, a 30% share of this pool business,
retroactive to January 1, 1997. In addition, the Company separately negotiated
retrocessions with certain pool participants, resulting in net premiums written
of $25.4 million and net underwriting income of $1.3 million for 1997.
Total revenues for the year were $17.8 million, consisting of net premiums
earned of $13.4 million, net investment income of $0.6 million and management
fee revenue of $3.8 million.
ESG Re's combined loss and acquisition expense ratio, a key measure for
assessing the performance of the reinsurance business, was 90.5% in 1997.
OUTLOOK
1998 will be our first full year operating as a reinsurance company and we have
entered it with enthusiasm and confidence. ESG Re's high level of renewals,
broad geographical spread of operations, and the
8
<PAGE>
ESG [LOGO]
opportunities which are expected to present themselves in the course of 1998
fill us with optimism and excitement.
Reinsurance is a highly personal business which is largely relationship
driven. We have worked diligently over the years to establish a reputation of
not only excellence and expertise, but also of trust and confidence between
ourselves and our ceding partners. These long-term relationships will continue
to play a crucial role in our future success.
Our involvement in health care and disability places us in a unique
position of influence regarding the quality and cost of these essential
services. We believe that by taking this social responsibility seriously, we are
acting in the best interest of all stakeholders--our ceding customers, their
original insureds, and our shareholders.
Our strategies for growth, combined with our competitive strengths and an
emphasis on underwriting profitability rather than market share, position us as
an industry leader in the fastest growing segments of the insurance world.
We wish to thank our shareholders for their support and interest in ESG Re
Limited and our employees for their enthusiasm and dedication. As co-owners, we
all look forward to building a strong and successful company.
/s/ Wolfgang M. Wand
Wolfgang M. Wand
Managing Director and
Chief Executive Officer
9
<PAGE>
OPERATING REVIEW
"Intelligent Reinsurance" as a Business Philosophy
It is our ongoing objective to have "Intelligent Reinsurance" become ESG Re's
recognized trademark. "Intelligent Reinsurance" is a business philosophy
centered on providing client-oriented solutions--not just capital. ESG Re
strives to provide one source for a full range of value-added reinsurance
products and expertise combined with unsurpassed client service.
[PHOTO OMITTED]
ESG Re gains market advantage by sharing with clients expertise, market
knowledge, specialized technologies and other services. We do not charge our
clients for "Intelligent Reinsurance" products or services; our clients choose
us as their reinsurance partner because we help them to manage their risks
better through "Intelligent Reinsurance".
Integral to the "Intelligent Reinsurance" concept of offering clients
alternative and creative solutions to underwriting challenges is a highly
analytical and proactive approach to risk management. Key elements include:
o Applying detailed knowledge and analysis of underlying local markets to
better understand the factors that affect losses and incorporating that
knowledge into reinsurance solutions, including the establishment of
rating tables and tariffs;
o Collecting, assessing, and sharing new information about markets in which
risks are based;
o Utilizing extensive case management principles and managed care techniques
to improve customer service and reduce costs; and
o Ensuring early involvement in claims management to minimize claims expense
without limiting benefits available to customers.
10
<PAGE>
ESG [LOGO]
Technology plays a critical role in supporting "Intelligent Reinsurance".
Our computer-based underwriting and claims management system--European Specialty
Insurance Management Services (ESIMS)--provides product support and design, as
well as loss prevention and disease management functions, enabling the accurate
prediction of potentially severe medical conditions. ESIMS streamlines the
process of entering new markets, developing products, administering claims and
managing risk, thereby enhancing profitability and service quality. We believe
that "Intelligent Reinsurance" creates a true partnership between ceding
customers and ESG Re--a partnership tied to the value we add and the success of
our clients' products.
Intelligent Reinsurance Solutions
Our goal is to foster an environment in which creative and innovative
reinsurance and insurance solutions are developed to meet the needs of clients
and customers in markets worldwide. For example:
o In Eastern Europe, we helped to create the first private health care
program using Western benefit and insurance standards.
o In Russia, we have been mandated by the Moscow City Health Fund to
help restructure the delivery of health care services to more than
13 million Moscovites.
o In Latin America, ESG Re has for many years played a major role in
the development of innovative medical expense programs that allow
policyholders to seek treatment in the United States, with direct
access to one of the world's leading preferred provider hospital
networks.
11
<PAGE>
Major Lines of Business
Medical Expense
With the restructuring of national health care systems around the world
generating new demand for private health insurance, reinsurance for medical
expenses has become one of the fastest growing classes in the insurance
industry. Our growth strategy centers on exporting products and services from
centers of excellence to areas of growing demand and to adjust these products
and services in a timely fashion if adverse developments occur.
ESG Re's management helped pioneer professional health care reinsurance in
the early 1970s. Leveraging this expertise, ESG Re now offers medical
reinsurance--comprehensive medical expense insurance, and short-term travel,
hospital daily income, defined illness and dread disease coverages. Through this
range of product solutions ESG Re provides both the tools and the framework to
underwrite more profitable business focused on high net worth individuals,
frequent travelers, and expatriates.
[The following table was depicted as a pie chart in the printed material.]
1997 GROSS PREMIUMS DISTRIBUTION
Medical Expense 38.2%
Personal Accident 35.8%
Credit/life and Disability 24.5%
Special Risk 1.5%
With access to over 4,600 hospitals, 23,000 service providers and 250,000
physicians worldwide, we offer one of the largest networks of specialist service
providers. Clinically trained staff provide immediate advice and support for a
wide range of services--from information on obtaining local medical care, to
arranging complete transportation from one country to another. This service
benefits the insured and substantially reduces claims exposure as a result of
discounts prearranged with hospitals and providers.
12
<PAGE>
ESG [LOGO]
With the capacity to provide up to $5 million in coverage per person, ESG
Re is a desired lead capacity provider capable of providing up to 100% of
required reinsurance capacity for most programs.
Personal Accident
ESG Re continues to expand its role as a personal accident and disability
reinsurance provider throughout Europe, Latin America, the Far East, and the
countries of the former Soviet Union. In North America, we continue to develop
and redefine existing programs as opportunities arise.
Our innovative programs include:
o Coverage for credit card issuing corporations and banks to cover
high concentration flight risk exposure;
o Occupational injury and health reinsurance programs in Scandinavia;
and
o Children's Disability programs developed with European ceding
clients and telemarketing programs to promote these products.
We will continue to develop and package features that fit particular
market needs and to strengthen relationships with our ceding clients by offering
programs with an acceptance capacity limit of $5 million on any one person and
an event capacity limit of $30 million.
Credit/Life and Disability
Demand for credit/life reinsurance products is increasing worldwide. ESG Re
plans to expand this line globally by utilizing our experience in credit/life
reinsurance in the North American, German, French, and Scandinavian markets.
13
<PAGE>
ESG Re writes coverage for several types of exposures in this line,
including group life, individual credit/life, credit disability and credit
unemployment. However, the Company typically does not engage in long-term life
or surplus relief reinsurance programs.
[PHOTO OMITTED]
Much of our group life business is provided in conjunction with
underwriting services related to personal accident, health, and credit/life and
disability reinsurance programs. Furthermore, most of our credit/life programs
protect short-term consumer loans, providing coverage for ongoing interest
payments and options for principal repayments.
ESG Re generally offers unemployment benefits as part of credit/life and
disability programs only in sophisticated markets where solid and reliable
benefit control systems are available through government unemployment agencies.
ESG Re maintains a capacity limit of $1 million for any one person.
Special Risk
In the current economic environment, many people are spending more of their
income on sports and entertainment events. Meeting this demand are promoters who
invest increasing sums on presenting events with highly paid stars, while
corporations compete to provide increasingly larger sums through sponsorship.
These activities generate enormous risks and create new demand for reinsurance
capacity related to individual events and the appearances of star performers.
SportSecure GmbH, our affiliated special risks company, has substantial
experience in providing special risk reinsurance around the globe for sports
disabilities, sports and entertainment contingency, nonappearance, cancellation
and abandonment, accident and disability,
14
<PAGE>
ESG [LOGO]
and medical insurance and assistance. From tennis championships and the Soccer
World Cup, the largest contingency coverage ever structured, to classical
recitals and rock concerts, SportSecure has a strong reputation of insuring some
of the world's leading events, athletes and artists. We also provide coverage in
the event of television transmission breakdown, and auxiliary benefits connected
with major events.
SportSecure is an acknowledged market leader in sports and entertainment
reinsurance. We maintain our own market intelligence database which allows us to
evaluate coverage and policy features with the goal of reducing risk. Our
capacity acceptance is $10 million for any one event or a related series of
events.
Developing Globally, Delivering Locally
ESG Re provides "Intelligent Reinsurance" on a global basis. As shown on
the map below, our offices are strategically located in the world's most
important business centers to provide service and support to our clients.
[GRAPHIC OMITTED]
[Graphic in the form of a map depicts offices in Berlin, Bermuda, Dublin,
Hamburg, Hong Kong, London, Miami, Moscow, Sydney and Toronto.]
An established global infrastructure with seamless coordination among
offices enables ESG Re to respond quickly and effectively
15
<PAGE>
with the appropriate products, programs and services necessary to capitalize on
market opportunities. Last year, ESG Re managed risks in more than 50 countries
worldwide, and in the year ahead, we will enhance our global presence with the
introduction of new products tailored to meet the needs of our clients.
[PHOTO OMITTED]
Major Markets
Our objective is to have Europe, North America, and the emerging markets each
contribute one-third of total gross premiums written.
North America--North America is the world's largest reinsurance market.
Annual premiums currently exceed $4 billion with significant growth anticipated
over the next five years. ESG Re intends to pursue opportunities in this market
and has opened an office in Toronto with a strong senior management team
supported by seasoned underwriters. The group will build on its existing client
relationships and focus primarily on health and accident reinsurance.
The Company will also capitalize on extensive information
exchange--importing ESG Re's global expertise into the North American market
where it is advantageous to do so, and exporting managed care techniques
developed in the North American market to areas where such products are in
demand. Many countries in Europe and other parts of the world are looking to
North America for solutions to their own health care crises. Certain techniques
used in North America can be adapted and transferred to other parts of the
world. We plan to participate from the onset in the creation of new health care
models in various markets.
16
<PAGE>
ESG [LOGO]
Europe--ESG Re is active in most European markets and focuses on providing
tailored product solutions which reflect our understanding of global trends as
well as local nuances. The demand for innovative products resulting from
continuing EU deregulation and progressive reform of health systems will provide
new opportunities for ESG Re to apply its expertise in creating and supporting
innovative risk solutions.
Markets of particular importance to ESG Re include Germany, where changes
in the public health sector will result in greater demand for health reinsurance
products and services. We also offer credit/life insurance and reinsurance
programs combined with unemployment coverage, product lines not previously
available in Germany.
[The following table was depicted as a pie chart in the printed material.]
1997 MARKET DISTRIBUTION
Western Europe 52.3%
Latin America 19.2%
United Kingdom 10.4%
Rest of World 9.8%
Eastern Europe 5.3%
Asia 1.5%
North America 1.5%
In Spain, ESG Re is currently creating a range of unique private medical
insurance and reinsurance products, including the initiation of new managed
health care products which are self-funded by employees. These product
applications will use sophisticated claims management technology developed by
the Company.
Emerging Europe--Continuing economic growth, increasing per capita income
and the erosion of traditional state health care systems are creating
considerable opportunity for targeted risk solutions in this region. ESG Re
provides both reinsurance solutions and supporting services to ceding companies
throughout this newly emerging market. Our ability to support young and
fast-growing local companies with complete and efficient software solutions
provides another competitive advantage.
ESG Re has been working closely with local ceding companies to create
private insurance products modeled on Western standards.
17
<PAGE>
Providing not only reinsurance capacity but also extensive product development
and training support, we are now developing a range of supplementary programs
including out-of-country medical, life, personal accident, and travel medical
plans.
Currently, ESG Re supports annual travel medical and trip programs
throughout the Commonwealth of Independent States, including Russia, Lithuania,
Latvia, Georgia, Uzbekistan, and Kazakhstan.
Other Regions--ESG Re is well positioned in Latin America, the Pacific Rim
and the Middle East. For example:
[PHOTO OMITTED]
o We offer health and occupational injury reinsurance in all Latin
American countries where the progressive growth of the middle class,
higher per capita income and the restructuring of health care
systems are well underway.
o In the Far East, ESG Re is active in the main Asian reinsurance
market and is able to respond to increased demand for health
insurance and reinsurance support across the region. Despite the
current adverse economic conditions in this area, we continue to
consider these markets to be important. Our opening of a new
regional headquarters in Sydney, Australia, effective in the spring
of 1998, is further evidence of our commitment to the region.
o The Middle East also presents new opportunities. We have pioneered
managed care programs in Saudi Arabia, the United Arab Emirates,
Lebanon, and Egypt. With the anticipated restructuring of social
health care systems throughout the Gulf Region, medical insurance
and reinsurance programs have started to take on a greater
importance.
18
<PAGE>
ESG [LOGO]
Organization of the Company
ESG Re Limited conducts its business through three operating subsidiaries:
European Specialty Reinsurance (Bermuda) Limited ("ES Bermuda"), European
Specialty Reinsurance (Ireland) Limited ("ES Ireland") and European Specialty
Ruckversicherung AG ("ES Germany"). European Specialty Group (United Kingdom)
and European Specialty (North America) conduct business on behalf of ES Bermuda
and ES Ireland. With underwriting profits accruing primarily in Bermuda and
Ireland, the Company benefits from the favorable tax environments in those
jurisdictions.
<TABLE>
<S> <C> <C> <C>
---------------------------
ESG Re Limited
("ESG Re" or the "Company")
---------------------------
-------------------------------------------------------
- ---------------------- ----------------------
European Specialty European Specialty
Reinsurance (Bermuda) Group (United Kingdom)
Limited ("ES Bermuda") Limited
- ---------------------- ----------------------
---------------------------------------------
- ---------------------- ------------------------ ------------------ ---------------
European Specialty European Specialty
Reinsurance (Ireland) European Specialty Group Holding AG Other Operating
Limited ("ES Ireland") (North American) Limited ("ESG Germany") Subsidiaries
- ---------------------- ------------------------ ------------------ ---------------
-----------------------
------------------- ---------------
European Specialty
Ruckversicherung AG Other Operating
("ES Germany") Subsidiaries
------------------- ---------------
</TABLE>
19
<PAGE>
ESG Re Limited Selected Consolidated Financial Data
The following table sets forth the selected consolidated financial data for ESG
Re Limited and subsidiaries. The financial statements included herein represent
the financial performance and results of the Company as a reinsurer and
reinsurance management company for the year ended December 31, 1997 and as a
reinsurance management company only for the years prior to 1997. The
consolidated statement of operations data for the years ended December 31, 1997,
1996, 1995, and 1994, and the consolidated balance sheet data as of December 31,
1997, 1996, and 1995, have been derived from the Company's audited Consolidated
Financial Statements. The consolidated statement of operations data for the year
ended December 31, 1993 and the consolidated balance sheet data as of December
31, 1994 and 1993, have been derived from the Company's unaudited consolidated
financial statements and, in the opinion of management, reflect all adjustments
necessary for a fair presentation of the results of operations and financial
condition. The data should be read in conjunction with the Company's
Consolidated Financial Statements, related notes, "Management's Discussion and
Analysis of Financial Conditions and Results of Operations" and other financial
information appearing elsewhere herein.
<TABLE>
<CAPTION>
Years Ended December 31, 1997(1) 1996 1995 1994 1993(2)
- ------------------------------------------------------------------------------------------------------
U.S. dollars in thousands except per share data
<S> <C> <C> <C> <C> <C>
Statement of Operations Data:
Net premiums earned $ 13,411 $ -- $ -- $ -- $ --
Management fee revenue 3,830 3,869 4,515 3,309 1,779
Total revenues 17,839 4,055 4,665 3,351 1,821
Total expenses
(excludes tax benefits/expenses) 23,504 4,062 4,221 3,313 2,329
Net income (loss) (5,096) (163) 146 (6) (165)
Basic net loss per share(3) (4.11) (1.38) -- -- --
Diluted net loss per share(3) (4.11) (1.38) -- -- --
======================================================================================================
<CAPTION>
As of December 31, 1997(1) 1996 1995 1994 1993(2)
- ------------------------------------------------------------------------------------------------------
U.S. dollars in thousands
<S> <C> <C> <C> <C> <C>
Balance Sheet Data:
Total investments and cash $ 236,976 $ 15 $ 33 $ 21 $ --
Total assets 273,068 2,518 2,683 2,881 1,505
Short-term and current
portion of long-term debt -- 1,812 1,746 537 674
Long-term debt -- -- 195 1,737 724
Total shareholders' equity (deficit) 234,375 (489) (152) (90) (77)
======================================================================================================
</TABLE>
The Company declared a dividend on March 9, 1998 of $0.075 per common share to
be paid on April 13, 1998 for shareholders of record on March 26, 1998.
(1) In 1997, the Company began operations as a reinsurance company.
(2) In 1994, the Company began operations as an underwriting management
company. Prior to 1994, the Company operated principally as a reinsurance
intermediary.
(3) The 1996 per share data have been calculated on a recapitalized basis.
Earnings per share data have not been calculated prior to 1996 as no
shares were outstanding.
20
<PAGE>
ESG Re Limited 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
subsidiaries ("the Company"). This discussion should be read in conjunction with
the "Selected Consolidated Financial Data" and the Company's Consolidated
Financial Statements and related notes thereto included elsewhere in this Annual
Report.
This Annual Report contains forward-looking statements regarding future profit
levels, premium growth, cash flows and other matters, which involve risks and
uncertainties that may affect the actual results of operations of the Company.
The following important factors, among others, could cause actual results to
differ materially from those set forth in the forward-looking statements: claims
frequency, claims severity, economic activity, competitive pricing, and the
regulatory environment in which the Company operates.
General
The Company is a specialty reinsurance enterprise which provides accident,
health, life, and special risk reinsurance to insurers and selected reinsurers
on a worldwide basis. The Company also provides underwriting management services
to selected reinsurers.
The December 31, 1997, financial statement results included herein represent the
Company's financial performance as a reinsurance entity and an underwriting
management company. The 1996 and 1995 financial statement results reflect only
the Company's operations as an underwriting management company.
In December 1997, the Company raised gross proceeds of $257 million in a private
placement and an initial public offering (the "Offerings"). As a result of
obtaining this capital, the Company was able to assume reinsurance risks for its
own account which it had previously managed for others as an underwriting
management company.
Results of Operations
The results of operations of the Company for the years ended December 31, 1997,
1996 and 1995 were as follows:
1997 1996 1995
- --------------------------------------------------------------------------------
U.S. dollars in thousands except per share data
Net underwriting income $ 1,269 $ -- $ --
Management fee revenue 3,830 3,869 4,515
Net investment income 598 186 150
Administrative expenses and taxes 7,167 4,218 4,519
Class B Warrants expense 3,626 -- --
Net income (loss) (5,096) (163) 146
Net loss per share (4.11) (1.38) --
================================================================================
21
<PAGE>
ESG Re Limited Management's Discussion and Analysis of Financial Conditions
and Results of Operations
Year Ended December 31, 1997 Compared to Year Ended December 31, 1996
The Company incurred a net loss of $5.1 million for 1997 as compared to a net
loss of $163 thousand for 1996. The principal reason for this increase in the
net loss is a result of a one-time, non-cash charge for compensation expense of
$3.6 million related to Class B Warrants issued in connection with the
Offerings. Also included in the net loss for 1997 are costs associated with the
Offerings of approximately $1.5 million.
Net Underwriting Income
Net underwriting income for the year ended December 31, 1997 is summarized as
follows:
<TABLE>
<CAPTION>
Medical Personal Accident Credit Special Risk Total
---------------------------------------------------------------------------------------------------
Amount Ratio Amount Ratio Amount Ratio Amount Ratio Amount Ratio
- ------------------------------------------------------------------------------------------------------------------------------
U.S. dollars in thousands
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Gross premiums written $ 9,989 $ 9,357 $ 6,401 $ 396 $26,143
Net premiums written 9,937 8,723 6,356 376 25,392
Net premiums earned 5,964 3,778 3,426 243 13,411
Losses and loss expenses 3,624 61% 1,907 51% 1,779 52% 139 57% 7,449 56%
Acquisition costs 2,099 35% 1,303 34% 1,206 35% 85 35% 4,693 35%
- ------------------------------------------------------------------------------------------------------------------------------
Net underwriting income $ 241 $ 568 $ 441 $ 19 $ 1,269
==============================================================================================================================
</TABLE>
Ratios are calculated on U.S. GAAP basis
No comparison with prior year net underwriting income is possible as 1997 was
the first period in which the Company underwrote risks on its own behalf.
Typically the underwriting results of a reinsurance company are evaluated by
reference to its loss and loss expense ratio, acquisition cost ratio,
administrative expense ratio and combined ratio. Management believes that it is
not meaningful to evaluate the Company's 1997 performance with reference to the
administrative expense ratio and the combined ratio because of the Class B
warrant expense and other costs that were incurred by the Company as a result of
the Offerings.
The Company manages its underwriting risk exposure by operating two forms of
retrocession: an excess of loss insurance policy and co-reinsurance. The
Company's excess liability insurance policy generally provides limits up to a
maximum of $10 million per occurrence, with a minimum attachment point generally
of $100 thousand. Effective January 1, 1998, the Company increased the maximum
limit to $30 million per occurrence for all new and renewal business.
Effective January 1, 1998, all of the Company's non-North American business will
be co-reinsured with two other reinsurance companies that will participate with
underwriting lines of 7.5% and 5.0%.
Management Fee Revenue
Management fee revenue decreased by $39 thousand or 1% from $3.9 million in 1996
to $3.8 million in 1997. This net decrease resulted from an increase in
management fee revenue of $666 thousand or 17% which was due to an increased
participation in the reinsurance pools managed by the Company. This increase was
offset by a decline of approximately 15% in the value of the
22
<PAGE>
Deutsche Mark against the U.S. dollar. Included in 1997 management fee revenue
is profit commission of $381 thousand relating to the 1996 underwriting year.
This compares with profit commission recognized during 1996 of $398 thousand.
As a result of the Company becoming a reinsurer for its own account in 1997, the
Company will discontinue its operations as an underwriting management company in
1998 except to manage the run-off of the business written between 1994 and 1997.
Consequently, management fee revenue will decrease significantly in 1998 and for
the years thereafter.
Net Investment Income
Net investment income increased by $412 thousand or 222% from $186 thousand in
1996 to $598 thousand in 1997 due to the Company's significantly larger
investment portfolio as a result of the proceeds raised from the Offerings. The
Company anticipates that there will be a significant increase in investment
income for the 1998 year as a result of the proceeds of the Offerings being
available for the full year.
Administrative Expenses and Taxes
Total administrative expenses, which includes personnel costs, professional
service fees, interest expense, other expenses and income taxes increased by
$3.0 million or 70% from $4.2 million in 1996 to $7.2 million in 1997.
Personnel costs increased by $900 thousand from $1.4 million in 1996 to $2.3
million in 1997, of which $690 thousand was principally due to the employment of
two executives who were previously consultants to the Company. The remainder of
the increase is due to employees for the new representative office in Toronto.
Professional services fees increased by $356 thousand from $1.2 million in 1996
to $1.6 million in 1997 primarily due to costs of $1.2 million associated with
the Company's capital raising activity. This increase was partially offset by a
reduction in consulting expenses for the two consultants who became executives.
Other expenses increased by $2.4 million from $1.3 million in 1996 to $3.7
million in 1997. This increase includes travel expenses associated with the
Company's capital raising activities of $314 thousand, an increase in unrealized
foreign exchange losses of $436 thousand as a result of the strengthening of the
U.S. dollar and other miscellaneous expenses including insurance, recruitment
fees, taxes and utilities. The increase in administrative expenses was offset
primarily by a decline of approximately 15% in the value of the Deutsche Mark
against the U.S. dollar.
Class B Warrants Expense
In connection with the Offerings, the Company issued Class A Warrants to
purchase up to 1,381,200 Common Shares and Class B Warrants to purchase up to
1,381,200 Common Shares if certain performance criteria are satisfied. The Class
A Warrants have been treated as an offering cost and as such have been
incorporated within equity.
The Class B Warrants have been determined to be in the form of compensation for
services rendered to the Company. As such, SFAS 123 "Accounting for
23
<PAGE>
ESG Re Limited Management's Discussion and Analysis of Financial Conditions
and Results of Operations
Stock-Based Compensation" and Emerging Issues Task Force Consensus 96-18
"Accounting for Equity Instruments that are Issued to Other than Employees for
Acquiring or in Conjunction with Selling Goods or Services" require that the
cost of these services be reflected as an expense for the year.
As a result, the Company recognized a one-time accounting charge of $3.6 million
relating to the Class B Warrants. The expense was calculated based on the fair
value of the warrants as of the date of completion of the Offerings. As the
expense was reflected as a charge to the statement of operations and as an
increase to additional paid-in capital, there was no impact on the Company's
total shareholders' equity or cash position.
Year Ended December 31, 1996 Compared to Year Ended December 31, 1995
Total revenues decreased by $610 thousand or 13% from $4.7 million in 1995 to
$4.1 million in 1996. This decrease was caused by a management decision to
reduce management fees and commissions by approximately 20% in order to enhance
the Company's competitive position and the underwriting profitability of the
business underwritten for the pools. This decision resulted in a decrease in fee
revenue of approximately $882 thousand. There was a further decline in total
revenue of $253 thousand due to a decline of approximately 6% in the value of
the Deutsche Mark against the U.S. dollar. These decreases were offset in part
by the recognition of approximately $398 thousand of profit commissions in 1996
of which no amounts were recognized in prior years. The Company earns a profit
commission based on the underlying profitability of the pool business. The
Company recorded its first profit commission revenue in 1996 based upon the
clear emergence of profitability in the underlying pools whereas no profit
commission was recorded in 1995 and 1994.
Total expenses decreased by $159 thousand or 4% from $4.2 million in 1995 to
$4.1 million in 1996 which was the result of increased expenses offset by the
decline of approximately 6% in the value of the Deutsche Mark against the U.S.
dollar. Personnel costs increased by $80 thousand which resulted from an
increase in the numbers of staff of $165 thousand and a decrease caused by a
decline of $85 thousand in the value of the Deutsche Mark against the U.S.
dollar. In addition, professional service fees of $252 thousand were incurred
for advice relating to the capitalization of the Company. These increases were
offset by a decrease of $254 thousand in total operating expenses due to a
decline of approximately 6% in the value of the Deutsche Mark against the U.S.
dollar. In addition, in 1996, the Company incurred a one-time tax expense
related to the reorganization of ESG Germany of $121 thousand.
Year Ended December 31, 1995 Compared to Year Ended December 31, 1994
Total revenues increased in 1995 by $1.3 million or 39% from $3.4 million in
1994 to $4.7 million in 1995. This increase was primarily attributable to the
increased underwriting activities of the Company on behalf of reinsurance
partners in the
24
<PAGE>
personal accident market. Management fee revenue from the personal accident
market increased by $888 thousand from 1994 to 1995. In addition, revenues
increased by $440 thousand reflecting the increase of approximately 11% in the
value of the Deutsche Mark against the U.S. dollar.
Total expenses increased by $908 thousand or 27% from $3.3 million in 1994 to
$4.2 million in 1995. Personnel costs accounted for $276 thousand of this
increase. This increase was due to an increase in the number of staff and
employee compensation of $150 thousand, and an increase of $126 thousand due to
the increase of approximately 11% in the value of the Deutsche Mark against the
U.S. dollar. In addition, marketing and selling-related costs increased by $190
thousand principally for the opening of new representative offices to cover the
Eastern European markets. In addition, expenses increased by $397 thousand
reflecting the increase of approximately 11% in the value of the Deutsche Mark
against the U.S. dollar.
Liquidity and Capital Resources
For the 1997 Year
In December 1997, the Company was capitalized with gross proceeds of $257
million from the Offerings. The proceeds were used to capitalize ES Bermuda, ES
Ireland and ES Germany with $55 million, $50 million and $12 million,
respectively. The Company also incurred expenses of the Offerings of
approximately $25 million and repaid its outstanding debt, principally loans
from shareholders and bank demand borrowings, of $3.5 million. Total assets
increased by $270.6 million from $2.5 million in 1996 to $273.1 million in 1997
and total shareholders' equity increased by $234.9 million to $234.4 million at
December 31, 1997. The increase in total assets and shareholders' equity was due
primarily to the proceeds received from the Offerings.
At December 31, 1997, the Company had $237.0 million in total investments and
cash. All fixed maturity securities in the Company's investment portfolio are
classified as available for sale and are carried at fair value. At December 31,
1997, the fixed maturity investment portfolio had an average credit quality of
AAA, an average duration of 2.3 years and an average yield of 5.7%.
The Company's objective is to maximize long-term investment returns while
maintaining a liquid, high-quality portfolio. To this end, the investment policy
requires that the portfolio has an average credit quality rating of AA and no
more than 3% of the portfolio is invested in a single issuer (other than issues
of sovereign governments with a rating of AA or better). The initial target
duration is 2.75 years.
In 1998, the Company will continue to pursue its investment objective. The cash
flows from underwriting operations along with other factors, including interest
rate trends, composition of reinsurance liabilities, liquidity needs, global
currency developments and emerging investment opportunities, will be determining
factors in the composition of the Company's investment portfolio.
25
<PAGE>
ESG Re Limited Management's Discussion and Analysis of Financial Conditions
and Results of Operations
As of December 31, 1997, the Company had the following material commitments for
operating leases and employment contracts:
U.S. Dollars
Years Ending December 31, (in thousands)
- --------------------------------------------------------------------------------
1998 $ 2,002
- --------------------------------------------------------------------------------
1999 1,732
- --------------------------------------------------------------------------------
2000 1,547
- --------------------------------------------------------------------------------
2001 401
- --------------------------------------------------------------------------------
2002 77
- --------------------------------------------------------------------------------
Thereafter --
- --------------------------------------------------------------------------------
Total $ 5,759
================================================================================
In addition to the above commitments, the Company will periodically, pursuant to
reinsurance contract provisions, be required to provide letters of credit to
secure reinsurance balances.
The Company expects that its financing and operational needs for the foreseeable
future will be met by the proceeds of the Offerings, as well as by funds
generated from ongoing operations. However, no assurance can be given that the
Company will be successful in the implementation of its operating strategy as a
reinsurance company.
For the 1996 Year
In 1996, the Company entered into a series of equity transactions to simplify
its capital structure, resulting, upon the settlement of certain of these
transactions, in a reduction of shareholders' equity at December 31, 1996 of
$173 thousand. Subsequent to December 31, 1996, certain other of these
transactions settled and resulted in an increase in capital of $516 thousand.
The Company's total outstanding debt decreased by $129 thousand from $1.9
million in 1995 to $1.8 million in 1996. This decrease was the result of
principal repayments of $133 thousand to a former shareholder and $139 thousand
to banks for long-term debt. This decrease was offset by an increase in
short-term debt of $296 thousand and the effect of translating the Deutsche Mark
into the U.S. dollar. The Company also purchased $153 thousand of fixed assets
and intangible assets.
For the 1995 Year
During 1995, the Company reduced its outstanding debt by repaying $771 thousand
of long-term debt, including $633 thousand to a former shareholder, which was
partially offset by an increase in short-term borrowings from banks of $251
thousand. The Company also made capital purchases for furniture and equipment of
$46 thousand and the Company agreed to repurchase from a selling shareholder
$203 thousand of registered equity capital.
Current Developments
The first quarterly cash dividend of $0.075 per share was declared on March 9,
1998 by the Company's Board of Directors payable on April 3, 1998, to common
shareholders of record on March 26, 1998.
26
<PAGE>
Currency
The Company's functional currency is the U.S. dollar. However, because the
Company underwrites reinsurance exposures and collects premiums in currencies
other than the U.S. dollar, the Company experiences foreign exchange gains and
losses, which, in turn affects the results of operations.
The Company intends to hold investments in the currencies in which it will
collect premiums, pay claims and hold reserves, thus creating a natural foreign
exchange hedge so that resulting foreign exchange rate gains and losses can be
reduced to the extent assets equal liabilities. If in the future this hedging
strategy is not effective, the Company may consider other hedging activities to
reduce its foreign currency exposures.
Inflation
The Company does not believe inflation has had a material impact on its
operations for any of the three years presented.
Year 2000
The inability of computers, software and other equipment utilizing
microprocessors to recognize data fields containing a two-digit code for year
2000 and beyond is commonly referred to as the Year 2000 Compliance Issue. As
the year 2000 approaches, some systems may be unable to process certain
date-based information accurately.
Based upon a review of the Company's computer systems, management believes that
they are Year 2000 compliant.
The Company's systems do not currently electronically interface with customers
or clients. As such, the Company's exposure to the year 2000 issue with respect
to customers and clients is limited to the possibility that information supplied
by these companies could not be of sufficient quality or timeliness and
therefore could indirectly affect the quality or timeliness of the Company's own
data. During 1998, the Company will initiate discussions with significant
customers and clients to determine the extent to which these companies are
vulnerable to the year 2000 Compliance Issue. The Company anticipates that
certain reinsurance management software systems will electronically interface
with the customers' systems in the near future. The Company believes that those
customers are currently in the process of evaluating their systems with regard
to the Year 2000 Compliance Issues. There can be no guarantee that the systems
of other companies on which the Company relies for information will be converted
in a timely manner and would not have an adverse effect on the Company's
financial position or results of operations.
The total cost to the Company of these Year 2000 Compliance activities has not
been and is not anticipated to be material to its financial position or results
of operations in any given year. These costs are based on management's best
estimates. However, there can be no guarantee that these estimates will be
achieved and actual results could differ significantly from those estimates.
Accounting Pronouncements
In February 1997, the Financial Accounting Standard Board ("FASB") issued SFAS
No. 128, "Earnings per Share" and SFAS No. 129, "Disclosure of Information about
Capital Structure" and in June 1997, the FASB issued SFAS No. 130, "Reporting
Comprehensive Income" and SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information." The Company has adopted each of these
pronouncments.
27
<PAGE>
ESG Re Limited Consolidated Balance Sheets
As of December 31, 1997 1996
- --------------------------------------------------------------------------------
U.S. dollars in thousands except share and per share data
ASSETS
Fixed maturities-available for sale, at fair value
(cost: $218,694 and $-) $ 218,867 $ --
Short-term investments 11,913 --
Cash and cash equivalents 6,196 15
- --------------------------------------------------------------------------------
Total investments and cash 236,976 15
Accrued investment income 437 --
Management fees receivable 3,259 1,780
Premiums receivable 25,785 --
Reinsurance recoverable on incurred losses 397 --
Prepaid reinsurance premiums 300 --
Deferred acquisition costs 4,147 --
Deferred tax asset 788 272
Other assets 979 451
- --------------------------------------------------------------------------------
TOTAL ASSETS $ 273,068 $ 2,518
================================================================================
LIABILITIES
Unpaid losses and loss expenses $ 7,846 $ --
Unearned premiums 12,168 --
Acquisition costs payable 10,335 --
Costs of offering payable
($ 2,520 and $-due to related parties) 5,802 --
Accrued expenses and accounts payable 2,309 822
Debt ($-and $868 due to related parties) -- 1,812
Liability for share transactions -- 373
Other liabilities 233 --
- --------------------------------------------------------------------------------
Total liabilities 38,693 3,007
Fiduciary liabilities 10,485 4,928
Less: Cash and cash equivalents held in a
fiduciary capacity (10,485) (4,928)
Commitments and contingencies (Note 11) -- --
SHAREHOLDERS' EQUITY
Preference shares, 50,000,000 and no
shares authorized; no shares issued
and outstanding for 1997 and 1996,
respectively -- --
Class B common shares, 100,000,000 and no
shares authorized; no shares issued and
outstanding for 1997 and 1996, respectively -- --
Common shares, par value $1 and 5DM per share;
100,000,000 and 100,000 shares authorized;
13,923,799 and 20,000 shares issued and
outstanding for 1997 and 1996, respectively 13,924 62
Additional paid-in capital 225,954 62
Accumulated other comprehensive income:
Foreign currency translation adjustments,
net of tax 32 (4)
Unrealized gains on securities, net of
reclassification adjustments and tax 170 --
- --------------------------------------------------------------------------------
Accumulated other comprehensive income 202 (4)
- --------------------------------------------------------------------------------
Retained deficit (5,705) (609)
- --------------------------------------------------------------------------------
Total shareholders' equity (deficit) 234,375 (489)
- --------------------------------------------------------------------------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 273,068 $ 2,518
================================================================================
The accompanying notes are an integral part of the Consolidated Financial
Statements.
28
<PAGE>
ESG Re Limited Consolidated Statements of Operations
Years Ended December 31, 1997 1996 1995
- --------------------------------------------------------------------------------
U.S. dollars in thousands except share and per share data
REVENUES
Net premiums written $ 25,392 $ -- $ --
Change in unearned premiums (11,981) -- --
- --------------------------------------------------------------------------------
Net premiums earned 13,411 -- --
Management fee revenue 3,830 3,869 4,515
Net investment income 598 186 150
- --------------------------------------------------------------------------------
TOTAL REVENUES 17,839 4,055 4,665
================================================================================
EXPENSES
Losses and loss expenses 7,449 -- --
Acquisition costs 4,693 -- --
Class B Warrants expense (for related party) 3,626 -- --
Personnel costs 2,282 1,382 1,302
Professional services fees (includes $-,
$861 and $793 for related parties) 1,594 1,238 1,005
Interest expense (includes $33, $68 and $129
for related parties) 119 141 185
Other expenses 3,741 1,301 1,729
- --------------------------------------------------------------------------------
TOTAL EXPENSES 23,504 4,062 4,221
================================================================================
NET INCOME (LOSS) BEFORE TAXES (5,665) (7) 444
Income tax expense (benefit) (569) 156 298
- --------------------------------------------------------------------------------
NET INCOME (LOSS) $ (5,096) $ (163) $ 146
================================================================================
PER SHARE DATA (Note 10)
Basic net loss per share $ (4.11) $ (1.38) $ --
- --------------------------------------------------------------------------------
Diluted net loss per share $ (4.11) $ (1.38) $ --
- --------------------------------------------------------------------------------
Weighted average shares outstanding
--basic and diluted 1,238,757 117,863 --
================================================================================
The accompanying notes are an integral part of the Consolidated Financial
Statements.
29
<PAGE>
ESG Re Limited Consolidated Statements of Changes in Shareholders' Equity
Years Ended December 31, 1997 1996 1995
- --------------------------------------------------------------------------------
U.S. dollars in thousands
COMMON SHARES (PAR VALUE)
Balance at January 1 $ 62 $ -- $ --
Reorganization of holding company -- 62 --
Issuance of shares in connection with
public and private offerings 13,936 -- --
Shares retired during year (74) -- --
- --------------------------------------------------------------------------------
Balance at December 31 13,924 62 --
================================================================================
ADDITIONAL PAID-IN CAPITAL
Balance at January 1 62 -- --
Reorganization of holding company -- 62 --
Issuance of shares in connection with
public and private offerings 216,113 -- --
Issuance of Class A Warrants to purchase
common shares 6,215 -- --
Issuance of Class B Warrants to purchase
common shares 3,626 -- --
Shares retired during year (62) -- --
- --------------------------------------------------------------------------------
Balance at December 31 225,954 62 --
================================================================================
REGISTERED CAPITAL
Balance at January 1 -- 316 316
Reorganization of holding company -- (316) --
- --------------------------------------------------------------------------------
Balance at December 31 -- -- 316
================================================================================
TREASURY CAPITAL
Balance at January 1 -- (19) (19)
Reorganization of holding company -- 19 --
- --------------------------------------------------------------------------------
Balance at December 31 -- -- (19)
================================================================================
ACCUMULATED OTHER COMPREHENSIVE INCOME
Balance at January 1 (4) (3) --
Foreign currency translation
adjustments, net of tax 36 (1) (3)
Unrealized gains on securities, net of
reclassification adjustments and tax 170 -- --
- --------------------------------------------------------------------------------
Balance at December 31 202 (4) (3)
================================================================================
RETAINED DEFICIT
Balance at January 1 (609) (446) (408)
Net income (loss) (5,096) (163) 146
Capital repurchased -- -- (184)
- --------------------------------------------------------------------------------
Balance at December 31 (5,705) (609) (446)
- --------------------------------------------------------------------------------
TOTAL SHAREHOLDERS' EQUITY (DEFICIT) $ 234,375 $ (489) $ (152)
================================================================================
The accompanying notes are an integral part of the Consolidated Financial
Statements.
30
<PAGE>
ESG Re Limited Consolidated Statements of Cash Flows
Years Ended December 31, 1997 1996 1995
- --------------------------------------------------------------------------------
U.S. dollars in thousands
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) $ (5,096) $(163) $ 146
Increase in equity investment (16) (4) (5)
Depreciation and amortization 117 132 93
Non-cash compensation expenses 3,665 -- --
Adjustments to reconcile net income
(loss) to net cash provided by
operating activities:
(Increase) in accrued investment income (437) -- --
(Increase) decrease in management fees
receivable (1,769) 139 159
(Increase) in premiums receivable (25,785) -- --
(Increase) in reinsurance recoverable
on incurred losses (397) -- --
(Increase) in prepaid reinsurance premiums (300) -- --
(Increase) in deferred acquisition costs (4,147) -- --
(Increase) decrease in deferred tax asset (573) (1) 223
Increase in unpaid losses and loss expenses 7,846 -- --
Increase in unearned premiums 12,168 -- --
Increase in acquisition costs payable 10,335 -- --
Increase in accrued expenses and accounts
payable 1,075 -- --
(Increase) decrease in other assets
and liabilities 775 32 (60)
- --------------------------------------------------------------------------------
Net cash provided by (used in) operating
activities (2,539) 135 556
================================================================================
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from sale of equity investment -- -- 21
Cost of fixed maturities acquired -
available for sale (218,694) -- --
Cost of other investment assets acquired (11,913) -- --
Purchases of fixed assets (203) (109) (46)
Purchases of intangible assets (230) (43) (3)
- --------------------------------------------------------------------------------
Net cash used in investing activities (231,040) (152) (28)
================================================================================
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issuance of shares 241,296 -- --
Repurchase of capital -- (204) --
Reorganization of holding company -- 58 --
Sale of shares -- 66 --
Advance for issuance of shares -- 67 --
Net change in short-term debt (1,622) 296 251
Repayments of long-term borrowings -- (272) (771)
- --------------------------------------------------------------------------------
Net cash provided by (used in) financing
activities 239,674 11 (520)
- --------------------------------------------------------------------------------
EFFECT OF EXCHANGE RATE CHANGES ON CASH 86 (12) 4
================================================================================
Net increase (decrease) in cash 6,181 (18) 12
Cash and cash equivalents at January 1 15 33 21
- --------------------------------------------------------------------------------
Cash and cash equivalents at December 31 $ 6,196 $ 15 $ 33
================================================================================
SUPPLEMENTAL CASH FLOW INFORMATION
Cash transactions
Interest paid $ 108 $ 124 $ 193
Income taxes paid 109 156 75
Noncash financing transaction
Issuance of common stock in connection
with Formation (Note 1) -- -- --
================================================================================
The accompanying notes are an integral part of the Consolidated Financial
Statements.
31
<PAGE>
ESG Re Limited Consolidated Statements of Comprehensive Income
Years Ended December 31, 1997 1996 1995
- --------------------------------------------------------------------------------
U.S. dollars in thousands
Net income (loss) $(5,096) $ (163) $ 146
- --------------------------------------------------------------------------------
Other comprehensive income, net of tax:
Foreign currency translation
adjustments 36 (1) (3)
Unrealized gains on securities:
Unrealized holding gains arising
during period 170 -- --
Less reclassification adjustment
for gains (losses)
Included in net income -- -- --
- --------------------------------------------------------------------------------
Other comprehensive income 206 (1) (3)
- --------------------------------------------------------------------------------
Comprehensive income $(4,890) $ (164) $ 143
================================================================================
The accompanying notes are an integral part of the Consolidated Financial
Statements.
32
<PAGE>
ESG Re Limited Notes to the Consolidated Financial Statements
Years Ended December 31, 1997, 1996 and 1995
1. Organization and Business
ESG Re Limited (the "Company") was incorporated under the laws of Bermuda on
August 21, 1997. Its principal activities, through subsidiaries, are to provide
accident, health, life and special risk reinsurance and to provide
underwriting management services for accident, health, life and special risk
reinsurance.
Prior to the incorporation, the Company's operations were conducted through its
subsidiary, European Specialty Group Holding AG ("ESG Germany"). On December 2,
1997, the shareholders of ESG Germany entered into agreements to receive 900,000
common shares, par value $1 per share, of the Company in exchange for all of
their interests in ESG Germany (the "Formation"). ESG Germany thereby became a
subsidiary of the Company.
On December 3, 1997, 2,673,799 common shares, Class A Warrants to purchase up to
1,381,200 common shares and Class B Warrants to purchase up to 1,381,200 common
shares, subject to certain performance criteria were sold (the "Direct Sales")
for proceeds of $50 million.
In December 1997, in an Initial Public Offering (the "IPO"), the Company issued
10,350,000 common shares for proceeds of $207 million. Costs including discounts
and commissions associated with the Formation, Direct Sales and IPO were
approximately $25.8 million of which $21.3 million were reflected as a reduction
of additional paid-in capital. The Formation, Direct Sales and IPO were
accounted for as a recapitalization.
Since 1994, ESG Germany has provided underwriting management services by
operating as a personal and special risk reinsurance underwriter on behalf of
certain reinsurers. ESG Germany earns a management fee from reinsurance
companies for administering various underwriting pools without directly
participating in the underwriting results as well as providing underwriting
services to reinsurance companies outside of the pool structure.
Subsequent to the IPO, the Company assumed for its own account, through
retrocession, risks that ESG Germany previously underwrote on behalf of its
reinsurance clients. The Company exercised a contractual right provided in the
pool agreements to retrocede from its reinsurance clients a 30% share of the
existing pool business, retroactive to January 1, 1997, of the 1997 business it
managed for its reinsurance clients. The Company also assumed additional quota
share reinsurance from various pool clients. In 1998, the Company intends to
discontinue its management services business except to manage the runoff of the
reinsurance pools.
The consolidated financial statements include the accounts of its direct
wholly-owned subsidiaries, European Specialty Reinsurance (Bermuda) Limited ("ES
Bermuda"), European Specialty Group (United Kingdom) Limited, and their
indirect, wholly-owned subsidiaries European Specialty Reinsurance (Ireland)
Limited, ESG Germany and European Specialty (North America) Limited. All
material intercompany balances and transactions have been eliminated in
consolidation.
33
<PAGE>
ESG Re Limited Notes to the Consolidated Financial Statements
The financial statements for the year ended December 31, 1997 represent the
financial performance of the Company both as a reinsurer for its own account and
as an underwriting management company. The comparative information for years
ended December 31, 1996 and 1995 represent the financial performance of the
Company as an underwriting management company. Certain reclassifications have
been made to the 1996 and 1995 financial statements to conform to the 1997
presentations.
2. Summary of Significant Accounting Policies
The Company's consolidated financial statements have been prepared in accordance
with accounting principles generally accepted in the United States of America
("U.S. GAAP"). The Company's significant accounting policies include the
following:
(a) Premium Revenues
Premiums written are estimated based upon reports received from ceding
companies, supplemented by the Company's estimate of premiums written for which
ceding company reports have not been received. Differences between such
estimates and actual amounts are recorded in the period in which the actual
amounts are determined. The reinsurance contracts entered into by the Company
are primarily of short-duration. Premiums written are recognized as earned over
the period of the contracts or policy in proportion to the amount of insurance
protection provided.
Unearned premium reserves are established to cover the remainder of the
unexpired contract period. Such reserves are established based upon reports
received from ceding companies or computed using pro rata methods based on
statistical data. Written and earned premiums, and the related costs, which have
not yet been reported to the Company are estimated and accrued.
(b) Reserve for Losses and Loss Expenses
The reserve for unpaid losses and loss adjustment expenses is based on
individual case estimates and reports received from ceding companies. A
provision is included for losses and loss expenses incurred but not reported
("IBNR") based on past experience. To the extent that the Company's historical
experience is inadequate for estimating reserves, such estimates may be
actuarially determined based upon industry experience and management's judgment.
The reserves are reviewed continually and any change in estimates is reflected
in earnings in the period the adjustment is made. Management believes that
adequate provision has been made for the Company's losses and loss expenses.
However, there can be no assurance that losses will not exceed the Company's
total reserves.
(c) Investments
Fixed maturity securities are classified as available for sale and are reported
at estimated fair value. Investments that are available for sale are expected to
be held for an indefinite period but may be sold depending on interest rates and
other considerations. Short-term investments comprise investments with a
maturity greater than 90 days but less than one year and are stated at cost,
which approximates fair
34
<PAGE>
ESG Re Limited Notes to the Consolidated Financial Statements
value. Unrealized investment gains and losses on fixed maturity securities
available for sale, net of applicable deferred income tax, are reported as a
separate component of "Accumulated other comprehensive income". Realized gains
or losses on sale of investments are determined on the basis of average cost.
The carrying value of fixed maturities are adjusted for impairments in value
that are considered to be other than temporary.
(d) Deferred Acquisition Costs
Acquisition costs, consisting principally of commissions and brokerage expenses
incurred at the time a contract or policy is issued, are deferred and amortized
over the period in which the related premiums are earned. Deferred policy
acquisition costs are limited to their estimated realizable value based on the
related unearned premiums, anticipated claims and claim expenses and anticipated
investment income.
(e) Reinsurance
Premiums are recorded net of retrocessions (ceded reinsurance). Reinsurance
premiums ceded are reported as prepaid reinsurance premiums and amortized over
the respective contract or policy periods in proportion to the amount of
insurance protection provided. Commissions on reinsurance ceded will be deferred
over the terms of the contracts of reinsurance to which they relate and
amortized in proportion to the amount of insurance protection provided. The
Company provides reserves for uncollectible reinsurance balances based on
management's assessment of the collectibility of the outstanding balances.
(f) Management Fee Revenue
Management fee revenue consists primarily of underwriting management and related
fees and profit commissions based on the underwriting results of the reinsurance
pools, as well as commissions for facultative business placed with reinsurers
that do not participate in the pools. Management and related fees are recorded
based on the estimated gross premiums written in each underwriting year net of
estimated uncollectible amounts. These fees are recognized in revenue when the
underwriting contract between the reinsurance pool and the ceding insurance
company becomes effective since substantially all services have been provided by
such date. The Company has had no provision for uncollectible fees for each of
the three years in the period ended December 31, 1997. The recognition of fee
revenue as of the effective date of the underwriting contract is based upon the
fact that the Company has no future obligations regarding these contracts except
to provide ancillary administrative services. Management and related fees, which
generally are collected over a period up to 24 months, are discounted for any
amounts expected to be collected after the first 12 months of the underwriting
contract. Any adjustments to management and related fees are made in the period
in which ceding companies report information requiring such changes. The Company
is only entitled to receive its management fees to the extent that gross written
premiums are collected. Profit commissions due from reinsurance pools are based
upon the actual underwriting results of each
35
<PAGE>
ESG Re Limited Notes to the Consolidated Financial Statements
underwriting pool and are generally calculated and earned 12 to 24 months after
the end of each underwriting year. The Company relies on data from ceding
companies and the expertise of its actuarial staff to determine when profit
commissions are earned. It is possible that profit commissions from various
underwriting years may be earned and recognized in the same accounting year. For
the year ended December 31, 1995, no profit commissions were recognized. For the
year ended December 31, 1996, profit commissions of $398 thousand were
recognized as earned from the 1994 and 1995 underwriting years. For the year
ended December 31, 1997, profit commissions of $381 thousand were recognized as
earned from the 1996 underwriting year. As of December 31, 1997, no profit
commission has been recognized to date with respect to the 1997 underwriting
year. Expenses for future administrative services that the Company is obligated
to provide are accrued when the underwriting contract is established. Such
accrued expenses were $66 thousand and $77 thousand as of December 31, 1997 and
1996, respectively, and are included in "Accrued expenses and accounts payable".
(g) Income Taxes
The Company and its subsidiaries file income tax returns as required by the laws
of each country in which it has operations. The Company accounts for income tax
expenses and liabilities under the asset and liability method in accordance with
Statement of Financial Accounting Standards Board ("SFAS") No. 109, "Accounting
for Income Taxes". Deferred income taxes arise from the recognition of temporary
differences between income reported for financial statement purposes and for
income tax purposes. These deferred taxes are measured by applying currently
enacted tax rates. In addition, SFAS No. 109 requires the recognition of future
benefits, such as for net operating loss carryforwards, to the extent that
realization of such benefits are more likely than not.
(h) Other Assets
(i) Equity Investment
As of December 31, 1997, the Company had a 40% ownership interest in
SportSecure GmbH, a reinsurance intermediary specializing in sports and
entertainment risks, and a 30% ownership interest in European Specialty
Berlin GmbH, a representative office. These investments are accounted for
under the equity method. The Company's equity in earnings of such
investments was $16 thousand, $4 thousand and $5 thousand for the years
ended December 31, 1997, 1996 and 1995, respectively.
(ii) Intangible Assets
Intangible assets consist primarily of exclusive marketing rights,
software licenses, trademark rights and certain organizational costs.
These assets are recorded at cost and are amortized on a straight-line
basis over useful lives of three to five years. Balances are periodically
reviewed and evaluated for impairment.
(iii) Fixed Assets
Fixed assets primarily consist of computer equipment and office furniture
and are depreciated over the estimated useful lives of the assets by the
straight-line
36
<PAGE>
ESG Re Limited Notes to the Consolidated Financial Statements
method. The estimated useful lives of assets range between three and ten
years depending on the type of the asset. Leasehold improvements are
amortized over the shorter of the term of the lease or the estimated
useful lives of the improvements.
(i) Foreign Currency Translation
The functional and reporting currency of the Company is U.S. dollars. Foreign
currency receivables or payables that are denominated in a currency other than
U.S. dollars are translated into U.S. dollars at the rates of exchange in effect
at the balance sheet date. Revenues and expenses are translated into U.S.
dollars using weighted average exchange rates for the period. The resulting
exchange gains or losses are included in the results of operations. Exchange
gains and losses related to the translation of investments available for sale
are included in the net unrealized appreciation (depreciation) of investments,
net of deferred income taxes, as a separate component of "Accumulated other
comprehensive income".
Assets and liabilities related to foreign operations are translated into U.S.
dollars at the exchange rate in effect at the balance sheet date; revenues and
expenses are translated into U.S. dollars using weighted average exchange rates
for the period. Gains and losses resulting from translating foreign currency
financial statements, net of deferred income taxes, are excluded from income and
included as a separate component of "Accumulated other comprehensive income".
(j) Earnings Per Share
Basic earnings per share are computed by dividing net income by the weighted
average number of common shares. Diluted earnings per common share reflect the
maximum dilution that would have resulted from the exercise of stock options and
warrants to purchase common shares. Diluted earnings per common share are
computed by dividing net income by the weighted average number of common shares
and all dilutive securities.
(k) Stock-Based Compensation
SFAS No. 123, "Accounting for Stock-Based Compensation" defines a fair value
based method of accounting for stock-based employee compensation plans. Under
SFAS No. 123, companies are encouraged, but are not required, to adopt the fair
value method for all employee awards granted. Companies are permitted to account
for such transactions under Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees", but must disclose, in a note to the
financial statements, pro forma net income and earnings per share as if SFAS No.
123 had been applied. The Company accounts for stock-based compensation under
APB No. 25 and provides the fair value method disclosures required by SFAS No.
123.
(l) Accounting Pronouncements
In February 1997, the Financial Accounting Standard Board ("FASB") issued SFAS
No. 128, "Earnings per Share" and SFAS No. 129, "Disclosure of Information about
Capital Structure" and in June 1997, the FASB issued SFAS No. 130, "Reporting
Comprehensive Income" and SFAS No. 131, "Disclosures about Segments of an
37
<PAGE>
ESG Re Limited Notes to the Consolidated Financial Statements
Enterprise and Related Information". The Company has adopted each of these
pronouncements.
(m) Cash and Cash Equivalents
Cash and cash equivalents include cash and bank deposits with original
maturities of 90 days or less.
(n) Estimates
The preparation of financial statements in accordance with U.S. GAAP requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses during
the reporting period as well as the disclosure of such amounts. Actual results
could materially differ from those estimates and assumptions.
3. Investments
(a) Fixed Maturities
The amortized cost, fair value and gross unrealized gains and losses of fixed
maturity investments are presented in the table below:
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Fair
As of December 31, 1997 Cost Gains Losses Value
- ---------------------------------------------------------------------------------------------------
U.S. dollars in thousands
<S> <C> <C> <C> <C>
Fixed maturities -- available for sale
U.S. treasury securities and obligations of U.S.
government agencies and corporations $ 218,694 $ 173 -- $218,867
- ---------------------------------------------------------------------------------------------------
Total $ 218,694 $ 173 -- $218,867
===================================================================================================
</TABLE>
As the Company did not have any fixed maturity or short-term investments in 1996
or 1995, no comparative information has been shown.
(b) Maturity Distribution
The amortized cost and market value of fixed maturities are shown in the
following table by contractual maturities:
Amortized Fair
As of December 31, 1997 Cost Value
================================================================================
U.S. dollars in thousands
Fixed maturities --
available for sale
Due in one year or
less $ 22,247 $ 22,295
Due after one year
through five years 196,447 196,572
- --------------------------------------------------------------------------------
Total $218,694 $218,867
================================================================================
(c) Realized Gains and Losses
No gains or losses were realized during 1997.
38
<PAGE>
ESG Re Limited Notes to the Consolidated Financial Statements
(d) Change in Net Unrealized Gains on Investments
The change in net unrealized gains on investments is derived from the following
sources:
As of December 31, 1997
- --------------------------------------------------------------------------------
U.S. dollars in thousands
Change in unrealized
gains on investments,
net of deferred taxes,
included in other
comprehensive income:
Fixed maturities $ 173
Deferred taxes (3)
- --------------------------------------------------------------------------------
Total $ 170
================================================================================
(e) Net Investment Income
The components of net investment income are presented in the table below:
Years Ended December 31, 1997 1996 1995
- --------------------------------------------------------------------------------
U.S. dollars in thousands
Interest on fixed
maturities $ 438 $ -- $ --
Interest on short-term
investments 71 -- --
Interest on funds held
in a fiduciary capacity 35 73 45
Amortization of discount on
long-term management
fee receivables 106 113 105
- --------------------------------------------------------------------------------
Total investment income 650 186 150
Investment expenses (52) -- --
- --------------------------------------------------------------------------------
Net investment income $ 598 $ 186 $ 150
================================================================================
4. Management Fees Receivable
Management fees receivable represents management fee and related revenue which
are primarily due from the reinsurers participating in the reinsurance pools.
The receivable is recorded net of $0 and $244 thousand of advances from the pool
participants as of December 31, 1997 and 1996, respectively. As described in
Note 2(f), the receivable is discounted for any amounts expected to be collected
after the first 12 months of the underwriting contract. The discount rates used
by the Company were 5.8% for 1997, and 6.1% for 1996 and 1995, which approximate
U.S. Treasury rates. The discount on the receivable is amortized into "Net
investment income" over a period of 24 months. The Company's fees are
collectible in various currencies. In selective instances, the Company has
entered into foreign currency contracts in order to hedge the risk of
fluctuations in exchange rates. Net foreign currency realized gains and
(losses), including results from foreign currency contracts, are reflected in
"Other expenses" and amounted to $(228) thousand, $87 thousand and $(128)
thousand for the years ended December 31, 1997, 1996 and 1995, respectively.
39
<PAGE>
ESG Re Limited Notes to the Consolidated Financial Statements
5. Deferred Acquisition Costs
Activity in deferred acquisition costs for the year ended December 31, 1997 is
summarized as follows:
Year Ended December 31, 1997
- --------------------------------------------------------------------------------
U.S. dollars in thousands
Balance at January 1 $ --
Acquisition costs incurred 8,840
Amortization of acquisition costs (4,693)
- --------------------------------------------------------------------------------
Net change in deferred acquisition
costs asset 4,147
- --------------------------------------------------------------------------------
Balances at December 31 $ 4,147
================================================================================
As the Company did not have any acquisition costs in 1996 or 1995, no
comparative information has been shown.
6. Losses and Loss Expenses
Activity in the reserve for unpaid losses and loss expenses for the year ended
December 31, 1997 is summarized as follows:
Year Ended December 31, 1997
- --------------------------------------------------------------------------------
U.S. dollars in thousands
Balance at January 1 $ --
Incurred related to:
Current year 7,449
- --------------------------------------------------------------------------------
Total incurred losses and loss expenses 7,449
- --------------------------------------------------------------------------------
Paid related to:
Current year --
- --------------------------------------------------------------------------------
Total paid losses and loss expenses --
- --------------------------------------------------------------------------------
Net balance at December 31 7,449
Plus reinsurance recoverable on
incurred losses 397
- --------------------------------------------------------------------------------
Balance at December 31 $7,846
================================================================================
40
<PAGE>
ESG Re Limited Notes to the Consolidated Financial Statements
7. Debt
The Company has outstanding debt as of December 31, 1997 and 1996 as follows:
As of December 31, 1997 1996
- --------------------------------------------------------------------------------
U.S. dollars in thousands
Shareholder loan, due December 1997,
balloon payment, interest at 5.7% $ -- $ 707
Shareholder loan, due December 1997,
balloon payment, interest at 5.7% -- 161
Bank borrowings, payable on demand,
interest at 8.0%-8.5% -- 924
Bank loan, due January 1997,
interest at 7.2% -- 9
Bank loan, due March 1997,
interest at 7.7% -- 11
- --------------------------------------------------------------------------------
Total debt $ -- $1,812
- --------------------------------------------------------------------------------
Current portion of debt $ -- $1,812
- --------------------------------------------------------------------------------
Long-term portion of debt $ -- $ --
================================================================================
8. Income Taxes
Under current Bermuda law, the Company is 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 the Company operates its business including Germany, Ireland, Canada
and the United Kingdom. The components of income taxes for the years presented
are as follows:
Years Ended December 31, 1997 1996 1995
- --------------------------------------------------------------------------------
U.S. dollars in thousands
Current tax expense
Bermuda $ -- $ -- $ --
Foreign 4 157 75
- --------------------------------------------------------------------------------
Total current tax expense 4 157 75
Total deferred tax expense
(benefit) (573) (1) 223
- --------------------------------------------------------------------------------
Total income tax expense
(benefit) $(569) $ 156 $ 298
================================================================================
The actual income tax expense attributable to income for the three years in the
period ended December 31, 1997 differed from the amount computed by applying the
combined effective rate of 0% under Bermuda law for 1997 and 48.375%
41
<PAGE>
ESG Re Limited Notes to the Consolidated Financial Statements
to income before income taxes under German law for 1996 and 1995, as a result of
the following:
Years Ended December 31, 1997 1996 1995
- --------------------------------------------------------------------------------
U.S. dollars in thousands
Computed "expected
tax expense" $ -- $ (4) $ 215
Tax effect of:
Foreign taxes (610) 19 50
Taxable gain on
reorganization of Company -- 121 --
Nondeductible expenses 15 7 10
Other 26 13 23
- --------------------------------------------------------------------------------
Total income tax expense (benefit) $(569) $ 156 $ 298
================================================================================
Deferred income taxes reflect the tax effect of the temporary differences
between the value of assets and liabilities for financial statement purposes and
such values as measured by the tax laws and regulations. The principal items in
the net deferred income tax asset (liability) are as follows:
As of December 31, 1997 1996
- --------------------------------------------------------------------------------
U.S. dollars in thousands
Deferred tax assets
Net operating loss carryforward $ 683 $ 178
Investments 18 54
Rent expense 83 32
Foreign currency translation 14 16
Other assets 46 14
- --------------------------------------------------------------------------------
Total deferred tax assets 844 294
- --------------------------------------------------------------------------------
Deferred tax liabilities
Unrealized investment gains (46) --
Management fee income (10) (22)
- --------------------------------------------------------------------------------
Total deferred tax liabilities (56) (22)
- --------------------------------------------------------------------------------
Net deferred tax asset $ 788 $ 272
================================================================================
Realization of the deferred tax asset is dependent on generating sufficient
taxable income in the future. Although realization is not assured, management
believes it is more likely than not that all of the deferred tax asset will be
realized. The amount of the deferred tax asset considered realizable could be
reduced in the near term if estimates of future taxable income are reduced. The
Company has a tax loss carryforward included in the calculation of the deferred
tax asset as of December 31, 1997 of $1.2 million available to offset future
foreign taxable income. This tax loss carryforward currently does not have an
expiration date. Management believes it is more likely than not that the
realization of the net deferred tax asset will not be affected by the
recapitalization.
9. Retrocessions
The Company utilizes retrocessional agreements to reduce its exposure to large
claims and catastrophic loss occurrences. These agreements provide for recovery
from retrocessionaires of a portion of the losses and loss expenses under
certain
42
<PAGE>
ESG Re Limited Notes to the Consolidated Financial Statements
circumstances. They do not discharge the primary liability of the Company. In
the event retrocessionaires were unable to meet their obligations under the
retrocession agreements, the Company would not be able to realize the full value
of the reinsurance recoverable balances. The Company believes that it has
minimized the credit risk with respect to its retrocessions by monitoring its
retrocessionaires and diversifying its retrocessions.
Losses and loss expenses incurred and earned premiums as reported in the
statement of operations are after deduction for retrocessions. Written and
earned premiums and losses incurred for the year ended December 31,1997 are
comprised of the following:
Year Ended December 31, 1997
- --------------------------------------------------------------------------------
U.S. dollars in thousands
Premiums written:
Assumed $ 26,143
Retroceded (751)
- --------------------------------------------------------------------------------
Net premiums written $ 25,392
================================================================================
Premiums earned:
Assumed $ 13,862
Retroceded (451)
- --------------------------------------------------------------------------------
Net premiums earned $ 13,411
================================================================================
Losses and loss expenses:
Assumed $ 7,846
Retroceded (397)
- --------------------------------------------------------------------------------
Net losses and loss expenses $ 7,449
================================================================================
10. Earnings Per Share
(a) Reconciliation of Numerators and Denominators
The following is a reconciliation of the numerators and denominators of the
basic and diluted earnings per share computations for income from continuing
operations:
Loss Shares Per Share
Year Ended December 31, 1997 (Numerator) (Denominator) Amount
- --------------------------------------------------------------------------------
U.S. dollars in thousands
except share and per share data
Basic earnings per share
Loss allocable to common stockholders $ (5,096) 1,238,757 $(4.11)
Effect of Dilutive Securities:
Class A Warrants -- -- --
Director and Employee Options -- -- --
Diluted earnings per share
- --------------------------------------------------------------------------------
Loss allocable to common stockholders $ (5,096) 1,238,757 $(4.11)
================================================================================
Year Ended December 31, 1996
- --------------------------------------------------------------------------------
U.S. dollars in thousands except
share and per share data
Basic earnings per share
Loss allocable to common stockholders $ (163) 117,863 $(1.38)
Effect of Dilutive Securities -- -- --
Diluted earnings per share
- --------------------------------------------------------------------------------
Loss allocable to common stockholders $ (163) 117,863 $(1.38)
================================================================================
43
<PAGE>
ESG Re Limited Notes to the Consolidated Financial Statements
Class A Warrants to purchase 1,381,200 common shares at $20 per share and
options to purchase up to 469,714 common shares at $20 per share were
outstanding as of December 31, 1997. The effect of dilutive securities was not
included in the computation of diluted earnings per share as required by SFAS
128, "Earnings per Share" because, as the Company incurred a loss for the year
ended December 31, 1997, the effect of these securities was antidilutive.
As discussed in Note 1, the Company was recapitalized in December 1997. In order
to provide a presentation comparable to 1997, all 1996 share amounts used in the
earnings per share calculation have been presented on a recapitalized basis.
No earnings per share information has been provided for the year ended December
31, 1995, as there were no common shares outstanding.
(b) Pro Forma Calculation of Earnings per Share (Unaudited)
As described in Note 1 to the financial statements, on December 29, 1997, the
Company exercised a contractual right provided in the pool agreements to
retrocede from its reinsurance clients, a 30% share of the existing pool
business retroactive to January 1, 1997 of the 1997 business it managed for its
reinsurance clients.
As a result of this contractual right, the Company recorded fourth quarter
revenues and expenses commensurate with a 30% share of the reinsurance pool
activity for all of 1997. The common shares of the Company however were
outstanding only for the period beginning December 12, 1997. Since the Company's
ability to exercise the option to assume 30% of the pool's 1997 business was
contingent upon successful completion of the Direct Sales and IPO, management
believes that it is appropriate to include a calculation of basic and diluted
earnings per share as if the common shares were outstanding also as at the
beginning of the year. Following are pro forma calculations of basic and diluted
earnings per share for the year ended December 31, 1997:
PRO FORMA PER SHARE DATA
U.S. dollars in thousands except share and per share data
- --------------------------------------------------------------------------------
Net loss after tax $ (5,096)
- --------------------------------------------------------------------------------
Basic net loss per share $ (0.37)
- --------------------------------------------------------------------------------
Diluted net loss per share $ (0.37)
- --------------------------------------------------------------------------------
Weighted average shares outstanding
--basic and diluted 13,923,799
================================================================================
44
<PAGE>
ESG Re Limited Notes to the Consolidated Financial Statements
The reconciliation of the numerators and denominators of the pro forma basic and
diluted earnings per share computations for income from continuing operations is
as follows:
Loss Shares Per Share
Year Ended December 31, 1997 (Numerator) (Denominator) Amount
- --------------------------------------------------------------------------------
U.S. dollars in thousands
except share and per share data
Basic earnings per share
Loss allocable to common stockholders $ (5,096) 13,923,799 $(0.37)
Effect of Dilutive Securities
Warrants -- -- --
Director and Employee Options -- -- --
Diluted earnings per share
Loss allocable to common stockholders $ (5,096) 13,923,799 $(0.37)
================================================================================
The effect of dilutive securities was not included in the computation of pro
forma diluted earnings per share.
11. Commitments and Contingencies
(a) Employment Contracts
The Company has entered into employment contracts with five employees for terms
of three years which have total minimum commitments of $4 million, excluding any
performance bonuses which are determined by the Board of Directors of the
Company. The contracts include various noncompete clauses following termination
of employment.
(b) Lease Commitments
The Company and its subsidiaries have various lease obligations. Rental expenses
are amortized on the straight-line basis over the term of the lease. Total
rental expense was approximately $286 thousand, $295 thousand and $193 thousand
for the years ended December 31, 1997, 1996 and 1995, respectively.
The future minimum commitments under lease and employment agreements are as
follows:
Employment Lease
Years Ending December 31, Commitments Commitments Total
- --------------------------------------------------------------------------------
U.S. dollars in thousands
1998 $1,618 $ 384 $2,002
1999 1,276 456 1,732
2000 1,078 469 1,547
2001 62 339 401
2002 -- 77 77
- --------------------------------------------------------------------------------
Total $4,034 $1,725 $5,759
================================================================================
45
<PAGE>
ESG Re Limited Notes to the Consolidated Financial Statements
(c) Pension Obligations
Certain subsidiaries are obligated to make defined contributions to pension
plans for their employees. There was no outstanding liability for pension
contributions as of December 31, 1997 and 1996. Pension contribution expense was
$29 thousand, $20 thousand and $24 thousand for the years ended December 31,
1997, 1996 and 1995, respectively.
12. Underwriting Management Services
As part of its underwriting pool management services, the Company collects
premiums and pays claims on behalf of the pool participants. In addition to fees
received for the underwriting services, the Company also earns interest income
on funds it is authorized to hold in accordance with the underwriting management
agreement between the Company and the pool participants. The Company is
authorized to retain 25% of gross premiums as a claims fund held in bank
accounts having trustee status with any interest accruing to such balances being
credited to the Company on a quarterly basis. Interest income on these funds
amounted to $35 thousand, $73 thousand and $45 thousand for the years ended
December 31, 1997, 1996 and 1995, respectively. All of the underwriting pool
funds are invested in short-term investments with original maturities of less
than 90 days. The total amount of funds held on behalf of the pools was $10.5
million and $4.9 million at December 31, 1997 and 1996, respectively.
13. Warrants
In connection with the Direct Sales, the Company issued Class A Warrants to
purchase up to 1,381,200 common shares and Class B Warrants to purchase up to
1,381,200 common shares if certain performance criteria are satisfied. The Class
A Warrants are vested and are exercisable at $20 per share at any time prior to
December 2007.
Twenty percent of the Class B Warrants are available for vesting during each of
the first five years following the closing date of the IPO, and will vest only
if, for any 20 consecutive trading days during the one-year vesting period, the
percentage change in the market price of the common shares since the closing
date of the IPO exceeds the percentage change in the Wilshire 5000 Stock Price
Index by at least 500 basis points. The Class B Warrants are exercisable for a
period of 10 years from the date of vesting. The exercise price per Common Share
is $20 and will be reduced by $1.50 on September 1, 2001.
In accordance with the Emerging Issues Task Force Consensus 96-18, the Company
has recorded compensation expense of $3.6 million. This expense was reflected as
a charge to the statement of operations for the year ended December 31, 1997,
and as an increase to additional paid-in capital.
On February 5, 1998, 276,240 of the Class B Warrants vested and are immediately
exercisable.
46
<PAGE>
ESG Re Limited Notes to the Consolidated Financial Statements
14. Stock-Based Compensation Plans
(a) Employee Stock Option Plan
On December 12, 1997, the Company adopted the 1997 Employees Stock Option Plan
(the "Stock Option Plan") under which employees of the Company and its
subsidiaries are eligible to participate. The Stock Option Plan is administered
by the Board of Directors. Subject to the provisions of the Stock Option Plan,
the Board of Directors has sole discretionary authority to interpret the Stock
Option Plan and to determine the terms and conditions of the award.
The exercise price of the option will be determined by the Board of Directors
when the options are granted. Options granted under the Stock Option Plan are
freely assignable subject to certain limitations. The Company has reserved
2,000,000 common shares for issuance under the Stock Option Plan.
Under the 1997 Employee Stock Option Plan, options to purchase a total of
374,000 shares of Common Stock were granted to officers and employees of the
Company. Options granted under the Employee Stock Option Plan vest at 25% at the
date of grant and at 25% on each of the second, third and fourth anniversaries
of the date of grant. All options are exercisable at fair market value of the
stock at the date of grant and expire 10 years after the date of grant.
(b) Directors' Stock Option Plan
On December 12, 1997, the Company adopted the ESG Re Limited Non-management
Directors' Compensation and Option Plan (the "Directors Plan"), under which
nonmanagement directors joining the Board of Directors within one year of the
closing of the Offering shall receive stock options to purchase up to 10,000
common shares. Options granted on December 12, 1997, the date of the IPO, were
granted at the IPO price of $20 per share. In addition, the Directors Plan
provides for automatic annual awards of options to purchase up to 5,000 common
shares (or, in each case, a lesser amount prorated to the extent the
participating director did not serve on the Board of Directors for the entire
year preceding the relevant annual shareholders' meeting), at an exercise price
per share equal to the then market price per share to be made to nonmanagement
directors on the date of each successive annual shareholders' meeting. In
addition, each nonmanagement director will receive fees for services as a member
of the Board of Directors and its committees, in amounts determined by the Board
of Directors, to be paid in a combination of cash and common shares, as
determined by the Board of Directors, unless otherwise elected pursuant to the
terms of the Directors Plan, as described below. In any year, in lieu of such
stock and cash payment, a Director may elect to receive all or a portion of such
fees in options or to defer all or a portion of such fees. If a director elects
to receive options, the director will receive options for common shares with a
value, as determined by the Board, equal to two times the fees that would
otherwise be payable. If the director elects to defer the receipt of the fees,
he will receive deferred compensation indexed to the greater of (i) the total
return on the common shares; or (ii) the one-year U.S. Treasury bill rate.
Deferred compensation will be paid in cash at the time
47
<PAGE>
ESG Re Limited Notes to the Consolidated Financial Statements
elected by the directors in accordance with the terms of the Directors Plan.
Shares granted under the Directors Plan will be nontransferable for six months
after receipt. The Company has reserved 1,000,000 common shares for issuance
under the Directors Plan.
On December 12, 1997, all nonmanagement directors elected to receive their fees
as options to purchase shares. As a result, 55,714 shares of Common Stock have
been granted as stock options. Compensation expense equal to the Directors' fee
payable of $195 thousand, will be recognized over the period in which the
services are to be provided. For the year ended December 31, 1997, compensation
expense of $39 thousand was recorded.
In addition, under the 1997 Directors' Stock Option Plan, an additional 40,000
shares of Common Stock were granted as stock options to nonmanagement directors
of the Company. Options granted under the Directors' Stock Option Plan vest 100%
at the date of grant. All options are exercisable at fair market value of the
stock at the date of grant and expire 10 years after the date of grant.
A summary of the status of the Company's stock option plans as of December 31,
1997 is presented below:
Weighted Average
Shares Exercise Price
- --------------------------------------------------------------------------------
Outstanding at January 1 -- --
Granted 469,714 $20.00
- --------------------------------------------------------------------------------
Outstanding at
December 31 469,714 $20.00
- --------------------------------------------------------------------------------
Options exercisable at
December 31 189,214 $20.00
- --------------------------------------------------------------------------------
Weighted average fair value of
options granted during the year $ 7.00
================================================================================
The fair value of each option grant was estimated on the date of grant using the
Black/Scholes option pricing model with the following assumptions: (i) dividend
yield of 1.13%; (ii) expected volatility of 20.9%; (iii) risk-free interest rate
of 5.841%; and (iv) expected life of 8 years.
The following table summarizes information about stock options outstanding as of
December 31, 1997:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
- ---------- -------------------------------------------------------- ----------------------------------
Number Weighted Average Weighted Number Weighted
Exercise Outstanding at Remaining Average Exercisable at Average
Price December 31, 1997 Contractual Life Exercise Price December 31, 1997 Exercise Price
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$20.00 469,714 10 years $20.00 189,214 $20.00
==========================================================================================================
</TABLE>
48
<PAGE>
ESG Re Limited Notes to the Consolidated Financial Statements
Had the compensation expense for the Company's stock-based compensation plans
been determined based on the fair value at the grant dates for awards under
those plans consistent with the method described in SFAS No. 123, the Company's
net loss and loss per share would have been adjusted to the pro forma amounts
indicated below:
Year Ended December 31, 1997
- --------------------------------------------------------------------------------
U.S. dollars in thousands except share and per share data
Net Loss
As reported $ (5,096)
Pro forma (5,409)
================================================================================
Loss per share - basic and diluted
As reported $ (4.11)
Pro forma (4.37)
================================================================================
15. Related Parties
In 1997, the Company entered into an agreement with Head Asset Management L.L.C.
("Head Asset Management"), an affiliate of Head & Company L.L.C. ("Head
Company"), relating to the provision of investment management services. The
Chairman of the Board of Directors is a Managing Member of Head Company.
Pursuant to this agreement, which is subject to the Company's investment
guidelines and other restrictions, the Company will pay Head Asset Management a
fee equal to the sum of (i) 0.25% per annum of the first $200 million of assets
under management; and (ii) 0.15% per annum of assets under management in excess
of $200 million. The Company expensed $45 thousand under this agreement for the
year ended December 31, 1997.
Head Company provided support and assistance in connection with the planning,
structuring and formation of the Company, as well as capital raising in
connection with the Direct Sales and IPO. For advisory services rendered by Head
Company, the Company incurred fees and expenses of $2.7 million of which $2.5
million was paid in January 1998. These expenses are reflected as a reduction of
additional paid-in capital. In January 1998, the Company entered into an
agreement with Head Company to provide financial advisory services as required
by the Company for a monthly fee of $50 thousand.
Certain of the former shareholders of ESG Germany who participated in the
Formation have agreed to indemnify ESG Germany for certain contingent
liabilities applicable to activity prior to 1997. Management believes that the
likelihood of incurring a loss related to any of those contingent liabilities is
remote.
49
<PAGE>
ESG Re Limited Notes to the Consolidated Financial Statements
16. Notes to the Statement of Comprehensive Income
(a) Tax Effect of Components of Comprehensive Income
As of December 31, 1997 Before Tax Tax Expense Net of Tax
================================================================================
U.S. dollars in thousands
Foreign currency translation
adjustments $ 36 $ -- $ 36
Unrealized gains on securities:
Unrealized holding gains arising
during the period 173 (3) 170
Less reclassification adjustment
for gains included in net income -- -- --
- --------------------------------------------------------------------------------
Unrealized gains on securities net of
reclassification adjustment 173 (3) 170
- --------------------------------------------------------------------------------
Other comprehensive income $ 209 $ (3) $ 206
================================================================================
As of December 31, 1996
- --------------------------------------------------------------------------------
Foreign currency translation
adjustments $ (1) $ -- $ (1)
- --------------------------------------------------------------------------------
Other comprehensive income $ (1) $ -- $ (1)
================================================================================
As of December 31, 1995
- --------------------------------------------------------------------------------
Foreign currency translation
adjustments $ (3) $ -- $ (3)
- --------------------------------------------------------------------------------
Other comprehensive income $ (3) $ -- $ (3)
================================================================================
(b) Accumulated Other Comprehensive Income
Foreign Accumulated
Currency Unrealized Other
Translation Gains on Comprehensive
As of December 31, 1997 Adjustments Securities Income
- --------------------------------------------------------------------------------
U.S. dollars in thousands
Beginning balance $ (4) $ -- $ (4)
Current period change 36 170 206
- --------------------------------------------------------------------------------
Ending balance $ 32 $ 170 $ 202
================================================================================
As of December 31, 1996
- --------------------------------------------------------------------------------
Beginning balance $ (3) $ -- $ (3)
Current period change (1) -- (1)
- --------------------------------------------------------------------------------
Ending balance $ (4) $ -- $ (4)
================================================================================
As of December 31, 1995
- --------------------------------------------------------------------------------
Beginning balance $ -- $ -- $ --
Current period change (3) -- (3)
- --------------------------------------------------------------------------------
Ending balance $ (3) $ -- $ (3)
================================================================================
50
<PAGE>
ESG Re Limited Notes to the Consolidated Financial Statements
17. Segment Information
SFAS No. 131 requires that an enterprise disclose information about its
operating segments. The following table provides summary financial information
of the Company's reportable segment by its geographic region:
Years Ended December 31, 1997 1996 1995
- --------------------------------------------------------------------------------
U.S. dollars in thousands
Revenue earned:
Bermuda $13,763 $ -- $ --
Germany 3,989 4,055 4,665
Other 87 -- --
- --------------------------------------------------------------------------------
Total revenue earned $17,839 $ 4,055 $ 4,665
================================================================================
Deferred Policy
Acquisition Deferred Tax
As of December 31, 1997 Costs Assets
================================================================================
U.S. dollars in thousands
Bermuda $4,147 $ --
Other foreign countries -- 788
- --------------------------------------------------------------------------------
$4,147 $ 788
================================================================================
As of December 31, 1996
- --------------------------------------------------------------------------------
Bermuda $ -- $ --
Other foreign countries -- 272
- --------------------------------------------------------------------------------
$ -- $ 272
- --------------------------------------------------------------------------------
18. Significant Clients
For the year ended December 31, 1997, three significant client relationships
contributed $3.6 million, $2.6 million and $2.4 million, to total revenue. For
the year ended December 31, 1996, one client contributed $774 thousand. For the
years ended December 31, 1995, two clients contributed $921 thousand and $469
thousand.
19. Fair Value Information
The fair value of financial instruments as of December 31, 1997 and 1996 was as
follows:
1997 1996
- --------------------------------------------------------------------------------
Carrying Fair Carrying Fair
Value Value Value Value
- --------------------------------------------------------------------------------
U.S. dollars in thousands
Assets:
Fixed maturities
available for sale $218,867 $218,867 $ -- $ --
Short-term investments 11,913 11,913 -- --
Cash and
cash equivalents 6,196 6,196 15 15
Foreign exchange contracts -- -- -- (12)
Short-term debt -- -- 1,812 1,812
================================================================================
51
<PAGE>
ESG Re Limited Notes to the Consolidated Financial Statements
20. Statutory Requirements and Dividend Restrictions
Under Bermuda law, the Company is prohibited from declaring or paying a dividend
if such payment would reduce the realizable value of its assets to an amount
less than the aggregate value of its liabilities, issued share capital (common
share capital) and share premium (additional paid-in capital) accounts.
Under the Bermuda Insurance Act, 1978, amendments thereto and Related
Regulations of Bermuda, ES Bermuda is required to maintain certain measures of
solvency and liquidity. For the year ended December 31, 1997, these requirements
have been met. The statutory capital and surplus of ES Bermuda was $101.5
million and the minimum required statutory capital and surplus was $4.1 million
as of December 31, 1997. The minimum required level of liquid assets was $22.3
million with actual liquid assets of $81.1 million as of December 31, 1997.
21. Unaudited Quarterly Financial Data
<TABLE>
<CAPTION>
1997 Operating data: 1st Quarter 2nd Quarter 3rd Quarter 4th Quarter
- ------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. dollars in thousands
except per share data
Gross premiums written $ -- $ -- $ -- $ 26,143
Net premiums written -- -- -- 25,392
Net premiums earned -- -- -- 13,411
Management fee revenue 2,378 217 356 879
Net investment income -- 15 6 577
Losses and loss expenses -- -- -- 7,449
Acquisition costs -- -- -- 4,693
Underwriting profit -- -- -- 1,269
Net income (loss) $ 450 $ (252) $ (310) $ (4,984)
==========================================================================================
Earnings per common share:
Basic net income (loss) per share $ 2.50 $ (1.40) $ (0.40) $ (1.32)
Diluted net income (loss) per share $ 2.50 $ (1.40) $ (0.40) $ (1.32)
Weighted average shares
outstanding (000's) 180 180 783 3,778
<CAPTION>
1996 Operating data:
- -------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. dollars in thousands
except per share data
Management fee revenue $ 2,781 $ 357 $ 209 $ 522
Net income (loss) 669 (228) (573) (31)
==========================================================================================
Earnings per common share:
Basic net loss per share $ -- $ (2.09) $ (3.18) $ (0.17)
Diluted net loss per share $ -- $ (2.09) $ (3.18) $ (0.17)
Weighted average shares
outstanding (000's) 0 109 180 180
==========================================================================================
</TABLE>
52
<PAGE>
ESG Re Limited Independent Auditors' Report
To the Board of Directors and Shareholders of ESG Re Limited
We have audited the accompanying consolidated balance sheets of ESG Re Limited
and subsidiaries as of December 31, 1997 and 1996, and the related consolidated
statements of operations, comprehensive income, changes in shareholders' equity
and cash flows for each of the three years in the period ended December 31,
1997. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of the Company and its subsidiaries as
of December 31, 1997 and 1996, and the results of their operations and their
cash flows for each of the three years in the period ended December 31, 1997, in
conformity with accounting principles generally accepted in the United States of
America.
Deloitte & Touche
Chartered Accountants
Hamilton, Bermuda
February 19, 1998
53
<PAGE>
ESG Re Limited Corporate Directory
Board of Directors
John C Head III(a)
Chairman of the Board
Managing Member
Head & Company L.L.C.
New York, New York
Wolfgang M. Wand
Managing Director and
Chief Executive Officer
ESG Re Limited
Hamilton, Bermuda
Steven H. Debrovner
Chief Operating Officer
ESG Re Limited
Hamilton, Bermuda
Kenneth P. Morse
Managing Director
MIT Entrepreneurship Center
and Senior Lecturer
MIT Sloan School of Management
Cambridge, Massachusetts
David L. Newkirk(a), (b)
Vice President
Booz-Allen & Hamilton
International (U.K.) Ltd.
London, England
William J. Poutsiaka(b)
President and
Chief Executive Officer
Arkwright Mutual Insurance Company
Waltham, Massachusetts
Edward A. Tilly(a), (b)
Chairman and Chief Executive
Consolidated Financial
Insurance Group, Ltd.
London, England
Executive Management
Wolfgang M. Wand
Managing Director
and Chief Executive Officer
Steven H. Debrovner
Chief Operating Officer
Gerhard Jurk
Chief Financial Officer
Renate M. Nellich
Chief Executive Officer
European Specialty (North
America) Limited
Corporate Secretary
Anthony Parfitt
Investor Relations
Hugo Idler
(a) Member of the Compensation Committee
(b) Member of the Audit Committee
54
<PAGE>
ESG Re Limited Subsidiary Companies-Supervisory Boards
European Specialty
Group Holding AG
Wolfgang M. Wand
Chairman
Yves Forestier
Member of the Board
Harald Hermann
Member of the Board
European Specialty
Ruckversicherung AG
Dr. Jean-Claude Mayor
Chairman
Dr. Jur. Hans Moser
Deputy Chairman
Dr. Jur. Franz Gori
Member of the Board
Jurgen Gorling
Member of the Board
European Specialty Group
(United Kingdom) Limited
Andrew W. Apps
Managing Director, U.K.
Darryl Gumm
Managing Director, Pacific Region
55
<PAGE>
ESG Re Limited Shareholder Information
Shareholders Meeting
The Annual General Meeting will be
held on May 4, 1998 at 11:00 a.m. at
the Waterloo House, 100 Pitts Bay
Road, Pembroke, Bermuda.
Independent Accountants
Deloitte & Touche
Corner House
Church & Parliament Streets
Hamilton, Bermuda
Counsel
Paul, Weiss, Rifkind, Wharton
& Garrison
1285 Avenue of the Americas
New York, New York
Appleby, Spurling & Kempe
Cedar House
41 Cedar Avenue
Hamilton, Bermuda
Market Information
ESG Re Limited common shares are
traded over the counter on the Nasdaq
National Market under the symbol
ESREF.
As of March 20, 1998, the
approximate number of common
shareholders was 1550.
Stock Transfer and
Dividend Agent
State Street Bank & Trust Company
c/o Boston Equiserve, L.P.
150 Royall Street
Canton, Massachusetts
Additional Information
ESG Re's Annual Report on Form
10-K, as filed with the Securities and
Exchange Commission, is available upon
request by writing to the Chief Financial
Officer at the Corporate Headquarters
in Bermuda
ESG Re Limited
ESG Re Limited
16 Church Street
Hamilton, HM 11, Bermuda
Telephone (1 441) 295 2185
Telefax (1 441) 292 1143
European Specialty Reinsurance
(Bermuda) Limited
16 Church Street
Hamilton, HM 11, Bermuda
Telephone (1 441) 295 2185
Telefax (1 441) 292 1143
European Specialty Reinsurance
(Ireland) Limited
11 Windsor Place
Lower Pembroke Street
Dublin, 2 Ireland
Telephone (353-1) 676 8766
Telefax (353-1) 676 8792
European Specialty Group
(United Kingdom) Limited
25-26 Lime Street
London, EC3M 7HR, England
Telephone (44 171) 220 7422
Telefax (44 171) 220 7593
European Specialty
(North America) Limited
141 Adelaide Street West
Toronto, M5H 3L2, Canada
Telephone (1 416) 864 7443
Telefax (1 416) 864 9615
European Specialty
Ruckversicherung AG
Fleethof
Stadthausbrucke 1-3
Hamburg, 20355 Germany
Telephone (49 40) 36 98 860
Telefax (49 40) 36 98 86 69
SportSecure GmbH
Fleethof
Stadthausbrucke 1-3
Hamburg, 20355 Germany
Telephone (49 40) 36 98 86 91
Telefax (49 40) 36 98 86 92
Jeffrey Leder Inc. Marketing Design NYC
56
<PAGE>
ESG [LOGO]
INTELLIGENT
REINSURANCE
Exhibit 24.1(a)
Independent Auditors' Report
To the Board of Directors and Shareholders of ESG Re Limited
We have audited the consolidated financial statements of ESG Re Limited
(the "Company") as of December 1997 and 1996, and for each of the three years in
the period ended December 31, 1997, and have issued our report thereon dated
February 19, 1998; such consolidated financial statements and report are
included in your 1997 Annual Report to Shareholders and are incorporated herein
by reference. Our audits also included the consolidated financial statement
schedules of the Company, listed in Item 14. These consolidated financial
statement schedules are the responsibility of the Company's management. Our
responsibility is to express an opinion based on our audits. In our opinion,
such consolidated financial statement schedules, when considered in relation to
the basic consolidated financial statements taken as a whole, present fairly in
all material respects the information set forth therein.
Deloitte & Touche
Chartered Accountants
Hamilton, Bermuda
February 19, 1998
EXHIBIT 24.1(b)
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in Registration Statement No.
333-40341 of ESG Re Limited on Form S-8 of our reports dated February 19, 1998,
appearing in and incorporated by reference in this Annual Report on Form 10-K of
ESG Re Limited for the year ended December 31, 1997.
Deloitte & Touche
Chartered Accountants
Hamilton, Bermuda
March 27, 1998
<TABLE> <S> <C>
<ARTICLE> 7
<LEGEND>
This schedule contains summary financial information extracted from the
consolidated balance sheets and consolidated financial statements of operations
and is qualified in its entirety by reference to such financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<DEBT-HELD-FOR-SALE> 218,867
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 0
<MORTGAGE> 0
<REAL-ESTATE> 0
<TOTAL-INVEST> 230,780
<CASH> 6,196
<RECOVER-REINSURE> 397
<DEFERRED-ACQUISITION> 4,147
<TOTAL-ASSETS> 273,068
<POLICY-LOSSES> 7,846
<UNEARNED-PREMIUMS> 12,168
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 0
<NOTES-PAYABLE> 0
0
0
<COMMON> 13,924
<OTHER-SE> 220,451
<TOTAL-LIABILITY-AND-EQUITY> 273,068
13,411
<INVESTMENT-INCOME> 598
<INVESTMENT-GAINS> 0
<OTHER-INCOME> 3,830
<BENEFITS> 7,449
<UNDERWRITING-AMORTIZATION> 4,693
<UNDERWRITING-OTHER> 0
<INCOME-PRETAX> (5,665)
<INCOME-TAX> (569)
<INCOME-CONTINUING> (5,096)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (5,096)
<EPS-PRIMARY> (4.11)
<EPS-DILUTED> (4.11)
<RESERVE-OPEN> 0
<PROVISION-CURRENT> 7,846
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 0
<PAYMENTS-PRIOR> 0
<RESERVE-CLOSE> 7,846
<CUMULATIVE-DEFICIENCY> 0
</TABLE>
