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As Filed Pursuant to Rule 424(b)(3)
Registration No. 333-76983
PROSPECTUS
ESG RE LIMITED
DIVIDEND REINVESTMENT AND
SHARE PURCHASE PLAN
2,000,000 COMMON SHARES
-------------------------
The price of our common shares offered under the dividend reinvestment and
share purchase plan will be based either on the average price of the shares on
the Nasdaq National Market at the time of your investment or on the average
price that our plan administrator pays for the relevant investment period to
purchase the shares on the open market.
Our common shares are listed on the Nasdaq National Market under the symbol
"ESREF." On September 23, 1999, our closing price was $9.00.
SEE "RISK FACTORS" BEGINNING ON PAGE 2 FOR FACTORS RELEVANT TO AN
INVESTMENT IN OUR COMMON SHARES.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED THESE SECURITIES OR DETERMINED IF THIS
PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
THE DATE OF THIS PROSPECTUS IS SEPTEMBER 24, 1999.
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FOR NORTH CAROLINA RESIDENTS: THE COMMISSIONER OF INSURANCE FOR THE STATE
OF NORTH CAROLINA HAS NOT APPROVED OR DISAPPROVED THIS OFFERING, NOR HAS THE
COMMISSIONER PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. A BUYER IN
NORTH CAROLINA MUST UNDERSTAND THAT NEITHER ESG RE LIMITED NOR ITS SUBSIDIARIES
IS LICENSED IN NORTH CAROLINA PURSUANT TO CHAPTER 58 OF THE NORTH CAROLINA
GENERAL STATUTES.
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THE COMPANY
We were formed on August 21, 1997, under the laws of Bermuda. Through our
subsidiaries, European Specialty Reinsurance (Bermuda) Limited, European
Specialty Reinsurance (Ireland) Limited, European Specialty Ruckversicherung AG
and Accent Europe Insurance Company Limited, we are a specialty
reinsurer/insurer 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.
In December 1997, we raised gross proceeds of $257 million in a combined
private placement and initial public offering. The proceeds from those offerings
provided the capitalization for us to assume for our own account risks that our
wholly owned reinsurance management subsidiary, ES Management, previously
underwrote on behalf of unaffiliated reinsurance companies. Subsequent to the
offerings, we assumed a 30% share of the business that ES Management underwrote
in 1997 on behalf of a group of those companies. In addition, since that time we
have separately negotiated additional reinsurance contracts with other
reinsurance companies.
We distinguish ourselves by actively assisting the primary insurance
companies that we reinsure by offering products and services for particular
underwriting problems, actuarial support, product design and, in the field of
medical expense reinsurance, loss prevention and disease management. We call our
approach "Intelligent Reinsurance."
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Our executive offices are located 16 Church Street, Hamilton HM11, Bermuda,
and our telephone number is (441) 295-2185.
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RISK FACTORS
You should carefully consider the following risk factors together with all
of the other information included or incorporated by reference in this
prospectus before you decide to purchase our common shares. This section
includes or refers to forward-looking statements. You should refer to the
explanation of the qualifications and limitations on these forward-looking
statements discussed on page 13 of this document.
FAVORABLE AND UNFAVORABLE TRENDS OR PATTERNS IN THE REINSURANCE INDUSTRY AS A
WHOLE ARE LIKELY TO AFFECT OUR RESULTS
Insurers and reinsurers earn their profits from two sources:
- successful underwriting, which means the ability to set the premiums for
insurance and reinsurance to meet or exceed the claims and expenses
incurred in relation to the insurance and reinsurance; and
- investment income, which an insurer or reinsurer earns on the investment
of its capital and its premium income.
In order to obtain the premium income that it will invest, a reinsurer must
compete with other reinsurers for reinsurance customers. Among the most
important factors that customers will consider in deciding which reinsurer to
select are:
- the ratings assigned to the reinsurer by independent rating agencies;
- the price charged by the reinsurer for the coverage it sells;
- how favorable the terms of that coverage are to the customer in relation
to the events that will give rise to the customer's right to make claims;
and
- restrictions on when and how claims may be submitted to the reinsurer.
If numerous reinsurers are available at a particular time with the
expertise and the capital resources, or "capacity," to write a particular kind
of reinsurance, a reinsurer may be faced with intense competition in terms of
the level of premium that it can charge and the features of the coverage that it
will write. Capacity is determined by an insurer's or reinsurers's level of
capital in relation to the risks that it already insures or reinsures in light
of requirements, both legal and prudential, to maintain a certain amount of
capital to back up a certain amount of risk. On the other hand, if only one or a
few companies have the capacity to provide reinsurance in the amount or type
being sought, those companies will be in a more favorable position to charge
higher premiums to their customers.
The level of industry capacity to write insurance and reinsurance is
affected by a number of unpredictable and cyclical factors that are generally
beyond the control of an individual reinsurer. Among those factors are:
- the occurrence or severity of natural disasters, other catastrophic
events, trends in disease, their treatment and health care expenditures
and other inherently unpredictable developments and occurrences. If
events and trends that give rise to high losses occur concurrently, or
over a short period of time, insurance and reinsurance companies may be
required to make higher-than-anticipated payments on a significant number
of claims. This may reduce available industry
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capital and the capacity to write new reinsurance. As a result, premiums
could be expected to increase.
Furthermore, unanticipated losses sustained by other insurance and
reinsurance industry participants may come about because, either
deliberately or inadvertently, they have taken risks that we did not
take. We are not necessarily in a position to know when or whether this
has occurred, or to prevent it even if we do know, even though its
occurrence can have a major impact on our competitive position. In the
short run, this kind of practice by other reinsurers may make it more
difficult for us to find customers for our reinsurance. In the long run,
if other participants in the insurance and reinsurance industries sustain
disproportionately higher losses than we do as a result of accepting
premium levels and policy terms that we were not willing to accept, those
losses may weaken them and lead to a corresponding improvement in our
relative competitive position. This would be particularly likely if other
companies' losses lead to a shortage of industry capacity.
- the ability or willingness of investors and other insurers to provide
additional capital to the insurance and reinsurance market places. When
capital is in short supply and reinsurance rates are high in a particular
portion of the reinsurance market place, existing insurers and reinsurers
and new investors may be motivated to make additional capital available.
Thus, the ability to charge high prices at any given time may attract
more capital into the industry and drive prices back down.
- general economic conditions. For example, the economic environment may be
marked by periods of inflation, deflation, labor shortages or recession.
These conditions may affect the profitability of investments that
insurers and reinsurers make and the perceived desirability of investing
in insurance and reinsurance versus other industries. Higher investment
profitability may increase the industry's capital, thereby increasing
capacity and driving down reinsurance rates. On the other hand, greater
perceived investment opportunities in other industries may decrease the
availability of capital to the insurance industry.
In addition, the underwriting and investment results of primary insurers
significantly influence the demand for reinsurance. If there have been few
catastrophes or unexpected loss trends, primary insurers may be financially
strong and have less need to seek reinsurance to protect themselves against
unexpected or unusual risk.
The profitability of our company and our competitors in providing
reinsurance is, therefore, related primarily to:
- the level of demand for reinsurance by primary insurers;
- prevailing premium rates and policy terms in the reinsurance industry;
and
- our ability and the ability of other reinsurance companies to provide
additional reinsurance given our and their levels of capital and other
insurance and reinsurance commitments.
We expect to be affected by these kinds of factors, which may occur in patterns
of "cycles." This potential cyclicality is particularly likely with regard to
the attraction of additional capital into the reinsurance market place when
premium rates are high and policy terms are favorable to reinsurers. These
effects may be either advantageous or disadvantageous to us.
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IF OUR LOSSES ON THE SPECIALITY RISKS WE INSURE AGAINST ARE HIGHER THAN
ORIGINALLY ESTIMATED, OUR RESULTS OF OPERATIONS COULD SUFFER
Our specialty risk lines of reinsurance are characterized by a relatively
small number of large risks, like the risk of cancellation of a World Cup Soccer
championship or the nonappearance of a performing artist. It is difficult to
predict if and when this kind of cancellation or non-appearance will occur. In
addition to being careful in what risks we reinsure and the terms of the
reinsurance we write, we try to protect ourselves by obtaining further
reinsurance of our own risks. In particular, we may obtain reinsurance that will
reimburse us when we have to pay more than a particular number of claims, or in
excess of a specified amount, in a given period of time. However:
- we may experience more loss events than we thought we would;
- the type of reinsurance that we purchase may not protect us fully; and
- if losses are unusually severe, we may receive payments from our
reinsurers and still have to absorb proportionately large losses for our
company.
The complexity of these intersecting factors makes it impossible to specify
the circumstances in which losses may occur that would adversely impact our
results of operations. However, if losses that we believe unlikely do actually
occur and those losses are not mitigated by the reinsurance that we purchase for
our account, the need to pay these losses could have a material adverse effect
on our income.
IF NATURAL DISASTERS OR OTHER CATASTROPHIC EVENTS OCCUR, OUR OPERATING RESULTS
AND FINANCIAL CONDITIONS COULD SUFFER AND WE MAY BE UNABLE TO PURCHASE
REINSURANCE AT COMMERCIALLY REASONABLE RATES
As with other reinsurers, our operating results and financial condition
could be adversely affected by natural disasters and other catastrophic events,
particularly if they resulted in significant claims under our various life and
health reinsurance coverages. If we had to pay out on these claims, we could
incur significant underwriting losses. This would reduce our operating income.
The incidence and severity of natural disasters and other catastrophic
events are inherently unpredictable. We seek to manage our exposure to
catastrophe losses through selective underwriting practices, including
monitoring risk accumulations on a geographic basis, and through the purchase of
additional reinsurance to cover part of the claims against us. However, these
practices may not be adequate to protect us against material losses. In
addition, in the future we may not be able to buy reinsurance at commercially
reasonable rates.
IF WE MUST INCREASE OUR LOSS RESERVES IN ANY PERIOD, OUR NET INCOME IN THAT
PERIOD WILL DECREASE CORRESPONDINGLY
We establish and maintain reserves to cover the ultimate payment of our
underwriting losses and expenses incurred in handling those losses. There is a
risk that our loss reserves may turn out not to be high enough, which would
require us to increase the reserves and give rise to a corresponding decrease in
our net income during the period.
Reserves are estimates of how much we will ultimately have to pay out for
reported but not paid claims and as a result of events that have occurred that
will give rise to claims that have not yet been
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reported. These reserves are calculated by making actuarial and statistical
projections at a given time to reflect our expectations of the costs of the
ultimate settlement and administration of claims. By their nature, reserves do
not represent an exact calculation of liability. Instead, we base reserves on
facts and circumstances then known to us, as well as estimates of trends in
claims severity and other variable factors, including new concepts of liability.
Under U.S. generally accepted accounting principles, we are not permitted to
establish loss reserves with respect to personal and special risk reinsurance
until an event that may give rise to a claim occurs.
The inherent uncertainties of estimating reserves are increased for
reinsurers, as compared to primary insurers, because of the significant lapse of
time that can occur between:
- the occurrence of an insured loss;
- the reporting of the loss to the primary insurer and, ultimately, to the
reinsurer;
- the primary insurer's payment of that loss; and
- the subsequent payment by the reinsurer.
These uncertainties are compounded by the necessity of relying on reinsured
companies for information on reported claims and by differing reserving
practices among the reinsured companies.
We periodically review and update our methods for establishing reserves.
Our management considers many factors when doing so, including:
- information from the companies we reinsure;
- historical trends, such as reserving patterns, loss payments and pending
levels of unpaid claims;
- our product mix;
- statistical methods that analyze our experience with similar cases;
- current legal interpretations of coverage and liability; and
- economic conditions.
Based on these considerations, our management believes that our reserves of
$44,379,000 as of December 31, 1998 were adequate. Because our reinsurance
business began operating only last year, our estimation of reserves may be
inherently less reliable than the reserve estimations of a reinsurer with a
stable volume of business and an established long-term loss history. Actual
losses and loss adjustment expenses paid may deviate, perhaps substantially,
from estimates reflected in the loss reserves in our financial statements.
Furthermore, additional losses may emerge in the future of a type or magnitude
that we cannot foresee. Future losses of this kind also could have material
adverse effects on our future consolidated financial condition, results of
operations and cash flows.
OUR BUSINESS COULD BE ADVERSELY AFFECTED BY THE DEPARTURE OF KEY PERSONNEL
We place substantial reliance on the reinsurance industry experience and
the continued services of our senior management, led by John C Head III, Steven
H. Debrovner, Joan H. Dillard and
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Renate M. Nellich. While we believe that, if necessary, we could find
replacements for our key personnel, the loss of their services could have a
material adverse effect on our operations by:
- requiring us to use company resources and time to find adequate
replacements;
- weakening our financial performance if we are unable to find suitable
replacements;
- requiring us to pay increased compensation to new management personnel;
and
- requiring us to integrate new personnel into our company, which may be
time-consuming and unsuccessful.
We pay competitive salaries and have employment agreements with our senior
management that impose obligations on them not to compete with us for a
reasonable period of time after leaving their jobs with us. However, those
agreements will not necessarily prevent an employee from accepting an attractive
position, especially if it is not with one of our direct competitors.
IF WE LOSE A SMALL NUMBER OF KEY CLIENTS, OUR PREMIUM REVENUE COULD BE ADVERSELY
REDUCED
We depend on a limited number of clients for a substantial portion of our
premium revenue. We have in excess of 400 centrally administered reinsurance
acceptances from clients. The non-renewal of even a limited number of programs
or policies could adversely affect our business by lowering our premium revenue
and reducing the amount of funds available to invest, pay out on claims and meet
our expenses. During 1998, our largest client, Caisse Centrale de Reassurance,
accounted for approximately 13.5% of our premium revenue. Our second largest
client, Best Meridian Insurance Company, accounted for approximately 7.5% of our
premium revenue in 1998. We will solicit new clients, but there is no assurance
that we will be successful in doing so.
COMPETITION IN THE INSURANCE INDUSTRY IS INTENSE, AND A DOWNGRADE IN OUR RATING
MIGHT LIMIT OUR ABILITY TO RETAIN AND ATTRACT BUSINESS
The reinsurance business is highly competitive. We compete for business in
the European, United States and other international reinsurance and insurance
markets with numerous international and domestic reinsurance and insurance
companies, some of which have higher ratings and far greater financial resources
than we do. Competition is based on many factors, including:
- the perceived financial strength of a reinsurer;
- premium charges;
- terms and conditions offered;
- services provided;
- ratings assigned by independent rating agencies;
- speed of claims payment; and
- reputation and experience in the line of reinsurance to be written.
Ultimately, this competition could affect our ability to attract business
on profitable terms.
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Ratings by insurance rating agencies are used by the insurers and
reinsurance brokers who are our customers as important means of assessing our
financial strength and quality and that of other reinsurers and of
distinguishing reinsurers from one another. We might be unable to retain
existing clients or attract reinsurance clients if a rating agency downgraded
our current rating. Insurers generally prefer to obtain reinsurance from
reinsurers with the highest rating available in relation to the price charged
for the reinsurance and the favorableness of the terms of the reinsurance. The
higher the rating, the greater the perceived ability of a reinsurer to meet its
financial commitments.
Ratings are based on quantitative evaluations of performance with respect
to profitability, leverage and liquidity and qualitative evaluations of
allocation of risk, reinsurance programs, investments, reserves and management.
We are currently rated A- (Strong) by Standard & Poor's, a division of The
McGraw-Hill Companies, Inc. We are not rated by any other rating service.
Standard & Poor's rating scale runs from AAA (Extremely Strong) to CC (Extremely
Weak). Standard & Poor's describes ratings of BBB- (Good) or higher as
indicating insurers having financial security characteristics that outweigh any
vulnerabilities, and highly likely to have the ability to meet financial
commitments.
IF OUR INVESTMENTS IN NEW BUSINESS AREAS AND MARKETS DO NOT SUCCEED, OUR
OPERATING RESULTS COULD SUFFER
We make acquisitions, strategic investments and loans with our partners to
support our operations and growth. These investments in new business areas and
markets could require substantial capital investments and resources and may not
succeed. The success of these ventures is largely dependant upon the success of
our strategic partners and of the markets in which these investments operate. If
an investment proved to be unsuccessful, we would write down the value of the
investment, creating a realized loss, and our operating results would be
adversely affected.
IF WE COULD NOT MAINTAIN LETTERS OF CREDIT TO SECURE OUR REINSURANCE OBLIGATIONS
IN JURISDICTIONS WHERE WE ARE NOT ADMITTED AS REINSURERS, WE WOULD BE UNABLE TO
RETAIN AND ATTRACT BUSINESS
We are licensed or admitted as reinsurers only in Bermuda, Ireland and
Germany, but we provide reinsurance to companies licensed in many other
jurisdictions. Many jurisdictions do not permit insurance companies to take
credit for reinsurance obtained from unlicensed or non-admitted insurers on
their statutory financial statements unless security is posted. Therefore,
reinsurance contracts frequently require us to post a letter of credit or other
security when the reinsurance contract is first written or after a company that
we reinsure reports a claim. In order to be able to provide the necessary
security, we may either obtain a letter of credit when it is required or draw on
letter of credit facilities that we have previously established for this
purpose. If our financial strength significantly deteriorated, however, we might
not be able to obtain new letters of credit or to maintain letter of credit
facilities. A failure of that kind could prevent us from retaining and obtaining
business from numerous companies licensed outside of Bermuda, Ireland or
Germany. This could, in turn, materially and adversely reduce our earnings.
CHANGES IN INSURANCE REGULATIONS OR THEIR INTERPRETATION COULD REDUCE OUR
PROFITABILITY
We are subject to the general corporate and insurance laws and regulations
of Bermuda, Ireland and Germany, our jurisdiction of incorporation and those of
each of our principal operating subsidiaries, and the laws and regulations of
the other jurisdictions in which those subsidiaries are licensed or authorized
to do business. Each state of the United States and many non-U.S. jurisdictions
regulate the
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sale of insurance and reinsurance within them by foreign insurers that have not
been "admitted" to do business. We do not maintain an office or solicit,
advertise, settle claims or conduct other insurance activities in any
jurisdiction where the conduct of those activities would be prohibited by our
lack of a license. However, we cannot guarantee that inquiries or challenges
relating to our activities will not be raised in the future or that our location
and regulatory status or restrictions on our activities will not adversely
affect our ability to conduct our business. Also, we cannot be sure that our
operations would comply with a given jurisdiction's regulations if we became
subject to them in the future. Nor can we predict what additional government
regulations affecting our business as it is currently conducted will be put in
place in the future or how they might be interpreted. As a result, we cannot
guarantee that future regulations will not have a serious adverse impact on our
ability, or the ability of the insurance industry in general, to conduct
business profitably.
CHANGES IN FOREIGN EXCHANGE RATES MAY INCREASES OUR LOSSES AS CLAIMS ARE SETTLED
AND LOWER THE U.S. DOLLAR VALUE OF OUR NET PREMIUM INCOME
Our functional currency is the U.S. dollar. However, we write a portion of
our business in currencies other than the U.S. dollar and maintain investments
denominated in currencies other than the U.S. dollar. Therefore, changes in
exchange rates could cause significant dollar gains and losses, which could in
turn affect our results of operations. We try to maintain a partial "natural
hedge" by keeping the portion of our funds invested in a particular currency
proportionate to the losses that we anticipate incurring in that currency.
Nevertheless, this kind of hedge may prove to be inadequate if our loss
estimates are incorrect. If our losses on reinsurance written in another
currency are higher than anticipated and the U.S. dollar has weakened against
the other currency, exchange rate fluctuations may increase our losses, as
measured in U.S. dollars, as claim amounts are settled.
Also, the net premium income that we derive from our underwriting
activities in other currencies is rendered less valuable in U.S. dollar terms if
that currency falls against the dollar. We do not try to hedge against that kind
of currency loss.
CHANGES IN THE INTERPRETATION, OR INTERPRETATIONS THAT WE HAVE NOT CORRECTLY
FORESEEN, IN TAX REGULATIONS COULD REQUIRE US TO PAY MORE TAXES AND MATERIALLY
AND ADVERSELY REDUCE OUR SHAREHOLDERS' EQUITY AND EARNINGS
We operate our business in a manner that does not cause us to be viewed as
engaged in a trade or business in the United States. As a result, neither our
company nor any of our subsidiaries, other than our U.S. subsidiary, is required
to pay United States corporate income taxes, other than withholding taxes.
However, the applicable tests that are applied in reaching these determinations
are essentially factual, and we cannot determine with certainty exactly which
activities may be held to constitute being engaged in a trade or business within
the United States. Therefore, we cannot eliminate the possibility that the
United States Internal Revenue Service may contend successfully that we or one
of our non-U.S. subsidiaries is engaged in a trade or business in the United
States. If we or any of our non-U.S. subsidiaries were subject to U.S. income
tax, the additional tax payments that we would be required to make could
materially and adversely reduce our earnings. See "Certain Tax
Considerations -- Taxation of the Company and its Subsidiaries."
We operate our business in a manner that does not cause us or our
subsidiaries to be taxable in jurisdictions other than the jurisdiction in which
they are organized. However, the applicable tests that are applied in reaching
these determinations are essentially factual, and we cannot determine with
certainty exactly which activities will cause a foreign corporation to be
subject to tax in jurisdictions
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outside their domiciles. Therefore, we cannot eliminate the possibility that the
relevant tax authorities may successfully contend that we and/or our other
subsidiaries are subject to tax in a jurisdiction outside its domicile. If a
company were subject to tax outside its country of domicile, the additional tax
payments that we would be required to make could materially and adversely reduce
our earnings. See "Certain Tax Considerations -- Taxation of the Company and its
Subsidiaries."
ANTI-TAKEOVER PROVISIONS IN OUR BYE-LAWS MAY KEEP SHAREHOLDERS FROM BENEFITTING
FROM SOMEONE'S ATTEMPTING TO ACQUIRE US AT A PREMIUM IN A HOSTILE OFFER
Our Bye-Laws provide for a staggered board of directors and voting
cut-backs. These provisions are likely to have the effect of discouraging
unsolicited takeover bids from third parties or the removal of incumbent
management. As a result, it may be less likely that you will receive a premium
price for your shares in an unsolicited takeover of our company by another
party. Our Bye-Laws provide that shareholders' voting rights with respect to our
common shares and any other voting securities directly or indirectly
beneficially or constructively owned by any person, other than John C Head III
and persons deemed to own our common shares with him for purposes of the
Internal Revenue Code of 1986, will be limited in total to 9.9% of the voting
power of our company. Voting rights for all shares deemed held by a person in
excess of the 9.9% limitation will be reallocated pro rata to the other holders
of our common shares, subject only to the further limitation that no shareholder
to whom additional voting rights are allocated, other than John C Head III and
individuals and entities affiliated with him, may exceed the 9.9% limitation as
a result of the reallocation.
In addition, our Class B warrants, which normally will vest over a period
of five years ending in December 2002 based upon whether the price of our stock
outperforms the Wilshire 5000 Index, will completely vest upon the occurrence of
a change in control. There are 1,104,960 Class B Warrants not currently vested.
If a change in control caused these Class B Warrants to vest, an acquiror could
be required to buy more shares, and therefore to pay more to acquire control of
our company or to buy all of it. As a result, a potential acquiror might decide
that it was too expensive to buy our company or might decide to pay a lower
price per share because more shares would be outstanding. Either way, your
ability to sell to that kind of acquiror, or to receive a high price in a sale,
could be reduced.
CONFLICTS OF INTEREST MIGHT PREVENT US FROM PURSUING DESIRABLE INVESTMENT AND
BUSINESS OPPORTUNITIES
Head & Company, which is controlled by John C Head III, the Chairman of our
Board of Directors and our Chief Executive Officer, makes investments through
its affiliates in insurance and reinsurance companies and companies providing
services to the insurance industry. As a result, conflicts of interest could
arise with respect to business opportunities that could be advantageous to Head
& Company, on the one hand, and our company, on the other hand. Transactions
involving an actual or potential conflict of interest must be approved by a
majority vote of the disinterested members of our board of directors. However,
this process cannot guarantee that we will pursue all advantageous transactions
that we would otherwise pursue in the absence of a conflict.
We may compete with affiliates of Head & Company on personal and special
risk reinsurance programs for the same prospective clients. In that case we will
conduct our underwriting and pricing analyses independently. Because of this
independence, we believe that competition of this kind should not adversely
affect us. We also have an agreement with Head Asset Management L.L.C., an
affiliate of John C Head III, relating to the provision of investment management
services, for which we pay fees to Head Asset Management.
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APPROXIMATELY 2.3 MILLION OF OUR COMMON SHARES MAY BE SOLD STARTING IN DECEMBER
1999; THE RAPID SALE OF THESE SHARES AFTER THAT TIME COULD DRIVE DOWN THE
TRADING PRICE OF OUR SHARES
Approximately 2.3 million of our common shares and common shares issuable
upon the exercise of our Class A and Class B Warrants may not be sold before
December 1999. This amount represents approximately 15.1% of our outstanding
common shares and warrants. If the holders of these shares and warrants sell the
shares rapidly after they become eligible to do so, the extra supply of shares
available on the market might drive down the market price of our shares.
This can be illustrated as follows:
<TABLE>
<CAPTION>
RESTRICTED OUTSTANDING COMMON
SHARES AND RESTRICTED SHARES PERCENTAGE OF ALL OUTSTANDING
THAT MAY BE SOLD UPON EXERCISE COMMON SHARES PLUS CLASS A AND
TOTAL OF OUTSTANDING SHARES PLUS OF CLASS A AND VESTED CLASS B VESTED CLASS B WARRANTS THAT
CLASS A WARRANTS AND VESTED WARRANTS THAT BECOME FREELY BECOME FREELY SALABLE IN
CLASS B WARRANTS SALABLE IN DECEMBER 1999 DECEMBER 1999
- -------------------------------- ------------------------------- -------------------------------
<S> <C> <C>
15,105,539 2,285,293 15.1%
</TABLE>
DIFFICULTIES IN SERVICE OF PROCESS AND ENFORCEMENT OF JUDGMENTS MIGHT PREVENT
SHAREHOLDERS FROM BEING ABLE TO BRING LAWSUITS AND ENFORCE CLAIMS
It may be difficult for you, if you believe you have legal claims against
our company or our officers or directors, to effect service of process within
the United States on directors and officers who reside outside the United
States. You also might not be able to recover in foreign courts against us or
those directors and officers on judgments of United States courts that are
predicated upon civil liabilities under U.S. federal securities laws. The
majority of our officers and directors are residents of jurisdictions outside
the United States. In addition, all or a substantial portion of our assets and
their assets are or may be located in jurisdictions outside the United States.
We have irrevocably agreed that we may be served with process in New York, New
York with respect to actions based on the offer and sale of our common shares
that we are making here. However, that submission does not extend to collection
of judgments. See "Enforceability of Civil Liabilities."
IF INSURANCE REGULATIONS PREVENT OUR SUBSIDIARIES FROM MAKING DIVIDEND PAYMENTS
TO OUR COMPANY, WE MIGHT NOT BE ABLE TO PAY OUR EXPENSES OR FUND PAYMENTS TO OUR
SHAREHOLDERS
We are a holding company and we have no operations. We are not committed to
holding significant assets other than our ownership of the capital stock of our
subsidiaries, although we may do so from time to time. Our subsidiaries will
make money available to our company primarily through the payment of dividends.
Our insurance subsidiaries, which hold most of our assets, are subject to
insurance regulations that can restrict their ability to pay dividends in order
to protect the customers that they reinsure. These restrictions could prevent
those subsidiaries from making money available to our company when we need funds
to pay our expenses or to provide funds with which to pay dividends. Therefore,
you should be aware that the assets shown as shareholders' equity, as well as
income, that are reported on our consolidated financial statements may not
actually be available to pay expenses when they need to be paid or to pay
dividends to you. Also, our ability to run our company
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could be adversely affected if our subsidiaries could not provide sufficient
funds to our company to pay our expenses of operation.
IF WE ARE NOT SUCCESSFUL IN ADDRESSING YEAR 2000 PROBLEMS, THAT FAILURE COULD
DISRUPT OUR BUSINESS OR INCREASE THE COST OF OUR DOING BUSINESS
The Year 2000 issue may affect us through the disruption of the processing
of business and general corporate transactions, both at our company and between
us and other businesses with which we interact, and through the assertion of
claims that costs related to the Year 2000 issue are covered under insurance in
respect of which we have a reinsurance obligation.
BACKGROUND
A significant percentage of the software that runs most computers relies on
two-digit date codes to perform a number of computation and decision-making
functions. These programs may fail from an inability to interpret date codes
properly, misreading two-digit codes (for example, "00" or "11") as dates in the
20th century (for example, 1900 or 1911) instead of the 21st century (in these
examples, 2000 or 2011). Among many other possibilities, insurance policies with
a January 1, 2000 or later expiration date could be affected by a Year 2000
malfunction.
OPERATIONAL RISK
We believe that our internal Year 2000 compliance program, which has now
been substantially completed, will result in our proprietary operating systems,
application software programs and computer hardware being Year 2000 compliant in
all material respects, though there can be no complete assurance in that regard.
We do not rely on computer-dependent transactions to the same extent as many
other businesses. However, if we have not succeeded in making our internal
processing environment Year 2000-compliant, or if any of our significant
business partners or service providers or other business entities experience
serious Year 2000 problems, we might experience disruption in our business. That
disruption, among other things, could conceivably:
- force us to compile information and process transactions manually;
- if compliance problems persisted, impair our ability to receive premiums
from and make claim payments to the companies that we reinsure;
- impair our ability to obtain information about our investments; or
- impair the value of our fixed maturity and equity investments if the
entities in which those investments were made have substantial Year 2000
costs, liabilities or disruptions.
Any or all of the types of possible disruptions resulting from this kind of
"worst case scenario" could materially increase our cost of doing business. They
could also could impair our ability to make required regulatory filings and
could reduce or eliminate our earnings or materially affect our results of
operations, liquidity or financial condition. However, based upon current
information, we do not expect worst case scenarios to occur and do not expect
material disruptions to our business.
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<PAGE> 14
INSURANCE RISKS
We have not received any claims made under policies for which we have
reinsurance obligations related to business losses caused by Year 2000
malfunctions or costs incurred in connection with prevention or correction of
Year 2000 problems. However, it is conceivable that claims of that kind could be
made. Published estimates of Year 2000 business losses and costs are in the many
billions of dollars. We are working with the companies that we reinsure to
attempt to determine whether any prospective or existing underwritten business
carries potential Year 2000 exposures. Nevertheless, we cannot be certain that
Year 2000 related claims will not increase the amounts we are required to pay
out under the reinsurance we have written and, as a result, have a material
adverse effect on our results of operations.
-------------------------
Neither the Registrar of Companies of Bermuda nor the Bermuda Monetary
Authority have recommended the common shares being offered by this document.
Furthermore, these authorities have not confirmed that this prospectus is
truthful or complete. Any representation to the contrary is a criminal offense.
This prospectus may not be distributed to any person in the United Kingdom
unless that person is a qualifying institution or corporation or other person
within article 11(3) of the Financial Services Act 1986 (Investment
Advertisements) (Exemptions) Order 1986 of the United Kingdom. The person must
also be either a qualifying securities professional within regulation 7(2)(a) of
the Public Offers of Securities Regulations 1995 of the United Kingdom or
personally selected by or on behalf of ESG Re Limited.
-------------------------
WE HAVE NOT UNDERTAKEN ANY ACTION TO PERMIT A PUBLIC OFFERING OF THE COMMON
SHARES COVERED BY THIS PROSPECTUS OUTSIDE THE UNITED STATES OR TO PERMIT THE
POSSESSION OR DISTRIBUTION OF THIS PROSPECTUS OUTSIDE THE UNITED STATES. PERSONS
OUTSIDE THE UNITED STATES WHO COME INTO POSSESSION OF THIS PROSPECTUS MUST
INFORM THEMSELVES ABOUT AND OBSERVE ANY RESTRICTIONS RELATING TO THE OFFERING OF
OUR COMMON SHARES AND THE DISTRIBUTION OF THIS PROSPECTUS OUTSIDE OF THE UNITED
STATES.
-------------------------
ENFORCEABILITY OF CIVIL LIABILITIES
We are organized under the laws of Bermuda, and substantially all of our
assets are located outside the United States. In addition, a majority of the
members of our board of directors and senior executive officers are not
residents of the United States. As a result, it may not be possible for
investors to effect service of process within the United States upon these
persons and to realize in the United States upon judgments of courts of the
United States predicated upon the civil liability of these persons under the
federal securities laws of the United States. Our Bermuda counsel, Appleby,
Sperling & Kempe, has advised us that there is doubt as to the enforceability,
in original actions in Bermuda courts, of judgments of United States courts
obtained in actions against our non-resident directors and senior executive
officers predicated upon the civil liability provisions of the federal
securities laws of the United States.
We have appointed CT Corporation System, New York, New York, as our agent
to receive service of process. This appointment cannot be revoked and applies to
litigation brought in any U.S. federal or state court relating to violations of
U.S. federal securities laws in connection with the transactions covered by this
prospectus.
-------------------------
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<PAGE> 15
FORWARD-LOOKING INFORMATION
Information both included and incorporated by reference in this prospectus
may contain forward-looking statements within the meaning of Section 27A of the
U.S. Securities Act of 1933 and Section 21E of the U.S. Securities Exchange Act
of 1934. This information may involve known and unknown risks, uncertainties and
other factors that may cause the actual results, performance or achievements of
our company to be materially different from future results, performance or
achievements expressed or implied by these forward-looking statements.
Forward-looking statements, which are based on assumptions and describe our
future plans, strategies and expectations, are generally identifiable by use,
either positively or negatively, of the following words:
<TABLE>
<S> <C>
- may - estimate
- will - believe
- should - intend
- expect - project
- anticipate - could
</TABLE>
or other variations of these words or comparable terminology. Factors that could
have a material adverse effect on the operations and future prospects of our
company include, but are not limited to, changes in:
- the frequency and severity of insured loss events, including
catastrophes;
- mortality rates of disease or injury;
- the persistence of adverse trends;
- prevailing levels of interest rates;
- currency exchange rates; and
- changes in laws.
These and other factors are discussed in "Risk Factors" above and elsewhere in
this prospectus. These risks and uncertainties should be considered in
evaluating any forward-looking statements contained or incorporated by reference
in this prospectus.
THE PLAN
The following summary and questions and answers explain and constitute the
plan. Shareholders who do not participate in the plan will continue to receive
cash distributions, as declared and paid in the usual manner.
SUMMARY OF PLAN
GENERAL
Our plan provides our shareholders and interested new investors with a
convenient and attractive method of investing cash distributions and optional
cash payments in additional common shares
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<PAGE> 16
without the payment of any brokerage commission or service charge. The shares
will either be sold directly by us or, at our choice, bought for the benefit of
plan participants on the stock market by State Street Bank and Trust Company,
which we have appointed to administer the plan.
Depending on the availability of common shares registered for issuance
under the plan, there is no total maximum number of shares that can be issued
pursuant to the reinvestment of distributions. There are, however, limitations
on the amount of optional cash payments that may be made unless we waive those
limitations as described below. As of the date of this prospectus, 2,000,000 of
our common shares have been registered and are available for sale under the
plan.
PRICES AND INVESTMENT DATES OF SHARES PURCHASED UNDER THE DIVIDEND REINVESTMENT
PLAN
Participants in the dividend reinvestment plan will pay one of two prices,
determined as follows:
- If the shares are sold by us, the price will be the average market price
of our shares on the Nasdaq National Market on the dividend payment date;
or
- If the shares are bought on the stock market, the price will be the
average of the prices that State Street Bank pays for the shares it
purchases on participants' behalves. State Street will make those
purchases within ten trading days of the dividend payment date.
OPTIONAL CASH INVESTMENTS
Generally
In general, in order to participate in the optional cash payment plan,
participants must invest at least $50 per month and no more than $12,500 per
month. Participants may invest in the plan periodically and are not required to
invest on a regular monthly basis. If participants make optional cash payments
of less than $50 per month or more than $12,500 per month, we may return some or
all of their investment to them without interest.
Automatic Deductions
Participants may also authorize monthly automatic deductions from an
account at a financial institution that is a member of the National Automated
Clearing House Association, of which most commercial banks are members. To do
so, participants must complete an automatic debit, or "ACH" authorization debit,
form. State Street will provide these forms to participants upon request.
Waivers and discounts
Participants may make optional cash payments in excess of $12,500 per month
only upon our receipt and acceptance of a completed Request for Waiver form as
described in Question 20. Purchases in the waiver program may reflect a discount
between 0% and 5% from the price otherwise payable for our common shares, which
we will establish in our sole discretion. If we accept and approve a
participant's waiver request for a given month, that participant will receive a
discount, if available for that month, on the full amount of his or her
investment. Please note that any discount may be discontinued at our discretion
after a review of current market conditions, the level of plan participation and
our current and projected capital needs.
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<PAGE> 17
We expect to grant requests for waiver to financial intermediaries,
including brokers and dealers, and perhaps to other participants. Grants of
requests for waiver will be made in our sole discretion based on a variety of
factors, including those described in Question 20. To the extent that we grant
requests for waiver, a greater proportion of our common shares may be issued
under the optional cash payment feature of the plan as opposed to the
distribution reinvestment feature of the plan.
Minimum share price
We may also establish a minimum price for a given month that will apply to
shares purchased under the waiver program. Participants may contact our Investor
Relations Department at 353-1-675-0264 to find out whether we have established a
minimum price. The minimum share price will be an amount that our average share
price on the Nasdaq National Market must exceed before plan participants may
invest optional cash payments in excess of $12,500 per month. There will be no
minimum share price applicable to optional cash payments that do not exceed
$12,500 per month or the reinvestment of distributions in additional common
shares.
Monthly participation cut-off date
In order to invest optional cash payments in the plan in any month, you
will be required to transmit both a participation form, if we do not already
have one on file from you, and the money that you will be investing through the
plan to State Street no later than the monthly participation cut-off date. That
date will be the fourth trading date of each month. See Schedule A for a list of
the expected participation cut-off dates through the end of the year 2000. State
Street may also be contacted for information relating to monthly participation
cut-off dates and the related investment dates.
Prices to be paid and investment dates for shares sold by us
When you purchase shares directly from us under the plan with optional cash
payments, a pricing period will begin in each month on the trading day after the
monthly participation cut-off date. The pricing period will be the period of ten
consecutive trading days used to determine the investment date. The investment
dates and the prices that you will pay for the stock that you are buying will be
as follows:
- if you are not participating in the waiver program, the investment date
will be the tenth day of the ten-day period, and the price that you will
pay will be the average price at which our stock trades on that tenth
day; or
- if you are participating in the waiver program, the investment dates will
be each day during the ten-day period unless we establish a minimum price
at which shares may be purchased under the waiver program. One-tenth of
the money invested by waiver plan participants will be invested on each
day of the ten-day period at the average price at which the stock trades
on that day unless the average price is less than the minimum price, if
any, that we have set. If the minimum price is not satisfied on one of
more dates, we will return the money to you that would have been invested
on those dates, without interest.
Prices to be paid and investment dates for shares purchased on the stock market
When State Street purchases shares on the stock market on behalf of
optional cash investment plan participants, it will do so beginning on the last
day of the related ten-day pricing period. State
15
<PAGE> 18
Street will finish investing as soon as practicable on or after this date, but
in any case before the tenth trading day after this date. The share price that
participants pay for these purchases will be the average price that State Street
pays on their behalves on the open market.
NO INTEREST PAID ON CASH HELD PENDING INVESTMENT
No interest will be paid on cash distributions or optional cash payments
pending investment or reinvestment under the terms of the plan. As a result, it
normally will be in the best interest of a participant to defer optional cash
payments until shortly before the applicable monthly participation cut-off date.
PAYMENT OF FEES UPON RESALE OF SHARES
Participants will not pay brokerage fees to purchase shares under the plan.
However, participants will have to pay a nominal fee per transaction to State
Street, a brokerage commission and any applicable share transfer taxes if State
Street resells common shares held in a participant's plan account at his or her
request.
DEADLINES FOR RECEIPT OF FORMS AND INSTRUCTIONS
Two types of deadlines will apply to participation in the plan:
- in the case of dividend reinvestments, participants must submit the
relevant forms by no later than the record date for the applicable
dividend; otherwise, they will not be able to participate in the
reinvestment plan, unless State Street waives this requirement, until the
next dividend is paid; and
- in the case of the optional cash payment plan, participants must submit
both the relevant forms, unless they have already submitted them, and
provide the funds necessary to participate in the plan by not later than
the applicable monthly participation cut-off date in order to be able to
participate in that month.
AUTOMATIC MODIFICATION, SUSPENSION OR TERMINATION
We reserve the right to modify, suspend or terminate participation in the
plan by otherwise eligible holders of our common shares or interested investors
in order to eliminate practices that we determine, in the our sole discretion,
to be inconsistent with the purposes or operation of the plan or to adversely
affect the price of our common shares.
PURPOSE
1. WHAT IS THE PURPOSE OF THE PLAN?
The primary purpose of the plan is to provide eligible holders of our
common shares and interested new investors with a convenient and simple method
of increasing their investment in our company. They may do so by investing cash
distributions and additional cash payments in additional common shares, in
either case without the payment of any brokerage commission or service charge.
See Question 7 for a description of the holders who are eligible to participate
in the plan. We may also use the plan to raise additional capital through the
sale each month of a portion of the common shares available for issuance under
the plan to current holders and interested new investors, including brokers or
dealers. Persons who make purchases under the plan in connection with a
distribution of our common shares may be deemed to be underwriters under the
federal securities laws.
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<PAGE> 19
2. ARE THERE ANY RESTRICTIONS ON WHO WILL BE PERMITTED TO PARTICIPATE IN THE
PLAN?
The plan is intended for the benefit of investors in our company and not
for individuals or investors who engage in transactions that may cause
aberrations in the price or trading volume of our common shares. From time to
time, financial intermediaries participating in the waiver program may engage in
positioning transactions in order to benefit from the discount from the market
price of our common shares acquired through optional cash payments under the
plan. Transactions of that type may cause fluctuations in the price or trading
volume of our common shares. We reserve the right to modify, suspend or
terminate participation in the plan by otherwise eligible holders of our common
shares or interested new investors in order to eliminate practices that are, in
our sole discretion, not consistent with the purposes or operation of the plan
or that adversely affect the price of our common shares.
OPTIONS AVAILABLE TO PARTICIPANTS
3. WHAT OPTIONS ARE AVAILABLE TO ENROLLED PARTICIPANTS?
Eligible holders of our common shares may elect to have the cash
distributions that are paid on all or a portion of their common shares
automatically reinvested in additional common shares. Cash distributions are
paid on our common shares when and as declared by our board of directors.
Depending on the availability of common shares registered for issuance under the
plan, there is no minimum limitation on the amount of distributions a
participant may reinvest under the distribution reinvestment feature of the
plan.
Each month plan participants may also elect to invest optional cash
payments in additional common shares, subject to a minimum per month purchase
limit of $50 and a maximum per month purchase limit of $12,500, which we may
waive. Participants may make optional cash payments each month even if
distributions on their common shares are not being reinvested and whether or not
a distribution has been declared.
ADVANTAGES AND DISADVANTAGES
4. WHAT ARE THE ADVANTAGES AND DISADVANTAGES OF THE PLAN?
Advantages:
- The plan provides participants with the opportunity to reinvest cash
distributions paid on all or a portion of their common shares in
additional common shares without payment of any brokerage commission or
service charge on common shares purchased directly from our company or in
the open market.
- The plan provides participants with the opportunity to make monthly
investments of optional cash payments, subject to minimum and maximum
amounts, for the purchase of additional common shares without the payment
of any brokerage commission or service charge on common shares purchased
directly from our company or in the open market. If we grant requests for
waiver for cash purchases in excess of the $12,500 per month limit,
purchases by investors participating in that program may be made at a
discount to the market price of our common shares at our discretion.
- All cash distributions paid on participants' common shares can be fully
invested in additional common shares because the plan permits fractional
shares to be credited to plan accounts.
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<PAGE> 20
Subsequent distributions on those fractional shares, as well as on whole
shares, will also be reinvested in additional shares, which will be
credited to plan accounts.
- The administrator of the plan, State Street Bank and Trust Company,
provides for the safekeeping of shares credited to each plan account at
no charge to participants.
- Periodic statements reflecting all current activity, including share
purchases and latest plan account balances, simplify participants' record
keeping. See Question 24 for information concerning reports to
participants.
Disadvantages:
- Neither State Street nor our company will pay any interest on
distributions or optional cash payments held pending reinvestment or
investment. See Question 16. In addition, optional cash payments made by
participants in the waiver program may be returned to participants in the
event that the average price of our common shares on the Nasdaq National
Market during a given ten-day pricing period does not exceed a minimum
share purchase price established by us for any trading day during the
ten-day pricing period. See Question 20.
- In the case of optional cash payments that are used to purchase shares
from us, the actual number of shares to be issued to a participant's plan
account, and the price paid for them, will not be determined until after
the end of the relevant ten-day pricing period. In the case of shares
that State Street purchases on the stock market on participants' behalves
during the applicable month, the actual number and price of the shares
will not be determined until the shares have been purchased.
- In the case of dividend distributions that State Street invests on
participants' behalves by purchasing shares on the stock market, the
actual number and price of the shares will not be known until State
Street has completed the purchases, which will begin on the distribution
payment date and finish on or after that date. Open market purchases will
be completed in any case before the tenth trading day after the
distribution payment date.
- In the above circumstances relating to cash payments and distributions,
participants will not know the actual number of shares they have
purchased or the price they have paid until notified by State Street.
- With respect to either dividend reinvestments or optional cash payments,
the price of our common shares to plan participants may exceed the price
at which our common shares are trading after the investment date.
- Because State Street must receive optional cash payments by the
applicable monthly participation cut-off date, purchases made with those
payments will be exposed to changes in market conditions for a longer
period of time than in the case of typical secondary market transactions.
By the same token, once received, a payment will be used to make
purchases under the plan unless State Street receives a written request
prior to the applicable participation cut-off date with respect to which
the participant has delivered optional cash payments. See Question 22.
- If State Street resells common shares held in a participant's plan
account at the request of a participant, the resale will involve a
nominal fee per transaction paid to State Street, a
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<PAGE> 21
brokerage commission and any applicable share transfer taxes on the
resales. See Questions 23 and 30.
ADMINISTRATION
5. WHO ADMINISTERS THE PLAN?
We have retained State Street to administer the plan, keep records, send
statements of account activity to each participant and perform other duties
relating to the plan. Shares purchased under the plan and held by State Street
will be registered in State Street's name or the name of its nominee for the
benefit of the participants. In the event that State Street resigns or otherwise
ceases to act as plan administrator, we will appoint a new plan administrator.
State Street also acts as distribution disbursing agent, transfer agent and
registrar for our common shares.
6. HOW DO YOU CONTACT STATE STREET WITH QUESTIONS ABOUT THE PLAN OR IF YOU WISH
TO ENROLL?
All correspondence regarding the plan should be directed to:
STATE STREET BANK AND TRUST COMPANY
c/o EquiServe, L.P.
P.O. Box 8200
Boston, Massachusetts 02266-8200
TELEPHONE: (800) 477-1077
Please mention ESG RE LIMITED and this plan in all correspondence.
PARTICIPATION
For purposes of this section, responses will generally be based upon the
method by which the holder holds his or her common shares. Generally, holders
are either record owners or beneficial owners. A record owner is a holder who
owns common shares in his or her own name. A beneficial owner is a holder who
beneficially owns common shares that are registered in a name other than his or
her own name. The shares of a beneficial owner will typically be registered in
the name of a broker, bank or other nominee.
7. WHO IS ELIGIBLE TO PARTICIPATE?
All record owners or beneficial owners of at least one of our common shares
are eligible to participate in the plan. A record owner may participate directly
in the plan. A beneficial owner must either become a record owner by having at
least one share transferred into his or her own name or arrange with the broker,
bank or other nominee who is the record holder to participate on his or her
behalf. In addition, interested new investors may participate in the optional
cash payment feature of the plan. If a beneficial owner who desires to become a
participant encounters any difficulties in arranging his or her participation in
the plan, he or she should call our Investor Relations Department in Ireland at
353-1-675-0264.
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<PAGE> 22
8. HOW DOES AN ELIGIBLE SHAREHOLDER OR INTERESTED NEW INVESTOR PARTICIPATE?
Record owners and new investors may join the plan by completing and signing
an authorization form, which is included with the plan, and returning it to
State Street. A non-postage-paid return envelope is provided for this purpose.
Authorization forms may be obtained at any time by writing to or telephoning
State Street.
To facilitate participation by beneficial owners, we have made arrangements
with State Street to reinvest distributions, on a per distribution basis, and
accept optional cash payments under the plan by brokers, banks and other
nominees on behalf of beneficial owners. Beneficial owners who wish to join the
plan must instruct their broker, bank or other nominee to complete and sign an
authorization form and/or a broker and nominee form. The latter form is required
to be used for optional cash payments when a nominee holds a beneficial owner's
shares in the name of a major securities depository, which is usually the case.
The nominee will forward the completed authorization form to its securities
depository. The securities depository will provide State Street with the
information necessary to allow the beneficial owner to participate in the plan.
If a new investor wishes to participate through a nominee, he or she will need
to follow the procedures outlined in this paragraph.
If a plan participant submits a properly executed authorization form
without electing an investment option, the authorization form will be deemed to
indicate the intention of the participant to apply all cash distributions and
optional cash payments, if applicable, toward the purchase of additional common
shares.
9. WHAT DOES THE AUTHORIZATION FORM PROVIDE?
The authorization form appoints State Street as agent for a plan
participant and directs us to pay to State Street each participant's cash
distributions on all or a part of our common shares owned by the participant, as
well as on all whole and fractional common shares already held in a
participant's plan account. The authorization form directs State Street to
purchase additional common shares with a participant's distributions and
optional cash payments, if any, made by the participant. The authorization form
also directs State Street to reinvest automatically all subsequent distributions
with respect to common shares held in a participant's plan account.
Distributions will continue to be reinvested on the number of common shares
specified by a plan participant and on all common shares held in a participant's
plan account until the participant specifies otherwise by contacting State
Street or the plan is terminated.
The authorization form provides for the purchase of additional common
shares through any of the following investment options:
- If "Full Distribution Reinvestment" is elected, State Street will apply
all cash distributions on all common shares then or subsequently
registered in the participant's name, and all cash distributions on all
common shares held in the participant's plan account, together with any
optional cash payments, toward the purchase of additional common shares.
- If "Partial Distribution Reinvestment" is elected, State Street will
apply all cash distributions on only the number of common shares
registered in the participant's name and specified on the authorization
form and all cash distributions on all common shares held in the
participant's plan account, together with any optional cash payments,
toward the purchase of additional
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<PAGE> 23
common shares. Shares subsequently held in the participant's name will
not be included if this option is chosen.
- If "Optional Cash Payments Only" is elected, the participant will
continue to receive cash distributions on common shares registered in
that participant's name, if any, in the usual manner. However, State
Street will apply all cash distributions on all common shares held in the
participant's plan account, together with any optional cash payments
received from the participant, toward the purchase of additional common
shares.
If State Street receives an authorization form prior to the record date for
a distribution payment, the election to reinvest distributions will begin with
that distribution payment. If State Street receives an authorization form on or
after the record date for a distribution payment, reinvestment of distributions
will begin on the distribution payment date following the next record date.
Record dates for payment of distributions normally precede payment dates by
approximately two weeks.
10. HOW DOES A PARTICIPANT CHANGE HIS OR HER INVESTMENT OPTION?
Participants may change their investment options at any time by requesting
a new authorization form and returning it to State Street.
If a participant desires to opt out of the distribution reinvestment
feature of the plan, a participant must notify State Street no later than three
business days before the record date for the related distribution payment date.
11. WHAT DOES THE BROKER AND NOMINEE FORM PROVIDE?
The broker and nominee form provides the only means by which a broker, bank
or other nominee holding shares of a beneficial owner in the name of a major
securities depository may invest optional cash payments on behalf of the
beneficial owner. A broker and nominee form must be delivered to State Street
each time a nominee transmits optional cash payments on behalf of a beneficial
owner. Broker and nominee forms will be furnished at any time by contacting our
Investor Relations Department at 353-1-675-0264.
Prior to submitting a broker and nominee form, the nominee for a beneficial
owner must submit a completed authorization form on behalf of the beneficial
owner.
IN ORDER FOR THE APPLICABLE DIVIDENDS OR PAYMENTS TO BE INVESTED BY THE
INTENDED INVESTMENT DATES, STATE STREET MUST RECEIVE THE BROKER AND NOMINEE FORM
AND APPROPRIATE INSTRUCTIONS NOT LATER THAN:
- THE APPLICABLE RECORD DATE, IN THE CASE OF A DIVIDEND REINVESTMENT; OR
- THE APPLICABLE MONTHLY PARTICIPATION CUT-OFF DATE, IN THE CASE OF
OPTIONAL CASH PAYMENTS.
12. IS PARTIAL PARTICIPATION POSSIBLE UNDER THE PLAN?
Yes. A record owner or the nominee for a beneficial owner may designate on
the authorization form a number of shares for which distributions are to be
reinvested. Distributions will then be reinvested only on the number of shares
specified, and the record owner or beneficial owner, as the case may be, will
continue to receive cash distributions on the remainder of the shares.
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<PAGE> 24
13. WHEN MAY AN ELIGIBLE SHAREHOLDER OR INTERESTED NEW INVESTOR JOIN THE PLAN?
A record owner or beneficial owner or interested new investor may join the
plan at any time. If State Street receives an authorization form from a
shareholder prior to the record date for a distribution payment, the election to
reinvest distributions will begin with that distribution payment, unless waived.
If State Street receives an authorization form on or after this record date, the
reinvestment of distributions will begin on the distribution payment date
following the next record date if the participant is still a shareholder of
record. Record dates for payment of distributions normally precede payment dates
by approximately two weeks.
For optional cash payments, in order for a participant to invest funds
during a given month, State Street must have received a check, money order or
wire transfer by the applicable monthly participation cut-off date.
Once in the plan, a participant remains in the plan until he or she
withdraws from the plan, we terminate his or her participation in the plan or we
terminate the plan.
14. WHEN WILL DISTRIBUTIONS BE REINVESTED AND/OR OPTIONAL CASH PAYMENTS BE
INVESTED UNDER THE PLAN?
Purchases from our company
Purchases of common shares from us will be made on the "investment date"
indicated below. On the same date, State Street will allocate and credit these
shares to a participant's plan account. The ten-day pricing period will begin on
the day following the applicable monthly participation cut-off date.
<TABLE>
<CAPTION>
METHOD OF PARTICIPATION INVESTMENT DATE
- ----------------------- ----------------------------------------------
<S> <C>
Quarterly distribution reinvestment........... Distribution payment date set by our board of
directors
Monthly optional cash payments
$12,500 or less............................. Last day of the monthly ten-day pricing period
Greater than $12,500........................ Each day in a ten-day pricing period unless we
establish a minimum share price that is not
met on that day*
</TABLE>
- -------------------------
* On each day during the ten-day period, one-tenth of a participant's optional
cash payments will be invested unless we establish a minimum share price that
is not met.
Purchases on the stock market
In the case of distributions that State Street invests through open market
purchases, State Street will purchase shares beginning on the distribution
payment date and finish on or after that date. Open market purchases will be
completed in any case before the tenth trading day after the distribution
payment date. Each day's purchases will be allocated to plan participants'
accounts in proportion to their participation in the total amount of dividends
that are being reinvested. State Street will credit to
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a plan account as of the distribution payment date shares purchased on the open
market with reinvested distributions.
In the case of optional cash payments that State Street invests through
open market purchases, State Street will purchase shares beginning on the last
day of the related ten-day pricing period and finish on or after that date. Open
market purchases will be completed in any case before the tenth trading day
after this pricing period conclusion date. State Street will credit to a plan
account as of the pricing period conclusion date shares purchased on the open
market with optional cash payments.
See Question 21 for information concerning when State Street must receive
funds in order for an investor to participate in the optional cash payment plan
with respect to a particular investment date.
PURCHASES AND PRICES OF SHARES
15. WHAT WILL BE THE PRICE TO PARTICIPANTS OF SHARES PURCHASED UNDER THE PLAN?
Distribution Reinvestment
- For common shares acquired directly from us, the price per share will be
the average of the high and low sales prices of our common shares on the
Nasdaq National Market on the distribution date, or, if no trading occurs
in our shares on the distribution date, the average of the high and low
sales prices for the first trading day immediately before the
distribution date for which trades are reported.
- For common shares acquired in open market purchases, the price per share
will be the weighted average of the actual prices State Street pays for
all of the common shares it purchases with all participants' reinvested
distributions.
Optional Cash Payments
- For common shares acquired directly from us, the price per share will be
the average of the daily high and low sale prices of our common shares as
reported on the Nasdaq National Market for the trading day relating to
each corresponding investment date or, if no trading occurs in our shares
on that trading day, for the trading day immediately preceding the
investment date for which trades are reported, less any applicable
discount in the case of participants in the waiver program. A "trading
day" means a day on which trades in our shares are reported on the Nasdaq
National Market.
- For common shares acquired through open market purchases, the price per
share will be the weighted average of the actual prices State Street pays
for all of the common shares it purchases with all participants' optional
cash payments for the related month.
Discount
Each month, at least three business days before the applicable monthly
participation cut-off date, we may establish a discount from the market price
applicable during the corresponding ten-day pricing period to optional cash
payments made by participants in the waiver program. We will notify State Street
of any discount we establish. The discount may be between 0% and 5% of the price
plan participants would otherwise pay for our common shares and may vary each
month. Once established, the discount will apply uniformly to all optional cash
payments made by participants during that month. We will establish any discount
in our sole discretion after a review of current market
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conditions, the level of participation in the plan and our current and projected
capital needs. The discount feature applies only to the issuance of common
shares purchased directly from us with optional cash payments under an accepted
waiver. It does not apply to open market purchases made with optional cash
payments or the reinvestment of distributions.
Neither our company nor State Street will be required to provide any
written notice to participants as to any discount. However, current information
regarding the discount applicable during the next month may be obtained by
contacting us at 353-1-675-0264. Setting a discount for a month will not affect
the setting of a discount for any subsequent month.
16. WILL INTEREST BE PAID ON CASH HELD PENDING INVESTMENT IN THE PLAN?
NO INTEREST WILL BE PAID ON CASH DISTRIBUTIONS OR OPTIONAL CASH PAYMENTS
PENDING INVESTMENT OR REINVESTMENT UNDER THE TERMS OF THE PLAN. SINCE NO
INTEREST IS PAID ON CASH HELD BY STATE STREET, IT NORMALLY WILL BE IN THE BEST
INTEREST OF A PARTICIPANT TO DEFER OPTIONAL CASH PAYMENTS UNTIL SHORTLY BEFORE
THE APPLICABLE MONTHLY PARTICIPATION CUT-OFF DATE.
17. HOW WILL STATE STREET PURCHASE SHARES ON THE OPEN MARKET?
When State Street makes open market purchases, those purchases may be made
on any securities exchange where the shares are traded, in the over-the-counter
market or by negotiated transactions. The purchases may also be made on terms
with respect to price, delivery and other matters as agreed to by State Street.
Neither our company nor any participant will have any authorization or
power to direct the time or price at which shares will be purchased or the
selection of the broker or dealer through or from whom State Street will make
purchases. However, when State Street makes open market purchases, it will use
its best efforts to purchase the shares at the lowest possible price.
18. HOW WILL THE NUMBER OF SHARES PURCHASED FOR A PARTICIPANT BE DETERMINED?
A participant's plan account will be credited with the number of whole and
fractional shares equal to the total amount to be invested on behalf of the
participant divided by the purchase price per share as calculated pursuant to
the methods described above. Depending on to the availability of common shares
registered for issuance under the plan, there is no total maximum number of
shares available for issuance under the plan.
19. WHAT IS THE SOURCE OF COMMON SHARES PURCHASED UNDER THE PLAN?
Plan shares will be purchased either directly from us or on the open
market, or by a combination of these methods. We will determine the source of
shares to be purchased under the plan at least three business days before the
relevant record date for a dividend or the applicable monthly participation
cut-off date, in the case of optional cash payments, and will notify State
Street of our determination. Neither our company nor State Street will be
required to provide any written notice to participants as to the source of
shares to be purchased under the plan. However, participants may obtain current
information regarding the source of shares by contacting our Investor Relations
Department at the number listed above.
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20. WHAT LIMITATIONS APPLY TO OPTIONAL CASH PAYMENTS?
General
Each optional cash payment is subject to a minimum per month purchase limit
of $50 and a maximum per month purchase limit of $12,500. For purposes of these
limitations, we will aggregate all plan accounts under the common control or
management of a participant, which we will determine at our sole discretion.
Generally, optional cash payments of less than $50 and that portion of any
optional cash payment in excess of $12,500, unless we waive the limit, will be
returned to participants without interest at the end of the relevant ten-day
pricing period.
Requests for Waiver
A participant may make optional cash payments in excess of $12,500 only
upon our acceptance of a completed request for waiver form from the participant
and receipt of the waiver form by State Street. We will notify participants of
our acceptance or denial of their requests. There is no preestablished maximum
limit applicable to optional cash payments that may be made following an
accepted request for waiver.
During any month in which we operate the plan, our company must receive and
elect to accept a request for waiver form no later than the applicable monthly
participation cut-off date. Waivers will be accepted only with respect to actual
record participants that beneficially own their common shares and not for the
benefit of beneficial owners or multiple participants whose stock is held in the
name of other record holders. Participants interested in obtaining further
information about a request for waiver should contact our company at the number
listed above.
We will consider waivers on the basis of a variety of factors, which may
include:
- our current and projected capital needs and the alternatives available to
us to meet those needs;
- prevailing market prices for our common shares;
- general economic and market conditions;
- expected aberrations in the price or trading volume of our common shares;
- the potential disruption of the price of our common shares by a financial
intermediary;
- the number of our common shares held by the participant submitting the
waiver request;
- the past actions of a participant under the plan;
- the aggregate amount of optional cash payments for which waivers have
been submitted; and
- the administrative constraints associated with granting waivers.
Grants of waivers will be made in our absolute discretion.
Minimum Share Price
Unless we waive our right to do so, we may establish for any ten-day
pricing period a minimum share price applicable only to the investment of
optional cash payments by participants in the waiver program. We would establish
a minimum share price in order to provide us with the ability to set a minimum
price at which common shares will be purchased directly from us under the plan
by virtue
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of waiver requests. We will, at least three business days before the applicable
monthly participation cut-off date, determine whether to establish a minimum
share price and, if established, its amount and so notify State Street. This
determination will be made at our discretion after a review of current market
conditions, the level of participation in the plan and our current and projected
capital needs.
The minimum share price for optional cash payments made pursuant to
requests for waiver will be a stated dollar amount that the average of the high
and low sale prices of our common shares on the Nasdaq National Market for each
trading day of the relevant ten-day pricing period must equal or exceed. In the
event that a minimum share price is not satisfied for a trading day in the
ten-day pricing period, then that trading day will be excluded from that ten-day
pricing period and no investment will occur on the corresponding investment
date.
For each trading day on which the minimum share price is not satisfied,
1/10 of each participant's optional cash payment will be returned to the
participant by check, without interest, after the end of the applicable ten-day
pricing period. Thus, for example, if the minimum price is not satisfied for
three of the ten trading days in a ten-day pricing period, 3/10 of each
participant's optional cash payment will be returned to the participant. State
Street expects to mail checks within five to ten business days after the end of
the applicable ten-day pricing period.
For any monthly pricing period, we may waive our right to set a minimum
share price. Participants may ascertain whether the minimum price applicable to
a given pricing period has been set or waived, as applicable, by contacting our
company at the number listed above.
For a list of the expected monthly participation cut-off dates in 1999 and
2000, see Schedule A.
THE MINIMUM SHARE PRICE CONCEPT AND RETURN PROCEDURE DISCUSSED ABOVE APPLY
ONLY TO OPTIONAL CASH PAYMENTS MADE BY VIRTUE OF REQUESTS FOR WAIVER WHEN OUR
COMMON SHARES ARE TO BE PURCHASED FROM US ON THE APPLICABLE INVESTMENT DATE. ALL
OTHER OPTIONAL CASH PAYMENTS WILL BE MADE AT THE PRICE OTHERWISE PAYABLE BY PLAN
PARTICIPANTS FOR OUR COMMON SHARES WITHOUT REGARD TO ANY MINIMUM SHARE PRICE.
21. WHEN MUST STATE STREET RECEIVE OPTIONAL CASH PAYMENTS?
Each month State Street will apply any optional cash payment for which good
funds are timely received to the purchase of our common shares for the account
of the participant during the next ten-day pricing period. In order for
investors to participate in the optional cash payment plan in a particular
month, State Street must have received a check, money order or wire transfer by
the applicable monthly participation cut-off date. Participants may use wire
transfers only if approved verbally in advance by State Street. State Street
will accept checks and money orders subject to timely collection as good funds
and verification of compliance with the terms of the plan. Checks or money
orders should be made payable to State Street and submitted together with,
initially, the authorization form or, subsequently, the form for additional
investments attached to participant's statements. Checks returned for any reason
will not be resubmitted for collection.
All deposits of optional cash payments, including automatic debit
deductions that may be made, must be in U.S. funds drawn on a U.S. bank. In the
event that any deposit is returned unpaid for any reason, State Street will
consider the request for the investment of the optional cash payment null and
void and will immediately remove from the participant's account any shares
purchased upon credit of this cash payment. State Street will then be entitled
to sell these shares to satisfy any uncollected
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amounts. If the net proceeds of the sale of these shares are insufficient to
satisfy the balance of any uncollected amounts, State Street may also sell any
other shares from the participant's account to satisfy the uncollected balance.
A $25 fee will be charged for any deposit returned unpaid.
In order for payments to be invested on the first investment date in a
ten-day pricing period, State Street must have received an authorization form or
a broker and nominee form, as appropriate, prior to or as of the applicable
monthly participation cut-off date.
22. MAY OPTIONAL CASH PAYMENTS BE RETURNED TO PARTICIPANTS?
If State Street receives a telephonic or written request from a participant
by the next monthly participation cut-off date, State Street will return funds
that it has received from that participant for use in the optional purchase plan
as soon as practicable. If State Street receives a request after the applicable
monthly participation cut-off date, a participant's optional cash payment will
not be returned but instead will be invested on the next related investment
date.
23. ARE THERE ANY EXPENSES TO PARTICIPANTS IN CONNECTION WITH THEIR
PARTICIPATION UNDER THE PLAN?
Participants will incur no brokerage commissions or service charges in
connection with the reinvestment of distributions or optional cash payments made
to acquire our common shares. We will pay all other costs of administration of
the plan. However, participants that request that State Street sell all or any
portion of their shares must pay a nominal fee of $15 per transaction to State
Street, any related brokerage commissions, which are not expected to exceed
$0.12 per share, and applicable share transfer taxes.
REPORTS TO PARTICIPANTS
24. WHAT KIND OF REPORTS WILL BE SENT TO PARTICIPANTS IN THE PLAN?
Each participant in the plan will receive a statement of his or her account
following each purchase of additional shares. These statements are participants'
continuing record of the cost of their purchases and should be retained for
income tax purposes. In addition, participants will receive copies of other
communications sent to holders of our common shares, including our annual report
to shareholders, the notice of annual meeting and proxy statement in connection
with our annual meeting of shareholders and Internal Revenue Service information
for reporting distributions paid.
DISTRIBUTIONS ON FRACTIONS
25. WILL PARTICIPANTS BE CREDITED WITH DISTRIBUTIONS ON FRACTIONS OF SHARES?
Yes.
CERTIFICATES FOR COMMON SHARES
26. WILL CERTIFICATES BE ISSUED FOR SHARES PURCHASED?
No. Common shares purchased for participants will be held in the name of
State Street or its nominee. No certificates will be issued to participants for
shares in the plan unless a participant submits a written request to State
Street or until participation in the plan is terminated. At any time, a
participant may submit a written request to State Street to send a certificate
for some or all of the
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whole shares credited to a participant's account. Any remaining whole shares and
any fractions of shares will remain credited to the plan account. Certificates
for fractional shares will not be issued under any circumstances.
27. IN WHOSE NAME WILL CERTIFICATES BE REGISTERED WHEN ISSUED?
Each plan account is maintained in the name in which the related
participant's certificates were registered at the time of enrollment in the
plan. Share certificates for whole shares purchased under the plan will be
similarly registered when issued upon a participant's request. If a participant
is a beneficial owner, any request to receive certificates held in the plan
should be placed through the participant's banker, broker or other nominee.
28. MAY A PARTICIPANT PLEDGE SHARES HELD IN A PLAN ACCOUNT?
No. A participant who wishes to pledge shares credited to the participant's
plan account must first withdraw these shares from the account.
WITHDRAWALS AND TERMINATION
29. WHEN MAY PARTICIPANTS WITHDRAW FROM THE PLAN?
A participant may withdraw from the plan with respect to all or a portion
of the shares held in his or her plan account at any time. If the request to
withdraw is received prior to a distribution record date, the request will be
processed within three business days following receipt of the request by State
Street.
If State Street receives the request to withdraw less than three business
days before a distribution record date, State Street, in its sole discretion,
may either pay the distribution in cash or reinvest it in shares for the
participant's account. The request for withdrawal will then be processed as
promptly as possible after the distribution payment date. All distributions
subsequent to the distribution payment date will be paid in cash unless a
shareholder re-enrolls in the plan, which may be done at any time.
Any optional cash payments that have been sent to State Street prior to a
request for withdrawal will also be invested on the next investment date unless
a participant expressly requests return of that payment in the request for
withdrawal and the request for withdrawal is received by State Street by the
applicable monthly participation cut-off date.
30. HOW DOES A PARTICIPANT WITHDRAW FROM THE PLAN?
A participant who wishes to withdraw from the plan with respect to all or a
portion of the shares held in his or her plan account must notify State Street
in writing. Upon a participant's withdrawal from the plan or termination of the
plan by us, certificates will be issued for the appropriate number of whole
shares credited to his or her account under the plan. A cash payment will be
made for any fraction of a share.
Upon withdrawal from the plan, a participant may also request in writing
that State Street sell all or part of the shares credited to his or her account
in the plan. State Street will sell the shares as requested within three
business days after processing the request for withdrawal. The participant will
receive the proceeds of the sale, less a nominal fee per transaction paid to
State Street, any brokerage
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fees or commissions and any applicable share transfer taxes, generally within
ten business days of the sale.
31. ARE THERE ANY AUTOMATIC TERMINATION PROVISIONS?
Participation in the plan will be terminated if State Street receives
written notice of the death or adjudicated incompetence of a participant,
together with satisfactory supporting documentation of the appointment of a
legal representative, at least three business days before the next record date
with respect to distribution reinvestments and the monthly participation cut-off
date with respect to optional cash payments. In the event State Street receives
written notice of death or adjudicated incompetence and any supporting
documentation less than three business days before the next record date or
participation cut-off date, shares will be purchased for the participant and
participation in the plan will not terminate until after any cash distribution
or optional cash payment has been invested. Following this investment, no
additional purchase of shares will be made for the participant's account and the
participant's shares and any cash distributions paid on these shares will be
forwarded to the participant's legal representative.
WE RESERVE THE RIGHT TO MODIFY, SUSPEND OR TERMINATE PARTICIPATION IN THE
PLAN BY OTHERWISE ELIGIBLE HOLDERS OF OUR COMMON SHARES OR INTERESTED INVESTORS
IN ORDER TO ELIMINATE PRACTICES THAT ARE, IN THE OUR SOLE DISCRETION, NOT
CONSISTENT WITH THE PURPOSES OR OPERATION OF THE PLAN OR WHICH ADVERSELY AFFECT
THE PRICE OF OUR COMMON SHARES.
OTHER INFORMATION
32. WHAT HAPPENS IF A PARTICIPANT SELLS OR TRANSFERS ALL OF THE SHARES
REGISTERED IN THE PARTICIPANT'S NAME?
If a participant disposes of all shares registered in his or her name, and
is not shown as a record owner on a distribution record date, the participant
may be terminated from the plan as of the record date and the termination
treated as though a withdrawal notice had been received prior to the record
date.
33. WHAT HAPPENS IF WE DECLARE A DISTRIBUTION PAYABLE IN SHARES OR DECLARE A
SHARE SPLIT?
Any distribution payable in shares and any additional shares we distribute
in connection with a share split in respect of shares credited to a
participant's plan account will be added to that account. Share distributions or
split shares that are attributable to shares registered in a participant's own
name and not in his or her plan account will be mailed directly to the
participant as in the case of shareholders of our company not participating in
the plan. In our discretion, rather than issuing physical share certificates, we
may wish to maintain computerized records of all share distributions or split
shares whether or not the underlying shares are held in a plan account or by a
shareholder not participating in the plan.
34. HOW WILL SHARES HELD BY STATE STREET BE VOTED AT MEETINGS OF SHAREHOLDERS?
If the participant is a record owner, the participant will receive a proxy
card covering both directly held shares and shares held in the plan. If the
participant is a beneficial owner, the participant will receive a proxy covering
shares held in the plan through his or her broker, bank or other nominee.
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If a proxy is returned properly signed and marked for voting, all the
shares covered by the proxy will be voted as marked. If a proxy is returned
properly signed but no voting instructions are given, all of the participant's
shares will be voted in accordance with the recommendations of our board of
directors, unless applicable laws require otherwise. If the proxy is not
returned, or if it is returned unexecuted or improperly executed, shares
registered in a participant's name may be voted only by the participant in
person.
35. WHAT ARE THE RESPONSIBILITIES OF OUR COMPANY AND STATE STREET UNDER THE
PLAN?
Our company and State Street will not be liable in administering the plan
for any act done in good faith or required by applicable law or for any good
faith omission to act, including:
- any claim of liability arising out of the failure to terminate a
participant's account upon his or her death;
- with respect to the prices at which our common shares are purchased
and/or the times when these purchases are made; or
- with respect to any fluctuation in the market value before or after the
purchase or sale of our common shares. Notwithstanding these limitations,
nothing contained in the plan limits our liability with respect to
violations of federal securities laws.
Our company and State Street will be entitled to rely on completed forms
and the proof of due authority to participate in the plan, without further
responsibility of investigation or inquiry.
36. MAY THE PLAN BE CHANGED OR DISCONTINUED?
Yes. We may suspend, terminate or amend the plan at any time. Notice will
be sent to participants of any suspension or termination, or of any amendment
that alters the plan terms and conditions, as soon as practicable after any
action by us.
We may substitute another administrator or agent in place of State Street
at any time. Participants will be promptly informed of any substitution.
37. WHAT ARE THE FEDERAL INCOME TAX CONSEQUENCES OF PARTICIPATION IN THE PLAN?
The following summary describes United States Federal income tax
considerations of participation in the plan applicable to holders of our common
shares who are generally subject to United States Federal income tax. This
summary is for general information purposes only and is based on the United
States Internal Revenue Code of 1986, and Treasury regulations under and
judicial and administrative interpretations of the Code, all as in effect on the
date of this prospectus and all of which are subject to change. The tax
treatment to a U.S. shareholder may vary depending upon his or her particular
situation. Holders such as persons that are not United States persons, as well
as banks, insurance companies, tax-exempt organizations, financial institutions,
persons subject to the alternative minimum tax and broker dealers, may be
subject to special rules not discussed below. The following summary is limited
to U.S. shareholders who will hold our common shares as "capital assets" within
the meaning of Section 1221 of the Internal Revenue Code. The discussion below
does not address the effect of any state, local or foreign tax law on a U.S.
shareholder.
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As used here, the term "United States" or "U.S." person means:
- an individual who is a citizen or resident of the United States;
- a partnership, corporation or other entity created or organized in or
under the laws of the United States or any of its states;
- an estate, the income of which is subject to U.S. Federal income tax,
regardless of source; or
- a trust if:
- a court within the United States is able to exercise primary
supervision over the administration of the trust; and
- one or more United States persons have the authority to control all
substantial decisions of the trust.
For United States Federal income tax purposes, a U.S. plan participant will
be treated as receiving a distribution equal to the number of our common shares
purchased with his or her reinvested dividends multiplied by the fair market
value of our common shares on the date they were purchased. For purposes of this
paragraph, the "fair market value" of our common shares will be the average of
the high and low sales prices for that date, as reported by the exchange on
which the common shares are principally traded. If our common shares do not
trade on that date, the fair market value will be the weighted average of the
mean of the high and low sales prices on the nearest trading dates before and
after the date of purchase. This amount may differ from the price used to
determine the number of shares a shareholder will acquire under the plan.
As discussed above, plan participants will not pay brokerage commissions on
open market purchases of our common shares made by State Street. We will pay
State Street charges for its services in effecting these purchases, part of
which might be deemed to constitute brokerage commissions. The Internal Revenue
Service has taken the position in private letter rulings that the payment of
brokerage commissions in this way should be treated as a dividend distribution
to a participant. However, we believe that the Internal Revenue Service position
might not be correct, because, for example, it may be appropriate to
characterize all payments of this kind as expenses incurred by us to satisfy our
obligation to deliver shares under the plan, rather than as brokerage expenses
incurred for the benefit of shareholders. If the position that has been taken by
the Internal Revenue Service were correct, the amount of the dividend would be
includible in the income of a plan participant and also in his or her basis in
the shares purchased. Because it is not clear that the Internal Revenue Service
position is correct, we have not yet decided whether to treat these commissions,
if any, as deemed dividend distributions to participants. In the future,
however, we might take the position that participants received their
proportionate amount of any brokerage commissions as distributions. If we do so,
we will arrange for participants and the Internal Revenue Service to receive any
tax form or notice necessary to reflect those brokerage commissions as
distributions on participants' income tax returns.
A U.S. shareholder who does not participate in the plan, and who continues
to receive cash dividends, will be treated as receiving a distribution equal to
the amount of cash received. In either case, subject to the discussion below
under "Certain Tax Considerations -- Taxation of Shareholders -- United States
Taxation of U.S. Shareholders and Non-U.S. Shareholders," the distribution will
be includible in the U.S. shareholder's income as a taxable dividend to the
extent of our company's then current and accumulated earnings and profits as
determined for United States Federal income tax
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purposes. Any cash dividend also will not be eligible for the dividends received
deduction available to corporations.
The tax basis to a U.S. participant in each share or fraction of a share
acquired through the dividend reinvestment aspect of the plan will equal the
fair market value of that share or fraction of a share on the date it was
purchased. The holding period will begin on the day following the date of
purchase.
Subject to the discussion below under "Certain Tax
Considerations -- Taxation of Shareholders -- United States Taxation of U.S.
Shareholders and Non-U.S. Shareholders," the sale of our common shares will
generally result in the recognition of gain or loss in an amount equal to the
difference between the amount realized on the sale and the holder's adjusted
basis in the common shares sold. For individuals, gain from a sale or exchange
will be taxed at varying rates depending on whether the stock sold was held for
one year or less, more than one year but not more than eighteen months, or more
than eighteen months.
For U.S. participants who are current shareholders of our company, it is
not entirely clear under current law how purchases of common shares from us
pursuant to the optional cash payment feature of the plan should be treated for
federal income tax purposes. Subject to the discussion above with respect to
brokerage commissions, we currently intend to take the position for tax
reporting purposes either that no distribution from us has occurred in
connection with optional cash purchases, or, alternatively, that any
distribution resulting from these purchases is not taxable as a dividend.
However, the Internal Revenue Service might contend that U.S. participants who
are our shareholders should be treated for federal income tax purposes as having
received a distribution from us in an amount equal to the excess of the fair
market value, determined as the average of the high and low trading prices of
our common shares on the investment date, over the amount of the optional cash
payment, and that all or a portion of that distribution should be treated as a
taxable dividend. In the future, we may, in light of subsequent developments in
the tax laws or for other reasons, treat as a taxable dividend all, or a
portion, of the excess of the fair market value of our common shares credited to
a participant's plan account on the investment date over the amount of the
optional cash payment. U.S. participants are encouraged to consult with their
own tax advisors with regard to the tax treatment of optional cash purchases.
38. HOW ARE INCOME TAX WITHHOLDING PROVISIONS APPLIED TO PARTICIPANTS IN THE
PLAN?
If a participant fails to provide federal income tax certifications in the
manner required by law, distributions on common shares proceeds from the sale of
fractional shares and proceeds from the sale of common shares held for a
participant's account will be subject to federal income tax withholding at the
rate of 31%. If withholding is required for any reason, the appropriate amount
of tax will be withheld. Generally institutional shareholders, such as most
corporations, are, however, exempt from these withholding requirements.
If a participant is a foreign shareholder whose distributions are subject
to federal income tax withholding at the 31% rate, or a lower treaty rate, the
appropriate amount will be withheld and the balance in common shares will be
credited to that participant's account.
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39. WHO BEARS THE RISK OF MARKET FLUCTUATIONS IN OUR COMMON SHARES?
A participant's investment in shares held in the plan account is no
different from his or her investment in directly held shares. The participant
bears the risk of any loss and enjoys the benefits of any gain from market price
changes with respect to his or her plan shares.
40. WHO HAS THE RIGHT AND THE RESPONSIBILITY TO INTERPRET THE PLAN?
We will determine any question of interpretation arising under the plan,
and any determination we make will be final. We may adopt any condition to
participation in the plan. Its operation will be governed by the laws of
Bermuda.
41. IS THERE ANY WAY I COULD LOSE MY RIGHTS TO SHARES HELD IN THE PLAN?
Common shares credited to a participant's plan are subject to escheat to
the state in which the participant resides in the event that the shares are
deemed, under that state's laws, to have been abandoned by the participant.
Participants, therefore, should notify State Street promptly in writing of any
change of address. Account statements and other communications to participants
will be addressed to them at the last address of record that they provide to
State Street.
42. ARE THERE ANY OTHER RIGHTS AVAILABLE UNDER THE PLAN?
Participants will have no right to draw checks or drafts against their plan
accounts or to instruct State Street with respect to any common shares or cash
held by State Street except as expressly provided in this prospectus.
CERTAIN TAX CONSIDERATIONS
The following summary of the taxation of our companies, ES Bermuda, ESG
Germany, ES Ireland, our Canadian subsidiary ES North America, ESG UK and Accent
Europe and the taxation of our shareholders is based upon current law.
Legislative, judicial or administrative changes may be forthcoming that could
affect this summary. Statements made below as to Bermuda law set forth the
opinion of Appleby Spurling & Kempe, our Bermuda counsel. Statements made below
as to United States federal income tax law set forth the opinion of Paul, Weiss,
Rifkind, Wharton and Garrison, our United States counsel. Statements made below
as to German taxation set forth the opinion of Deloitte & Touche GmbH.
Statements made below as to United Kingdom taxation set forth the opinion of
Deloitte & Touche, our United Kingdom advisors. Statements made below as to
Canadian taxation set forth the opinion of Deloitte & Touche, our Canadian
advisors. Statements made below as to Irish law set forth the opinion of
Matheson Ormsby Prentice, our Irish counsel.
TAXATION OF OUR COMPANY AND ITS SUBSIDIARIES
BERMUDA
Our company and ES Bermuda have each received from the Minister of Finance
of Bermuda a written undertaking under the Exempted Undertakings Tax Protection
Act, 1966 (as amended) of Bermuda. These undertakings provide that in the event
of there being enacted in Bermuda any legislation imposing tax computed on
profits or income, or computed on any capital asset, gain or appreciation, or
any tax in the nature of estate duty or inheritance tax, then the imposition of
any of
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these taxes shall not be applicable to our company and ES Bermuda or to any of
our operations or those of ES Bermuda's or the shares, debentures or other
obligations of our company and ES Bermuda until March 28, 2016. These assurances
are qualified by the proviso that they are not construed to prevent the
application of any tax or duty to those persons as are ordinarily resident in
Bermuda or to prevent the application of any tax payable in accordance with the
provisions of The Land Tax Act 1967 of Bermuda or otherwise payable in relation
to the land leased to us and ES Bermuda.
Each of our company and ES Bermuda is required to pay annual Bermuda
government fees. ES Bermuda, additionally, is required to pay insurance
registration fees as an insurer under the Insurance Act 1978. Under current
rates, we pay a fixed fee of BD$15,900 and ES Bermuda pays a total of BD$18,400
per year, which includes the annual Bermuda government fee and the annual
insurance registration fee. Currently there is no Bermuda withholding tax on
dividends that ES Bermuda may pay to us.
UNITED STATES
A foreign corporation is subject to taxation in the United States on its
business profits:
- if it is engaged in a trade or business in the United States; or
- if a treaty applies, if it is so engaged through a permanent
establishment in the United States.
Our company and our non-U.S. subsidiaries intend to operate our business in
a manner that will not cause us to be required to pay U.S. income tax, other
than withholding tax as described below, under one or both of these tests.
However, because there is considerable uncertainty as to their application,
there can be no assurances that the Internal Revenue Service will not contend
successfully that we or a subsidiary of ours is subject to taxation in the
United States.
A foreign corporation that is engaged in trade or business in the United
States, and that does not qualify for benefits under a tax treaty so that it may
apply the permanent establishment test, would be subject to U.S. income tax, as
well as the branch profits tax, on income that is treated as "effectively
connected" with the conduct of that trade or business. "Effectively connected"
income generally includes U.S. source income and, in the case of an insurance
company, underwriting and investment income from all sources to the extent the
underwriting income is attributable to the conduct of a U.S. insurance business.
A foreign corporation that is entitled to benefits under a tax treaty, but
nevertheless has a U.S. permanent establishment, is subject to U.S. income tax
on the business profits attributable to its permanent establishment. If U.S.
income tax were imposed under either test, taxable income would be computed in a
manner generally analogous to that applied to the income of a domestic
corporation, except that a foreign corporation can claim an allowance for
deductions and credits only if it files a U.S. income tax return on a timely
basis for the applicable tax year. Currently, the maximum federal tax rate on a
corporation's effectively connected income is 35%, and the branch profits tax
rate is 30% unless reduced by a treaty provision. The branch profits tax is
imposed each year on a corporation's effectively connected earnings and profits,
with certain adjustments, that are deemed repatriated out of the United States.
There are limitations on the applicability of the tax treaty between
Bermuda and the United States. That treaty applies the permanent establishment
test to a company, such as ES Bermuda, that is predominantly engaged in the
insurance business. The Bermuda treaty does not, however, apply a
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lower withholding tax rate to dividends and interest income or reduce the branch
profits tax rate. ES Bermuda would not be entitled to the benefits of the
Bermuda treaty if:
- 50% or more of ES Bermuda's stock were beneficially owned, directly or
indirectly, by persons other than Bermuda residents or U.S. citizens or
residents; or
- ES Bermuda's income were used in substantial part to make
disproportionate distributions to, or to meet liabilities to, persons who
are not Bermuda residents or U.S. citizens or residents.
Although we can give no assurance that ES Bermuda satisfies, or will
continue to satisfy, the 50% ownership test, we believe that these limitations
on the Bermuda treaty's benefits do not apply to ES Bermuda. However, even if
the Bermuda treaty did not apply, we believe that ES Bermuda would not be
subject to U.S. taxation, other than withholding tax as described below, on the
grounds that it is not engaged in a trade or business in the United States.
Foreign corporations not engaged in a trade or business in the United
States are nonetheless subject to U.S. income tax on certain "fixed or
determinable annual or periodic gains, profits and income" derived from sources
within the United States, such as dividends and certain interest on investments,
as enumerated in Section 881(a) of the Internal Revenue Code of 1986.
The United States also imposes an excise tax on insurance and reinsurance
premiums paid to foreign insurers or reinsurers with respect to risks located in
the United States. The rate of tax applicable to reinsurance premiums paid to ES
Bermuda and ES Ireland is 1% of gross premiums.
IRELAND
In general, Irish companies must pay corporation tax on their trading
income at the rate of 28%. However, ES Ireland has been granted a certificate
that qualifies it for special relief under Section 446 of the Taxes
Consolidation Act, 1997, provided that it engages only in "relevant trading
operations". Provided the conditions attaching to the certificate are met, the
effect of Section 446 is to reduce the rate of corporation tax on income arising
from relevant trading operations to 10%. Unless it is revoked, the certificate
remains in force until December 31, 2005. ES Ireland's relevant trading
operations comprise:
- the provision of reinsurance facilities consisting of its underwriting
reinsurance placements that are solely in respect of risks arising
outside Ireland; and
- reinsurance of its own non-Irish risks with insurance and reinsurance
companies.
If ES Ireland engages in other activities that are not relevant trading
operations, to that extent its profits will be liable to Irish taxation at the
rate of 28%.
Foreign corporations that engage in business in Ireland are subject to
Irish taxation on profits at the rate of 28%. Each of ES Bermuda, ESG Germany,
or any other of our German subsidiaries, ESG UK, or any other of our U.K.
subsidiaries, and ES North America intends to operate its business activities in
a manner that will not result in its being considered to be engaged in a trade
or business or to have a permanent establishment in Ireland under any applicable
tax treaty. However, whether or not a company is engaged in a trade or business
or has a permanent establishment in Ireland are essentially factual tests, and
there is considerable uncertainty as to the activities that will cause a foreign
corporation to be subject to tax under them. Thus, there can be no assurance
that Irish tax authorities will not successfully contend that we or our
non-Irish subsidiaries are subject to Irish tax.
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WITHHOLDING TAXES. There is no withholding tax on interest payments made
by a company qualifying under Section 446 in carrying out its relevant trading
operations.
There is a withholding tax on the payment of dividends and distributions by
Irish resident companies at the standard rate of income taxation, which is
currently 24%, subject to some exceptions that we believe should apply to us.
Those exceptions are for dividends and distributions paid to:
- companies resident in a jurisdiction outside the European Union with
which Ireland does not have a double tax treaty, if the company is
ultimately controlled by shareholders resident in a European Union member
state or in a treaty country, which includes the United States; and
- companies that are not resident in Ireland and the principal class of the
shares of
- the company, or
- another company of which the company is a 75% subsidiary,
is substantially and regularly traded on one or more than one recognized
stock exchange in a jurisdiction in which Ireland has a double taxation
treaty, including Nasdaq, where our shares are traded, or a European
Union Member State or on another stock exchange approved of by the
Minister for Finance for this purpose.
STAMP DUTY. Irish capital duty will generally arise in respect of monies
subscribed for shares in Irish limited liability companies such as ES Ireland.
The rate of duty is 1%.
The transfer of the beneficial ownership of any shares in ES Ireland will
give rise to Irish stamp duty at a rate of 1%. Stamp duty becomes payable when
the share transfer is executed. No stamp duty is chargeable on a transfer of
nominal or legal title.
No stamp duty is payable on the issue of policies of insurance which relate
to risk located outside Ireland.
GERMANY
ESG Germany, our German holding company, and its subsidiaries will be
subject to tax in Germany on their income. If the requirements of a fiscal unity
between ESG Germany and its other German subsidiaries are met, the income of the
subordinated companies will be directly attributed to ESG Germany.
ESG Germany is currently subject to trade tax on its income, including the
income of our other subsidiaries attributed to it, at an effective rate of about
19%. Its remaining profit after the deduction of the trade tax is subject to
corporate income tax at a rate of 40% for retained earnings, which is reduced to
30% to the extent that its profits are distributed to ESG UK, its immediate
parent corporation. Additionally, a solidarity surcharge of 5.5% is levied on
the corporate income tax. Accordingly, the overall effective tax rate in Germany
will be approximately 54% for retained earnings and 45% for distributed
earnings. Non-deductible expenses would increase the overall effective tax
burden.
Dividends ESG Germany pays to ESG UK, our U.K. holding company and ESG
Germany's immediate parent, will be exempt from German withholding tax and
solidarity surcharge, but only if there is sufficient business purpose for the
existence of ESG UK or ESG UK carries out business activities on its own under
German tax law. We expect that a sufficient business purpose will be found,
under German tax law, because ESG UK owns all of the shares of ES North America,
European
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Specialty Limited and European Specialty Insurance Management Services Limited,
in addition to all of the shares of ESG Germany, and provides management
functions for these companies. If sufficient business purpose were lacking, ESG
Germany would have to withhold 25% withholding tax and a solidarity surcharge of
5.5% on the withholding tax on dividends paid to ESG UK. The total withholding
tax burden would then be 26.375%.
ES Ireland will not be subject to tax in Germany unless it operates through
a permanent establishment in Germany. Although it is not free from doubt, we
expect that ES Germany, our German insurance company, will qualify as an
independent agent acting in the ordinary course of its business for ES Ireland
and thus will not constitute a permanent establishment. In this regard, it is
assumed that the activities of ES Germany will be structured as follows:
ES Germany will be independently capitalized at a level comparable to that
of other German reinsurers with similar levels of business and will itself
assume a considerable part of the reinsurance business that it writes. ES
Germany will have its own employees with extensive experience, knowledge and
relationships in the reinsurance industry, and decisions regarding the
underwriting business will be made in Germany by employees of ES Germany. ES
Germany will write reinsurance policies on behalf of itself, ES Ireland and to a
considerable extent also on behalf of unrelated companies. ES Ireland will not
direct the manner in which ES Germany operates, nor will it exercise any other
form of control over ES Germany's operations or guarantee the profitability of
ES Germany.
With regard to Bermuda, although not free from doubt, we believe that
structuring the activities of ES Germany as described above should also support
the opinion that ES Bermuda should not be subject to tax in Germany. The tax
position of ES Bermuda is strengthened by the fact that it has no contractual
relationship with ES Germany.
If ES Ireland or ES Bermuda were taxed in Germany, the current overall
effective tax rate would be approximately 54%, although non-deductible expenses
would increase the overall effective tax burden.
UNITED KINGDOM
Prior to April 1, 1999, ESG UK and its U.K. subsidiaries were subject to
corporate income tax in the United Kingdom at the 31% rate. As of April 1, 1999,
the corporate income tax rate in the United Kingdom is 30%. ESG UK will be
entitled to a foreign tax credit for German taxes paid by ESG Germany, and for
Canadian taxes paid by ES North America, with respect to profits paid as
dividends to ESG UK. As a result, the effective U.K. corporate tax rate on
dividends received from ESG Germany and ES North America should be zero, on the
assumption that foreign tax borne in each jurisdiction is at least equivalent to
the U.K. rate of taxation.
CANADA
ES North America will be subject to Canadian federal and provincial income
tax on its income at a combined rate of approximately 44%. It will also be
subject to Canadian federal and provincial capital taxes at a combined rate of
up to 0.5%. Dividends that ES North America pays to ESG UK will be subject to
Canadian withholding tax at the rate of 10%.
Non-resident companies that carry on business in Canada may also be subject
to Canadian income and capital taxes on the profits of the business carried on
in Canada. Pursuant to the Canada-Ireland
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tax treaty, ES Ireland will be subject to tax in Canada only if it carries on
business through a permanent establishment in Canada, and then only on income
attributable to that permanent establishment. We intend to operate so that none
of our subsidiaries, other than ES North America, is subject to tax in Canada.
TAXATION OF SHAREHOLDERS
BERMUDA TAXATION
There is no Bermuda withholding tax on dividends paid by our company.
UNITED STATES TAXATION OF U.S. AND NON-U.S. SHAREHOLDERS
CLASSIFICATION AS A CONTROLLED FOREIGN CORPORATION ("CFC"). Under Section
951(a) of the Internal Revenue Code, each "Major U.S. Shareholder" of a CFC must
include in its gross income for U.S. Federal income tax purposes its pro rata
share of the CFC's Subpart F income, even if the Subpart F income is not
distributed. Until recently, Subpart F income included, among other items,
"insurance income," defined as including income, including premium and
investment income, attributable to issuing or reinsuring any insurance or
annuity contract:
- in connection with risks located in, liabilities arising out of
activities in, or the lives or health of residents of a country other
than the country under the laws of which the corporation is organized;
and
- that would be taxed under the provisions of the Internal Revenue Code
relating to insurance companies if the income were the income of a
domestic insurance company.
Pursuant to temporary legislation enacted at the end of 1998, however, the
definition of Subpart F "insurance income" has been modified. Under this
legislation, insurance income does not include income derived from exempt
contracts covering non-U.S. risks in the case of a qualifying insurance company
that derives at least 50% of its premiums from insuring unrelated persons in the
insurer's own country. Unless extended, the temporary legislation generally will
be in effect only in 1999. In all cases, however, Subpart F "insurance income"
does not include income that was subject to an effective rate of income tax
imposed by a foreign country greater than 90% of the maximum rate specified in
Section 11 of the Internal Revenue Code. As discussed above, that maximum tax
rate is currently 35%.
Under Section 951(b) of the Internal Revenue Code, any U.S. person who
owns, directly or indirectly through foreign persons, or is considered to own,
by application of the rules of constructive ownership set forth in Section
958(b) of the Internal Revenue Code, 10% or more of the voting power of all
classes of shares of a foreign corporation will be considered to be a "Major
U.S. Shareholder." In general, a foreign corporation is treated as a CFC if
Major U.S. Shareholders collectively own more than 50% of the total combined
voting power or total value of the corporation's shares for an uninterrupted
period of 30 days or more during any tax year. Additionally, a 25% threshold
applies to insurance companies that primarily insure risks outside their own
country of organization. We believe that neither the 25% nor the 50% ownership
tests will apply to us or our subsidiaries because:
- our share ownership will be widely dispersed; and
- under our articles of association, no U.S. Holder except John C Head III
and persons deemed to own our common shares with him under Section 958 of
the Internal Revenue Code are
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permitted to hold as much as 10% of our total combined voting power, and
John C Head III is not permitted to hold more than 25% of that voting
power. See "Risk Factors -- Anti-Takeover Considerations."
Additionally, John C Head III has informed us that he has no intention of
acquiring any shares that would cause him to be treated as owning 25% or more of
the total value of our company. Therefore, we do not believe that either we or
any of our subsidiaries will be a CFC for U.S. Federal income tax purposes. In
the absence of any controlling authority, however, there can be no assurance
that the Internal Revenue Service would not successfully take a contrary
position regarding the effect of these limitations on voting power and therefore
assert that we are a CFC. Moreover, if John C Head III acquired sufficient
shares so that he would be treated as owning more than 25% of the value of our
company for an uninterrupted period of 30 days or more during any tax year, we
would be a CFC. If we or any subsidiary of ours were deemed to be a CFC, each
Major U.S. Shareholder would be required to include in its gross income for U.S.
Federal income tax purposes its pro rata share of our Subpart F income, even if
the Subpart F income were not distributed.
RELATED PERSON INSURANCE INCOME ("RPII"). RPII is defined in Section
953(c)(2) of the Internal Revenue Code as any "insurance income" attributable to
policies of insurance or reinsurance with respect to which the person directly
or indirectly insured is a U.S. shareholder or a "related person" to a U.S.
shareholder. For these purposes, a U.S. shareholder generally includes any U.S.
person who beneficially owns any amount of our shares. The term "related person"
for these purposes generally means someone who controls or is controlled by an
RPII shareholder, or someone who is controlled by the same person or persons
that control the RPII shareholder.
If the RPII rules applied to us, insurance income derived by our insurance
subsidiaries from insuring our U.S. shareholders and persons related to them
would be taxed to all U.S. shareholders if they held our shares at the end of
the applicable year.
However, the RPII rules do not apply in cases in which, among others:
- less than 20% of the insurance income of each of our insurance
subsidiaries is derived during a year from the direct or indirect
insurance of our U.S. shareholders or their related persons; or
- less than 20% of the value or voting power of our shares is held by U.S.
shareholders who, together with their related persons, are directly or
indirectly insured by one of our insurance subsidiaries.
Because, for these reasons, we believe the RPII rules are unlikely to apply
to us, the effect of the rules is not further described here.
DISPOSITIONS OF ORDINARY SHARES. Section 1248 of the Internal Revenue Code
provides that any gain from the sale or exchange of stock of a CFC may be
treated as ordinary income in the hands of a Major U.S. Shareholder to the
extent of the CFC's earnings and profits during the period that the Major U.S.
Shareholder held the shares, with certain adjustments. As noted above, we do not
believe we will be a CFC.
Section 1248 also applies to the sale or exchange of shares in a foreign
insurance company if 25% or more of its shares are owned by U.S. persons, even
if those U.S. persons are not Major
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U.S. Shareholders. We believe that these rules, and related reporting
requirements, will not apply to the disposition of our common shares because:
- we are not directly engaged in the insurance business; and
- neither the statute nor the proposed regulations issued by the U.S.
Department of the Treasury on April 17, 1991 provide a look-through rule.
Therefore, we believe that the disposition of our shares should not be viewed as
a disposition of the shares of our subsidiaries. No assurance, however, can be
given that the Internal Revenue Service will agree with this interpretation. We
would send appropriate notices to our shareholders if we concluded that these
rules applied to us.
PASSIVE FOREIGN INVESTMENT COMPANIES. Sections 1291 through 1298 of the
Internal Revenue Code contain special rules applicable to foreign corporations
that are "passive foreign investment companies" ("PFICs"). In general, a foreign
corporation will be a PFIC if 75% or more of its income constitutes "passive
income" or 50% or more of its assets produce passive income. If we were to be
characterized as a PFIC, our U.S. shareholders would be subject to a penalty tax
at the time of their sale of, or receipt of an "excess distribution" with
respect to, our common shares. In general, a shareholder receives an "excess
distribution" if the amount of the distribution is more than 125% of the average
distribution with respect to our common shares during the three preceding
taxable years, or shorter period during which the taxpayer held our common
shares. In general, the penalty tax is equivalent to the taxes that are deemed
due during the period the U.S. shareholder owned our common shares, computed by
assuming that the excess distribution or gain, in the case of a sale, with
respect to our common shares was taxed in equal portions throughout the holder's
period of ownership at the maximum tax rate for ordinary income applicable to
each applicable period, plus an interest charge. The interest charge is equal to
the applicable rate imposed on underpayment of U.S. federal income tax for the
applicable period.
The PFIC statutory provisions contain an express exception for income
"derived in the active conduct of an insurance business by a corporation which
is predominantly engaged in an insurance business." This exception is intended
to ensure that the income of a bona fide insurance company is not treated as
passive income except to the extent that it is attributable to financial
reserves in excess of the reasonable needs of the insurance business. We believe
that the income and assets of our insurance subsidiaries will be attributed to
us for purposes of applying these principles. We intend that we and our
subsidiaries taken together will be predominantly engaged in an insurance
business and that our insurance subsidiaries will not have financial reserves in
excess of the reasonable needs of their insurance business. Accordingly, we
believe that we will not be treated as a PFIC. However, no regulations
interpreting these specific PFIC provisions have yet been issued. Therefore,
substantial uncertainty exists with respect to their application or their
possible retroactivity. Each U.S. person who is considering an investment in our
common shares should consult its tax advisor as to the effects of these rules.
OTHER. Dividends paid by our company to U.S. corporate shareholders will
not be eligible for the dividends received deduction provided by section 243 of
the Internal Revenue Code.
Except as discussed below with respect to backup withholding, dividends
paid by our company will not be subject to U.S. withholding tax.
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Non-resident alien individuals will not be subject to U.S. estate tax with
respect to our common shares.
Information reporting to the Internal Revenue Service by paying agents and
custodians located in the United States will be required with respect to
payments of dividends on our common shares to U.S. persons. Thus, a holder of
our common shares may be subject to backup withholding at the rate of 31% with
respect to dividends paid by those persons, unless that holder:
- is a corporation or comes within other exempt categories and, when
required, demonstrates that fact; or
- provides a taxpayer identification number, certifies as to no loss of
exemption from backup withholding and otherwise complies with applicable
requirements of the backup withholding rules.
The backup withholding tax is not an additional tax and may be credited
against a holder's regular federal income tax liability.
GERMANY TAXATION
Our profits should not be taxed at the level of a German shareholder until
they are distributed. However, because Bermuda is considered as a low tax state
and our company's income should qualify as (normal) passive income and/or
passive income with investment character, German shareholders of our company may
be subject to German CFC rules.
Under those rules income qualifying as passive income with "investment
character" that is derived at the level of a foreign company that is subject to
low taxation is included in the taxable income of a German resident who owns at
least 10% of the shares or voting rights in the foreign company in proportion to
his participation in the foreign company.
If we have (normal) passive income, our income would be attributed to the
German residents in proportion to their participation, if German residents in
their totality held more than 50% of the shares or voting rights in our company,
even if the shareholding of each resident were lower than 10%.
The German CFC rules may also be applicable if one or several companies or
partnerships are interposed between the shareholders and our company.
The German CFC rules, under some circumstances, may also require German
residents to include in income their proportionate share of the income of our
subsidiaries. German residents are urged to consult their personal tax advisors
regarding the possible application of the German CFC rules to their particular
circumstances.
-------------------------
The opinions of Appleby Spurling & Kempe, Paul, Weiss, Rifkind, Wharton and
Garrison, Matheson Ormsby Prentice, Deloitte & Touche, Canada, Deloitte &
Touche, United Kingdom and Deloitte & Touche GmbH upon which the foregoing
discussion is based do not include any factual or accounting matters,
determinations or conclusions such as RPII amounts and computations or
components of those amounts and computations or facts relating to our business
or activities. The summary is based upon current tax law. The tax treatment of a
holder of our common shares, or of a person treated as a holder of our common
shares for United States Federal income, state, local or non-U.S. tax purposes,
may vary depending on the holder's particular tax situation. Legislative,
judicial or
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administrative changes or interpretations may be forthcoming that could be
retroactive and could affect the tax consequences to our shareholders.
PROSPECTIVE INVESTORS SHOULD CONSULT THEIR OWN TAX ADVISORS CONCERNING THE
UNITED STATES FEDERAL, STATE, LOCAL AND NON-U.S. TAX CONSEQUENCES OF OWNING OUR
COMMON SHARES.
USE OF PROCEEDS
We do not know either the number of our common shares that will be
ultimately sold pursuant to the plan or the prices at which our common shares
will be sold. However, we propose to use the net proceeds from the sale of newly
issued common shares for working capital purposes.
PLAN OF DISTRIBUTION
Except to the extent State Street purchases common shares in open market
transactions, the common shares acquired under the plan will be sold directly by
our company through the plan. Shares acquired under the plan, including shares
purchased pursuant to waivers granted with respect to the optional cash payment
feature of the plan, may be sold in market transactions, including coverage of
short positions, on any national securities exchange on which our common shares
trade or in privately negotiated transactions. Our common shares are currently
traded on the Nasdaq National Market.
We expect that a portion of the common shares available for issuance under
the plan will be issued pursuant to waivers of the $12,500 monthly purchase
maximum. If participants submit requests for waiver of the monthly maximum for
any investment date for an aggregate amount in excess of the amount we are
willing to accept, we will grant these requests in our absolute discretion and
on the basis of the factors described in Question 20 above.
Persons who make purchases in connection with a "distribution" of our
common shares, as that term is used under the Securities Act of 1933, may be
deemed to be underwriters under the federal securities laws. If a person is
deemed to be an underwriter, the difference between the price that person pays
to our company for common shares acquired under the plan, after deduction of any
applicable discount from the market price, and the price at which the shares
purchased are resold may be deemed to constitute underwriting commissions
received by that person in connection with those transactions. We will not
extend to any person who may be deemed to be an underwriter any rights or
privileges other than those to which he or it would be entitled as a plan
participant. We also will not enter into any agreement with any person regarding
that person's purchase of any of our common shares or any resale or distribution
of them. If any purchaser believes himself or itself to be an underwriter, we
will make available to him or it copies of this prospectus to be delivered to
subsequent purchasers of our common shares from him or it.
Subject to the availability of our common shares registered for issuance
under the plan, there is no total maximum number of shares that can be issued
pursuant to the reinvestment of distributions.
We will pay any and all brokerage commissions and related expenses incurred
in connection with purchases of our common shares under the plan. Upon
withdrawal by a participant from the plan by the sale of common shares held
under the plan, the participant will receive the proceeds of the sale less a
nominal fee per transaction paid to State Street, if the resale is made by State
Street at the request of a participant, any related brokerage commissions and
any applicable transfer taxes.
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Our common shares may not be available under the plan in all states. This
prospectus does not constitute an offer to sell, or a solicitation of an offer
to buy, any of our common shares or other securities in any state or any other
jurisdiction to any person to whom it is unlawful to make the offer.
LEGAL CONSIDERATIONS
We have been designated as a non-resident for exchange control purposes by
the Bermuda Monetary Authority.
The transfer of our common shares between persons regarded as non-resident
in Bermuda for exchange control purposes and the issue of shares to these
persons may be effected without specific consent under the Exchange Control Act
of 1972 and regulations under that statute. Issues and transfers of shares to
any person regarded as resident in Bermuda for exchange control purposes require
specific prior approval under the Exchange Control Act of 1972.
There are no limitations on the rights of persons regarded as non-resident
of Bermuda for foreign exchange control purposes owning our common shares to
hold or vote their common shares. Because we have been designated as a
non-resident for Bermuda exchange control purposes, there are no restrictions on
our ability to transfer funds in and out of Bermuda or to pay dividends to U.S.
residents who are holders of our common shares, other than in respect of local
Bermuda currency.
In accordance with Bermuda law, share certificates are issued only in the
names of corporations or individuals. In the case of an applicant acting in a
special capacity, such as an executor or trustee, certificates may, at the
request of the applicant, record the capacity in which the applicant is acting.
Notwithstanding the recording of any special capacity, we are not bound to
investigate or incur any responsibility in respect of the proper administration
of any estate or trust that is so recorded.
We will take no notice of any trust applicable to any of our common shares
whether or not we had notice of it.
As an "exempted company," we are exempt from Bermuda laws restricting the
percentage of share capital that may be held by non-Bermudians, but as an
exempted company we may not participate in business transactions such as:
- the acquisition or holding of land in Bermuda, except that required for
our business and held by way of lease or tenancy for terms of not more
than 21 years, without the express authorization of the Bermuda
legislature;
- the taking of mortgages on land in Bermuda to secure an amount in excess
of $50,000 without the consent of the Minister of Finance of Bermuda;
- the acquisition of securities created or issued by, or any interest in,
any local company or business, other than select types of Bermuda
government securities or securities of another "exempted" company,
partnership or other corporation resident in Bermuda but incorporated
abroad; or
- the carrying on of business of any kind in Bermuda, except in furtherance
of our business carried on outside Bermuda or under a license granted by
the Minister of Finance of Bermuda.
The Bermuda government actively encourages foreign investment in "exempted"
entities like our company that are based in Bermuda but do not operate in
competition with local business. In addition
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to having no restrictions on the degree of foreign ownership, we are subject
neither to taxes on our income or dividends nor to any foreign exchange controls
in Bermuda. In addition, there is no capital gains tax in Bermuda, and we can
accumulate profits, as required, without limitation.
EXPERTS
The consolidated financial statements of ESG Re Limited and subsidiaries as
of December 31, 1998 and 1997 and for each of the years in the three-year period
ended December 31, 1998, included in our Annual Report on Form 10-K for the
fiscal year ended December 31, 1998 and incorporated by reference into this
prospectus, have been incorporated by reference in reliance on the reports of
Deloitte & Touche, Hamilton, Bermuda, independent accountants, and on the
authority of Deloitte & Touche as experts in accounting and auditing.
LEGAL MATTERS
Paul, Weiss, Rifkind, Wharton & Garrison, New York, New York, will issue an
opinion confirming its opinion in this prospectus about U.S. tax matters and
will rely, as to Bermuda law, upon the opinion of Appleby, Spurling & Kempe,
Hamilton, Bermuda. Appleby, Spurling & Kempe will issue an opinion about the
legality of the issuance of our common shares offered by this prospectus.
Appleby, Spurling & Kempe will also issue an opinion about the accuracy of
statements made in this prospectus regarding Bermuda tax matters. Deloitte &
Touche GmbH will issue an opinion confirming its opinion in this prospectus
about German tax matters. Deloitte & Touche, United Kingdom, will issue an
opinion on the accuracy and presentation of United Kingdom tax matters described
in this prospectus. Matheson Ormsby Prentice, Ireland, will issue an opinion
confirming its opinion in this prospectus about Irish tax matters. Deloitte &
Touche, Canada, will issue an opinion confirming its opinion in this prospectus
about Canadian tax matters.
WHERE YOU CAN FIND MORE INFORMATION
We have filed a registration statement on Form S-3 regarding the offering
with the Securities and Exchange Commission. This prospectus, which is a part of
the registration statement, does not contain all of the information included in
the registration statement. You should refer to the registration statement and
its exhibits to read that information. You may read and copy the registration
statement, the related exhibits and the other materials we file with the SEC at
the SEC's public reference room in Washington, D.C., and at the SEC's regional
offices in Chicago, Illinois and New York, New York. Please call the SEC at
1-800-SEC-0330 for further information on the operation of the public reference
rooms. The SEC also maintains an Internet site that contains reports, proxy and
information statements and other information regarding issuers that file with
the SEC, including our company. The site's address is http://www.sec.gov.
We file annual, quarterly and current reports, proxy statements and other
information with the SEC. You may read and copy any of these reports, statements
or other information at the SEC's Internet site or at the SEC's public reference
rooms in Washington, D.C., New York, New York and Chicago, Illinois. You can
request copies of those documents, upon payment of a duplicating fee, by writing
to the SEC.
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<PAGE> 47
INCORPORATION BY REFERENCE
The SEC allows us to "incorporate by reference" in this prospectus other
information we file with them, which means that we can disclose important
information to you by referring you to those documents. The information
incorporated by reference is an important part of this prospectus, and
information that we file later with the SEC will automatically update and
supersede the earlier filed or incorporated information. We incorporate by
reference the documents listed below and any future filings made with the SEC
under Sections 13(a), 13(c), 14 or 15(d) of the Securities Exchange Act of 1934
until we sell all of the securities covered by this prospectus:
- Our Annual Report on Form 10-K for the fiscal year ended December 31,
1998;
- Our Quarterly Reports on Form 10-Q for the fiscal quarters ended March
31, 1999 and June 30, 1999;
- Our Report on Form 8-K filed on September 15, 1999;
- Our Definitive Proxy Statement on Schedule 14A filed with the SEC on
April 8, 1999; and
- The description of our common shares contained in our Registration
Statement on Form 8-A, filed with the SEC on December 9, 1997.
We have filed each of these documents with the SEC, and they are available
from the SEC's Internet site and public reference rooms described under "Where
You Can Find More Information" above. You may also request a copy of these
filings, at no cost, by writing or telephoning us at the following address:
Corporate Secretary
ESG Re Limited
16 Church Street
Hamilton HM11, Bermuda
(441) 295-2185
You should rely only on the information incorporated by reference or
provided in this prospectus or any prospectus supplement. We have not authorized
anyone else to provide you with different information.
PREPARATION OF FINANCIAL STATEMENTS
Our financial statements have been prepared in accordance with U.S.
generally accepted accounting principles. Audited financial statements as of
December 31, 1998 are incorporated into this prospectus and the registration
statement by reference to our Annual Report on Form 10-K for the fiscal year
ended December 31, 1998. As used in this prospectus, "$" refers to U.S. dollars
and "BD$" refers to Bermuda dollars.
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SCHEDULE A
OPTIONAL CASH PAYMENTS
<TABLE>
<CAPTION>
MINIMUM PRICE
AND PARTICIPATION PRICING PERIOD PRICING PERIOD
DISCOUNT SET DATE CUT-OFF DATE COMMENCEMENT DATE CONCLUSION DATE
- ----------------- ----------------- ------------------ ------------------
<S> <C> <C> <C>
October 1, 1999 October 6, 1999 October 7, 1999 October 20, 1999
November 1, 1999 November 4, 1999 November 5, 1999 November 18, 1999
December 1, 1999 December 6, 1999 December 7, 1999 December 20, 1999
January 3, 2000 January 6, 2000 January 7, 2000 January 20, 2000
February 1, 2000 February 4, 2000 February 7, 2000 February 18, 2000
March 1, 2000 March 6, 2000 March 7, 2000 March 20, 2000
April 3, 2000 April 6, 2000 April 7, 2000 April 20, 2000
May 1, 2000 May 4, 2000 May 5, 2000 May 18, 2000
June 1, 2000 June 6, 2000 June 7, 2000 June 20, 2000
July 3, 2000 July 7, 2000 July 10, 2000 July 21, 2000
August 1, 2000 August 4, 2000 August 7, 2000 August 18, 2000
September 11,
September 1, 2000 September 8, 2000 2000 September 22, 2000
October 2, 2000 October 5, 2000 October 6, 2000 October 19, 2000
November 1, 2000 November 6, 2000 November 7, 2000 November 20, 2000
December 1, 2000 December 6, 2000 December 7, 2000 December 20, 2000
</TABLE>
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<PAGE> 49
- ---------------------------------------------------
- ---------------------------------------------------
WE HAVE NOT AUTHORIZED ANY DEALER, SALESPERSON OR OTHER PERSON TO GIVE ANY
INFORMATION OR REPRESENT ANYTHING NOT CONTAINED IN THIS PROSPECTUS. YOU MUST NOT
RELY ON ANY UNAUTHORIZED INFORMATION. THIS PROSPECTUS DOES NOT OFFER TO SELL OR
BUY ANY SHARES IN ANY JURISDICTION WHERE IT IS UNLAWFUL. THE INFORMATION IN THIS
PROSPECTUS IS CURRENT AS OF SEPTEMBER 24, 1999.
-------------------------
TABLE OF CONTENTS
-------------------------
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
The Company...................... 1
Risk Factors..................... 2
Enforceability of Civil
Liabilities.................... 12
Forward-Looking Information...... 13
The Plan......................... 13
Certain Tax Considerations....... 33
Use of Proceeds.................. 42
Plan of Distribution............. 42
Legal Considerations............. 43
Experts.......................... 44
Legal Matters.................... 44
Where You Can Find More
Information.................... 44
Incorporation by Reference....... 45
Preparation of Financial
Statements..................... 45
</TABLE>
- ---------------------------------------------------
- ---------------------------------------------------
- ---------------------------------------------------
- ---------------------------------------------------
2,000,000
COMMON SHARES
ESG RE LIMITED
-------------------------
PROSPECTUS
-------------------------
September 24, 1999
- ---------------------------------------------------
- ---------------------------------------------------
ESG-899
