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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
-----------------
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 12 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1999
Commission file number 000-23481
-----------------
ESG RE LIMITED
(Exact name of Registrant as specified in its charter)
Bermuda Not Applicable
(State or other jurisdiction of (I.R.S. Employer
incorporation of organization) Identification No.)
16 Church Street
Hamilton HM11, Bermuda
(Address of executive offices, zip code)
Telephone (441) 295-2185
(Registrant's telephone number, including area code)
-----------------
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports, and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [_]
The number of the Registrant's common shares (par value $1.00 per share)
outstanding as of August 13, 1999, was 13,845,099.
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<PAGE>
ESG RE LIMITED
Index to the Condensed Consolidated Financial Statements
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Condensed Consolidated Balance Sheets as of June 30, 1999 (unaudited) and December 31, 2
1998
Condensed Consolidated Statements of Operations for the three months and six months
ended June 30, 1999 and 1998 (unaudited) 3
Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 1999
and 1998 (unaudited) 4
Condensed Consolidated Statements of Comprehensive Income for the three months and six
months ended June 30, 1999 and 1998 (unaudited) 5
Notes to the Condensed Consolidated Financial Statements (unaudited) 6
Independent Accountants' Review Report 8
</TABLE>
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
ESG RE LIMITED
Condensed Consolidated Balance Sheets
(U.S. dollars in thousands except share and per share data)
<TABLE>
<CAPTION>
Unaudited
June 30, December 31,
1999 1998
----------------------
<S> <C> <C>
ASSETS
Fixed maturity investments - available for sale, at fair value
(cost: $203,160 and $ 211,592) $ 199,524 $ 212,387
Cash and cash equivalents 37,657 16,942
Other Investments 14,194 5,917
----------------------
Total investments and cash 251,375 235,246
Accrued investment income 4,047 3,629
Management fees receivable 4,987 3,164
Premiums receivable 256,351 162,015
Reinsurance balances receivable 14,280 6,259
Reinsurance recoverable on incurred losses 6,535 2,761
Funds retained by ceding companies 6,552 3,592
Prepaid reinsurance premiums 4,598 2,276
Deferred acquisition costs 54,608 37,625
Deferred tax asset 746 843
Other Assets 5,570 2,222
Cash and cash equivalents held in a fiduciary capacity 6,006 6,741
----------------------
TOTAL ASSETS $ 615,655 $ 466,373
======================
LIABILITIES
Unpaid losses and loss expenses $ 92,948 $ 44,379
Unearned premiums 170,936 111,884
Acquisition costs payable 72,686 45,487
Reinsurance balances payable 23,302 7,114
Payable for securities purchased -- --
Accrued expenses, accounts payable, and other liabilities ($131 and
$204 due to related parties) 4,349 5,927
Fiduciary liabilities 6,006 6,741
----------------------
Total liabilities 370,227 221,532
----------------------
SHAREHOLDERS' EQUITY
Preference shares, 50,000,000 shares authorized; no shares issued and
outstanding for 1999 and 1998 -- --
Class B common shares, 100,000,000 shares authorized; no shares
issued and outstanding for 1999 and 1998 -- --
Common shares, par value $1 per share; 100,000,000 shares authorized;
13,915,799 shares issued and outstanding for 1999 and 13,923,799
shares issued and outstanding for 1998 13,916 13,924
Additional paid-in capital 226,224 226,216
Accumulated other comprehensive income:
Foreign currency translation adjustments, net of tax (1,093) (574)
Unrealized gains/(losses) on securities, net of
reclassification adjustments and tax (3,797) 634
----------------------
Accumulated other comprehensive income (4,890) 60
----------------------
Retained earnings 10,178 4,641
----------------------
Total shareholders' equity 245,428 244,841
----------------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 615,655 $ 466,373
======================
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
2
<PAGE>
ESG RE LIMITED
Condensed Consolidated Statements of Operations
(U.S. dollars in thousands except share and per share data)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, 1999 June 30, 1998 June 30, 1999 June 30, 1998
----------------------------- -----------------------------
<S> <C> <C> <C> <C>
REVENUES
Net premiums written $ 40,304 $ 19,526 $ 183,870 $ 103,682
Change in unearned premiums 27,218 (1,436) (58,224) (62,373)
----------------------------- -----------------------------
Net premiums earned 67,522 18,090 125,646 41,309
Management fee revenue 1,123 229 1,940 1,199
Net investment income 3,722 3,211 7,022 6,231
Net realized investment loss (275) 173 (275) 1,326
----------------------------- -----------------------------
72,092 21,703 134,333 50,065
----------------------------- -----------------------------
EXPENSES
Losses and loss expenses 48,909 11,340 83,660 26,982
Acquisition costs 14,108 4,434 32,918 9,704
Administrative expenses 5,458 2,392 9,981 6,304
----------------------------- -----------------------------
68,475 18,166 126,559 42,990
----------------------------- -----------------------------
NET INCOME BEFORE TAXES 3,617 3,537 7,774 7,075
Income tax expense 145 290 311 577
----------------------------- -----------------------------
NET INCOME $ 3,472 $ 3,247 $ 7,463 $ 6,498
============================ ============================
PER SHARE DATA
Basic net income per share $ 0.25 $ 0.23 $ 0.54 $ 0.47
============================ ============================
Diluted net income per share $ 0.25 $ 0.23 $ 0.54 $ 0.45
============================ ============================
Weighted average shares outstanding
Basic 13,922,898 13,923,799 13,923,346 13,923,799
Diluted 13,923,830 14,230,547 13,936,790 14,303,303
============================ ============================
Dividends declared per share $ 0.08 $ 0.075 $ 0.16 $ 0.15
============================ ============================
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
3
<PAGE>
ESG RE LIMITED
Condensed Consolidated Statements of Cash Flows
(U.S. dollars in thousands)
(Unaudited)
<TABLE>
<CAPTION>
Six Months Ended
June 30, 1999 June 30, 1998
------------------------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net cash provided by operating activities $ 26,283 $ (2,459)
--------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Cost of fixed maturity investments acquired
- available for sale (129,391) (278,029)
Proceeds from sale of fixed maturity investments
- available for sale 136,962 295,205
Net proceeds from sale of other investment assets 0 4,778
Funding of other investments (8,564) --
Purchases of fixed assets (1,346) (604)
Purchases of intangible assets (885) (64)
--------------------------
Net cash provided by investing activities (3,224) 21,286
--------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Dividends paid (2,228) (2,089)
Stock repurchase (116) --
Additional offering costs -- (85)
--------------------------
Net cash used in financing activities (2,344) (2,174)
--------------------------
Net increase in cash 20,715 16,653
Cash and cash equivalents at January 1 16,942 6,196
--------------------------
Cash and cash equivalents at June 30 $ 37,657 $ 22,849
==========================
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
4
<PAGE>
ESG RE LIMITED
Condensed Consolidated Statements of Comprehensive Income
(U.S. dollars in thousands)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30, June 30, June 30,
1999 1998 1999 1998
----------------------------------------
<S> <C> <C> <C> <C>
Net income $ 3,472 $ 3,247 $ 7,463 $ 6,498
----------------------------------------
Other comprehensive income, net of tax:
Foreign currency translation adjustments (526) (379) (519) (837)
Unrealized gains on securities:
Unrealized holding (losses)/gains arising during
the period (3,227) 963 (4,706) 1,478
Less reclassification adjustment for
losses/(gains) included in net income 275 (173) 275 (1,298)
----------------------------------------
Other comprehensive income (3,478) 411 (4,950) (657)
Comprehensive income $ (6) $ 3,658 $ 2,513 $ 5,841
========================================
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
5
<PAGE>
ESG RE LIMITED
Notes to the Unaudited Condensed Consolidated Financial Statements
1. BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements of ESG Re Limited
(together with its subsidiaries, the "Company") have been prepared in accordance
with generally accepted accounting principles in the United States of America
("U.S. GAAP") except pursuant to the rules and regulations of the Securities and
Exchange Commission which do not include all of the information and footnotes
required by generally accepted accounting principles for complete financial
statements. In the opinion of management, these unaudited financial statements
reflect all adjustments considered necessary for a fair presentation of
financial position, results of operations and comprehensive income as of and for
the periods presented. The results of operations for any interim period are not
necessarily indicative of the results for a full year. These unaudited
consolidated financial statements should be read in conjunction with the audited
consolidated financial statements, and related notes thereto, included in the
Company's 1998 Annual Report on Form 10-K.
The preparation of financial statements in accordance with U.S. GAAP requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses during
the reporting period as well as the disclosure of such amounts. Actual results
could materially differ from those estimates and assumptions.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The Company's condensed consolidated financial statements have been prepared in
accordance with accounting principles generally accepted in the United States of
America ("U.S GAAP"). The Company's significant accounting policies include the
following:
(A) PREMIUM REVENUES
Premiums written are estimated and recognized at the inception of the
reinsurance contract, based upon information received from intermediaries and
ceding companies. The Company compares estimated written premiums to actual
premiums as reported by ceding companies on a periodic basis. The timeliness and
frequency of ceding company reports vary considerably by ceding company, line of
business and geographic area, which means that the actual ultimate premium
written may not be known with certainty for prolonged periods. Differences
between such estimates and actual amounts as reported by ceding companies are
recorded in the period in which the actual amounts are determined.
The reinsurance contacts entered into by the Company are primarily of short
duration. Premiums written are recognized as earned over the coverage period in
proportion to the amount of protection provided. Unearned premium reserves are
established to cover the unexpired contract period.
(B) RESERVE FOR LOSSES AND LOSS EXPENSES
The reserve for unpaid losses and loss adjustment expenses includes an estimate
of reported case reserves and an estimate for losses incurred but not reported.
Case reserves are estimated based on ceding company reports and other data
considered relevant to the estimation process. The liability for losses incurred
but not reported is based to a large extent on the expectations of ceding
companies about ultimate loss ratios at the inception of the contracts,
supplemented by industry experience and the Company's specific historical
experience where available. As the Company has limited specific historical
experience on a significant number of its programs on which to base its estimate
of losses incurred but not reported, its reliance on ceding company expectations
and industry experience is necessarily increased, which increases the
uncertainty involved in the loss estimation process
The reserves as established by management are reviewed periodically, and
adjustments are made in the periods in which they become known. Although
management believes that an adequate provision has been made for the liability
for losses and loss expenses, based on all available information, there can be
no assurance that the ultimate losses will not differ significantly from the
amounts provided.
6
<PAGE>
(C) INVESTMENTS
Fixed maturity securities are classified as available for sale and are reported
at estimated fair value. Investments that are available for sale are expected to
be held for an indefinite period but may be sold depending on interest rates and
other considerations. Short-term investments comprise investments with a
maturity greater than 90 days but less than one year and are stated at cost,
which approximates fair value. Other investments over which the Company
exercises significant influence are accounted for under the equity method .
Other investments are accounted for at cost. Unrealized investment gains and
losses on fixed maturity securities available for sale, net of applicable
deferred income tax, are reported as a separate component of "accumulated other
comprehensive income". Realized gains or losses on sale of investments are
determined on the basis of average cost. The carrying values of fixed maturities
and other investments are adjusted for impairments in value that are considered
to be other than temporary.
(D) ESTIMATES
The preparation of financial statements in accordance with U.S. generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period as
well as the disclosure of such amounts. Actual results could materially differ
from those estimates and assumptions.
3. COMMITMENTS AND CONTINGENCIES
(A) EMPLOYMENT CONTRACTS
The Company has entered into employment contracts with several employees for
terms of one to five years which have total minimum commitments of $6.8 million
excluding any performance bonuses which are at the discretion of and determined
by the Board of Directors of the Company. The contracts remunerate the employees
for providing services to the Company. The contracts include various non-compete
clauses following termination of employment.
(B) LEASE COMMITMENTS
The Company and its subsidiaries have various obligations under operating
leases.
(C) LOAN COMMITMENTS
The Company and its subsidiaries have unfunded loan commitments outstanding of
$12.4 million of which $10.4 million was to COMED, the new German healthcare
association which the Company helped to establish in December 1998. A further $2
million is to a third party which is a significant ceding company to ESG. The
Company expects to fund these commitments within the course of the year.
(D) LETTERS OF CREDIT
Letters of Credit in the amount of $44.9 million have been issued in favor of
ceding companies of which $22.0 million is secured against the Company's
investment portfolio.
The future minimum commitments under lease and employment agreements are as
follows:
Employment Lease
U.S. dollars in thousands Commitments Commitments Total
- --------------------------------------------------------------------------------
Years Ending December 31,
1999 $1,642 $ 272 $1,914
2000 2,859 531 3,390
2001 1,241 420 1,661
2002 774 171 945
2003 245 96 341
Thereafter 784 784
--------------------------------------
Total $6,761 $2,274 $9,035
======================================
7
<PAGE>
4. RELATED PARTIES
Included in net investment income for the three months and six months ended June
30, 1999 were related party investment expenses of $152 thousand and $272
thousand respectively.
INDEPENDENT ACCOUNTANTS' REVIEW REPORT
To the Board of Directors and Shareholders of ESG Re Limited
We have reviewed the accompanying condensed consolidated balance sheet of ESG Re
Limited and subsidiaries as of June 30, 1999 and the related condensed
consolidated statements of operations, comprehensive income and cash flows for
the three month and six month periods ended June 30, 1999 and 1998. These
financial statements are the responsibility of the Company's management.
We conducted our review in accordance with standards established by the American
Institute of Certified Public Accountants. A review of interim financial
information consists principally of applying analytical procedures to financial
data and of making inquiries of persons responsible for financial and accounting
matters. It is substantially less in scope than an audit conducted in accordance
with generally accepted auditing standards, the objective of which is the
expression of an opinion regarding the financial statements taken as a whole.
Accordingly, we do not express such an opinion.
Based upon our review, we are not aware of any material modifications that
should be made to such condensed consolidated financial statements for them to
be in conformity with accounting principles generally accepted in the United
States.
We have previously audited, in accordance with auditing standards generally
accepted in the United States, the consolidated balance sheet of ESG Re Limited
and subsidiaries as of December 31, 1998 and the related consolidated statements
of operations, comprehensive income, changes in shareholders' equity and cash
flows for the year then ended (not presented herein) and in our report dated
March 8, 1999, we expressed an unqualified opinion on those consolidated
financial statements. In our opinion, the information set forth in the
accompanying condensed consolidated balance sheet as of December 31, 1998 is
fairly stated, in all material respects, in relation to the consolidated balance
sheet from which it has been derived.
Deloitte & Touche
Chartered Accountants
Hamilton, Bermuda
August 11, 1999
8
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
The following is a discussion and analysis of the financial condition as of June
30, 1999 and the results of operations of ESG Re Limited and subsidiaries (the
"Company" or "ESG") for the three months and six months ended June 30, 1999 as
compared to the three months and six months ended June 30, 1998. This discussion
and analysis should be read in conjunction with the attached unaudited
consolidated financial statements and notes thereto and the audited consolidated
financial statements of the Company as of and for the year ended December 31,
1998 and notes thereto included in the Company's Annual Report to Shareholders
for the fiscal year ended December 31, 1998. The unaudited consolidated
financial statements as of and for the three months and six months ended June
30, 1999 and for the three months and six months ended June 30, 1998 and notes
thereto have been reviewed by independent accountants in accordance with
standards established by the American Institute of Certified Public Accountants.
The results of operations and cash flows for any interim period are not
necessarily indicative of results for the full year. In addition, this quarterly
report contains forward-looking statements regarding future profit levels,
premium growth, cash flows and other matters, which involve risks and
uncertainties that may affect the actual results of operations of the Company.
The following important factors, among others, could cause actual results to
differ materially from those set forth in the forward-looking statements: claims
frequency, claims severity, economic activity, competitive pricing and the
regulatory environment in which the Company operates.
GENERAL
The Company is a specialty reinsurance enterprise providing accident, medical,
credit, life and special risk reinsurance to insurers and selected reinsurers on
a worldwide basis, and underwriting management services to co-reinsurers.
On December 12, 1997, the Company raised gross proceeds of $257 million in a
private placement and an initial public offering (the "Offerings"). As a result,
the Company is now able to assume reinsurance risks for its own account. Prior
to the Offerings, the Company operated solely as a reinsurance management
services company.
RESULTS OF OPERATIONS
NET INCOME
Consolidated results of operations for the three months and six months ended
June 30, 1999 and 1998 are presented below.
<TABLE>
<CAPTION>
Three Months Ended June 30, Six Months Ended June 30,
--------------------------- ------------------------
U.S dollars in thousands except per share data 1999 1998 1999 1998
<S> <C> <C> <C> <C>
Gross Managed Premium 43,658 20,700 203,190 118,600
Net Premium Written 40,304 19,526 183,870 103,682
------- ------- -------- -------
Net Premium Earned 67,522 18,090 125,646 41,309
Less:
Losses & Loss Adjustment Expenses (48,909) (11,340) (83,660) (26,982)
Acquisition Costs (14,108) (4,434) (32,918) (9,704)
------- ------- -------- -------
Total Underwriting Expenses (63,017) (15,774) (116,578) (36,686)
------- ------- -------- -------
Profit from Underwriting 4,505 2,316 9,068 4,623
Administrative Expenses (5,458) (2,392) (9,981) (6,304)
Net Investment Income 3,722 3,211 7,022 6,231
Net realized investment gains/(losses) (275) 173 (275) 1,326
Management Fee Revenue 1,123 229 1,940 1,199
------- ------- -------- -------
Net income before taxes 3,617 3,537 7,774 7,075
Income Tax Expense 145 290 311 577
------- ------- -------- -------
Net Income 3,472 3,247 7,463 6,498
------- ------- -------- -------
Income excluding realized investment gains (losses) 3,747 3,074 7,738 5,172
Basic net income per common share $0.25 $0.23 $0.54 $0.47
Diluted net income per common share $0.25 $0.23 $0.54 $0.45
</TABLE>
9
<PAGE>
For the three months ended June 30, 1999, the Company managed, on behalf of
itself and its co-reinsurers, total premiums of $43.7 million, an increase of
$23.0 million, or 111%, over the prior period ending June 30, 1998. Also during
the quarter, the Company placed $3.1 million with co-reinsurers, retroceded $0.3
million and reported net premiums written of $40.3 million, compared to net
premiums written of $19.5 million for the three months ended June 30, 1998.
For the six months ended June 30, 1999, the Company managed, on behalf of itself
and its co-reinsurers, total premiums of $203.2 million, an increase of $84.6
million, or 71%, over the prior period ending June 30, 1998. Also during the
quarter, the Company placed $15.5 million with co-reinsurers, retroceded $3.8
million and reported net premiums written of $183.9 million, compared to net
premiums written of $103.7 million for the three months ended June 30, 1998.
Loss and loss adjustment expense ratios for the three months ended June 30, 1999
and 1998 were 72.4% and 62.7%, respectively, and acquisition expense ratios for
the same periods were 20.9% and 24.5%, respectively.
Loss and loss adjustment expense ratios for the six months ended June 30, 1999
and 1998 were 66.6% and 65.3%, respectively, and acquisition expense ratios for
the same periods were 26.2% and 23.5%, respectively.
Total administrative expenses for the three months ended June 30, 1999 were $5.5
million, compared to $2.4 million for the three months ended June 30, 1998.
Administrative expenses for the six months ended June 30, 1999 increased to
$10.0 million from $6.3 million for six months ended June 30, 1998.
Total administrative expenses for the three months ended June 30, 1999 represent
13.5% of net premiums written and 8.1% of net premiums earned, compared to 12.3%
and 13.2%, respectively, for the prior year. For the six months ended June 30,
1999 administrative expenses represent 5.4% of net premiums written and 7.9% of
net premiums earned, compared to 6.1% and 15.3%, respectively, for the prior
year.
Net income for the three months ended June 30, 1999 and 1998 was $3.5 million
and $3.2 million, respectively. Net income for the six months ended June 30,
1999 and 1998 was $7.5 million and $6.5 million, respectively.
UNDERWRITING RESULTS
Gross and net premiums written and net premiums earned for the three months and
six months ended June 30, 1999 and 1998 were as follows:
<TABLE>
<CAPTION>
Three months ended Three months ended
U.S. dollars in millions June 30, 1999 June 30, 1998
- --------------------------------------------------------------------------------
<S> <C> <C>
Total premiums managed $43.7 $20.7
Amount placed with co-reinsurers 3.1 1.3
Gross premiums written 40.6 19.4
Net premiums written 40.3 19.5
Net premiums earned 67.5 18.1
</TABLE>
Gross premiums managed for the three months ended June 30, 1999 consisted of the
following:
o $10 million in additional gross managed premium written by the
Company's representative office in Toronto, Canada and related to
medical reinsurance for the transition of group health insurance
coverage sold through affinity groups to alternative providers. It is
expected that the portfolio of approximately $80 million in annual
premiums will be transferred to alternative medical providers by
year-end. The company recognized $19.9 million of earned premium in
the quarter in respect of this contract.
o $10.9 million in gross managed premium on a new account, providing
health care benefits to approximately 1030 retired employees. The
premium was received in advance with the benefits to be paid
throughout the lives of the insureds. The entire premium is recorded
as earned and carries a loss and acquisition ratio of 100%. The profit
emerges over the life of the account, averaged at approximately 17
years, via investment income and developments on the experience.
10
<PAGE>
o $8.6 million in gross managed premium on a new three-year occupational
injury account written by the Hamburg office.
Gross premiums managed for the three months ended June 30, 1998 consisted of the
following:
o New Business - approximately $16.5 million of gross managed premium
was generated from new business, of which the Toronto office wrote
$9.5 million.
o Renewal Business - approximately $1.4 million of gross managed premium
was generated from renewal business. Historically, the primary renewal
period for the international treaty reinsurance market has been the
first quarter of each calendar year.
Six months ended Six months ended
U.S. dollars in millions June 30, 1999 June 30, 1998
- --------------------------------------------------------------------------------
Total premiums managed $203.2 $118.6
Amount placed with co-reinsurers 15.5 13.1
Gross premiums written 187.7 105.5
Net premiums written 183.9 103.7
Net premiums earned 125.6 41.3
Gross premiums managed for the six months ended June 30, 1999 consisted of the
following:
o New Business - approximately $129 million or 63% of gross managed
premium was generated from new business contracts incepting on or
after January 1, 1999. The Company's representative office in Toronto
underwrote $65 million or 50% of gross managed premium, which includes
$45 million in gross managed premium on a large medical contract. The
Company has recognized $38.3 million of earned premium in this period
in respect of this contract.
o Renewal Business - approximately $68 million, or 34% of gross managed
premium was generated from renewal business.
Gross premiums managed for the six months ended June 30, 1998 consisted of the
following:
o New Business - approximately $70.3 million or 66.7% of gross managed
premium was generated from new business. Two significant contracts for
European medical, personal accident and life business were
underwritten in the first quarter, including one for quota share
treaty reinsurance incepting January 1, 1997. These contracts
contributed $22.5 million to gross premiums written and $15.9 million
to net premiums earned for the six months ended June 30, 1998. The
Company's representative office in Toronto underwrote $27.1 million of
gross premiums written.
o Renewal Business - approximately $32.0 million, or 30.3% of gross
managed premiums was generated from renewal business.
11
<PAGE>
Underwriting results for the three months ended June 30, 1999, by line of
business and in total were as follows:
<TABLE>
<CAPTION>
Personal
U.S. dollars in thousands Medical Accident Special Credit Life Other Total
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Gross premiums written $38,388 $6,468 $(460) $ (826) $(2,936) $ -- $40,634
=================================================================================
Net premiums written 38,492 5,954 (453) (798) (2,891) -- 40,304
=================================================================================
Net premiums earned 55,405 7,490 300 1,268 2,094 965 67,522
Losses and loss expenses 40,723 5,668 154 1,031 888 445 48,909
Acquisition costs 12,647 584 59 250 169 399 14,108
Operating costs 3,937 664 27 112 186 93 5,019
---------------------------------------------------------------------------------
Net underwriting income (loss) $(1,902) $ 574 $ 60 $ (125) $ 851 $ 28 $ (514)
=================================================================================
</TABLE>
Medical results primarily reflect the $38.3 million and $10.9 million earned on
two significant accounts at a loss and acquisition ratio of 95% and 100%
respectively.
Life premium is reduced due to a premium adjustment of $2.85 million on a North
American life contract due to a significant account within the contract being
cancelled by the ceding company.
Special Risks business is reduced due to a premium adjustment on a North
American sports treaty.
Credit business is reduced due to a premium adjustment on a Latin American
contract due to the U.S. dollar being stronger than originally anticipated.
Other business relates to a portfolio of auto warranty reinsurance obtained
through the Company's investment in a German automobile assistance insurance
company.
Underwriting results for the three months ended June 30, 1998, by line of
business and in total were as follows:
<TABLE>
<CAPTION>
Personal
U.S. dollars in thousands Medical Accident Special Credit Life Other Total
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Gross premiums written $ 10,056 $ 6,928 $ 431 $ 1,385 $ 617 $ -- $ 19,417
==============================================================================
Net premiums written 9,712 7,122 409 1,344 939 -- 19,526
==============================================================================
Net premiums earned 6,250 8,390 579 848 2,023 -- 18,090
Losses and loss expenses 3,338 5,412 238 579 1,773 -- 11,340
Acquisition costs 2,513 1,513 193 85 130 -- 4,434
Operating costs 629 845 57 85 204 -- 1,820
------------------------------------------------------------------------------
Net underwriting income (loss) $ (230) $ 620 $ 91 $ 99 $ (84) $ -- $ 496
==============================================================================
</TABLE>
12
<PAGE>
Underwriting results for the six months ended June 30, 1999, by line of business
and in total were as follows:
<TABLE>
<CAPTION>
Personal
U.S. dollars in thousands Medical Accident Special Credit Life Other Total
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Gross premiums written $129,107 $47,276 $ 665 $4,498 $3,927 $2,294 $187,767
==================================================================================
Net premiums written 126,912 45,955 652 4,318 3,813 2,220 183,870
==================================================================================
Net premiums earned 100,580 16,691 1,355 1,767 4,194 1,059 125,646
Losses and loss expenses 68,302 10,526 674 750 2,913 495 83,660
Acquisition costs 27,201 3,876 517 398 488 438 32,918
Operating costs 7,167 1,322 102 148 336 100 9,175
----------------------------------------------------------------------------------
Net underwriting income (loss) $ (2,090) $ 967 $ 62 $ 471 $ 457 $ 26 $ (107)
==================================================================================
</TABLE>
Underwriting results for the six months ended June 30, 1998, by line of business
and in total were as follows:
<TABLE>
<CAPTION>
Personal
U.S. dollars in thousands Medical Accident Special Credit Life Other Total
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Gross premiums written $ 53,191 $ 31,674 $ 5,423 $ 3,991 $ 11,239 $ -- $105,518
========================================================================
Net premiums written 52,522 30,897 5,254 3,869 11,140 -- 103,682
========================================================================
Net premiums earned 13,786 17,534 1,149 1,472 7,368 -- 41,309
Losses and loss expenses 8,661 11,335 487 1,048 5,451 -- 26,982
Acquisition costs 4,399 3,496 403 185 1,221 -- 9,704
Operating costs 1,388 1,766 115 148 742 -- 4,159
------------------------------------------------------------------------
Net underwriting income (loss) $ (662) $ 937 $ 144 $ 91 $ (46) $ -- $ 464
========================================================================
</TABLE>
Medical premiums were higher for the six months ended June 30, 1999, primarily
due to a contract for $45 million in premium, written by the Toronto office and
a contract for $10.9 million written by the Hamburg office.
OPERATING RATIOS
The operating ratios for the three months ended June 30, 1999, by line of
business and in total were as follows:
<TABLE>
<CAPTION>
Personal Special
Medical Accident Risk Credit Life Other Total
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Loss ratio 73.5% 75.7% 51.3% 81.3% 42.4% 46.1% 72.4%
Acquisition expense ratio 22.8% 7.8% 19.7% 19.7% 8.1% 41.4% 20.9%
- ------------------------------------------------------------------------------------------------------------------------------------
Loss and acquisition expense
Ratio 96.3% 83.5% 71.0% 101.0% 50.5% 87.5% 93.3%
- ------------------------------------------------------------------------------------------------------------------------------------
Operating expense ratio 7.4%
-----
Combined ratio 100.7%
=====
</TABLE>
13
<PAGE>
The operating ratios for the three months ended June 30, 1998, by line of
business and in total were as follows:
<TABLE>
<CAPTION>
Personal Special
Medical Accident Risk Credit Life Other Total
- --------------------------------------- ------------ ------------- ------------- ------------ ------------ ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Loss ratio 53.4% 64.5% 41.1% 68.3% 87.7% -- 62.7%
Acquisition expense ratio 40.2% 18.0% 33.3% 10.0% 6.4% -- 24.5%
- --------------------------------------------------------------------------------------------------------------------------------
Loss and acquisition expense
Ratio 93.6% 82.5% 74.4% 78.3% 94.1% -- 87.2%
- --------------------------------------------------------------------------------------------------------------------------------
Operating expense ratio 10.1%
----
Combined ratio 97.3%
====
</TABLE>
The operating ratios for the six months ended June 30, 1999, by line of business
and in total were as follows:
<TABLE>
<CAPTION>
Personal Special
Medical Accident Risk Credit Life Other Total
- --------------------------------------- ------------ ------------- ------------- ------------ ------------ ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Loss ratio 67.9% 63.1% 49.7% 42.4% 69.5% 46.7% 66.6%
Acquisition expense ratio 27.1% 23.2% 38.2% 22.5% 11.6% 41.4% 26.2%
- --------------------------------------------------------------------------------------------------------------------------------
Loss and acquisition expense
Ratio 95.0% 86.3% 87.9% 64.9% 81.1% 88.1% 92.8%
- --------------------------------------------------------------------------------------------------------------------------------
Operating expense ratio 7.3%
-------
Combined ratio 100.1%
=======
</TABLE>
The Credit loss ratio reflects an improved claims development pattern recognized
on a significant Latin American contract during the first quarter.
The operating ratios for the six months ended June 30, 1998, by line of business
and in total were as follows:
<TABLE>
<CAPTION>
Personal Special
Medical Accident Risk Credit Life Other Total
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Loss ratio 62.8% 64.6% 42.4% 71.2% 74.0% -- 65.3%
Acquisition expense ratio 31.9% 19.9% 35.1% 12.6% 16.6% -- 23.5%
- -------------------------------------------------------------------------------------------------------------------------------
Loss and acquisition expense
Ratio 94.7% 84.5% 77.5% 83.8% 90.6% -- 88.8%
- -------------------------------------------------------------------------------------------------------------------------------
Operating expense ratio 10.1%
-------
Combined ratio 98.9%
=======
</TABLE>
The operating expense ratios for the three months and six months ended June 30,
1999 and 1998, respectively, were calculated by expressing total administrative
expenses net of corporate office expenses, as a percentage of net premiums
earned. For the three months and six months ended June 30, 1998, management fee
revenue of $229 thousand and $1.2 million respectively, was deducted from
operating expenses due to the expense of administering the pool business of 1997
and prior underwriting years, which the Company previously managed as a
reinsurance management services company.
14
<PAGE>
Geographic diversification of the Company's business is demonstrated by the
distribution of gross written premiums for the three months ended June 30, 1999
and 1998 and for the year ended December 31, 1998, as follows:
<TABLE>
<CAPTION>
Three months ended Three months ended Year ended
June 30, 1999 June 30, 1998 December 31, 1998
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Western Europe 33.6% 23.8% 30.9%
North America 40.9% 56.2% 46.2%
Latin America 11.4% 2.0% 14.9%
Other 14.1% 18.0% 8.0%
- ---------------------------------------------------------------------------------------------------------------------
Total 100.0% 100.0% 100.0%
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
The distribution of gross written premiums for the six months ended June 30,
1999 and 1998 and for the year ended December 31, 1998, is as follows:
<TABLE>
<CAPTION>
Six months ended Six months ended Year ended
June 30, 1999 June 30, 1998 December 31, 1998
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Western Europe 32.2% 46.0% 30.9%
North America 50.0% 29.4% 46.2%
Latin America 11.1% 11.9% 14.9%
Other 6.7% 12.7% 8.0%
- ------------------------------------------------------------------------------------------------------------------
Total 100.0% 100.0% 100.0%
- ------------------------------------------------------------------------------------------------------------------
</TABLE>
15
<PAGE>
PRODUCT MIX
The distribution of gross premiums written by line of business for the three
months and six months ended June 30, 1999 and 1998, and for the year ended
December 31, 1998 was as follows:
<TABLE>
<CAPTION>
Three months ended Three months ended Year ended
June 30, 1999 June 30, 1998 December 31, 1998
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Medical 94.4% 51.8% 59.6%
Personal Accident 15.9% 35.7% 26.1%
Credit (2.0)% 7.1% 6.2%
Life (7.2)% 3.2% 5.5%
Special Risk (1.1)% 2.2% 2.6%
- ------------------------------------------------------------------------------------------------------------------
Total 100.0% 100.0% 100.0%
- ------------------------------------------------------------------------------------------------------------------
<CAPTION>
Six months ended Six months ended Year ended
June 30, 1999 June 30, 1998 December 31, 1998
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Medical 68.8% 50.4% 59.6%
Personal Accident 25.2% 30.0% 26.1%
Credit 2.4% 3.8% 6.2%
Life 2.1% 10.7% 5.5%
Special Risk 0.3% 5.1% 2.6%
Other 1.2% --% --%
- ------------------------------------------------------------------------------------------------------------------
Total 100.0% 100.0% 100.0%
- ------------------------------------------------------------------------------------------------------------------
</TABLE>
EXPOSURE MANAGEMENT
The Company manages its underwriting risk exposures through geographic
distribution, an excess of loss reinsurance program, and co-reinsurance. The
Company's excess liability insurance policy generally provides limits up to a
maximum of $30 million per occurrence, with a minimum attachment point generally
of $100 thousand.
The Company's non-North American business is co-reinsured with two other
reinsurance companies that have participation with underwriting lines totaling
12.5%; the North American business is co-reinsured with two companies, having a
total participation of 15.0%.
MANAGEMENT FEE REVENUE
Management fee revenue increased to $1.1 million for the three months ended June
30, 1999 from $229 thousand for the three months ended June 30, 1998. The
increase was primarily due to the recognition of fee income associated with the
establishment of COMED, a new German healthcare service association which the
Company helped to establish. For the six months ended June 30, 1999, management
fee revenue increased to $1.9 million from $1.2 million for the six months ended
June 30, 1998. The overall increase is due to fee income from COMED together
with fees earned as compensation for underwriting and managing the reinsurance
portfolio on behalf of the Company's co-reinsurers less a reduction in fees from
reinsurance management of pool business which were fully earned in 1998.
16
<PAGE>
INVESTMENT RESULTS
For the three months ended June 30, 1999, net investment income totaled $3.7
million and net realized investment losses totaled $0.3 million. For the three
months ended June 30, 1998, net investment income and net realized investment
gains totaled $3.2 million and $0.2 million respectively. For the six months
ended June 30, 1999, net investment income totaled $7.0 million and net realized
investment losses totaled $0.3 million. For the six months ended June 30, 1998,
net investment income and net realized investment gains totaled $6.2 million and
$1.3 million respectively. As of June 30, 1999, total investments and cash were
$251.4 million, an increase of $22.3 million from the first quarter due to
strong premium inflows, which contributed to the increase in net investment
income in each of the three month and six month periods.
The following table reflects the investment results for the three months ended
June 30, 1999:
<TABLE>
<CAPTION>
Net Annualized Net Realized
Average Investment Effective Investment
U.S dollars in thousands Investments Income(1) Yield Losses
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Fixed maturity investments $200,091 $ 3,215 6.4% $ (275)
Other investments (2) 12,410 144 4.6% --
Cash and cash equivalents 27,744 379 5.5% --
- ----------------------------------------------------------------------------------------------------------
Total $240,245 $ 3,738 6.2% $ (275)
- ----------------------------------------------------------------------------------------------------------
</TABLE>
(1) Net investment income is net of investment-related expenses and income on
premium receivable and funds held by ceding companies.
(2) Loans of $1.6 million were provided to COMED under its $12 million loan
facility. In addition, a further loan was provided to another investee
under an existing loan facility.
The following table reflects the investment results for the three months ended
June 30, 1998:
<TABLE>
<CAPTION>
Net Annualized Net Realized
Average Investment Effective Investment
U.S dollars in thousands Investments Income(1) Yield Gains
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Fixed maturity investments $ 223,142 $ 2,977 5.3% $ 173
Other investments -- -- --% --
Cash and cash equivalents 25,806 234 3.6% --
- -----------------------------------------------------------------------------------------------------------
Total $ 248,948 $ 3,211 5.2% $ 173
- -----------------------------------------------------------------------------------------------------------
</TABLE>
(1) Net investment income is net of investment related expenses.
The following table reflects the investment results for the six months ended
June 30, 1999:
<TABLE>
<CAPTION>
Net Annualized Net Realized
Average Investment Effective Investment
U.S dollars in thousands Investments Income(1) Yield Losses
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Fixed maturity investments $ 204,190 $ 6,019 5.9% $ (275)
Other investments (2) 10,245 209 4.1% --
Cash and cash equivalents 24,143 576 4.8% --
- ----------------------------------------------------------------------------------------------------------
Total $ 238,578 $ 6,804 5.7% $ (275)
- ----------------------------------------------------------------------------------------------------------
</TABLE>
(1) Net investment income is net of investment-related expenses and income on
premium receivable and funds held by ceding companies.
(2) In addition to the $1.6 million provided to COMED, a further $7 million has
been provided to two companies that are expected to generate or secure
profitable business for the Company.
17
<PAGE>
The following table reflects the investment results for the six months ended
June 30, 1998:
<TABLE>
<CAPTION>
Net Annualized Net Realized
Average Investment Effective Investment
U.S dollars in thousands Investments Income(1) Yield Losses
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Fixed maturity investments $ 221,389 $ 5,899 5.3% $ 1,326
Other investments -- -- --% --
Cash and cash equivalents 20,163 332 3.3% --
- ----------------------------------------------------------------------------------------------------------
Total $ 241,552 $ 6,231 5.2% $ 1,326
- ----------------------------------------------------------------------------------------------------------
</TABLE>
(1) Net investment income is net of investment related expenses.
ADMINISTRATIVE EXPENSES
Total administrative expenses for the three months ended June 30, 1999 increased
to $5.5 million from $2.4 million for the comparative prior year quarter.
Administrative expenses increased by $1 million from the three months ended
March 31, 1999. Administrative expenses consist primarily of personnel costs,
professional fees, travel costs, and occupancy expenses. Total administrative
expenses for the six months ended June 30, 1999 increased to $10.0 million from
$6.3 million for the six months ended June 30, 1998.
Personnel costs increased by $0.9 million to $2.1 million in the three months
ended June 30, 1999 from $1.2 million in the three months ended June 30, 1998,
due to the continued investment in key personnel at the holding company and
various representative offices. There was an increase of $0.5 million in
personnel costs from the three months ended March 31, 1999 due to a combination
of continued investment in key staff and a decrease in the net deferral of
personnel expenses directly related to and, varying with, the volume of business
of generated.
Professional service fees increased by $0.9 million to $1.6 million in the three
months ended June 30, 1999, due to a combination of legal and taxation costs
associated with the Company's Dividend Reinvestment and Share Purchase Plan,
statutory filings and contract reviews. Furthermore, additional accounting and
consulting fees were incurred in the preparation of the Company's Annual Report
and further consultancy fees were incurred in the development of the Company's
direct marketing systems and actuarial support for the Company's product
strategy in Asia. There was an increase of $176 thousand in professional service
fees from the three months ended March 31, 1999.
Travel expenses increased by $0.2 million to $0.5 million for the three months
ended June 30, 1999 from the corresponding prior year period. These travel
expenses relate primarily to the Company's continuing identification and
investigation of new business and underwriting opportunities. Occupancy expenses
increased by $0.2 million to $0.3 million for the three months ended June 30,
1999 from the corresponding prior year period due to the higher costs associated
with the additional representative offices added by the Company in the last 12
months. Computer related expenses increased by $0.2 million to $0.3 million for
the three months ended June 30, 1999 from the corresponding prior year period
due to additional costs associated with licensing new reporting systems in
Ireland and Asia, upgrading the Company's general ledger systems to Year 2000
compliant versions and review of the reinsurance systems. Board of Directors and
subsidiary company supervisory board costs increased by $0.2 million over the
corresponding prior year period and by $0.1 million over the three months ended
March 31, 1999.
Foreign exchange profits of $0.2 million were reported for the three months
ended June 30, 1999 as compared to profits of $0.3 million in the prior year
period.
Transition costs associated with the set-up of the Shared Services Support
function in Dublin during the three months ended June 30, 1999 were $19
thousand. These costs primarily related to travel expenses associated with the
training of new staff hires.
18
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
As of June 30, 1999, total investments and cash were $251.4 million compared to
$235.2 million at December 31, 1998. Cash flow from operating activities for the
six months ended June 30, 1999 was $26.3 million with two significant accounts
contributing $15.4 million of positive cash flow. All fixed maturity securities
in the Company's investment portfolio are classified as available for sale and
are carried at fair value. The following table summarizes the fixed maturity
investment portfolio as of June 30, 1999.
<TABLE>
<CAPTION>
Average
U.S. dollars in thousands Fair Duration Market Credit
Value (Years) Yield Rating
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Corporate securities $ 121,955 2.8 6.5% AA
U.S. treasury securities and obligations of
U.S. government corporations and agencies 31,327 1.9 4.6% AAA
Mortgage & Asset backed securities 15,739 0.9 6.6% AAA
Obligations of states and political
subdivisions 23,478 3.1 6.6% AAA
Foreign currency debt securities 7,025 3.2 3.8% AAA
- ----------------------------------------------------------------------------------------------------------
Total $ 199,524 2.6 6.2% AA
- ----------------------------------------------------------------------------------------------------------
</TABLE>
By comparison, at December 31, 1998, the fixed maturity investment portfolio
analysis was as follows:
<TABLE>
<CAPTION>
Average
U.S. dollars in thousands Fair Duration Market Credit
Value (Years) Yield Rating
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Corporate securities $138,727 3.1 5.7% AA
U.S. treasury securities and obligations of
U.S. government corporations and agencies 31,698 1.5 4.4% AAA
Mortgage & Asset backed securities 9,232 0.8 5.8% AAA
Obligations of states and political
subdivisions 24,647 2.3 5.9% AA
Foreign currency debt securities 8,083 3.4 3.5% AA
- ----------------------------------------------------------------------------------------------------------
Total $212,387 2.6 5.2% AA
- ----------------------------------------------------------------------------------------------------------
</TABLE>
The Company's investment policy objective is to maximize long-term investment
returns while maintaining a liquid, high-quality portfolio. To this end, the
investment policy requires that the portfolio have an average credit quality
rating of AA, no more than 3% of the portfolio invested in the securities of a
single issuer (other than issues of sovereign governments with a rating of AA or
better), and a target duration of 2.75 years. The Company's investment portfolio
reflects its investment policy and guidelines.
The Company expects that its financial and operational needs for the foreseeable
future will be met by funds generated from operations.
Shareholders' equity as of June 30, 1999 was $245.4 million compared to $244.8
million at December 31, 1998. The major factors contributing to the increased
level of shareholders' equity included $7.5 million of net income, offset by net
unrealized investment losses of approximately $4.4 million and by the
declaration of cumulative dividends of $0.16 per common share. Book value per
common share increased to $17.64 as of June 30, 1999 from $17.58 as of December
31, 1998.
19
<PAGE>
CURRENT DEVELOPMENTS
A quarterly cash dividend of $0.08 per share was declared on August 10, 1999 by
the Company's Board of Directors, payable on September 8, 1999 to common
shareholders of record on August 23, 1999.
The Company has relationships with Odyssey Re (London) Limited and other parties
relating to business which may have been underwritten or reinsured by Odyssey Re
or brokered by those other parties. The Company is investigating its potential
exposure, if any, resulting from these relationships, but is unable at this time
to determine the amount of such exposure and the possible effect upon the
Company's business, financial condition or results of operations.
During the quarter the Company extended a loan to COMED, the new German
healthcare association which the Company helped to establish, under the loan
facility of $12 million provided in December 1998. At June 30, 1999, $1.6
million is outstanding under this facility. In addition, the Company has billed
and unbilled receivables of $2.9 million due from COMED. Of this amount, $1.1
million was recognized as fees in the second quarter. Membership recruitment in
COMED commenced in June by recruiting members through alliances with other
associations and by direct marketing to the general public. The ability of COMED
to repay the $4.5 million is dependent on its ability to generate sufficient
revenues from members.
The Company, through its German subsidiary, Institut fur Praventivmedizin &
Techologie GmbH, "IPT" has $1.2 million in prepaid expenses under a service
contract with a company to supply heart-monitoring technology for resale to
COMED and other healthcare providers. These prepaid expenses may not be
recoverable if the Company is unable to sell a sufficient amount of this
technology.
The Company has repurchased 78,700 shares of its common stock, equivalent to
0.6% of the outstanding shares of ESG Re Limited under its Common Stock
Repurchase Program as of July 31, 1999. The average purchase price was $14.85
and represents a significant discount to book value of $17.64.
On June 30, 1999, the Company committed to purchasing majority stakes in a third
party administrator in Thailand and a third party administrator and insurance
company in Indonesia, for a combined cost of $0.5 million. Legal contracts are
being finalized and the Company is negotiating an increase in its shareholding
in the Thai company to 100%.
In June, the company launched a new business unit focused on the growing health
care management and technology field. The "Intelligent Health Care" division
will be aimed at developing and distributing disease management programs,
cardiovascular and other telemedicine applications worldwide. As part of the
Company's expansion, over the next six months, the Company will commit up to $5
million to the development and introduction of innovative medical technologies
and to secure talent in the health care field. The Company expects to complete a
detailed business plan for the future of this division by late fall of this
year. Through a Bermuda holding company, ESG Health Ltd., the Company expects to
complete its integrated program its reinsurance risk management techniques with
health management techniques such as diabetes and cardiovascular telemedicine.
MARKET RISK
The Company is subject to market risk arising from the potential change in value
of its various financial instruments. These changes may be due to fluctuations
in interest rates or foreign exchange rates, or both in the case of foreign
currency investments. The Company monitors its exposure to interest rate and
currency rate risk on a continuous basis and currently does not believe that the
use of derivatives to manage such risk is necessary. The Company intends to
reevaluate the need for a formal hedging strategy on a periodic basis, and may
determine that such a strategy, including the use of derivative instruments, is
appropriate in the future.
20
<PAGE>
INTEREST RATE RISK
The largest source of market risk for the Company is interest rate risk on its
portfolio of fixed maturity investments, especially fixed rate instruments. In
addition, the credit worthiness of the issuer, relative values of alternative
investments, liquidity and general market conditions may affect fair values of
interest rate sensitive instruments.
The Company's general strategy with respect to fixed maturity securities is to
invest in high quality securities while maintaining diversification and to avoid
significant concentrations in individual issuers' industry segments or
countries.
FOREIGN CURRENCY RISK
The Company's functional currency is the U.S. dollar. However, the Company
writes reinsurance business in numerous geographic regions and currencies,
giving rise to the risk that the ultimate settlement of receivables and payables
on reinsurance transactions will differ from the amounts currently recorded as
assets and liabilities in the financial statements. The Company intends to hold
investments in currencies in which it will collect premiums and pay claims, thus
creating a partial natural hedge against exchange rate fluctuations.
INFLATION
Inflation has not had a material impact on the Company's operations for the
periods presented. The Company has commenced writing reinsurance business in
Latin America, particularly in Brazil, which has experienced periods of high
inflation. It is possible that future inflationary conditions may impact
subsequent accounting periods.
THE EURO
On January 1, 1999, a single currency, the "euro" was adopted as the national
currency of the 11 participating countries in the European Monetary Union,
including Germany and Ireland, two of the countries in which the Company
operates and in which the Company maintains a significant presence. The
Company's German and Irish subsidiaries will not be required to use the euro for
accounting purposes prior to January 1, 2002. Due to uncertainties related to
the euro conversion, the impact of the conversion is not known. To date, the
impact of the conversion has had no material impact on the Company's operations,
accounting systems or financial reporting. The Company's general ledger systems
have been upgraded to a euro compliant platform.
YEAR 2000 ISSUE
The Year 2000 Issue relates to the ability of computer systems to properly
interpret date information for the year 2000 and beyond. In January 1998, the
Company initiated an enterprise-wide project to address Year 2000 issues with
respect to the Company's computer software and information technology systems.
The initiative had as its focus two distinct areas that include Year 2000
compliance of the Company's software, systems and technology platforms and the
evaluation of the Year 2000 preparedness of significant third parties with whom
the Company conducts business, including vendors and customers.
The Company has substantially completed this initiative as of the end of second
quarter 1999. The remaining issues for the Company are the implementation of its
Year 2000 compliant general ledger system in its Thai subsidiary acquired on
June 30, 1999 and implementing a Year 2000 compliant accounting system for its
pool administration business which has been in run-off since 1997. All system
upgrades are expected to be completed by September 30, 1999. Future costs of
remediation are not expected to have a material impact on the Company's
financial position, results of operations or cash flows, although no assurance
can be given in this regard.
The Company's systems do not interface electronically with those of its
customers or clients. As such, the Company's exposure to the Year 2000 issue
with respect to customers and clients is limited to the possibility that
information supplied by these companies could not be of sufficient quality or
timeliness and therefore could indirectly affect the quality or timeliness of
the Company's own data. The Company has communicated with its significant
clients and service providers to assess their vulnerability and readiness to
comply with Year 2000 issues and will address compliance risks with each new
significant vendor.
21
<PAGE>
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
There are no lawsuits pending, or to the knowledge of the Company threatened, to
which the Company or any of its subsidiaries or affiliates is a party or of
which any of their properties is subject other than the routine litigation
incidental to the business.
ITEM 2. CHANGES IN SECURITIES
Not applicable.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS
The second Annual General Meeting of Shareholders was held pursuant to notice on
May 7, 1999 at 11.00 a.m. local time in Pembroke, Bermuda. There were present at
the meeting, in person or represented by proxy, the holders of 8,556,709 of the
outstanding common stock of the Company, which represented approximately 61% of
the outstanding shares as at March 22, 1999, the date of record. The matters
voted on at the meeting and the votes cast were as follows:
Proposal 1 Election of Directors
Kenneth P. Morse and William J. Poutsiaka were re-elected as Class II Directors
to serve until the Annual General Meeting of Shareholders in 2002.
For Abstain
--- -------
Kenneth P. Morse 8,527,984 28,725
William J. Poutsiaka 8,527,984 28,725
Proposal 2. Ratification of the Appointment of Independent Auditors
The selection of Deloitte & Touche as independent auditors for the fiscal year
ending December 31, 1999 was ratified with 8,550,709 shares voting in favor of
such proposal and 1,100 abstaining from voting.
ITEM 5. OTHER TRANSACTIONS
Not applicable.
ITEM 6. EXHIBITS
Exhibit 11.1 Computation of Earnings Per Share
Exhibit 15.1 Consent of Deloitte & Touche
Exhibit 27.1 Financial Data Schedule
22
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Company has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
August 13, 1999
ESG RE LIMITED
By: /s/ Joan H. Dillard
------------------------------
Name: Joan H. Dillard
Title: Chief Financial Officer
23
Exhibit 11.1
Computation of Earnings Per Share
The following is a reconciliation of the numerators and denominators of the
basic and diluted earnings per share computations for income from continuing
operations:
<TABLE>
<CAPTION>
Income Shares Per Share
U.S. dollars in thousands except share and per share data (Numerator) (Denominator) Amount
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Three Months Ended June 30, 1999
- --------------------------------------------
Basic earnings per share
Income available to common shareholders $3,472 13,922,898 $0.25
Effect of Dilutive Securities:
Class A Warrants --
Director and Employee Options 932
Class B Warrants --
---------------------------------------------------------------
Diluted earnings per share
Income available to common shareholders $3,472 13,923,830 $0.25
===============================================================
Three Months Ended June 30, 1998
- --------------------------------------------
Basic earnings per share
Income available to common shareholders $3,247 13,923,799 $0.23
Effect of Dilutive Securities:
Class A Warrants --
Director and Employee Options 306,748
Class B Warrants --
---------------------------------------------------------------
Diluted earnings per share
Income available to common shareholders $3,247 14,230,547 $0.23
---------------------------------------------------------------
Six Months Ended June 30, 1999
- --------------------------------------------
Basic earnings per share
Income available to common shareholders $7,463 13,923,346 $0.54
Effect of Dilutive Securities:
Class A Warrants --
Director and Employee Options 13,444
Class B Warrants --
---------------------------------------------------------------
Diluted earnings per share
Income available to common shareholders $7,463 13,936,790 $0.54
===============================================================
Six Months Ended June 30, 1998
- --------------------------------------------
Basic earnings per share
Income available to common shareholders $6,498 13,923,799 $0.47
Effect of Dilutive Securities:
Class A Warrants --
Director and Employee Options 379,504
Class B Warrants --
---------------------------------------------------------------
Diluted earnings per share
Income available to common shareholders $6,498 14,303,303 $0.45
===============================================================
</TABLE>
EXHIBIT 15.1
August 13, 1999
ESG Re Limited
Skandia International House
16 Church Street
Hamilton, Bermuda
We have made a review, in accordance with standards established by the American
Institute of Certified Public Accountants, of the unaudited interim financial
information of ESG Re Limited and subsidiaries for the periods ended June 30,
1999 and 1998, as indicated in our report dated August 11, 1999; because we did
not perform an audit, we expressed no opinion on that information.
We are aware that our report referred to above, which is included in your
Quarterly Report on Form 10-Q for the quarter ended June 30, 1999 is
incorporated by reference in Registration Statement No. 333-40341 on Form F-1.
We are also aware that the aforementioned report, pursuant to Rule 436(c) under
the Securities Act of 1933, is not considered a part of the Registration
Statement prepared or certified by an accountant or a report prepared or
certified by an accountant within the meaning of Sections 7 and 11 of that Act.
/s/ Deloitte & Touche
- ----------------------
Deloitte & Touche
Hamilton, Bermuda
<TABLE> <S> <C>
<ARTICLE> 7
<LEGEND>
This schedule contains summary financial information extracted from the
condensed consolidated balance sheet at June 30, 1999 and condensed consolidated
statement of operations for the quarter ended June 30, 1999, and is qualified in
its entirety by reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> JUN-30-1999
<DEBT-HELD-FOR-SALE> 199,524
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 0
<MORTGAGE> 0
<REAL-ESTATE> 0
<TOTAL-INVEST> 213,718
<CASH> 37,657
<RECOVER-REINSURE> 6,535
<DEFERRED-ACQUISITION> 54,608
<TOTAL-ASSETS> 615,655
<POLICY-LOSSES> 92,948
<UNEARNED-PREMIUMS> 170,936
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 0
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0
0
<COMMON> 13,916
<OTHER-SE> 226,224
<TOTAL-LIABILITY-AND-EQUITY> 615,655
40,304
<INVESTMENT-INCOME> 3,722
<INVESTMENT-GAINS> (275)
<OTHER-INCOME> 1,123
<BENEFITS> 48,909
<UNDERWRITING-AMORTIZATION> 14,108
<UNDERWRITING-OTHER> 0
<INCOME-PRETAX> 3,617
<INCOME-TAX> 145
<INCOME-CONTINUING> 3,472
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 0
<EPS-BASIC> 0.25
<EPS-DILUTED> 0.25
<RESERVE-OPEN> 0
<PROVISION-CURRENT> 0
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 0
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</TABLE>
