ESG RE LTD, 10-K, 2000-03-30

ESG RE LTD
10-K, 2000-03-30
LIFE INSURANCE

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549
------------------------

FORM 10-K

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

FOR THE FISCAL YEAR ENDED DECEMBER 31, 1999
COMMISSION FILE NUMBER 000-2348\
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ESG RE LIMITED

(Exact name of registrant as specified in its charter)

<TABLE>
<S> <C>
BERMUDA NOT APPLICABLE
(State or other jurisdiction of (I.R.S. Employer Identification No.)
Incorporation of organization)
</TABLE>

16 CHURCH STREET
HAMILTON HM11, BERMUDA
(Address of executive offices, zip code)

(441) 295-2185
(Registrant's telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:

TITLE OF EACH CLASS

Common Shares, $1.00 par value

NAME OF EACH EXCHANGE ON WHICH REGISTERED
Nasdaq National Market

Securities registered pursuant to Section 12(g) of the Act: None
------------------------

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

Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K / /

The aggregate market value of the voting stock held by non-affiliates of the
Registrant, as of March 24, 2000, was $50,730,120.75 based on the closing price
of $4.25 on that date.

The number of the Registrant's common shares (par value $1.00 per share)
outstanding as of March 24, 2000, was 11,936,499.

DOCUMENTS INCORPORATED BY REFERENCE:

Certain portions of the Definitive Proxy Statement in connection with the
2000 Annual General Meeting of Shareholders (the "Proxy Statement") which will
be filed with the Securities and Exchange Commission not later than 120 days
after the Registrant's fiscal year ended December 31, 1999, are incorporated by
reference in Part III of this Form 10-K.

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PART I.

Unless the context requires otherwise, references herein to the "Company" or
"ESG Re" include ESG Re Limited and the subsidiaries through which it operates.
All references to the Company prior to the closing of its initial public
offering on December 12, 1997 are to the Company's reinsurance management
business, which was conducted through its subsidiary, European Specialty Group
Holding AG ("ESG Germany") and its subsidiaries (together with ESG Germany, "ES
Management").

NOTES ON FORWARD-LOOKING STATEMENTS

This discussion 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.

ITEM 1. BUSINESS

GENERAL DEVELOPMENT OF THE BUSINESS

ESG Re Limited was formed on August 21, 1997, under the laws of Bermuda. The
Company, through its wholly owned direct and indirect subsidiaries, European
Specialty Reinsurance (Bermuda) Limited ("ES Bermuda"), European Specialty
Reinsurance (Ireland) Limited ("ES Ireland") and European Specialty
Ruckversicherung AG ("ES Germany"), is a specialty reinsurer providing
innovative risk solutions and capacity on a global basis in the fields of
accident, health, life and special risk reinsurance to insurers and selected
reinsurers. On December 12, 1997, the Company raised gross proceeds of $257
million in a private placement and initial public offering (the "Offerings").
The net proceeds from the Offerings of the Company's common shares in December
1997 provided the capitalization for the Company to assume reinsurance risks.

In June 1998, the Company incorporated Accent Insurance Company Ltd.
("Accent") in Ireland, enabling it to offer its products on a pan-European basis
directly to its insured parties.

In the former Soviet State of Georgia, ESG Re has helped to establish one of
the first locally-managed insurance companies to be run along Western business
standards, supplying a range of innovative products and services, extensive
management and training support, technical expertise and capital funding. The
Company has also established operations in the Latin American market and has
increased its presence in the London, North American, and Asian markets. In June
1998, the Company increased its investment in SportSecure GmbH, a reinsurance
intermediary specializing in sports and entertainment risks, giving the Company
a majority ownership interest.

In November 1998, the Company established a global support center (the
"Shared Services Center") in Dublin, Ireland. Corporate functions operating from
the Shared Services Center include operating and administrative functions such
as underwriting, claims management, systems and technology, finance and
accounting, human resources and policy administration.

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In recent months, the approach has been to attract members through direct
contact with public and private sick funds, the German equivalent of HMO's. This
has not yet led to any formal agreement with sick funds to offer COMED services
to its members. Under the terms of the loan agreement, the Company has the right
to refuse any further disbursements where the ability of COMED to repay the loan
is in doubt.

In December 1998, the Company incorporated
Vermittlungs-Beratungs-und-Beteiligungs GmbH ("VBB") as a founding member of
COMED and Institut fur Praeventivmedizin & Techologie GmbH ("IPT") as a
technology and service provider to COMED.

In June 1999, the company launched a new business unit focused on the
growing health care management and technology field. The health care division
("ESG Health") is aimed at developing and distributing disease management
programs, cardiovascular programs and other telemedicine applications. This
division will encompass the Company's on-going relationship with COMED, together
with the activities of IPT and VBB. In February 2000, the Company incorporated
VBB Bermuda Limited, a holding company in Bermuda. This company will be the
holding company of the Company's health care division. In addition, during March
2000, the Company completed the acquisition of Innovacare GmbH, a disease
Management Company based in Munich, Germany. The purchase price was $5.9
million.

The company expects to divest a portion of the health care division in 2000
through raising external capital to fund the venture. Extensive review by
outside consultants and the senior management recruited by the Company from the
pharmaceutical/disease management industry indicates substantial growth
opportunities for the division in the European and North American markets. The
Company is in negotiation with outside parties to take an initial equity stake
in the division as the first step in reducing the Company's equity interest to a
significant non-controlling equity investment in the venture.

In June 1999, the Company acquired a majority equity interest in Health
Benefits Consultants Company Limited, a third party administrator of medical and
personal accident insurance products in Thailand and a 75% equity interest in PT
International Health Benefits Pty., a third party administrator of medical and
personal accident insurance products and an insurer of limited managed care
insurance products in Indonesia. These two companies have extensive provider
networks in their countries of operation and provide ESG with a platform to
promote medical insurance products throughout South East Asia.

MARKET GROWTH

The Company believes that it is well positioned to benefit from market
growth developments because of its reputation as a recognized lead underwriter,
risk-oriented approach and far-ranging and well-established relationship
network. ESG Re believes that its reinsurance markets are currently experiencing
significant growth as a result of: (i) the worldwide trend of transferring
social security and national health responsibility to the private sector; (ii)
increasing insurance demand accompanying economic growth in emerging markets in
Eastern Europe, Asia and Latin America; (iii) the deregulation of certain
European markets as a consequence of new trade directives from the European
Union enabling the introduction of new products; and (iv) increasing individual
morbidity and decreasing mortality within large demographic segments of the
population.

BUSINESS STRATEGY

The Company's strategy places an emphasis on underwriting profitability
rather than market share. To meet this objective, the Company has ceased writing
North American medical business through its London market operation.

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The Company intends to achieve its growth objectives through the following
strategic initiatives:

PRODUCTS AND SERVICES

Management believes that customers recognize the Company as a provider of
"intelligent reinsurance" through innovative insurance products and services.
ESG Re intends to maintain its competitive advantage by developing reinsurance
products and services that are tailored to the needs of particular markets and
by working closely with primary insurers and insureds to implement loss control
techniques. The Company intends to (i) introduce and implement managed care
techniques in selected European markets where these techniques have been
underutilized; (ii) create private medical care and insurance products for
emerging markets within Eastern Europe, Latin America and Asia; and (iii) expand
occupational injury and health reinsurance programs in Scandinavia. Consistent
with its practice and experience, ESG Re offers reinsurance of health risks in
conjunction with loss-reducing products and services. The Company expects that
its ceding clients will assist with the use and implementation of such products
and services because of their favorable impact on claims expenses.

FOCUS ON HIGH GROWTH MARKETS

ESG Re will focus its health insurance underwriting activities on markets
with high growth potential in developing areas such as Latin America and Asia.
The Company will also target selected developed markets for the introduction of
innovative products.

BUSINESS SEGMENTS

The Company has two business segments, Reinsurance and Health Care. The
Company's health care division was established in 1999 and its results are
included in Item 7, "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS." This division does not encompass any specific lines
of business.

The major lines of business of the Company's reinsurance division includes
medical expense, personal accident and disability, credit, life and special risk
reinsurance. ESG Re's gross premiums written in 1999 totaled $333.4 million
(1998: $199.9 million; 1997: $26.1 million). The breakdown of gross premiums
written for the years ended December 31, 1999, 1998 and 1997 by major lines of
business was as follows:

<TABLE>
<CAPTION>
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Medical Expense........................................ 75.7% 59.6% 38.2%
Personal Accident and Disability....................... 19.9% 26.1% 35.8%
Credit................................................. 0.5% 6.2% 24.5%
Life................................................... 2.1% 5.5% --%
Special Risk........................................... 0.8% 2.6% 1.5%
Other.................................................. 1.0% --% --%
----- ----- -----
Total.................................................. 100.0% 100.0% 100.0%
===== ===== =====
</TABLE>

Further segment information is disclosed in Item 7, "MANAGEMENT'S DISCUSSION
AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS."

MEDICAL EXPENSE

Medical expense reinsurance consists primarily of medical expense
reimbursement plans, short-term travel, defined illnesses and dread diseases, as
well as medical expense add-on coverages, top-up benefits and carve-out
programs. To properly evaluate these reinsurance risks, ESG Re relies on its
detailed knowledge of the underlying insurance product and active risk
management, instead of relying

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solely on past performance or general market pricing. ESG Re frequently
underwrites risk only concurrently with the implementation of the Company's loss
control measures and underwriting support systems. The Company generally does
not underwrite business where the insured has no deductible or co-payment
without being able to influence its loss ratios (by applying cost containment
measures whenever prudent). To this end, the Company generally seeks to have
insurers include deductibles and coinsurance requirements in the primary
insurance contracts. In developing countries, ESG Re encourages ceding clients
to develop adequate retention levels.

ESG Re encourages its ceding clients through regular client meetings and
audits to employ stringent cost control and loss prevention measures, such as
managing a patient's choice of doctors and hospital networks, reducing benefit
utilization and reducing claims frequency. The Company introduces selected
managed care concepts in Europe and emerging insurance markets through
"intelligent reinsurance" (i.e., the combination of capacity, system and data
management support and the application of preventative loss control). The
Company believes insurance companies in these markets are receptive to managed
care since these companies often have limited experience with modern cost-
containment measures.

ESG Re believes that medical expense reinsurance is one of the strongest
growing classes in the insurance industry. The restructuring of social security
systems throughout numerous countries generates the need for private insurance
and, consequently, generates reinsurance demand. New markets have emerged
particularly in Eastern Europe, due to changes in laws that have transferred
insurance responsibility from government funds to private institutions, such as
trade unions.

In the area of health reinsurance, ESG Re has focused its underwriting
activities on both highly developed markets, like Europe and North America, and
less developed markets with high growth potential, like Latin America.

PERSONAL ACCIDENT

Personal accident reinsurance covers death and dismemberment, disability,
loss of license and special coverages for credit card issuing corporations
relating to injuries to card holders. The reinsurance of non-traditional risks,
such as tailor-made coverage for occupational injuries, also comprises an
important part of ESG Re's personal accident reinsurance business. The Company
favors the "local approach" to personal accident reinsurance (i.e., it acquires
direct knowledge of the underlying business by establishing personal
relationships and transacting business directly with the ceding clients or local
brokers in the country of origin). ESG Re focuses its business in areas in which
it has detailed knowledge of local culture, insureds' behavior, market
conditions and other risk elements, since such knowledge allows the Company to
assess and price risk appropriately.

CREDIT/LIFE

ESG Re provides credit reinsurance for defaults resulting from the perils of
death, accident, disability and unemployment. ESG Re has considerable experience
underwriting credit/life reinsurance in the American, French and Scandinavian
markets. In 1998, the Company entered the German and selected other European
markets for credit/life reinsurance, applying the same underwriting practice it
has employed in its existing markets (with the necessary adaptations for local
markets). In 1998, the Company began underwriting activities in the area of
traditional life reinsurance, initially limited to developing markets. Because
the Company does not intend to compete with established insurers and reinsurers
in long-term life insurance or investment-related life products, it seeks to
offer these products in less established markets.

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SPECIAL RISK

Special risk reinsurance includes insurance with unique risk
characteristics, such as sports disabilities, sports and entertainment
contingency, non-appearance, cancellation and abandonment.

UNDERWRITING

The Company employs a disciplined, analytical and forward-looking approach
to underwriting in order to maximize underwriting profitability. On certain
contracts, primarily in North America, the Company's financial results have been
negatively impacted by not maintaining adherence to this underwriting approach.
This led to the Company's decision to cease writing North American medical
business through the London market and to re-evaluate its other North American
medical programs. The Company intends to construct a portfolio of reinsurance
contracts in the personal and special risk markets that maximizes shareholders'
return on equity, subject to prudent risk constraints.

ESG Re's future success rests squarely on its ability to generate consistent
underwriting profits. Management believes that its strategy of "intelligent
reinsurance" provides the appropriate tools for achieving the Company's mission.
ESG Re's products and services also serve to enhance the persistency of the
portfolio, which in turn supports long-term profitability. With an emphasis on
underwriting profitability, the Company has cancelled contracts with ceding
companies when underwriting profits were not in line with expectations.

Underwriting new and renewal business is conducted on a risk-by-risk basis,
with consideration given to the general direction of rates, policy terms, loss
histories and future exposures, ESG Re's acceptance limits and general book of
business. As part of its underwriting process, the Company focuses on the
reputation of the proposed ceding company, the likelihood of establishing a
long-term relationship, the geographic area in which the ceding company conducts
business and the ceding company's market share. The Company reviews historical
loss data in order to compare the ceding company's historical loss experience to
industry averages, as well as the perceived financial strength of the ceding
company. Over time, the Company has developed its own manuals that serve as a
detailed underwriting guideline.

The Company protects its portfolio by effecting non-proportional reinsurance
coverage in various layers to protect against large individual and aggregate
losses and risks of known and unknown concentration. In addition, the Company
will continue to effect proportional coverage on underwritten risks that might
have fluctuating results.

The Company, together with co-reinsurers, provides the following gross
capacities:

<TABLE>
<S> <C>
Medical Expense.............................. $5 million lifetime benefit per person

Personal Accident and Disability............. $5 million any one person and $30 million in
accumulated losses from any one known event

Credit/Life.................................. $5 million any one person

Special Risk................................. $10 million any one event or series of events
</TABLE>

The Company does not intend to expose itself to risk for any individual in
excess of $500,000 for personal accident, special risk, medical, life and
credit/life reinsurance, $1 million for any one known accumulation and
$2,500,000 for contingency for major events, prior to additional reinsurance.

CLAIMS

Normally, a reinsurer is not actively involved in claims handling. It is the
task of the ceding client to adjust the original losses and settle claims made
by its direct insureds. To the extent possible, the

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Company's approach differs from other reinsurers in that it actively seeks to
reduce claim costs in most of its medical expense reinsurance lines while its
reinsurance policies are in effect.

The Company's claims handling assistance, particularly for complicated
cases, has proven in many instances to be successful in significantly reducing
loss ratios of ceding clients' portfolios in comparison to their loss ratios
before ESG Re's involvement. Involvement in claims handling also will allow the
Company to be constantly aware of claims development in the health care field
and to establish reserves more accurately at an early point in time. These
claims support techniques have also proven to be an important tool in the
acquisition of new business.

Depending on the experience and the retention of the ceding client and the
extent of non-proportional reinsurance made available, the Company it will
require either claims control or claims co-operation clauses in the reinsurance
treaties it negotiates. Claims control clauses allow the reinsurer to determine
the extent to which a claim will be paid, whereas claims co-operation clauses
require the agreement of the insurer and reinsurer to jointly determine the
extent to which a claim will be paid. These clauses may improve the claims
performance of a ceding client, which might not be sufficiently experienced in
dealing with complex issues.

The Company performs audits at its ceding clients where deemed necessary.
Such audits may include underwriting, claims, financial, and systems audits.
Qualitatively, such audits test compliance and discover weaknesses in the
reporting and reserving system of a ceding client and thereby help the ceding
client to arrive at a realistic and timely methodology to evaluate risk
exposure.

OPERATIONS

The Company has structured its reinsurance underwriting operations according
to business lines. Underwriters are responsible for underwriting the business
according to internal guidelines and procedural and underwriting manuals, as
well as for supervising claims and handling claims subsequent to entering into
the contracts. Business is monitored monthly by the actuarial department. The
Company's management and underwriting information system provides a current
database for individual and general risk assessment.

In November 1998, the Company established a Shared Services Support Centre
in Dublin, Ireland, providing centralised global operational support for
insurance administration, finance, systems and human resources. This center
established the operating platform necessary to support and enhance the
Company's accelerated growth and development, to supply value-added leading edge
services and to enable the Company to contain future costs in an increasingly
competitive marketplace.

RESERVES

The Company expects that, due to the short-tail nature of personal and
special risk reinsurance claims, most claims under its treaties will generally
become known and ascertainable within approximately 12 to 24 months from the
date the insurance policy is written. However, a portion of the Company's
business, written and classified as typical "London market business," generally
takes longer to develop. The majority of the Company's reinsurance contracts
permit annual adjustment of terms.

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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.

INVESTMENTS

As of December 31, 1999, the Company's cash and invested assets totalled
$221.5 million. The Company has developed specific investment guidelines for the
management of its investment portfolio. Although these guidelines stress
diversification of risk, preservation of capital and market liquidity,
investments are subject to market risks and fluctuations, as well as to risks
inherent in particular securities. The Company's primary investment objective
for the portfolio is to preserve the capital assets of the Company while
achieving a total return commensurate with market conditions.

The Company has allocated up to $25 million to fund "other investments."
Other investments represent equity investments in, and loans to, reinsurance
related enterprises, ceding companies or distribution channels that are expected
to generate or secure additional profitable business for the Company. At
December 31, 1999, ESG Re had invested $15.7 million primarily into five such
enterprises with a further $2 million invested in its majority owned Georgian
subsidiary, IMEDI L. Insurance Company Limited ("IMEDI"). In March 2000, the
Company completed the acquisition of Innovacare GmbH, a disease management
company based in Munich, Germany. The Company has outstanding loan commitments
of $10.8 million as at December 31, 1999, of which $8.8 million was to COMED.
The Company has approved a plan to divest itself of a majority interest in its
health care division in 2000, which includes the activities of COMED. The
Company intends therefore to limit further loan contributions to COMED to ensure
that the Company does not exceed its $25 million fund for other investments.

In 1997, the Company entered into an Investment Advisory Agreement with Head
Asset Management L.L.C. to supervise and direct the investment of the Company's
asset portfolio in accordance with, and subject to, the investment objectives
and guidelines established by the Company. Pursuant to the terms of the
Investment Advisory Agreement, the Company will pay a fee, payable quarterly in
arrears, equal to 0.25% per annum of the first $200 million of assets under its
management declining to 0.15% per annum of the assets under its management, in
excess of $200 million. The investment advisory Agreement may be terminated upon
90 days written notice by the investment advisor or by the Company on five days
notice or upon shorter notice upon mutual written agreement by the parties. See
"Certain Relationships and Related Transactions." The performance of, and the
fees paid to, the Investment Advisor has been and will continue to be reviewed
periodically by the Board of Directors.

MATURITY AND DURATION OF PORTFOLIO

The maximum effective maturity for any single security in the Company's
investment portfolio is set at 30 years for U.S. government and U.S. government
agency securities with full faith and credit guarantees and at 10 years for all
other issues, measured from the date of settlement. The duration of the
portfolio varies according to decisions taken by the investment advisor on the
outlook for interest rate movements. The benchmark for such duration is
approximately 3 years.

QUALITY OF DEBT SECURITIES IN PORTFOLIO

The minimum average credit quality of the Company's investment portfolio is
AA.

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EQUITY SECURITIES AND REAL ESTATE

In August 1999, the Company modified its investment policy to allow up to
10% of its investment assets to be held in equity securities. Private equity
investments ("strategic investments") have been placed with strategic partners
in order to support ESG Re's core business or to secure distribution. The
Company does not intend to invest in real estate other than for its own use.

DIVERSIFICATION AND LIQUIDITY

No more than 3% of the Company's investment portfolio may be invested in the
securities of any single issuer, with the exception of sovereign governments or
agencies, including supranational agencies, with an AA rating or better.

FOREIGN CURRENCY EXPOSURES

The Company's investment portfolio is invested predominantly in fixed income
securities denominated in U.S. dollars, Euros and German Marks. The Company's
primary risk exposures and premiums receivable are denominated predominantly in
U.S. dollars and European currencies. The Company intends to hold investments in
the currencies in which it will collect premiums, pay claims and hold reserves
thus creating a partial natural foreign exchange hedge against exchange rate
fluctuations.

COMPETITION

The reinsurance industry is highly competitive. The Company competes with
other reinsurers, some of which have substantially greater financial, marketing,
and management resources than the Company. It may also compete with new market
entrants in the future. Management believes that virtually all major reinsurers
write personal accident business, mainly through their property and casualty
departments. A smaller number engage also in the fields of health, credit/life
and special risks. On an international basis, excluding carriers that are
predominantly focused on the United States, few reinsurers are considered lead
reinsurers in the segments in which ESG Re is active. In other markets, however,
certain traditional or domestic reinsurers hold a dominant position, creating
highly competitive market conditions.

Most reinsurers provide capacities for the various classes of personal
reinsurance through discrete units or profit centers. ESG Re believes that it
will benefit from being a flexible, innovative specialty reinsurer with its
focus on personal and special risk reinsurance (allowing specialized risk
solutions from one source).

EMPLOYEES

As of March 15, 2000, the Company had 183 employees, excluding the Company's
operations in Tbilisi, Georgia. None of these employees is represented by a
labor union. The Company expects to add additional underwriting, marketing and
administrative staff consistent with the implementation of the Company's
business plan. The Company believes that its employee relations are generally
good.

REGULATION

BERMUDA

THE COMPANIES ACT 1981 (AS AMENDED) AND RELATED REGULATIONS. The Companies
Act regulates the business of both the Company and ES Bermuda.

THE INSURANCE ACT 1978 (AS AMENDED) AND RELATED REGULATIONS. The Insurance
Act 1978 of Bermuda (as amended) and related regulations from time to time in
force (the "Act"), which regulates

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the business of ES Bermuda, provides that no person shall carry on an insurance
business in or from within Bermuda unless registered as an insurer under the Act
by the Minister of Finance. The Minister of Finance, in deciding whether to
grant registration, has broad discretion to act as he thinks fit in the public
interest. The Minister of Finance is required by the Act to determine whether
the applicant is a fit and proper body to be engaged in insurance business and,
in particular, whether it has, or has available to it, adequate knowledge and
expertise. In connection with registration, the Minister of Finance may impose
conditions relating to the writing of certain types of insurance.

An Insurance Advisory Committee and sub-committees thereof appointed by the
Minister of Finance advises him on matters connected with the discharge of his
functions and supervise and review the law and practice of insurance in Bermuda,
including reviews of accounting and administrative procedures.

The Act imposes solvency and liquidity standards and auditing and reporting
requirements on Bermuda insurance companies and grants to the Minister of
Finance powers to supervise, investigate and intervene in the affairs of
insurance companies. Significant aspects of the Bermuda insurance regulatory
framework are set out below.

CANCELLATION OF INSURER'S REGISTRATION. An insurer's registration may be
cancelled by the Minister of Finance on certain grounds specified in the Act,
including failure of the insurer to comply with its obligations under the Act or
if, in the opinion of the Minister of Finance, after consultation with the
Insurance Advisory Committee, the insurer has not been carrying on business in
accordance with sound insurance principles.

INDEPENDENT APPROVED AUDITOR. Every registered insurer must appoint an
independent auditor who will annually audit and report on the statutory
financial statements and the statutory financial return of the insurer, which
are required to be filed annually with the Registrar of Companies (the
"Registrar"), who is the chief administrative officer under the Act. The auditor
must be approved by the Minister of Finance as the independent auditor of the
insurer. The approved auditor may be the same person or firm which audits the
insurer's financial statements and reports for presentation to its shareholders.

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

MINIMUM CAPITAL AND SURPLUS. Under the Act, ES Bermuda has been designated
as a Class 3 composite insurer. The Act requires $1.25 million minimum capital
and surplus for Class 3 composite insurers (i.e. insurers which write both
general business and long-term business) with a minimum paid up share capital of
$370,000.

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

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

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

SUPERVISION, INVESTIGATION AND INTERVENTION. The Minister of Finance may
appoint an inspector with extensive powers to investigate the affairs of an
insurer if the Minister of Finance believes that an investigation is required in
the interest of the insurer's policyholders or persons who may become
policyholders. In order to verify or supplement information otherwise provided
to him, the Minister of Finance may direct an insurer to produce documents or
information relating to matters connected with the insurer's business.

If it appears to the Minister of Finance that there is a risk of the insurer
becoming insolvent, the Minister of Finance may direct the insurer not to take
on any new insurance business; not to vary any insurance contract if the effect
would be to increase the insurer's liabilities; not to make certain investments;
to realize certain investments; to maintain in Bermuda, or transfer to the
custody of a Bermuda bank, certain assets; and to limit its premium income.

An insurer is required to maintain a principal office in Bermuda and to
appoint and maintain a principal representative in Bermuda to oversee the
business of the Company and to report to the Minister of Finance and the
Registrar of Companies in respect of certain events. Unless the approval of the
Minister of Finance has been obtained, an insurer may not terminate the
appointment of its principal representative, and the principal representative
may not cease to act as such, unless 30 days notice in writing to the Minister
of Finance is given of the intention to do so. It is the duty of the principal
representative, within 30 days of his reaching the view that there is a
likelihood of the insurer, for which he acts, becoming insolvent or its coming
to his knowledge, or his having reason to believe, that an "event" has occurred,
to make a written report to the Minister of Finance setting out all the
particulars of the case that are available to him. Examples of such an "event"
include failure by the reinsurer to comply substantially with a condition
imposed upon the reinsurer by the Minister of Finance relating to a solvency
margin or a liquidity or other ratio.

DIVIDENDS. The Bermuda Companies Act 1981 would allow dividend payments
when there are reasonable grounds for believing that (i) ESG Re will be able to
pay its debts as they fall due after payment of a dividend, and (ii) ESG Re's
assets will exceed the aggregate value of its liabilities and its issued share
capital and premium accounts. The Bermuda Insurance Act 1978 requires ES Bermuda
to maintain a minimum solvency margin and a minimum liquidity ratio.

11
<PAGE>
REDUCTION OF STATUTORY CAPITAL. Approval is needed from the Minister of
Finance for any reduction in total statutory capital of an insurance company of
15% or more. Applicants are required to show that the proposed reduction of
capital will not cause ES Bermuda to fail to meet applicable statutory margin
requirements in Bermuda.

GERMANY

The German regulatory framework for the insurance industry is provided by
the Insurance Supervisory Law (Versicherungsaufsichtsgesetz, or "VAG"). The
supervision of all insurance companies domiciled in Germany is the
responsibility of the BAV, which is an agency of the Ministry of Finance.

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

A professional reinsurance company requires no license from the BAV. Only a
summary filing is required, setting forth the domicile and corporate form of the
reinsurance company and the members of the executive and supervisory boards. The
BAV encourages reinsurers to submit the names of the company's shareholders with
such filings, and also to include the qualifications of the members of the
executive and supervisory boards. The submission of a business plan is not
necessary.

Insurance and reinsurance companies are under the direct supervision of the
BAV. For reinsurers, however, the level of supervision is substantially relaxed,
and pertains primarily to the financial supervision of reinsurers, requiring
only submission of financial statements. Except as set forth above, the
provisions of the VAG and the Capitalization Law (Kapitalausstattungs VO) do not
apply to reinsurers. Reinsurance mutuals (Ruckversicherungsverein VVaG) are
subject to solvency controls. Reinsurance companies, such as ES Germany, are not
subject to capitalization requirements, but the BAV prefers that reinsurance
companies have the same level of capitalization as primary insurers
(approximately 16- 18% of net premiums).

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

IRELAND

Irish law directly regulates only two of the Company's subsidiaries, ES
Ireland and Accent.

REGULATION. Direct insurance business in Ireland is regulated by an
extensive list of acts and regulations from the Assurance Companies Act 1909 to
the Insurance Act 1989 and the European Communities (Non Life Insurance)
Regulations 1976 to the European Communities (Non Life Insurance) Framework
Regulations 1994. Direct insurance companies must be authorized by the Minister
for Enterprise, Trade and Employment (the "Minister") before commencing
business.

Specialist reinsurers incorporated in Ireland, such as ES Ireland, are not
subject to authorization by the Irish Government and are only required to notify
the Minister that they carry on the business of reinsurance pursuant to Section
22 of the Insurance Act 1989.

AUDITOR'S REPORT AND DUTIES. The Companies Act 1963 requires all companies
incorporated in Ireland to prepare and have audited annual accounts for their
shareholders. Section 22(1) Insurance Act 1989 requires reinsurance companies to
prepare their accounts in such form as the Minister may specify and such audited
accounts are required to be filed in the Companies Registration Office and are
available for public inspection.

GEORGIA

Georgia law directly regulates only one of the Company's subsidiaries,
IMEDI.

12
<PAGE>
REGULATION. The Georgian Parliament adopted an Insurance Regulation in 1996
regarding foreign ownership and capitalization requirements. Specific laws
governing automobile third party liability insurance and compulsory fire
insurance were introduced in 1997 and 1999 respectively. Regulation is carried
out by the Insurance State Supervision Service.

MINIMUM CAPITAL REQUIREMENTS: The minimum capital requirement for an
insurance company to underwrite most lines of insurance is GEL500 thousand. For
a company carrying out life insurance, the requirement is increased to GEL600
thousand and to GEL1 million for a company carrying out pension insurance.

UNITED STATES AND OTHER

The Company is not admitted to do insurance or reinsurance business in any
jurisdiction except Bermuda, Ireland, Germany, Indonesia and Georgia. The
insurance laws of each state of the United States and of many foreign countries
regulate the sale of insurance within their jurisdictions by alien insurers,
such as the Company, which are not admitted to do business within such
jurisdictions. With some exceptions, such sale of insurance within a
jurisdiction where the insurer is not admitted to do business is prohibited. The
Company does not intend to maintain an office or to solicit, advertise, settle
claims or conduct other insurance activities in any jurisdiction where the
conduct of such activities would require that the Company be so admitted and the
Company is not so admitted.

ITEM 2. PROPERTIES

ESG Re and its subsidiaries lease office space in Bermuda, Dublin, Hamburg,
Toronto, Miami, Hong Kong, Singapore, Taiwan, Sydney, Bangkok, Jakarta and
London and own an office located in the Soviet State of Georgia. The owned
property is currently valued at $290,000. All of these properties are for the
Company's reinsurance division. The Company believes its space is adequate to
meet its current and expected needs. The Company's health care division is
provided with office space at the Company's offices in Hamburg.

ITEM 3. LEGAL PROCEEDINGS

ESG Re and its subsidiaries, in common with the insurance industry in
general, are subject to litigation, including claims for punitive damages, in
the normal course of their business. ESG Re does not believe that such
litigation will have a material adverse effect on its financial condition,
future operating results or liquidity. (See also Management's Discussion and
Analysis of Financial Condition and Results of Operations.)

13
<PAGE>
PART II.

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

No matters were submitted to a vote of security holders during the fourth
quarter of fiscal 1999.

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

MARKET INFORMATION

Since December 12, 1997, the common stock of the Company has been traded on
NASDAQ under the symbol ESREF. The high and low market prices of the Company's
common stock for each fiscal quarter since December 12, 1997 were as follows:

<TABLE>
<CAPTION>
HIGH LOW
-------- --------
<S> <C> <C>
From December 12 to December 31, 1997....................... $23.88 $21.50
From January 1 to March 31, 1998............................ $28.88 $21.00
From April 1 to June 30, 1998............................... $27.50 $19.88
From July 1 to September 30, 1998........................... $23.88 $13.50
From October 1 to December 31, 1998......................... $21.25 $12.75
From January 1 to March 31, 1999............................ $22.25 $15.63
From April 1 to June 30, 1999............................... $20.06 $14.00
From July 1 to September 30, 1999........................... $16.75 $ 8.63
From October 1 to December 31, 1999......................... $ 9.38 $ 5.13
</TABLE>

NUMBER OF RECORD HOLDERS OF COMMON STOCK

The number of record holders of the common stock of the Company as of March
15, 2000 was 116.

DIVIDEND HISTORY AND RESTRICTIONS

The dividend history of the Company for each fiscal quarter since December
12, 1997 is as follows:

<TABLE>
<CAPTION>
DIVIDEND DATE DATE RECORD OF
DECLARED DECLARED SHAREHOLDERS DATE PAID
- -------- ----------------- ----------------- -----------------
<C> <S> <C> <C>
$ 0.075 March 9, 1998 March 28, 1998 April 3, 1998
$ 0.075 May 4, 1998 May 18, 1998 May 27, 1998
$ 0.075 August 6, 1998 August 20, 1998 September 1, 1998
$ 0.075 November 10, 1998 November 23, 1998 December 1, 1998
$ 0.08 February 25, 1999 March 15, 1999 March 22, 1999
$ 0.08 May 7, 1999 May 24, 1999 June 4, 1999
$ 0.08 August 10, 1999 August 23, 1999 September 8, 1999
$ 0.08 November 8, 1999 November 22, 1999 December 8, 1999
$ 0.08 February 25, 2000 March 15, 2000 March 30, 2000
</TABLE>

The Company's dividend policy is reviewed quarterly by the Board of
Directors.

ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA

The following table sets forth the selected consolidated financial data for
ESG Re Limited and subsidiaries. The financial statements included herein
represent the financial performance and results of the Company as a reinsurer
for the years ended December 31, 1999 and 1998, as a reinsurer and

14
<PAGE>
reinsurance management company for the year ended December 31, 1997 and as a
reinsurance management company only for the years prior to 1997.

<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31 1999 1998 1997 1996 1995
- ----------------------- -------- -------- -------- -------- --------
U.S. DOLLARS IN THOUSANDS EXCEPT PER SHARE DATA
<S> <C> <C> <C> <C> <C>
CONSOLIDATED OPERATING DATA
Gross managed premium............................. $348,265 $224,204 $100,000 -- --
Net premiums written.............................. 313,638 195,578 25,392 -- --
Net premiums earned............................... 249,553 98,841 13,411 -- --
Investment income................................. 13,575 12,930 598 186 --
Total revenues.................................... 263,481 115,827 17,839 4,055 4,665
Losses and loss expenses.......................... 200,016 61,364 7,449 -- --
Acquisition costs................................. 66,230 26,714 4,693 -- --
Class B Warrants expense.......................... -- -- 3,626 -- --
Administrative Expenses--Insurance Division....... 26,490 11,965 7,736 4,062 4,221
Administrative Expenses--Health Care Division..... 11,924 -- -- -- --
Total expenses.................................... 304,660 100,043 23,504 4,062 4,221
Net underwriting (loss)/income.................... (16,693) 10,763 1,269 -- --
Loss ratio...................................... 80.2% 62.1% 55.5% -- --
Acquisition ratio............................... 26.5% 27.0% 35.0% -- --
Loss and acquisition ratio...................... 106.7% 89.1% 90.5% -- --
Net (loss) income................................. (41,994) 14,522 (5,096) (163) 146
Basic net (loss) income per share................. (3.17) 1.04 (4.11) (1.38) --
Diluted net (loss) income per share............... (3.17) 1.03 (4.11) (1.38) --
Dividends declared per share...................... $ 0.32 $ 0.30 $ -- $ -- $ --

CONSOLIDATED BALANCE SHEET DATA
Investments and cash.............................. $221,549 $235,246 $236,976 $ 15 $ 33
Reinsurance balances receivable................... 276,112 168,274 25,785 -- --
Total assets...................................... 605,684 466,373 283,553 7,446 2,683
Unpaid losses and loss expenses................... 136,935 44,379 7,846 -- --
Unearned premiums................................. 181,127 111,884 12,168 -- --
Total shareholders' equity........................ 176,815 244,841 234,375 (489) (152)
Book value per share.............................. 15.24 17.58 16.83 -- --

COMMON STOCK PRICE RANGE
High.............................................. $ 22.25 $ 28.75 $ 23.88(1) $ -- $ --
Low............................................... $ 5.13 $ 12.75 $ 21.50(1) $ -- $ --
</TABLE>

- ------------------------

(1) 1997 stock prices are for the period from December 12, 1997, the date of the
initial public offering, to December 31, 1997. The initial public offering
price was $20.00 per share.

The Company declared a dividend on February 25, 2000 of $0.08 per common
share to be paid March 30, 2000 to the shareholders of record on March 15, 2000.

15
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS

THE FOLLOWING IS A DISCUSSION AND ANALYSIS OF THE FINANCIAL CONDITION,
RESULTS OF OPERATIONS, LIQUIDITY AND CAPITAL RESOURCES OF ESG RE LIMITED AND ITS
SUBSIDIARIES ("THE COMPANY" OR "ESG"). THIS DISCUSSION AND ANALYSIS SHOULD BE
READ IN CONJUNCTION WITH THE COMPANY'S CONSOLIDATED FINANCIAL STATEMENTS AND
RELATED NOTES.

GENERAL

The Company is a specialty reinsurance enterprise providing accident,
health, life and related special risk reinsurance to insurers and selected
reinsurers on a worldwide basis and, underwriting management services to
co-reinsurers.

In December 1997, the Company raised gross proceeds of $257 million in a
private placement and an initial public offering (the "Offerings"). As a result
of obtaining this capital, the Company is able to assume reinsurance risks for
its own account. Prior to the Offerings, the Company operated solely as a
reinsurance management services company.

In June 1998, the Company incorporated Accent Europe Insurance Company Ltd.
("Accent"), a direct insurance company in Ireland. With current capitalization
of $15 million, Accent offers health and accident products on a pan-European
basis to its insured parties.

In June 1998, the Company increased its investment in SportSecure GmbH
("SportSecure"), a reinsurance intermediary specializing in sports and
entertainment risks. ESG holds a majority ownership in SportSecure.

In December 1998, the Company initiated the creation of a non profit
healthcare service association, COMED, in the German market. Member services
include physician referrals, a medical information hotline, second opinion
services and access to disease management advisors. ESG has supported the
formation and development of COMED by extending a credit facility of $12 million
to fund start-up operations. As of December 31, 1999, $3.2 million has been
advanced to COMED under this facility and were fully provided for. The ability
of COMED to repay the loan is dependent on its ability to generate sufficient
revenues from members. The initial marketing strategy of COMED was to carry out
direct marketing programs to the general public, which failed to develop
significant members. In recent months, the approach has been to attract members
through direct contact with public and private sick funds, the German equivalent
of HMO's. This has not yet led to any formal agreement with sick funds to offer
COMED services to its members. Under the terms of the loan agreement, the
Company has the right to refuse any further disbursements where the ability of
COMED to repay the loan is in doubt.

16
<PAGE>
company in Bermuda for the health care division. In addition, during March 2000,
the Company completed the acquisition of Innovacare GmbH, a disease Management
Company based in Munich, Germany. The purchase price was $5.9 million.

In June 1999, the Company acquired majority ownership of Health Benefit
Consultants Ltd., a third party administrator of medical and personal accident
insurance products in Thailand and PT International Health Benefits, a third
party administrator of medical and personal accident insurance products and an
insurer of limited managed care insurance products in Indonesia. The cost of
these companies was not material. These two companies have established and
manage extensive provider networks in their countries of operation and will
provide ESG with a solid platform to promote medical insurance products
throughout South East Asia.

The Company initiated a stock repurchase program in May 1999 to actively
manage its capital base. As of March 23, 2000, the Company has repurchased
2,612,800 shares of its common stock, equivalent to 18.0% of the outstanding
shares of ESG Re Limited under its Common Stock Repurchase Program. The average
purchase price was $6.82. The Company can buy a further 83,391 shares of its
common stock under the existing program.

The December 31, 1999 and 1998, financial statement results included herein
reflect the Company's financial performance as a reinsurance company. The
December 31, 1997 financial statement results reflect the Company's financial
performance as a reinsurance company and as a reinsurance management services
company.

CONSOLIDATED RESULTS OF OPERATIONS

Consolidated results of operations reflect the combined results of
operations of the Company's reinsurance and health care divisions. Consolidated
results of operations for the years ended December 31, 1999, 1998 and 1997 were
as follows:

<TABLE>
<CAPTION>
1999 1998 1997
-------- -------- --------
U.S. DOLLARS IN THOUSANDS
EXCEPT PER SHARE DATA
<S> <C> <C> <C>
Net underwriting (loss) income before allocated
administrative costs...................................... $(16,693) $10,763 $ 1,269
Management fee revenue...................................... 2,532 1,894 3,830
Net investment income....................................... 13,575 12,930 598
Loss on equity investments.................................. (205) -- --
Net realized investment (losses) gains...................... (1,974) 2,162 --
Administrative expenses and taxes........................... 39,229 13,227 7,167
Class B Warrants expense.................................... -- -- 3,626
Net income (loss)........................................... (41,994) 14,522 (5,096)
Net income (loss) per share................................. (3.17) 1.04 (4.11)
-------- ------- -------
</TABLE>

YEAR ENDED DECEMBER 31, 1999 COMPARED TO YEAR ENDED DECEMBER 31, 1998

The Company reported net loss of $30.4 million for 1999 from its reinsurance
division, compared to a net profit of $14.5 million for 1998. The Company's
health care division established in 1999 had

17
<PAGE>
losses of $11.6 million. The Company has approved a plan to divest a majority
interest in its Health Care Division in 2000 through raising external capital to
fund the venture. The Company expects to maintain a significant non-controlling
equity investment in the venture as the Company envisages considerable long term
benefit from the unit but significant additional capital is required to fund the
major opportunities available in a fast consolidating sector.

Certain important events occurred during the year including:

1. Management Changes--On September 10, 1999, John C Head III was appointed
Chief Executive Officer of the Company, effective October 1, 1999, following
the resignation of Wolfgang Wand effective September 30, 1999; Edward Tilly,
a non-executive director of the Company was appointed Deputy Chairman; and
Steven Debrovner was appointed Chief Executive Officer of the Reinsurance
division, having previously been Chief Marketing and Underwriting Officer of
the Company. Dr. Gerald Moeller was appointed Chief Executive Officer of the
Health Care Division on July 1, 1999. In October 1999, the Company appointed
Antony Jeffery as Chief Actuary reporting to Joan Dillard. The Company
announced the departure of Renate Nellich, President and CEO of ES North
America, ESG's marketing and underwriting manager in Toronto, Canada,
effective November 5, 1999. Marty Hatfield, Senior Vice President,
Marketing, Underwriting and Claims, was appointed as Regional Executive for
North America. In January 2000, the Company appointed Alasdair Davis as
Chief Underwriting Officer of the Company reporting to Steven Debrovner. See
"Current Developments" included in this filing.

2. Negative impact upon underwriting results due primarily to deterioration of
several major North American and European Accounts:

- A medical quota share contract in Maine covering both 1998 and 1999
underwriting years has developed into a 126% loss and acquisition ratio,
resulting in a loss of $4.8 million on the account. This loss was
identified in the third quarter of 1999 and the Company has initiated a
forensic audit on the account to determine whether the Company has any
legal recourse against third parties to recover losses incurred. This
account generated $18.9 million in net written premiums to the Company.

- A large quota share contract covering six ceding companies written in 1998
developed into a 111% loss and acquisition ratio. The negative development
was primarily recognized during 1999, as re-pricing of the account in
September 1998 did not ultimately prove sufficient to reverse losses from
the initial tranche of the account, which incepted in January 1998. The
ultimate loss on the account is estimated to be $4.6 million on $42
million in gross written premiums in 1998. This account has been renewed
in 1999 on significantly improved terms.

- A large 1999 medical group health account producing $65 million in gross
written premium developed at a 99% loss and acquisition ratio, higher than
anticipated at the inception of the risk. The negative development
resulted in a deterioration of $2.1 million being reported in the third
quarter.

- A North American medical account written through the London market for the
1998 underwriting year has deteriorated significantly in the fourth
quarter. The ultimate loss recognized on the account is $2.3 million of
which $1.8 million was recognized in the fourth quarter.

- A further North American medical account written through the London market
for the 1998 and 1999 years had adverse development reported to the
Company during January 2000. Although gross premium written by the Company
for both years was limited to $0.1 million, the Company has recognized an
ultimate loss of $3.2 million equivalent to a loss and acquisition ratio
of 3,716%.

18
<PAGE>
- The significant adverse development on North American medical business in
the fourth quarter has resulted in the company adding an additional $6
million to IBNR reserves in the quarter. The Company is confident that
adequate reserves have been provided. As part of a realignment of product
mix, the Company has ceased writing North American medical business
through its London market operation.

- During the third quarter, the Company added $1.4 million to reserves
relating to adverse development in several smaller accounts in North
America, written through the Toronto office. No further deterioration in
the performance of the business written through the Toronto office
occurred during the fourth quarter.

- A medical account in Latin America produced a loss of $2 million in the
fourth quarter. The account was immediately restructured on better terms
and pricing.

- Uncertainties regarding collections raised by slow payments on two
accounts in Europe resulted in the establishment of a reserve of $2.0
million in the third and fourth quarters.

- Reserves were increased by $3.4 million in the fourth quarter on a
Personal Accident account in Continental Europe having written premium of
$31.4 million for underwriting years 1997, 1998 and 1999 respectively,
following receipt of an interim bordereau in February 2000.

3. On November 11, 1999, the Company was notified that Standard & Poor's
lowered the long term counterparty credit and insurer financial strength
ratings of the Company's reinsurance subsidiaries from single-A-minus to
triple-B. Standard & Poor's cited (i) weak earnings in the North American
market; (ii) concerns over internal control mechanism and wide-scale changes
in the management team, and (iii) a departure from its original business
development strategy, as the motivating factors behind its decision.
However, the rating agency listed the Company's extremely strong
capitalization as a mitigating factor behind its decision.

On March 8, 2000, the Company was notified that Standard & Poor's lowered
the long term counterparty credit and insurer financial strength ratings of
the Company's reinsurance subsidiaries to double-B-plus from triple-B.
Standard & Poor's again cited the Company's continued weak earnings
performance, concerns over internal control mechanisms and the Company's
early departure from its original business development strategy. In
addition, the reduced capitalization resulting from the loss in the fourth
quarter was also raised as a concern.

The Company expects to return to its original business development strategy
by refocusing its underwriting efforts on certain markets other than the
North American market. The Company has no plans to exit the North American
medical market as premium rates are increasing and the Company expects to
generate moderate underwriting profits from business written by its Toronto
office. As noted above, as part of the refocus of the group, the Company has
ceased writing North American medical business through its London market
operation.

4. Anticipated Withdrawal from a Line of Business--The Health Care division
recognized $1.6 million in expenses associated with the unsuccessful launch
of heart-monitoring technology services. The Company exited this business in
the fourth quarter of 1999.

5. The Company recognized an impairment loss of $0.7 million in the fourth
quarter in respect of the goodwill recognized by the Company on its
investment in SportSecure, a company in which the Company took majority
ownership of in 1998. Management changes and declining premium volumes from
the special risks line of business contributed to this decision.

19
<PAGE>
REINSURANCE DIVISION

The results of operations of the Reinsurance Division of the Company for the
years ended December 31, 1999, 1998 and 1997 were as follows:

<TABLE>
<CAPTION>
1999 1998 1997
-------- -------- --------
U.S. DOLLARS IN THOUSANDS
EXCEPT PER SHARE DATA
<S> <C> <C> <C>
Net underwriting (loss) income before allocated
administrative costs...................................... $(16,693) $10,763 $ 1,269
Management fee revenue...................................... 2,283 1,894 3,830
Net investment income....................................... 13,524 12,930 598
Loss on equity investments.................................. (205) -- --
Net realized investment (losses) gains...................... (1,974) 2,162 --
Administrative expenses and taxes........................... 27,305 13,227 7,167
Class B Warrants expense.................................... -- -- 3,626
Net income (loss) from Reinsurance Division................. (30,370) 14,522 (5,096)
Net income (loss) per share................................. (2.35) 1.04 (4.11)
-------- ------- -------
</TABLE>

NET UNDERWRITING INCOME

For the year ended December 31, 1999, the Company managed, on behalf of
itself and its co-reinsurers, total premiums of $348.3 million, of which it
placed $14.9 million with co-reinsurers and retroceded $19.8 million, resulting
in $313.6 million net premiums written. For the year ended December 31, 1998,
the Company managed, on behalf of itself and its co-reinsurers, total premiums
of $224.2 million, of which it placed $24.3 million with co-reinsurers and
retroceded $4.3 million, resulting in $195.6 million net premiums written. The
amount placed with co-reinsurers declined to 4.3% of total premiums managed in
1999 compared to 10.8% in 1998, as the Company amended two of its co-
reinsurance agreements to enable business from certain markets to be retroceded
to the reinsurers. In addition, the Company had one large medical account in
North America, contributing $65 million in premium managed, which was retained
100% by ESG.

Net premiums earned increased by 152% over 1998 due to the Company now being
in its second full year of operation, leading to a higher earned to written
percentage on normal business. In addition, the Company wrote two accounts
during the year with total premium of $76.5 million that had accelerated
earnings patterns resulting in all such premium being earned during 1999. Gross
and net premiums written and net premiums earned for the 12 months ended
December 31, 1999 and 1998 were as follows:

<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31, 1999 1998
- ------------------------ -------- --------
U.S. DOLLARS
IN MILLIONS
<S> <C> <C>
Total premiums managed...................................... $348.3 $224.2
Amount placed with co-reinsurers............................ 14.9 24.3
Gross premiums written...................................... 333.4 199.9
Retroceded.................................................. 19.8 4.3
Net premiums written........................................ 313.6 195.6
Net premiums earned......................................... 249.6 98.8
====== ======
</TABLE>

Total premiums managed for the 12 months ended December 31, 1999 consisted
of the following:

- New Business--approximately $207 million, or 60.0%, of total premiums
managed was generated from new business. Two new accounts contributed
$76.5 million of managed premiums and these accounts are non-renewable in
2000.

20
<PAGE>
- Renewal Business--approximately $141 million, or 40.0%, of total premiums
managed was generated from renewal business. This represents a renewal
rate of 63% of risks managed in 1998.

During 1999, the Company had reductions in gross premiums written on the
1998 underwriting year of $1.6 million, equivalent to 0.8% of gross premium
written in 1998. This represents differences between estimates made at the time
contracts are written and actual amounts as reported by ceding companies. Such
changes are recorded in the period in which the actual amounts are determined.

Underwriting results for the 12 months ended December 31, 1999 and 1998, by
line of business and in total, were as follows:

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1999 MEDICAL ACCIDENT SPECIAL RISK CREDIT LIFE OTHER TOTAL
- ---------------------------- --------- -------- ------------ -------- -------- -------- --------
U.S. DOLLARS IN THOUSANDS
<S> <C> <C> <C> <C> <C> <C> <C>
Gross premiums written........... $ 252,412 $ 66,514 $ 2,559 $ 1,851 $ 6,934 $3,158 $333,428
Net premiums written............. 240,742 61,549 2,426 714 5,550 2,657 313,638
Net premiums earned.............. 188,444 42,443 2,811 3,933 9,593 2,329 249,553
Losses and loss expenses......... (154,879) (33,001) (834) (2,424) (8,015) (863) (200,016)
Acquisition costs................ (52,874) (9,287) (1,086) (795) (1,516) (672) (66,230)
Operating costs.................. (17,324) (4,393) (287) (421) (976) (263) (23,664)
--------- -------- ------- ------- ------- ------ --------
Net underwriting income (loss)... $ (36,633) $ (4,238) $ 604 $ 293 $ (914) $ 531 $(40,357)
========= ======== ======= ======= ======= ====== ========
</TABLE>

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1998 MEDICAL ACCIDENT SPECIAL RISK CREDIT LIFE OTHER TOTAL
- ---------------------------- --------- -------- ------------ -------- -------- -------- --------
U.S. DOLLARS IN THOUSANDS
<S> <C> <C> <C> <C> <C> <C> <C>
Gross premiums written........... $ 119,157 $ 52,254 $ 5,120 $12,346 $10,995 $ -- $199,872
Net premiums written............. 117,353 50,814 4,943 11,910 10,558 -- 195,578
Net premiums earned.............. 40,875 46,038 2,571 4,856 4,501 -- 98,841
Losses and loss expenses......... (24,646) (29,003) (859) (3,448) (3,408) -- (61,364)
Acquisition costs................ (14,241) (10,207) (906) (837) (523) -- (26,714)
Operating costs.................. (3,584) (4,036) (228) (420) (534) -- (8,802)
--------- -------- ------- ------- ------- ------ --------
Net underwriting income (loss)... $ (1,596) $ 2,792 $ 578 $ 151 $ 36 $ -- $ 1,961
========= ======== ======= ======= ======= ====== ========
</TABLE>

The operating ratios for the 12 months ended December 31, 1999 and 1998, by
line of business and in total, were as follows:

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1999 MEDICAL ACCIDENT SPECIAL RISK CREDIT LIFE OTHER TOTAL
- ---------------------------- --------- -------- ------------ -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Loss Ratio....................... 82.2% 77.7% 29.7% 61.6% 83.6% 37.0% 80.2%
Acquisition expense ratio........ 28.1% 21.9% 38.6% 20.2% 15.8% 28.9% 26.5%
Loss and acquisition expense
ratio.......................... 110.3% 99.6% 68.3% 81.8% 99.4% 65.9% 106.7%
--------- -------- ------- ------- ------- ------ --------
Operating expense ratio.......... 9.5%
--------
Combined ratio................... 116.2%
========
</TABLE>

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1998 MEDICAL ACCIDENT SPECIAL RISK CREDIT LIFE OTHER TOTAL
- ---------------------------- --------- -------- ------------ -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Loss Ratio....................... 60.3% 63.0% 33.4% 71.0% 75.7% --% 62.1%
Acquisition expense ratio........ 34.8% 22.2% 35.2% 17.2% 11.6% --% 27.0%
Loss and acquisition expense
ratio.......................... 95.1% 85.2% 68.6% 88.2% 87.3% --% 89.1%
--------- -------- ------- ------- ------- ------ --------
Operating expense ratio.......... 8.9%
--------
Combined ratio................... 98.0%
========
</TABLE>

21
<PAGE>
The Company experienced rapid growth in 1999 in its medical portfolio,
particularly in the North American market. The Company's London market office
established in July 1998 had a full year of production and exceeded premium
targets set by management. The Toronto office wrote one large medical contract
for $65 million that led to a dramatic growth in written and earned premium for
the medical line. The North American medical rates are increasing and more
rigorous terms of trade are being accepted by ceding companies. The Company will
maintain its presence in the North American market on a selective basis whilst
taking every opportunity to diversify the product range.

Accident business grew by 27% in 1999, with strong growth in the London
market reflective of 1999 being the first full year of operation. The London
market is more competitive than the Continental Europe market and this has
contributed to the increase in the loss and acquisition ratio in 1999. In
addition, during the fourth quarter, the Company added $3.4 million to reserves
relating to adverse development on a large Continental Europe contract,
following the receipt of accounting information from the ceding company in
February 2000.

Special Risk business has declined by 50%, with one 1998 contract incurring
a reduction in premium of $0.9 million in 1999.

Gross premium written from Credit business has declined by 85% in 1999. One
three year contract in Latin America written in 1998 at $8 million was cancelled
by the ceding company after twelve months with a resultant decrease in written
premium of $5.3 million in 1999. Excluding the impact of this account on both
underwriting years, the Credit portfolio has grown by 64%. The Company expects
to develop this line of business further in 2000.

Gross premium from Life business declined by 37% in 1999 from $11.0 million
to $6.9 million. Approximately $6.3 million of Life business written in Latin
America in 1998 did not renew in 1999. Life business remains a core element of
the ESG strategy. Additional underwriting and actuarial management has been
recruited by the Company to enable expansion of this product line in 2000.
Deterioration on two risks underwritten in Continental Europe has led to the
loss on the account.

Other business represents automobile warranty business ceded by a German
company in which ESG made a 10% equity investment in 1998. In addition, property
and casualty business written by the Company's subsidiary in Tbilisi, Georgia is
included, on which the Company has a minimal risk retention.

As indicated previously, poor underwriting results on the medical line
contributed to the increase in the loss and acquisition ratio from 89.1% in 1998
to 106.7% in 1999. The 1999 results are comprised of two underwriting years,
with the 1998 underwriting year contributing earned premium of $78.8 million,
carrying a loss and acquisition ratio of 118.4%. The 1999 underwriting year
contributed $170.7 million, carrying a loss and acquisition ratio of 101.3%.

The operating expense ratios for the years ended December 31, 1999 and 1998,
were calculated by expressing total administrative expenses net of corporate
office expenses and health care division expenses, as a percentage of net
premiums earned. For the year ended December 31, 1998, management fee revenue of
$1.9 million 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. In
addition, for the years ended December 31, 1999 and 1998, the Company deferred
$1.3 million and $1.5 million respectively of expenses, which were identified by
management as directly related to and, varying with, the volume of business
generated. The deferral of such costs reflects a more appropriate matching of
revenues with related expenses and improved the year-to-date combined ratios for
years ended December 31, 1999 and 1998 by 0.5% and 1.5% respectively.

22
<PAGE>
GEOGRAPHIC SPREAD

The Company has experienced significant growth in North America business in
1999 both through its Toronto underwriting office and its London market
operations. The distribution of gross written premiums for years ended December
31, 1999 and 1998, is as follows:

<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31, 1999 1998
- ------------------------ -------- --------
<S> <C> <C>
Western Europe.............................................. 21.2% 30.9%
North America............................................... 63.5% 46.2%
Latin America............................................... 9.8% 14.9%
Other....................................................... 5.5% 8.0%
----- -----
Total....................................................... 100.0% 100.0%
===== =====
</TABLE>

PRODUCT MIX

The distribution of gross premiums written by line of business for the years
ended December 31, 1999 and 1998 was as follows:

<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31, 1999 1998
- ------------------------ -------- --------
<S> <C> <C>
Medical..................................................... 75.7% 59.6%
Personal Accident........................................... 19.9% 26.1%
Special Risk................................................ 0.5% 2.6%
Credit...................................................... 2.1% 6.2%
Life........................................................ 1.8% 5.5%
Other....................................................... 1.0% --%
----- -----
Total....................................................... 100.0% 100.0%
===== =====
</TABLE>

MANAGEMENT FEE REVENUE

The majority of management fee revenue in 1999 and 1998 consists of fees
earned on those premiums managed for the Company's co-reinsurers. During 1999,
the Company adjusted downwards $1.0 million in estimated profit commissions due
on pool underwriting years prior to 1998 following a re-evaluation of the pool
results of those years.

Management fee revenue in 1998 includes an upward revision in management
fees on pool underwriting years prior to 1998 in the amount of $144 thousand.

NET INVESTMENT INCOME

Net investment income increased by $0.6 million from $12.9 million in 1998
to $13.5 million in 1999. The increase resulted from accelerated cash flows and
more efficient management of short-term deposits. As of March 23, 2000, the
Company's stock repurchase program has resulted in expenditure of $17.8 million
of which $10.6 million was incurred in the fourth quarter of 1999. This will
reduce investment income in 2000.

23
<PAGE>
The following table reflects the investment results for the year ended
December 31, 1999:

<TABLE>
<CAPTION>
NET ANNUALIZED NET REALIZED
AVERAGE INVESTMENT EFFECTIVE INVESTMENT
INVESTMENTS INCOME(1) YIELD LOSSES
----------- ---------- ---------- ------------
U.S DOLLARS IN THOUSANDS
<S> <C> <C> <C> <C>
Investments...................................... $197,781 $11,528 5.8% $(1,960)
Other investments(2)............................. 10,931 495 4.5% (14)
Cash and cash equivalents........................ 26,889 1,334 5.0% --
-------- ------- --- -------
Total............................................ $235,601 $13,357 5.7% $(1,974)
======== ======= === =======
</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 $3.2 million of loans provided to COMED, a further $7.8
million of equity investment and loans has been provided to three companies
that are expected to generate or secure profitable reinsurance business for
the Company.

The Company's investment portfolio in 1999 was negatively impacted by a
general decrease in prices in the U.S. bond markets, which resulted in net
investment losses being realized on sales of fixed income securities during the
year.

The following table reflects the investment results for the 12 months ended
December 31, 1998:

<TABLE>
<CAPTION>
ANNUALIZED NET REALIZED
AVERAGE NET INVESTMENT EFFECTIVE INVESTMENT
INVESTMENTS INCOME(1) YIELD GAINS
----------- -------------- ---------- ------------
U.S. DOLLARS IN THOUSANDS
<S> <C> <C> <C> <C>
Fixed maturity investments.................... $218,383 $12,160 5.57% $2,162
Other investments............................. 7,721 440 5.70% --
Cash and cash equivalents..................... 13,516 330 2.44% --
-------- ------- ---- ------
Total......................................... $239,620 $12,930 5.40% $2,162
======== ======= ==== ======
</TABLE>

- ------------------------

(1) Net investment income is net of investment-related expenses.

The Company's investment portfolio in 1998 was positively affected by a
general increase in prices in the U.S. bond markets, which allowed net
investment gains to be realized on sales of fixed income securities during the
year.

ADMINISTRATIVE EXPENSES AND TAXES

Total administrative expenses, which includes personnel costs, professional
service fees, interest expense, other expenses and income taxes, increased by
$14.1 million, or 106%, from $13.2 million in 1998 to $27.3 million in 1999.

The Company continued to incur significant expenses for professional
services and for travel expenses in the development of its business. Personnel
costs increased by $5.0 million from $4.4 million in 1998 to $9.4 million in
1999. The number of employees has increased from 76 at December 31, 1998 to 121
at December 31, 1999, excluding the Company's operations in Tbilisi, Georgia.

24
<PAGE>
Professional service fees increased by $4.6 million from $3.6 million in
1998 to $8.2 million in 1999. Professional fees included $2.4 million in legal
fees in respect of corporate compliance, standardization of policy contracts and
management agreements, acquisitions and forensic audits. Audit and accountancy
costs of $2.8 million were incurred in audit, accounting, tax advisory and
corporate reporting services. Consulting expenses of $3.0 million were incurred
in actuarial support, computer systems improvements, recruitment, due diligence
and corporate communications.

Foreign exchange losses were $11 thousand in the 12 months ended December
31, 1999 compared to foreign exchange gains of $141 thousand for the 12 months
ended December 31, 1998. These gains or losses are primarily unrealized and were
incurred on the revaluation of assets and liabilities denominated in foreign
currencies for reporting purposes. As the Company maintains a partial natural
hedge, whereby foreign currency assets are held in the same currencies in which
it must pay liabilities, the impact on cash flows from foreign exchange
movements is reduced.

Taxes decreased by $0.5 million from $1.3 million in 1998 to $0.8 million in
1999. The reduction in taxes reflects the loss reported by the Company during
1999. The deferred tax asset of $0.8 million held by the Company at December
1998 has been written off as the Company considers recovery of the asset
unlikely.

HEALTH CARE DIVISION

Through its newly formed health care division, ESG Health, the Company
offers medical referral, second opinion and disease management services to the
German market. The new division includes the costs associated with funding
COMED, a non-profit German healthcare association that the Company helped to
establish and IPT (Institut fuer Praeventivmedizin & Technologie GmbH), a
provider of doctor's referral and second opinion services.

In February 2000, the Company incorporated VBB Bermuda Limited, a holding
company in Bermuda. This company will be the holding company of the Company's
health care division. In addition, during March 2000, the Company completed the
acquisition of Innovacare GmbH, a disease Management Company based in Munich
Germany. The purchase price was $5.9 million.

<TABLE>
<CAPTION>
YEARS ENDED
DECEMBER 31,
-------------------
1999 1998
-------- --------
U.S. DOLLARS
IN THOUSANDS
<S> <C> <C>
Management Fee Income....................................... $ 249 $ --
Investment Income........................................... 51 --
-------- ----
Total Income................................................ 300 --
Personnel Expenses.......................................... 1,163 --
Professional Service Fees................................... 2,456 --
Heart Monitoring technology services........................ 1,558 --
Expenses Associated with COMED.............................. 5,997 --
Other Expenses.............................................. 750 --
-------- ----
Total Expenses.............................................. 11,924 --
-------- ----
Net (Loss).................................................. $(11,624) $ --
======== ====
</TABLE>

Expenses of $11.9 million were incurred primarily to establish ESG Health
and to position its health care products. A provision of $6.0 million was
established for an outstanding loan to and receivables from COMED incurred since
its formation, of which $3.2 million related to loans provided under the $12
million loan facility provided by ESG in December 1998. COMED's ability to repay
is dependent on its ability to generate sufficient revenues from members. Under
the terms of the loan

25
<PAGE>
agreement, the Company has the right to refuse any further disbursements where
the ability of COMED to repay the loan is in doubt. The initial marketing
strategy of COMED was to carry out direct marketing programs to the general
public, which failed to develop significant members. In recent months, the
approach has been to attract members through direct contact with public and
private sick funds, the German equivalent of HMO's. The Company continues to
market the concept of COMED directly to the public and private sick funds in
Germany and remains confident that the services provided by COMED will develop
into significant business opportunities in the German health care market as it
moves to greater privatization.

The Company, through its German subsidiary, IPT, had $1.3 million in loans
and 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 will not be recovered. Following the unsuccessful launch
of this heart-monitoring technology service, the Company decided to exit this
business in the fourth quarter of 1999. The Company provided a loan of $0.3
million to this supplier in the third quarter whilst the Company undertook due
diligence on acquiring this entity. The Company decided against the acquisition
and has provided in full for this loan amount.

YEAR ENDED DECEMBER 31, 1998 COMPARED TO YEAR ENDED DECEMBER 31, 1997

The Company reported net income of $14.5 million for 1998, compared to a net
loss of $5.1 million for 1997. The year ended December 31, 1998 represents the
first full year of the Company's operation as a reinsurance company. The net
loss incurred in 1997 includes a one-time, non-cash charge for compensation
expense of $3.6 million related to Class B Warrants issued in connection with
the Offerings, and approximately $1.5 million of other Offerings related costs.

NET UNDERWRITING INCOME

For the year ended December 31, 1998, the Company managed, on behalf of
itself and its co-reinsurers, total premiums of $224.2 million, of which it
placed $24.3 million with co-reinsurers and retroceded $4.3 million, resulting
in $195.6 million net premiums written for the period. In December 1997, the
Company assumed a portion of the pool business it previously managed on behalf
of reinsurance clients, retroactive to January 1, 1997. For the year ended
December 31, 1997, the Company managed approximately $100 million of gross
premiums written, of which it assumed approximately $26 million. Gross and net
premiums written and net premiums earned for the 12 months ended December 31,
1998 and 1997 were as follows:

<TABLE>
<CAPTION>
YEARS ENDED
DECEMBER 31,
-------------------
1998 1997
-------- --------
U.S. DOLLARS
IN MILLIONS
<S> <C> <C>
Total premiums managed...................................... $224.2 $100.0
Amount placed with co-reinsurers or pool participants....... 24.3 73.9
Gross premiums written...................................... 199.9 26.1
Net premiums written........................................ 195.6 25.4
Net premiums earned......................................... 98.8 13.4
====== ======
</TABLE>

26
<PAGE>
Total premiums managed for the 12 months ended December 31, 1998 consisted
of the following:

- New Business--approximately $186.2 million, or 83.0%, of total premiums
managed was generated from new business. The Company's new representative
office in Toronto underwrote $85.9 million of gross premiums. 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 total premiums managed for the 12 months
ended December 31, 1998. Additionally, one significant North American
medical contract was underwritten in the third quarter, contributing
$21.6 million to total premiums managed.

- Renewal Business--approximately $38.0 million, or 17.0%, of total premiums
managed was generated from renewal business. Underwriting results for the
12 months ended December 31, 1998 and 1997, by line of business and in
total, were as follows:

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1998
-------------------------------------------------------------------
MEDICAL ACCIDENT SPECIAL RISK CREDIT LIFE TOTAL
-------- -------- ------------ -------- -------- --------
U.S. DOLLARS IN THOUSANDS
<S> <C> <C> <C> <C> <C> <C>
Gross premiums written................... $119,157 $ 52,254 $5,120 $12,346 $10,995 $199,872
Net premiums written..................... 117,353 50,814 4,943 11,910 10,558 195,578
Net premiums earned...................... 40,875 46,038 2,571 4,856 4,501 98,841
Losses and loss expenses................. (24,646) (29,003) (859) (3,448) (3,408) (61,364)
Acquisition costs........................ (14,241) (10,207) (906) (837) (523) (26,714)
Operating costs.......................... (3,584) (4,036) (228) (420) (534) (8,802)
-------- -------- ------ ------- ------- --------
Net underwriting income (loss)........... $ (1,596) $ 2,792 $ 578 $ 151 $ 36 $ 1,961
======== ======== ====== ======= ======= ========
</TABLE>

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1997
-------------------------------------------------------------------
MEDICAL ACCIDENT SPECIAL RISK CREDIT LIFE TOTAL
-------- -------- ------------ -------- -------- --------
U.S. DOLLARS IN THOUSANDS
<S> <C> <C> <C> <C> <C> <C>
Gross premiums written................... $ 9,989 $ 9,357 $ 396 $ 6,401 $ -- $ 26,143
Net premiums written..................... 9,937 8,723 376 6,356 -- 25,392
Net premiums earned...................... 5,964 3,778 243 3,426 -- 13,411
Losses and loss expenses................. (3,624) (1,907) (139) (1,779) -- (7,449)
Acquisition costs........................ (2,099) (1,303) (85) (1,206) -- (4,693)
Operating costs.......................... -- -- -- -- -- --
-------- -------- ------ ------- ------- --------
Net underwriting income (loss)........... $ 241 $ 568 $ 19 $ 441 $ -- $ 1,269
======== ======== ====== ======= ======= ========
</TABLE>

27
<PAGE>
The operating ratios for the 12 months ended December 31, 1998 and 1997, by
line of business and in total, were as follows:

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1998
-------------------------------------------------------------------
MEDICAL ACCIDENT SPECIAL RISK CREDIT LIFE TOTAL
-------- -------- ------------ -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Loss Ratio.................................... 60.3% 63.0% 33.4% 71.0% 75.7% 62.1%
Acquisition expense ratio..................... 34.8% 22.2% 35.2% 17.2% 11.6% 27.0%
---- ---- ---- ---- ---- ----
Loss and acquisition expense ratio............ 95.1% 85.2% 68.6% 88.2% 87.3% 89.1%
---- ---- ---- ---- ---- ----
Administrative expense ratio.................. 8.9%
----
Combined ratio................................ 98.0%
====
</TABLE>

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1997
-------------------------------------------------------------------
MEDICAL ACCIDENT SPECIAL RISK CREDIT LIFE TOTAL
-------- -------- ------------ -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Loss Ratio.................................... 60.8% 50.5% 57.2% 51.9% -- 55.5%
Acquisition expense ratio..................... 35.2% 34.5% 35.0% 35.2% -- 35.0%
---- ---- ---- ---- ---- ----
Loss and acquisition expense ratio............ 96.0% 85.0% 92.2% 87.1% -- 90.5%
==== ==== ==== ==== ==== ====
</TABLE>

The 12 months ended December 31, 1998 constituted the first full 12-month
period that the Company operated as a reinsurer writing for its own account.
Accordingly, a combined ratio is presented inclusive of an administrative
expense component to provide a meaningful indication of the underwriting results
of the business. The administrative expense ratio of 8.9% for the 12 months
ended December 31, 1998, was calculated by expressing total administrative
expenses, net of management fee revenue and corporate office expenses, as a
percentage of net premiums earned. In addition, during the year, the Company
deferred $1.5 million of expenses, which were identified by management as
directly related to and, varying with, the volume of business generated. The
deferral of such costs reflects a more appropriate matching of revenues with
related expenses and improved the year-to-date combined ratio by 1.5%.

Typically, the underwriting results of a reinsurance company are evaluated
by its loss and loss expense ratio, acquisition cost ratio, administrative
expense ratio and combined ratio. Management believes that it is not meaningful
to evaluate the Company's 1997 performance with reference to the administrative
expense ratio and combined ratio because of the Class B Warrant expense and
other costs that were incurred by the Company as a result of the Offerings.

GEOGRAPHIC SPREAD

Geographic diversification of the Company's business continues to be
demonstrated by the distribution of gross written premiums for the years ended
December 31, 1998 and 1997, as follows:

<TABLE>
<CAPTION>
YEARS ENDED
DECEMBER 31,
-------------------
1998 1997
-------- --------
<S> <C> <C>
Western Europe.............................................. 30.9% 62.7%
North America............................................... 46.2% 1.5%
Latin America............................................... 14.9% 19.2%
Eastern Europe.............................................. 0.1% 5.3%
Other....................................................... 7.9% 11.3%
----- -----
Total....................................................... 100.0% 100.0%
===== =====
</TABLE>

28
<PAGE>
PRODUCT MIX

The distribution of gross premiums written by line of business for the years
ended December 31, 1998 and 1997 was as follows:

<TABLE>
<CAPTION>
YEARS ENDED
DECEMBER 31,
-------------------
1998 1997
-------- --------
<S> <C> <C>
Medical..................................................... 59.6% 38.2%
Personal Accident........................................... 26.1% 35.8%
Special Risk................................................ 2.6% 1.5%
Credit...................................................... 6.2% 24.5%
Life........................................................ 5.5% --%
----- -----
Total....................................................... 100.0% 100.0%
===== =====
</TABLE>

MANAGEMENT FEE REVENUE

The majority of management fee revenue in 1998 consists of fees earned on
those premiums managed for the Company's co-reinsurers. Management fee revenue
in 1998 includes an upward revision in management fees on pool underwriting
years prior to 1998 in the amount of $144 thousand.

NET INVESTMENT INCOME

Net investment income increased by $12.3 million from $598 thousand in 1997
to $12.9 million in 1998. In December 1997, the Company raised net proceeds from
the Offerings of $232 million. These proceeds were invested for the full year in
1998.

The following table reflects the investment results for the 12 months ended
December 31, 1998:

<TABLE>
<CAPTION>
NET ANNUALIZED NET REALIZED
AVERAGE INVESTMENT EFFECTIVE INVESTMENT
INVESTMENTS INCOME(1) YIELD GAINS
----------- ---------- ------------ ----------
U.S. DOLLARS IN THOUSANDS
<S> <C> <C> <C> <C>
Fixed maturity investments....................... $218,383 $12,160 5.57% $2,162
Short-term investments/strategic investments..... 7,721 440 5.70% --
Cash and cash equivalents........................ 13,516 330 2.44% --
-------- ------- ---- ------
Total............................................ $239,620 $12,930 5.40% $2,162
======== ======= ==== ======
</TABLE>

- ------------------------

(1) Net investment income is net of investment-related expenses.

The Company's investment portfolio was positively affected by a general
increase in prices in the U.S. bond markets, which allowed net investment gains
to be realized on sales of fixed income securities during the year.

ADMINISTRATIVE EXPENSES

Total administrative expenses, which includes personnel costs, professional
service fees, interest expense, other expenses and income taxes, increased by
$6.0 million, or 85%, from $7.2 million in 1997 to $13.2 million in 1998.

29
<PAGE>
For the year ended December 31, 1998, the Company incurred significant
expenses on professional services, on initiatives for improving accounting and
control systems, hiring key executives, and identifying strategic investments,
and on travel expenses related to all of the above activities. Total
administrative expenses, less tax, for the 12 months ended December 31, 1998,
were $12.0 million, or 6.1% and 12.1%, respectively, of net premiums written and
net premiums earned, compared to $7.7 million in 1997. The 1997 expenses include
$1.5 million of travel expense and professional service fees associated with the
Company's capital raising activities. Tax expense increased by $1.8 million to
$1.3 million in 1998. In 1997, the Company had a tax benefit of $569 thousand.

Personnel costs increased by $2.1 million from $2.3 million in 1997 to $4.4
million in 1998. This increase was a result of the significant investment in
personnel made both prior to and since the Offerings and includes additions of
executives and staff at the holding company and various representative offices.
Professional service fees increased by $2.0 million from $1.6 million in 1997 to
$3.6 million in 1998. These professional service fees incurred in 1998 relate to
the Company's new public reporting requirements, staff recruiting efforts and
computer systems improvements. Professional costs in 1997 include $1.2 million
associated with the Company's capital-raising activities. Travel expenses
decreased by $0.3 million to $1.0 million, compared to the corresponding prior
year period. These travel expenses relate primarily to the Company's continuing
identification and investigation of new business and underwriting opportunities.

Foreign exchange gains of $141 thousand were recognized for the 12 months
ended December 31, 1998. These gains were primarily unrealized and were incurred
on the revaluation of assets and liabilities denominated in foreign currencies
for reporting purposes. As the Company maintains a partial natural hedge,
whereby foreign currency assets are held in the same currencies in which it must
pay liabilities, the impact on cash flows from foreign exchange movements is
reduced.

30
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES

As of December 31, 1999, total investments and cash were $221.5 million,
compared to $235.2 million at December 31, 1998. All fixed maturity securities
in the Company's investment portfolio are classified as available for sale and
are carried at fair value. Additionally, the Company purchased $4.0 million in
foreign currency equities matched to liabilities related to a long-term European
medical account.

The fixed maturity investment portfolios as of December 31, 1999 and 1998
were as follows:

<TABLE>
<CAPTION>
AVERAGE
FAIR DURATION MARKET CREDIT
AS AT DECEMBER 31, 1999 VALUE (YEARS) YIELD RATING
- ----------------------- -------- -------- -------- --------
U.S. DOLLARS IN THOUSANDS
<S> <C> <C> <C> <C>
Corporate securities...................................... $102,355 3.0 7.2% A+
U.S. treasury securities and obligations of U.S.
Government corporations and agencies.................... 21,329 2.7 6.2% AAA
Asset-backed securities/Mortgage-backed securities........ 23,486 1.0 7.8% AAA
Obligations of states and political subdivisions.......... 16,281 2.3 7.1% AA+
Foreign currency debt securities.......................... 13,719 3.7 4.7% AAA
-------- --- --- ---
Total..................................................... $177,170 2.7 7.0% AA
======== === === ===
</TABLE>

<TABLE>
<CAPTION>
AVERAGE
FAIR DURATION MARKET CREDIT
AS AT DECEMBER 31, 1998 VALUE (YEARS) YIELD RATING
- ----------------------- -------- -------- -------- --------
U.S. DOLLARS IN THOUSANDS
<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
Asset-backed securities/Mortgage-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, with 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 as of December 31, 1999 and 1998 complies with the adopted
investment policy and guidelines.

In 2000, the Company will continue to follow its investment policy and
guidelines while seeking to improve long-term value by continuing to invest in
selected strategic investments in accordance with its current commitments. A
strategic investment is defined as an investment in a reinsurance-related
enterprise, ceding company or distribution channel that is expected to generate
or secure additional profitable business for the Company. In the aggregate, the
Company has allocated up to $25 million to strategic investments. To date, ESG
has invested $2.0 million and acquired an 83% ownership interest in IMEDI L
International, a provider of general insurance products, based in Tbilisi,
Georgia. This Company is consolidated within the Company's operating results.
Additionally, equity investments and loans totaling $15.7 million were extended
primarily to five other companies or associations with whom ESG has operating
relationships. As noted under "Health Care Division" the Company has provided an
investment impairment reserve of $3.2 million representing loans outstanding to
COMED included in this total. In March 2000, the Company completed the
acquisition of Innovacare GmbH, a disease

31
<PAGE>
management company based in Munich, Germany. The Company has outstanding loan
commitments of $10.8 million as at December 31, 1999, of which $8.8 million was
to COMED. The Company has approved a plan to divest itself of a majority
interest in its health care division in 2000, which includes the activities of
COMED. The Company intends therefore to limit further loan contributions to
COMED to ensure that the Company does not exceed its $25 million fund for other
investments.

In December 1997, the Company was capitalized with gross proceeds of $257
million from the Offerings. The Company also incurred expenses of $25 million
related to the Offering and repaid its outstanding debt, principally loans from
shareholders and bank demand borrowings, of $3.5 million. The proceeds of the
Offering were used to capitalize ES Bermuda, ES Ireland and ES Germany with $55
million, $50 million and $12 million, respectively.

In 1998, the Company increased the capital of ES Bermuda by $35 million, and
ES Ireland by $50 million. Accent Europe Insurance Company, the direct writer
formed in 1998, is capitalized at $15 million.

Operating activities provided net cash of $22.1 million for the year ended
December 31, 1999 and $1.0 million for the year ended December 31, 1998. Cash
flows from operations in future years may differ substantially from net income.
As the Company only began to assume reinsurance risks for its own account in
1997, the Company has built up substantial loss reserves to meet future loss
payments under reinsurance contracts. As reinsurance contracts mature, the
Company will be required pay out a higher percentage of incurred losses in loss
payments, which affect cash flows.

The Company initiated a stock repurchase program in May 1999 to actively
manage its capital base. As of March 23, 2000, the Company has repurchased
2,612,800 shares of its common stock, equivalent to 18.0% of the outstanding
shares of the Company under its Common Stock Repurchase Program. The average
purchase price was $6.82. The Company can buy a further 83,391 shares of its
common stock under the existing program.

Reinsurance balances receivable increased from $168.3 million as at December
31, 1998 to $276.1 million as at December 31, 1999. The increase was due to the
growth in gross reinsurance premiums written by the Company, which are
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 monthly basis and differences are recorded in the period in which the actual
amounts are determined.

Prepaid reinsurance premiums increased from $2.3 million as at December 31,
1998 to $9.1 million as at December 31, 1999. During the year, the Company
retroceded 6.3% of its gross written premiums to reinsurers compared to 2.2% in
1998, as the Company amended two of its co-reinsurance agreements to enable
business from certain markets to be retroceded to the reinsurers. The Company
has maintained the same levels of excess of loss protection in 1999 as was
purchased in 1998.

Funds recoverable on incurred losses increased from $2.8 million as at
December 31, 1998 to $11.5 million as at December 31, 1999. The increase was due
to additional losses being incurred above the Company's net retention levels
that enable the Company to make recoveries from its excess of loss reinsurers,
plus the additional quota share cessions to two of its retrocessionaires.

Deferred acquisition costs increased from $37.6 million as at December 31,
1998 to $57.8 million as at December 31, 1999. Acquisition costs, consisting
principally of commissions and brokerage expenses incurred at the time a
contract or policy is issued, are deferred and amortized over the period in
which the related premiums are earned. The increase is due to the growth in
acquisition expenses in the twelve months ended December 31, 1999 and the growth
in unearned premium.

At December 31, 1999, reserves for unpaid losses and loss expenses were
$136.9 million compared to $44.4 million at December 31, 1998. The increase was
due to a combination of growth in the

32
<PAGE>
Company's reinsurance business in 1999 and upward revision of incurred but not
reported loss reserves on specific large contracts underwritten through the
Company's Toronto and London offices in response to worsening loss experience.
Where the Company determined that individual contracts would generate loss and
acquisition ratios in excess of 100%, future losses applicable to the unearned
premium reserve have been fully recognized in the current financial year.

At December 31, 1999, unearned premium reserves were $181.1 million compared
to $111.9 million at December 31, 1998. Unearned premium reserves are
established to cover the unexpired period of contracts of reinsurance
underwritten by the Company. The increase was due to the growth in gross
reinsurance premiums written by the Company. In the year ended December 31,
1999, the Company wrote two large contracts of reinsurance at a total premium of
$75.9 million which had an accelerated earnings pattern compared to the normal
contracts written by the Company.

At December 31, 1999, acquisition costs payable were $73.1 million compared
to $45.5 million at December 31, 1998. The balance represents acquisition
expenses due on gross reinsurance premiums written by the Company and is
consistent with the increase in reinsurance balances receivable.

Shareholders' equity as of December 31, 1999 was $176.8 million, compared to
$244.8 million at December 31, 1998. The major factors influencing the reduction
in shareholders' equity in the 12-month period included a net loss of $30.4
million from the reinsurance division, a net loss of $11.6 million from the
health care division, repurchase of common shares at a cost of $16.5 million,
net unrealized investment losses of $3.6 million and the declaration of four
dividends, each of $0.08 per common share, aggregating to $4.1 million. Book
value per common share declined to $15.24 as of December 31, 1999 from $17.58 as
of December 31, 1998.

The Company expects that its financial and operational needs for the
foreseeable future will be met by funds generated from operations and the
liquidity of its investment portfolio, but may consider acquiring additional
funding as attractive market opportunities emerge.

As of December 31, 1999, the Company had the following material commitments
for operating leases and employment contracts:

<TABLE>
<CAPTION>
TOTAL COMMITMENTS IN U.S. DOLLARS (IN THOUSANDS) LEASE EMPLOYEE
YEARS ENDING DECEMBER 31, COMMITMENTS COMMITMENTS TOTAL
- ------------------------------------------------ ----------- ----------- --------
<S> <C> <C> <C>
2000......................................... $1,072 $3,696 $ 4,768
2001......................................... 838 2,457 3,295
2002......................................... 461 1,558 2,019
2003......................................... 233 219 452
2004......................................... 118 -- 118
2005 to 2012................................. 746 -- 746
------ ------ -------
Total...................................... $3,468 $7,930 $11,398
====== ====== =======
</TABLE>

In addition to the above commitments, the Company has outstanding loan
commitments of $10.8 million as at December 31, 1999 of which $8.8 million was
to COMED. As at December 31, 1998, the Company had a loan commitment of $12
million to COMED.

In support of its business, the Company enters into Letters of Credit
arrangements with ceding companies. As at December 31, 1999, the Company had
outstanding Letters of Credit of $65.8 million of which $39.1 million were
secured against its fixed maturity investment portfolio. As at December 31,
1998, the Company had $23.6 million unsecured Letters of Credit issued in favor
of ceding companies. In addition, certain ceding companies require the Company
to maintain funds on deposit with them pursuant to reinsurance contract
provisions. At December 31, 1999, the Company had $15.5 million funds retained
on deposit by ceding companies compared to $3.6 million as at December 31, 1998.

33
<PAGE>
EXPOSURE MANAGEMENT

The Company manages its underwriting risk exposures primarily through an
excess of loss reinsurance program. This program generally provides limits up to
a maximum of $30 million per occurrence, with a minimum attachment point
generally of $100 thousand.

CURRENT DEVELOPMENTS

On February 25, 2000, the Board of Directors declared a quarterly cash
dividend of $0.08 per share, payable on March 30, 2000 to common shareholders of
record on March 15, 2000.

In February 2000, the Company incorporated VBB Bermuda, a holding company in
Bermuda. This company will be the holding company of the Company's health care
division, which the company plans to partially divest during 2000 through
raising external capital to fund the venture. The Company plans to retain a
significant non-controlling equity interest in the venture. The Company expects
to commence private placement funding during the second quarter of 2000. As part
of the development of the health care division, the Company intends to acquire
the assets and brand of COMED, the non-profit organization that the Company
helped to establish in December 1998 and restructure it as a for-profit
organization that can be synergised with the Company's own health care entities.
In addition, during March 2000, the Company completed the acquisition of
Innovacare GmbH, a disease Management Company based in Munich, Germany. The
purchase price was $5.9 million.

As at December 31, 1999, the Company had extended loans to COMED of $3.2
million under the loan facility of $12 million provided in December 1998. These
loans were fully provided for as of December 31, 1999. The ability of COMED to
repay the loan is dependent on its ability to generate sufficient revenues from
members. Under the terms of the loan agreement, the Company has the right to
refuse any further disbursements where the ability of COMED to repay the loan is
in doubt.

In February 2000, Odyssey Re instituted an action in England against a
broker, Stirling Cooke Brown, alleging fraud and conspiracy on the reinsurance
placement of 1997 and 1998 Personal Accident and Workers Compensation "carve
out" business with Odyssey Re. These proceedings mirror earlier proceedings
commenced in New York which were dismissed on jurisdictional grounds. During
1998, ESG accepted a 25% quota share reinsurance treaty with Odyssey Re (UK)
retroactive to January 1, 1998. This treaty covers various reinsurance contracts
underwritten by Odyssey Re (UK) and retroceded to ESG. Among these ceding
companies are various insurance companies involved in the litigation Odyssey Re
instituted in New York over 1997 and 1998 business. This treaty terminated as of
December 31, 1998 but ESG renewed its participation for 1999 directly to one of
those ceding companies. In December 1999, the Company gave notice to rescind its
contract with Odyssey Re (UK) for misrepresentation and failure to disclose
material facts. The Company continues to investigate its position regarding the
1999 account regarding possible misrepresentation and failure to disclose
material facts. At this time, the Company is unable to determine the amount of
its exposure and the possible effect upon the Company's business, financial
condition or results of operation from these two contracts.

Following large losses on two underwriting accounts in North America in the
third quarter, the Company initiated audits of both accounts to determine
whether the Company has any legal recourse against third parties to recover
losses incurred. This audit work is expected to be completed during the second
quarter of 2000. These two accounts, one of which covered both the 1998 and 1999
business, generated premium to the Company of $85 million.

As of March 23, 2000, the Company has repurchased 2,612,800 shares of its
common stock, equivalent to 18.0% of the outstanding shares of ESG Re Limited
under its Common Stock Repurchase Program. The average purchase price was $6.82.
The Company can buy a further 83,391 shares of its common stock under the
existing program.

34
<PAGE>
On November 11, 1999, the Company was notified that Standard & Poor's
lowered the long term counterparty credit and insurer financial strength ratings
of the Company's reinsurance subsidiaries from single-A-minus to triple-B.
Standard & Poor's cited (i) weak earnings in the North American market; (ii)
concerns over internal control mechanism and wide-scale changes in the
management team, and (iii) a departure from its original business development
strategy, as the motivating factors behind its decision. However, the rating
agency listed the Company's extremely strong capitalization as a mitigating
factor behind its decision. On March 8, 2000, the Company was notified that
Standard & Poor's lowered the long term counterparty credit and insurer
financial strength ratings of the Company's reinsurance subsidiaries to
double-B-plus from triple-B. Standard & Poor's again cited the Company's
continued weak earnings performance, concerns over internal control mechanisms
and the Company's early departure from its original business development
strategy. In addition, the reduced capitalization resulting from the loss in the
fourth quarter was also raised as a concern. The Company expects to return to
its original business development strategy by refocusing its underwriting
efforts on certain markets other than the North American market in the future.
The Company has no plans to exit the North American medical market as premium
rates are increasing and the Company expects to generate moderate underwriting
profits from business written by its Toronto office. As noted above, as part of
the refocus of the group, the Company has ceased writing North American medical
business through its London market operation. The impact, if any, of the rating
changes on the Company's ability to secure new and renewal business is not known
at this time.

ACCOUNTING PRONOUNCEMENTS

In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities" ("SFAS 133"). This statement is effective for all fiscal
quarters of fiscal years beginning after June 15, 2000. The Company believes
that it does not currently enter into any transactions that are covered by this
statement and therefore, the Company does not anticipate any significant change
to its current financial reporting.

The AICPA issued Statement of Position 98-7, "Deposit Accounting" which is
effective for financial statements with fiscal years beginning after June 15,
1999. The Company does not expect that this standard will have a significant
impact on the current financial reporting.

UNCERTAINTY DUE TO THE 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
completed this initiative at no material cost.

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 communicated with its significant clients
and service providers to assess their vulnerability and readiness to comply with
Year 2000 issues and addressed compliance risks with each new significant vendor
as they arose.

Although the change in date has occurred, it is not possible to conclude
that all aspects of the Year 2000 issue that may affect the entity including
those related to customers, suppliers, or other third parties, have been fully
resolved.

35
<PAGE>
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

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 currency rates, or both in the case of
foreign currency investments. The Company monitors its exposure to interest rate
and currency rate risk on a quarterly 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.

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 to avoid
significant concentrations in individual issuers' industry segments or
countries.

Generally, it is expected that an increase in market interest rates will
cause a decline in the value of the Company's investment portfolio, whereas a
decrease in rates may cause an increase in value. The following table shows the
approximate effect on the value of the Company's fixed maturities investment
portfolio, based on hypothetical changes in market interest rates for the year
ended December 31, 1999 and 1998:

<TABLE>
<CAPTION>
-150 -100 -50 +50 +100 +150
BASIS BASIS BASIS MARKET BASIS BASIS BASIS
POINTS POINTS POINTS VALUE POINTS POINTS POINTS
-------- -------- -------- -------- -------- -------- --------
U.S. DOLLARS IN THOUSANDS
<S> <C> <C> <C> <C> <C> <C> <C>
December 31, 1999.............. $184,558 $182,040 $179,578 $177,170 $174,814 $172,508 $170,252
December 31, 1998.............. $223,775 $219,828 $216,035 $212,387 $208,882 $205,501 $202,238
-------- -------- -------- -------- -------- -------- --------
</TABLE>

The changes in portfolio values shown were ascertained by calculating the
market yield of each bond given its actual market price at December 31, 1999 and
1998, raising or lowering each bond's yield by the hypothetical changes in
market interest rates indicated above and, then calculating the resulting prices
and the resulting aggregate market values. The modeled yield changes are assumed
to occur instantaneously and equally across the yield curve. Price changes of
floating rate bonds were calculated assuming coupons adjusted by the modeled
amounts at their next scheduled reset date. Effects on portfolio value of
prepayment related interest rate changes in the case of mortgage-backed
securities are DE MINIMIS. The values indicated above are estimates and are
necessarily based on various assumptions that are subjective in nature.
Accordingly, the actual impact of changes in market rates on the Company's
investment portfolio may be significantly greater or less than those indicated
above.

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

36
<PAGE>
natural hedge against exchange rate fluctuations. The Company believes that its
exposure to foreign currency risk is not material.

INFLATION

Inflation has not had a material impact on the Company's operations for any
of the three years presented. The Company has commenced writing reinsurance in
Latin America, particularly in Brazil, which has experienced periods of high
inflation. However, it is possible that future inflationary conditions may
impact subsequent accounting periods.

THE EURO

On January 1, 1999, a single currency, the "Euro," was adopted as the
national currency of the 11 participating countries in the European Monetary
Union, including Germany and Ireland, two of the countries in which the Company
operates and in which the Company maintains a significant presence. ESG'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.

37
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

ESG RE LIMITED
CONSOLIDATED BALANCE SHEETS

<TABLE>
<CAPTION>
AS OF DECEMBER 31, 1999 1998
- ------------------ ---------- ----------
U.S. DOLLARS IN THOUSANDS
EXCEPT SHARE AND PER
SHARE DATA
<S> <C> <C>
ASSETS
Investments--available for sale, at fair value (cost:
$184,767 and $211,589).................................... $181,155 $212,387
Cash and cash equivalents................................... 28,278 16,942
Other investments........................................... 12,116 5,917
-------- --------
Total investments and cash.................................. 221,549 235,246
Accrued investment income................................... 3,367 3,629
Management fees receivable.................................. 1,303 3,164
Reinsurance balances receivable............................. 276,112 168,274
Reinsurance recoverable on incurred losses.................. 11,462 2,761
Funds held by ceding companies.............................. 15,541 3,592
Prepaid reinsurance premiums................................ 9,108 2,276
Deferred acquisition costs.................................. 57,807 37,625
Deferred tax asset.......................................... -- 843
Other assets................................................ 6,071 2,222
Cash and cash equivalents held in a fiduciary capacity...... 3,364 6,741
-------- --------
TOTAL ASSETS................................................ $605,684 $466,373
-------- --------

LIABILITIES
Unpaid losses and loss expenses............................. $136,935 $ 44,379
Unearned premiums........................................... 181,127 111,884
Acquisition costs payable................................... 73,055 45,487
Reinsurance balances payable................................ 26,025 7,114
Payable for securities purchased............................ 241 --
Accrued expenses, accounts payable, and other liabilities
($125 and $204 due to related parties).................... 8,122 5,927
Fiduciary liabilities....................................... 3,364 6,741
-------- --------
Total liabilities........................................... 428,869 221,532
-------- --------
Commitments and contingencies............................... -- --
-------- --------

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; 11,598,799 shares issued and outstanding for
1999 and 13,923,799 shares issued and outstanding for
1998...................................................... 11,599 13,924
Additional paid-in capital.................................. 211,225 226,216
Accumulated other comprehensive income:
Foreign currency translation adjustments.................. (1,702) (574)
Unrealized (losses) gains on securities (net of tax of $--
and $164)............................................... (3,612) 634
-------- --------
Accumulated other comprehensive income...................... (5,314) 60
-------- --------
Retained earnings (deficit)................................. (40,695) 4,641
-------- --------
Total shareholders' equity.................................. 176,815 244,841
-------- --------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY.................. $605,684 $466,373
======== ========
</TABLE>

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

38
<PAGE>
ESG RE LIMITED
CONSOLIDATED STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31, 1999 1998 1997
- ------------------------ ----------- ----------- ----------
U.S. DOLLARS IN THOUSANDS
EXCEPT SHARE AND PER SHARE DATA
<S> <C> <C> <C>
REVENUES
Net premiums written................................... $ 313,638 $ 195,578 $ 25,392
Change in unearned premiums............................ (64,085) (96,737) (11,981)
----------- ----------- ----------
Net premiums earned.................................... 249,553 98,841 13,411
Management fee revenue................................. 2,532 1,894 3,830
Net investment income (includes expenses of $495, $549
and $45 for related parties)......................... 13,575 12,930 598
Loss on equity investments............................. (205) -- --
Net realized investment (losses) gains................. (1,974) 2,162 --
----------- ----------- ----------
263,481 115,827 17,839
=========== =========== ==========
EXPENSES
Losses and loss expenses............................... 200,016 61,364 7,449
Acquisition costs...................................... 66,230 26,714 4,693
Class B Warrants expense (for related party)........... -- -- 3,626
Personnel costs........................................ 10,556 4,352 2,282
Professional service fees (includes $--, $378 and $--
for related parties)................................. 10,622 3,599 1,594
Expenses associated with COMED......................... 5,997 -- --
Other expenses......................................... 11,239 4,014 3,860
----------- ----------- ----------
304,660 100,043 23,504
=========== =========== ==========
NET (LOSS) INCOME BEFORE TAXES......................... (41,179) 15,784 (5,665)
Income tax expense (benefit)........................... 815 1,262 (569)
----------- ----------- ----------
NET (LOSS) INCOME...................................... $ (41,994) $ 14,522 $ (5,096)

PER SHARE DATA
Basic net income (loss) per share...................... $ (3.17) $ 1.04 $ (4.11)
----------- ----------- ----------
Diluted net income (loss) per share.................... $ (3.17) $ 1.03 $ (4.11)
----------- ----------- ----------
Basic................................................ 13,260,214 13,923,799 1,238,757
Diluted.............................................. 13,260,214 14,076,443 1,238,757
=========== =========== ==========
Dividends declared per share........................... $ .32 $ .30 $ --
=========== =========== ==========
</TABLE>

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

39
<PAGE>
ESG RE LIMITED
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY

<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31, 1999 1998 1997
- ------------------------ -------- -------- --------
U.S. DOLLARS IN THOUSANDS
<S> <C> <C> <C>
COMMON SHARES (PAR VALUE)
Balance at January 1........................................ $ 13,924 $ 13,924 $ 62
Issuance of shares in connection with public and private
offerings................................................. -- -- 13,936
Shares retired during year.................................. (2,334) -- (74)
Issuance of shares to employees............................. 9 -- --
-------- -------- --------
Balance at December 31...................................... 11,599 13,924 13,924
-------- -------- --------
ADDITIONAL PAID-IN CAPITAL
Balance at January 1........................................ 226,216 225,954 62
Issuance of shares in connection with public and private
offerings................................................. -- -- 216,113
Issuance of Class A Warrants to purchase common shares...... -- -- 6,215
Issuance of Class B Warrants to purchase common shares...... -- -- 3,626
Shares retired during year.................................. (14,195) -- (62)
Directors' fees taken as stock options...................... 232 347 --
Dividends................................................... (1,072) -- --
Additional offering costs................................... -- (85) --
Issuance of shares to employees............................. 44 -- --
-------- -------- --------
Balance at December 31...................................... 211,225 226,216 225,954
-------- -------- --------
ACCUMULATED OTHER COMPREHENSIVE INCOME
Balance at January 1........................................ 60 202 (4)
Foreign currency translation adjustments, net of tax........ (1,128) (606) 36
Unrealized (losses) gains on securities, net of tax......... (4,246) 464 170
-------- -------- --------
Balance at December 31...................................... (5,314) 60 202
-------- -------- --------
RETAINED (DEFICIT) EARNINGS
Balance at January 1........................................ 4,641 (5,705) (609)
Net (loss) income........................................... (41,994) 14,522 (5,096)
Dividends................................................... (3,342) (4,176) --
-------- -------- --------
Balance at December 31...................................... (40,695) 4,641 (5,705)
-------- -------- --------
TOTAL SHAREHOLDERS' EQUITY.................................. $176,815 $244,841 $234,375
======== ======== ========
</TABLE>

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

40
<PAGE>
ESG RE LIMITED
CONSOLIDATED STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31, 1999 1998 1997
- ------------------------ -------- -------- --------
U.S. DOLLARS IN THOUSANDS
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net (loss) income........................................... $(41,994) $ 14,522 $ (5,096)
Adjustments to reconcile net (loss) income to net cash
provided by (used in) operating activities
Depreciation and amortization............................. 1,773 252 117
Realized investment losses (gains)........................ 1,974 (2,162) --
Amortization of premiums and discounts.................... 89 200 --
Bad debt provisions....................................... 3,416 -- --
Non-cash compensation expenses............................ 285 347 3,665
Changes in assets and liabilities:
Accrued investment income................................. 262 (3,192) (437)
Management fees receivable................................ 1,861 95 (1,769)
Reinsurance balances receivable........................... (107,838) (142,489) (25,785)
Reinsurance recoverable on incurred losses................ (8,701) (2,364) (397)
Funds held by ceding companies............................ (11,949) (3,592) --
Prepaid reinsurance premiums.............................. (6,832) (1,976) (300)
Deferred acquisition costs................................ (20,182) (33,478) (4,147)
Deferred tax asset........................................ 843 (55) (573)
Unpaid losses and loss expenses........................... 92,556 36,533 7,846
Unearned premiums......................................... 69,243 99,716 12,168
Acquisition costs payable................................. 27,568 35,152 10,335
Reinsurance balances payable.............................. 18,911 7,114 --
Accrued expenses and accounts payable..................... 2,195 (2,579) 1,075
Other assets and liabilities.............................. (1,329) (1,065) 775
-------- -------- --------
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES......... 22,151 979 (2,523)
-------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Cost of investments acquired--available for sale............ (301,290) (436,239) (218,694)
Proceeds from sale of investments--available for sale....... 325,129 445,305 --
Change in short-term investments............................ -- 11,913 (11,913)
Purchases of fixed assets................................... (2,686) (967) (203)
Purchases of intangible assets.............................. (958) (57) (230)
Funding of other investments................................ (10,067) (5,917) (16)
-------- -------- --------
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES......... 10,128 14,038 (231,056)
======== ======== ========
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issuance of shares............................ -- -- 241,296
Net change in short-term debt............................... -- -- (1,622)
Repurchase of common shares................................. (16,529)
Additional offering costs................................... -- (85) --
Dividends paid.............................................. (4,414) (4,177) --
-------- -------- --------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES......... (20,943) (4,262) 239,674
======== ======== ========
EFFECT OF EXCHANGE RATE CHANGES ON CASH..................... -- (9) 86
-------- -------- --------
Net increase in cash........................................ 11,336 10,746 6,181
Cash and cash equivalents at January 1...................... 16,942 6,196 15
-------- -------- --------
Cash and cash equivalents at December 31.................... $ 28,278 $ 16,942 $ 6,196
======== ======== ========
SUPPLEMENTAL CASH FLOW INFORMATION
Cash transactions
Interest paid............................................. $ 17 $ 8 $ 108
Income taxes paid......................................... 496 40 109
-------- -------- --------
</TABLE>

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

41
<PAGE>
ESG RE LIMITED
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31, 1999 1998 1997
- ------------------------ -------- -------- --------
U.S. DOLLARS IN THOUSANDS
<S> <C> <C> <C>
Net (loss) income........................................... $(41,994) $14,522 $(5,096)
-------- ------- -------
Other Comprehensive income, net of tax:
Foreign currency translation adjustments.................. (1,128) (606) 36
Unrealized (losses) gains on securities (net of tax of
$--, $172 and $3)....................................... (6,220) 2,615 170
Less reclassification adjustment for losses (gains)
included in net income, (net of tax of $--, $11 and
$--).................................................... 1,974 (2,151) --
-------- ------- -------
Other comprehensive (loss) income........................... (5,374) (142) 206
-------- ------- -------
Comprehensive (loss) income................................. $(47,368) $14,380 $(4,890)
======== ======= =======
</TABLE>

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

42
<PAGE>
ESG RE LIMITED

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

YEARS ENDED DECEMBER 31, 1999, 1998, 1997

1. ORGANIZATION AND BUSINESS

ESG Re Limited ("the Company") was incorporated under the laws of Bermuda on
August 21, 1997. Its principal activities conducted through its subsidiaries,
are to provide accident, health, credit, life and special risk reinsurance and
to provide underwriting management services for these lines. During 1999, the
Company established a health care division to offer medical referral, second
opinion and disease management services to the German market.

Prior to the incorporation, the Company's operations were conducted through
its subsidiary, European Specialty Group Holding AG ("ESG Germany"). On December
2, 1997, the shareholders of ESG Germany entered into agreements to receive
900,000 common shares, par value $1 per share, of the Company in exchange for
all of their interests in ESG Germany (the "Formation"). ESG Germany thereby
became a subsidiary of the Company.

On December 3, 1997, 2,673,799 common shares, Class A Warrants to purchase
up to 1,381,200 common shares and Class B Warrants to purchase up to 1,381,200
common shares, subject to certain performance criteria, were sold (the "Direct
Sales") for proceeds of $50 million.

In December 1997, in an Initial Public Offering (the "IPO"), the Company
issued 10,350,000 common shares for proceeds of $207 million. Costs including
discounts and commissions associated with the Formation, Direct Sales and IPO
were approximately $25.8 million, of which $21.3 million were reflected as a
reduction of additional paid-in capital. The Formation, Direct Sales and IPO
were accounted for as a recapitalization.

Since 1994, ESG Germany has provided underwriting management services by
operating as a personal and special risk reinsurance underwriter on behalf of
certain reinsurers. ESG Germany earned management fees from reinsurance
companies for administering various underwriting pools and providing
underwriting services to reinsurance companies outside of the pool structure
without directly participating in the underwriting results.

Subsequent to the IPO, the Company assumed for its own account, through
retrocession, risks that ESG Germany previously underwrote on behalf of its
reinsurance clients. The Company exercised a contractual right provided in the
pool agreements to retrocede from its reinsurance clients a 30% share of the
existing pool business, retroactive to January 1, 1997, of the 1997 business it
managed for its reinsurance clients. The Company also assumed additional quota
share reinsurance from various pool clients. In December 1999, the Company
outsourced the administration of the runoff of the reinsurance pools to AON
Claims Consultancy.

The consolidated financial statements include the accounts of the Company
and its majority owned subsidiaries. All material intercompany balances and
transactions have been eliminated in consolidation.

The financial statements for the year ended December 31, 1997 represent the
financial performance of the Company both as a reinsurer and as a reinsurance
management company. Certain items in the 1998 and 1997 financial statements have
been reclassified to conform to the presentation adopted in 1999.

43
<PAGE>
ESG RE LIMITED

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

YEARS ENDED DECEMBER 31, 1999, 1998, 1997

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

The Company's consolidated financial statements have been prepared in
accordance with accounting principles generally accepted in the United States of
America ("U.S. GAAP"). The Company's significant accounting policies include the
following:

(A) PREMIUM REVENUES

Premiums written are estimated 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 contracts 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.

Fixed maturity securities are classified as available for sale and are
reported at estimated fair value. Investments that are available for sale are
expected to be held for an indefinite period but may be sold depending on
interest rates and other considerations. Other investments over which the
Company exercises significant influence are accounted for under the equity
method. Other investments are accounted for at the lower of cost or estimated
realizable value. Unrealized investment gains and losses on investments
available for sale, net of applicable deferred income tax, are reported as a
separate component of "accumulated other comprehensive income". Realized gains
or losses on sale of investments are determined on the basis of average cost.
The carrying values of investments available for sale and other investments are
adjusted for impairments in value that are considered to be other than
temporary.

44
<PAGE>
ESG RE LIMITED

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

YEARS ENDED DECEMBER 31, 1999, 1998, 1997

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
(D) DEFERRED ACQUISITION COSTS

Acquisition costs, consisting principally of commissions and brokerage
expenses incurred at the time a contract or policy is issued, are deferred and
amortized over the period in which the related premiums are earned. Deferred
policy acquisition costs are limited to their estimated realizable value based
on the related unearned premiums, anticipated claims and claim expenses and
anticipated investment income.

(E) REINSURANCE PREMIUMS CEDED

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

(F) MANAGEMENT FEE REVENUE

Management fee revenue consists primarily of fees earned as compensation for
underwriting and managing the reinsurance portfolio on behalf of the Company's
co-reinsurers. These fees are estimated and recognized at the inception of the
contracts with the co-reinsurers and amortized over the life of the contracts.
In addition, adjustments to management fees and profit commission arising from
underwriting results for 1997 and prior years, when the Company operated as a
reinsurance management company, are estimated and accrued.

(G) INCOME TAXES

The Company and its subsidiaries file income tax returns as required by the
laws of each country in which it has operations. The Company accounts for income
tax expenses and liabilities under the asset and liability method in accordance
with Statement of Financial Accounting Standards Board ("SFAS") No. 109,
"Accounting for Income Taxes." Deferred income taxes arise from the recognition
of temporary differences between income reported for financial statement
purposes and income for income tax purposes. These deferred taxes are measured
by applying currently enacted tax rates. In addition, SFAS No. 109 requires the
recognition of future benefits, such as for net operating loss carryforwards, to
the extent that realization of such benefits is more likely than not.

(H) FOREIGN CURRENCY TRANSLATION

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

45
<PAGE>
ESG RE LIMITED

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

YEARS ENDED DECEMBER 31, 1999, 1998, 1997

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
(I) EARNINGS PER SHARE

Basic earnings per share are computed by dividing net income by the weighted
average number of common shares outstanding. Diluted earnings per common share
reflect the maximum dilution that would have resulted from the exercise of stock
options and warrants to purchase common shares. Diluted earnings per common
share are computed by dividing net income by the weighted average number of
common shares outstanding and the dilutive potential common shares during the
period of calculation.

(J) STOCK-BASED COMPENSATION

SFAS No. 123, "Accounting for Stock-Based Compensation" defines a fair value
based method of accounting for stock-based employee compensation plans. Under
SFAS No. 123, companies are encouraged, but are not required, to adopt the fair
value method for all employee awards granted. Companies are permitted to account
for such transactions under Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees," but must disclose in a note to the
financial statements, pro forma net income and earnings per share as if SFAS
No. 123 had been applied. The Company accounts for stock-based compensation
under APB No. 25 and provides the fair value method disclosures required by SFAS
No. 123.

(K) CASH AND CASH EQUIVALENTS

For purposes of the consolidated statement of cash flows, the Company
considers all time deposits and commercial paper with original maturity dates of
90 days or less to be cash equivalents.

(L) USE OF 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
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period as well as the disclosure of such amounts. Actual results,
particularly for premiums written, premiums earned and loss reserves could
materially differ from those estimates and assumptions.

(M) FAIR VALUE OF FINANCIAL INSTRUMENTS

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

(N) ACCOUNTING PRONOUNCEMENTS

In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities" ("SFAS 133"). This statement is effective for all fiscal
quarters of fiscal years beginning after June 15, 2000. The Company does not
currently enter into any transactions that are covered by this statement and
therefore, the Company does not anticipate any significant change to its current
financial reporting.

46
<PAGE>
ESG RE LIMITED

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

YEARS ENDED DECEMBER 31, 1999, 1998, 1997

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
The AICPA issued Statement of Position 98-7, "Deposit Accounting" which is
effective for financial statements with fiscal years beginning after June 15,
1999. The Company does not expect that this standard will have a significant
impact on the current financial reporting.

3. INVESTMENTS

The Company's investment portfolio at December 31, 1999 and 1998 is
comprised of the following:

<TABLE>
<CAPTION>
AS AT DECEMBER 31, 1999 1998
- ------------------ -------- --------
U.S. DOLLARS IN
THOUSANDS
<S> <C> <C>
Fixed maturities--available for sale.................... 177,170 212,387
Equities................................................ 3,985 --
-------- --------
Total................................................... $181,155 $212,387
======== ========
</TABLE>

(A) FIXED MATURITIES AND EQUITIES

The amortized cost, fair value and gross unrealized gains and losses of
fixed maturity investments and equity investments as of December 31, 1999 and
1998 are presented in the tables below:

<TABLE>
<CAPTION>
COST OR GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED FAIR
AS AT DECEMBER 31, 1999 COST GAINS LOSSES VALUE
- ----------------------- --------- ---------- ---------- ---------
U.S. DOLLARS IN THOUSANDS
<S> <C> <C> <C> <C>
Corporate securities................ $105,581 $ 405 $3,631 $102,355
U.S. treasury securities............ 21,417 233 321 21,329
Asset-backed securities/Mortgage-
backed securities................. 23,453 327 294 23,486
Obligations of states and political
subdivisions...................... 16,481 103 303 16,281
Foreign currency debt securities.... 13,850 52 183 13,719
Equity investments.................. 3,985 -- -- 3,985
-------- ------ ------ --------
Total............................... $184,767 $1,120 $4,732 $181,155
======== ====== ====== ========
</TABLE>

<TABLE>
<CAPTION>
COST OR GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED FAIR
AS AT DECEMBER 31, 1998 COST GAINS LOSSES VALUE
- ----------------------- --------- ---------- ---------- ---------
U.S. DOLLARS IN THOUSANDS
<S> <C> <C> <C> <C>
Corporate securities................ $138,447 $ 307 $ 27 $138,727
U.S. treasury securities............ 31,887 108 297 31,698
Mortgage-backed securities /Asset-
backed securities................. 9,230 15 13 9,232
Obligations of states and political
subdivisions...................... 24,231 416 -- 24,647
Foreign currency debt securities.... 7,794 289 -- 8,083
-------- ------ ---- --------
Total............................... $211,589 $1,135 $337 $212,387
======== ====== ==== ========
</TABLE>

47
<PAGE>
ESG RE LIMITED

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

YEARS ENDED DECEMBER 31, 1999, 1998, 1997

3. INVESTMENTS (CONTINUED)
(B) MATURITY DISTRIBUTION

The amortized cost and fair value of fixed maturities by contractual
maturity are shown in the following table:

<TABLE>
<CAPTION>
AMORTIZED FAIR
AS AT DECEMBER 31, 1999 COST VALUE
- ----------------------- --------- --------
U.S. DOLLARS IN
THOUSANDS
<S> <C> <C>
Fixed maturities--available for sale
Due in one year or less............................... $ 9,042 $ 9,019
Due after one year through five years................. 111,030 108,703
Due after five years through ten years................ 34,356 33,003
Due after ten years................................... 2,902 2,959
Mortgage-backed securities /Asset-backed securities..... 23,452 23,486
-------- --------
Total................................................... $180,782 $177,170
======== ========
</TABLE>

Proceeds from the sales of investments available for sale for the years
ended December 31, 1999 and 1998 were $325.1 million and $445.3 million
respectively. Realized investment gains and losses for the years ended December
31, 1999 and 1998 were as follows:

<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31, 1999 1998
- ------------------------------- -------- --------
U.S. DOLLARS IN
THOUSANDS
<S> <C> <C>
Gross realized gains....................................... $ 460 $2,165
Gross realized losses...................................... (2,434) (3)
------- ------
Total net realized gains................................... $(1,974) $2,162
======= ======
</TABLE>

<TABLE>
<CAPTION>
AS OF DECEMBER 31, 1999 1998 1997
- ------------------ -------- -------- --------
U.S. DOLLARS IN THOUSANDS
<S> <C> <C> <C>
Change in unrealized gains on investments, net of
deferred taxes, included in other comprehensive
income:
Fixed Maturities................................... $(6,220) $2,787 $173
Deferred taxes..................................... -- (172) (3)
------- ------ ----
Total................................................ $(6,220) $2,615 $170
======= ====== ====
</TABLE>

(D) NET INVESTMENT INCOME

48
<PAGE>
ESG RE LIMITED

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

YEARS ENDED DECEMBER 31, 1999, 1998, 1997

3. INVESTMENTS (CONTINUED)
The components of net investment income are presented in the table below:

<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31, 1999 1998 1997
- ------------------------ -------- -------- --------
U.S. DOLLARS IN THOUSANDS
<S> <C> <C> <C>
Interest on fixed maturities....................... $12,335 $12,813 $438
Interest on other investments...................... 495 126 --
Interest on cash and cash equivalents.............. 1,334 608 71
Other.............................................. 218 36 141
------- ------- ----
Total investment income............................ 14,382 13,583 650
Investment expenses................................ (807) (653) (52)
------- ------- ----
Total.............................................. $13,575 $12,930 $598
======= ======= ====
</TABLE>

4. OTHER INVESTMENTS

Other investments represents equity investments in, and loans to,
reinsurance-related enterprises, ceding companies or distribution channels that
are expected to generate or secure additional profitable business for the
Company. The loans bear interest at rates between 6% and 9% and are repayable
between one and five years. Impairment reserves have been provided against loans
of $3.2 million advanced to COMED, under a $12 million loan commitment and
against a loan of $0.2 million advanced in 1998 to a North American health care
organization.

<TABLE>
<CAPTION>
AS OF DECEMBER 31, 1999 1998
- ------------------ -------- --------
U.S. DOLLARS IN
THOUSANDS
<S> <C> <C>
Equity Investments......................................... $ 4,316 $1,971
Loans...................................................... 11,216 3,946
------- ------
15,532 5,917
Allowance for uncollectible loans.......................... 3,416 --
------- ------
$12,116 $5,917
======= ======
</TABLE>

5. MANAGEMENT FEES RECEIVABLE

Management fees receivable represents management fee and related revenues
that are primarily due from co-reinsurers and quota share retrocessionnaires to
whom a portion of the Company's gross managed premium is allocated. At December
31, 1998, the Company had significant fees due from the

49
<PAGE>
ESG RE LIMITED

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

YEARS ENDED DECEMBER 31, 1999, 1998, 1997

5. MANAGEMENT FEES RECEIVABLE (CONTINUED)
reinsurers participating in the reinsurance pools in 1997 and prior years.
Management fees receivable at December 31, 1999 and 1998 consist of the
following:

<TABLE>
<CAPTION>
AS OF DECEMBER 31, 1999 1998
- ------------------ -------- --------
U.S. DOLLARS IN
THOUSANDS
<S> <C> <C>
Fees from co-reinsurers..................................... $ 935 $1,062
Management fees on 1997 and prior reinsurance pools......... 241 1,542
Other fees.................................................. 127 560
------ ------
Total....................................................... $1,303 $3,164
====== ======
</TABLE>

6. DEFERRED ACQUISITION COSTS

Activity in deferred acquisition costs for the years ended December 31, 1999
and 1998 is summarized as follows:

<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31, 1999 1998
- ------------------------ -------- --------
U.S. DOLLARS IN
THOUSANDS
<S> <C> <C>
Balance at January 1.................................... $ 37,625 $ 4,147
Acquisition costs incurred.............................. 86,412 60,192
Amortization of acquisition costs....................... (66,230) (26,714)
-------- --------
Net change in deferred acquisition costs................ 20,182 33,478
-------- --------
Balance at December 31.................................. $ 57,807 $ 37,625
======== ========
</TABLE>

50
<PAGE>
ESG RE LIMITED

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

YEARS ENDED DECEMBER 31, 1999, 1998, 1997

7. LOSSES AND LOSS EXPENSES

Activity in the reserve for unpaid losses and loss expenses for the years
ended December 31, 1999 and 1998 is summarized as follows:

<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31, 1999 1998
- ------------------------ -------- --------
U.S. DOLLARS
IN THOUSANDS
<S> <C> <C>
Balance at January 1........................................ $ 44,379 $ 7,846
Less reinsurance recoverable................................ (2,761) (397)
-------- -------
Net balance at January 1.................................... 41,618 7,449
Incurred related to:
Current year.............................................. 190,474 60,912
Prior year................................................ 9,542 452
-------- -------
Total incurred losses and loss expenses..................... 200,016 61,364
-------- -------
Paid related to:
Current year.............................................. 85,378 22,171
Prior year................................................ 30,783 5,024
-------- -------
Total paid losses and loss expenses......................... 116,161 27,195
-------- -------
Net balance at December 31.................................. 125,473 41,618
Plus reinsurance recoverable on incurred losses............. 11,462 2,761
-------- -------
Balance at December 31...................................... $136,935 $44,379
======== =======
</TABLE>

8. INCOME TAXES

Under current Bermuda law, the Company is not required to pay taxes in
Bermuda on either income or capital gains. Provision for income taxes consists
of corporate and other applicable income taxes payable in the various
jurisdictions in which the Company conducts its business including, but not
limited to, Germany, Ireland, Canada and the United Kingdom. The components of
income taxes for the years presented are as follows:

<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31, 1999 1998 1997
- ------------------------ -------- -------- --------
U.S. DOLLARS IN THOUSANDS
<S> <C> <C> <C>
Current tax expense
Bermuda................................................... $ -- $ -- $ --
Foreign................................................... (28) 1,435 4
---- ------ -----
Total current tax expense................................... (28) 1,435 4
Total deferred tax expense (benefit)........................ 843 (173) (573)
---- ------ -----
Total income tax expense (benefit).......................... $815 $1,262 $(569)
==== ====== =====
</TABLE>

51
<PAGE>
ESG RE LIMITED

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

YEARS ENDED DECEMBER 31, 1999, 1998, 1997

8. INCOME TAXES (CONTINUED)
The actual income tax expense attributable to income for the three years in
the period ended December 31, 1999 is based on the statutory tax rates in the
Company's taxable jurisdictions, which range from 0% to approximately 50%.

<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31, 1999 1998 1997
- ------------------------ -------- -------- --------
U.S. DOLLARS IN THOUSANDS
<S> <C> <C> <C>
Computed "expected tax expense"....................... $ -- $ -- $ --
Tax effect of foreign taxes........................... 815 1,262 (569)
---- ------ -----
Total income tax expense (benefit).................... $815 $1,262 $(569)
==== ====== =====
</TABLE>

Deferred income taxes reflect the tax effect of the temporary differences
between the value of assets and liabilities for financial statement purposes and
such values as measured by the tax laws and regulations. The principal items in
the net deferred income tax asset (liability) are as follows:

<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31, 1999 1998
- ------------------------ -------- --------
U.S. DOLLARS IN
THOUSANDS
<S> <C> <C>
Deferred tax assets
Net operating loss carryforward.......................... $ 6,948 $1,874
Other assets............................................. 956 470
------- ------
Gross deferred tax assets.................................. 7,904 2,344
Less: valuation allowance.................................. (6,834) (976)
------- ------
Deferred tax assets after valuation allowance.............. $ 1,070 $1,368
======= ======
Deferred tax liabilities
Unrealized investment gains.............................. (154) (164)
Other liabilities........................................ (916) (361)
------- ------
Total deferred tax liabilities............................. $(1,070) $ (525)
------- ------
Net deferred tax asset..................................... $ -- $ 843
======= ======
</TABLE>

Realization of deferred tax assets is dependent on generating sufficient
taxable income in the future. During 1999 and 1998, the Company recorded a
valuation allowance of $6.8 million and $1.0 million, respectively, to reduce
its deferred tax asset to estimated realizable value. The Company has tax loss
carryforwards included in the calculation of the deferred tax asset as of
December 31, 1999 and 1998, of $20.3 million and $3.4 million respectively,
available to offset future foreign taxable income. Such tax loss carryforwards
do not have an expiration date.

9. RETROCESSIONS

The Company utilizes retrocessional agreements to reduce its exposure to
large claims and catastrophic loss occurrences. These agreements provide for
recovery from retrocessionaires of a portion of the losses and loss expenses
under certain circumstances. They do not discharge the primary liability of the
Company. In the event retrocessionaires were unable to meet their obligations
under the retrocession agreements, the Company would be liable for such
defaulted amounts. The Company

52
<PAGE>
ESG RE LIMITED

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

YEARS ENDED DECEMBER 31, 1999, 1998, 1997

9. RETROCESSIONS (CONTINUED)
believes that it has minimized the credit risk with respect to its reinsurance
by monitoring its retrocessionaires and avoiding concentrations with any single
company.

Losses and loss expenses incurred and earned premiums as reported in the
statement of operations are after deduction for retrocessions. Written and
earned premiums and losses incurred for the years ended December 31, 1999, 1998
and 1997 are comprised of the following:

<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31, 1999 1998 1997
- ------------------------ -------- -------- --------
U.S. DOLLARS IN THOUSANDS
<S> <C> <C> <C>
Premiums written:
Assumed...................................... $333,428 $199,872 $26,143
Ceded........................................ (19,790) (4,294) (751)
-------- -------- -------
Net premiums written........................... 313,638 $195,578 $25,392
-------- -------- -------
Premiums earned:
Assumed...................................... $262,879 $100,985 $13,862
Ceded........................................ (13,326) (2,144) (451)
-------- -------- -------
Net premiums earned............................ $249,553 $ 98,841 $13,411
-------- -------- -------
Losses and loss expenses:
Assumed...................................... $212,630 $ 63,728 $ 7,846
Ceded........................................ (12,614) (2,364) (397)
-------- -------- -------
Net losses and loss expenses................... $200,016 $ 61,364 $ 7,449
======== ======== =======
</TABLE>

53
<PAGE>
ESG RE LIMITED

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

YEARS ENDED DECEMBER 31, 1999, 1998, 1997

10. EARNINGS PER SHARE

RECONCILIATION OF NUMERATORS AND DENOMINATORS

The following is a reconciliation of the numerators and denominators of the
basic and diluted earnings per share computations for income from continuing
operations:

<TABLE>
<CAPTION>
LOSS SHARES PER SHARE
YEAR ENDED DECEMBER 31, 1999 (NUMERATOR) (DENOMINATOR) AMOUNT
- ---------------------------- ----------- ------------- ---------
U.S. DOLLARS IN THOUSANDS
EXCEPT SHARE AND PER SHARE DATA
<S> <C> <C> <C>
BASIC EARNINGS PER SHARE
Net loss allocable to common
shareholders............................ (41,994) 13,260,214 $(3.17)
Effect of dilutive securities:
Class A Warrants........................ -- -- --
Class B Warrants........................ -- -- --
Director and Employee Options........... -- -- --
Employee Share Grant.................... -- -- --
Repurchase of common shares............. -- -- --
DILUTED EARNINGS PER SHARE
Net loss allocable to common
shareholders............................ $(41,994) 13,260,214 $(3.17)
======== ========== ======
</TABLE>

<TABLE>
<CAPTION>
INCOME SHARES PER SHARE
YEAR ENDED DECEMBER 31, 1998 (NUMERATOR) (DENOMINATOR) AMOUNT
- ---------------------------- ----------- ------------- ---------
U.S. DOLLARS IN THOUSANDS
EXCEPT SHARE AND PER SHARE DATA
<S> <C> <C> <C>
BASIC EARNINGS PER SHARE
Net income allocable to common
shareholders............................ $14,522 13,923,799 $1.04
Effect of dilutive securities:
Class A Warrants........................ -- 100,401 --
Class B Warrants........................ -- 34,143 --
Director and Employee Options........... -- 18,100 --
DILUTED EARNINGS PER SHARE
Net income allocable to common
shareholders............................ $14,522 14,076,443 $1.03
======= ========== =====
</TABLE>

Class A Warrants to purchase 1,381,200 common shares at $20 per share were
outstanding as of December 31, 1999 and 1998. Options to purchase up to
1,440,503 common shares, issued at exercise prices between $5.44 and $26.50,
were outstanding as of December 31, 1999. Options to purchase up to 815,428
common shares, issued at exercise prices between $14.76 and $26.50, were
outstanding as of December 31, 1998. The incremental shares from assumed
exercise of options and warrants have not been included in the above computation
for 1999 as they have an anti-dilutive effect on the net loss per common share.

11. COMMITMENTS AND CONTINGENCIES

(A) EMPLOYMENT CONTRACTS

The Company has entered into various employment contracts with terms of up
to five years that have total minimum commitments of $7.9 million, excluding any
performance bonuses that are

54
<PAGE>
ESG RE LIMITED

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

YEARS ENDED DECEMBER 31, 1999, 1998, 1997

11. COMMITMENTS AND CONTINGENCIES (CONTINUED)
determined by the Board of Directors of the Company. The contracts include
various non-compete clauses following termination of employment. As of December
31, 1998, the minimum employee commitments were $7 million.

(B) LEASE COMMITMENTS

The Company and its subsidiaries have various lease obligations. Rental
expenses are amortized on the straight-line basis over the term of the lease.
Total rental expense was approximately $931 thousand, $398 thousand and $286
thousand for the years ended December 31, 1999, 1998 and 1997, respectively.
During the year, the Company leased new premises in Ireland, Hong Kong,
Australia, Indonesia, Toronto, Thailand, Taiwan, United States and Singapore to
support the growth of the Company's operations.

The future minimum commitments under operating leases and employment
contracts are as follows:

<TABLE>
<CAPTION>
LEASE EMPLOYMENT
YEAR ENDED DECEMBER 31, 1999 COMMITMENTS COMMITMENTS TOTAL
- ---------------------------- ----------- ----------- --------
U.S. DOLLARS IN THOUSANDS
<S> <C> <C> <C>
2000....................................... $1,072 $3,696 $ 4,768
2001....................................... 838 2,457 3,295
2002....................................... 461 1,558 2,019
2003....................................... 233 219 452
2004....................................... 118 -- 118
Over five years............................ 746 -- 746
------ ------ -------
Total...................................... $3,468 $7,930 $11,398
====== ====== =======
</TABLE>

Secured Letters of Credit in the amount of $39.1 million have been issued in
favor of ceding companies. The letters of credit are secured by a lien on the
Company's fixed maturities investment portfolio equal to 110% of the amount of
the outstanding letters of credit. Unsecured Letters of Credit in the amount of
$26.7 million have been issued in favor of ceding companies. As of December 31,
1998, unsecured Letters of Credit in the amount of $23.6 million have been
issued in favor of ceding companies.

(D) PENSION OBLIGATIONS

Certain subsidiaries of the Company are obligated to make defined
contributions to pension plans for their employees. As of December 31, 1999 and
1998, there were outstanding liabilities for pension contributions of $448
thousand and $207 thousand respectively. Pension contribution expenses were $590
thousand, $143 thousand and $29 thousand, for the years ended December 31, 1999,
1998 and 1997, respectively.

55
<PAGE>
ESG RE LIMITED

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

YEARS ENDED DECEMBER 31, 1999, 1998, 1997

11. COMMITMENTS AND CONTINGENCIES (CONTINUED)
(E) CONTINGENCIES

12. FIDUCIARY ASSETS AND LIABILITIES

As part of its prior underwriting pool management services, the Company
collects premiums and pays claims on behalf of the pool participants. In
addition to fees received for the underwriting services, the Company also earns
interest income on funds it is authorized to hold in accordance with the
underwriting management agreements between the Company and the pool
participants. The Company is authorized to retain 25% of gross premiums as a
claims fund held in bank accounts having trustee status.

13. WARRANTS

In connection with the Direct Sales, the Company issued Class A Warrants to
purchase up to 1,381,200 common shares and Class B Warrants to purchase up to
1,381,200 common shares if certain performance criteria are satisfied. The Class
A Warrants are vested and are exercisable at $20 per share at any time prior to
December 2007.

Twenty percent of the Class B Warrants are available for vesting during each
of the first five years following the closing date of the IPO, and will vest
only if, for any 20 consecutive trading days during the one-year vesting period,
the percentage change in the market price of the common shares since the closing
date of the IPO exceeds the percentage change in the Wilshire 5000 Stock Price
Index by at least 500 basis points. The Class B Warrants are exercisable for a
period of 10 years from the date of vesting. The exercise price per Common Share
is $20 and will be reduced by $1.50 on September 1, 2001. As of December 31,
1999 and 1998, 276,240 of the Class B Warrants are vested and are exercisable.

For the year ended December 31, 1997, in accordance with the Emerging Issues
Task Force Consensus 96-18, "Accounting for Equity Instruments that are Issued
to Other Than Employees for Acquiring, or in Conjunction with Selling, Goods and
Services," the Company recorded compensation

56
<PAGE>
ESG RE LIMITED

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

YEARS ENDED DECEMBER 31, 1999, 1998, 1997

13. WARRANTS (CONTINUED)
expense of $3.6 million paid to a related party. This expense was reflected as a
charge to the statement of operations, and as an increase to additional paid-in
capital.

14. STOCK-BASED COMPENSATION

(A) EMPLOYEE STOCK OPTION PLAN

On December 12, 1997, the Company adopted the 1997 Employees Stock Option
Plan (the "Stock Option Plan") under which employees of the Company and its
subsidiaries are eligible to participate. The Stock Option Plan is administered
by the Board of Directors. Subject to the provisions of the Stock Option Plan,
the Board of Directors has sole discretionary authority to interpret the Stock
Option Plan and to determine the terms and conditions of the awards.

The exercise price of the option are determined by the Board of Directors
when the options are granted. Options granted under the Stock Option Plan are
freely assignable subject to certain limitations. The Company has reserved
2,000,000 common shares for issuance under the Stock Option Plan.

As of December 31, 1999, options to purchase a total of 980,075 shares of
common stock were granted, net of forfeitures, to officers and employees of the
Company (1998: 609,000). Options granted under the Employee Stock Option Plan
generally vest at 25% at the date of grant and at 25% on each of the second,
third and fourth anniversaries of the date of grant. All options are exercisable
at the fair market value of the stock at the date of the grant and expire 10
years after the date of the grant.

(B) DIRECTORS' STOCK OPTION PLAN

On December 12, 1997, the Company adopted the ESG Re Limited Non-management
Directors' Compensation and Option Plan (the "Directors' Plan"), under which
non-management directors are compensated for their service on the Board.
Non-management directors who were on the Board at the time of the closing of the
offering, or who joined the Board within one year of the closing were granted
stock options to purchase up to 10,000 common shares. Options granted on
December 12, 1997, the date of the IPO, were granted at the IPO price of $20 per
share. Each non-management director receives fees for services as a member of
the Board of Directors and its committees, in amounts determined by the Board of
Directors, to be paid in a combination of cash and common shares, as determined
by the Board. A Director may elect to receive all or a portion of such fees in
the form of options to purchase common shares equal to two times the fees that
would otherwise be payable. A director may also elect to defer receipt of the
fees, and if so deferred, will receive deferred compensation indexed to the
greater of (i) the total return on the common shares; or (ii) the one-year U.S.
Treasury bill rate. If a director does not elect the payment in options or
deferred compensation alternatives, the fees will be paid in a combination of
cash and shares as determined by the Board. Shares granted under the Directors'
Plan will not be transferable for six months after receipt. The Company has
reserved 1,000,000 common shares for issuance under the Directors' Plan.

To date all non-management directors have elected to receive their fees as
options to purchase shares. As a result, a total of 460,428 shares of common
stock have been granted, net of forfeitures, as stock options as of December 31,
1999 (1998:206,428). Compensation expense related to these grants of

57
<PAGE>
ESG RE LIMITED

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

YEARS ENDED DECEMBER 31, 1999, 1998, 1997

14. STOCK-BASED COMPENSATION (CONTINUED)
$232 thousand and $347 thousand was recognized for the years ending December 31,
1999 and 1998, respectively.

Options granted under the Directors' Plan vest 100% at the date of grant.
All options are exercisable at fair market value of the stock at the date of
grant and expire 10 years after the date of grant.

A summary of the status of the Company's outstanding stock options as of
December 31, 1999 and 1998 is presented below:

<TABLE>
<CAPTION>
1999 1998 1997
-------------------------- ------------------------- -------------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
SHARES EXERCISE PRICE SHARES EXERCISE PRICE SHARES EXERCISE PRICE
--------- -------------- -------- -------------- -------- --------------
U.S. DOLLARS IN THOUSANDS
<S> <C> <C> <C> <C> <C> <C>
Outstanding at January 1.......... 815,428 $21.90 469,714 $20.00 -- --
Granted......................... 1,033,500 $11.68 355,214 $24.50 469,714 $20.00
Exercised....................... -- -- -- -- -- --
Forfeited....................... (408,425) $19.66 (9,500) $25.13 -- --
--------- ------ ------- ------ ------- ------
Outstanding at December 31........ 1,440,503 $15.20 815,428 $21.90 469,714 $20.00
--------- ------ ------- ------ ------- ------
Options exercisable at December
31.............................. 1,005,378 $13.54 358,678 $22.37 189,214 $20.00
--------- ------ ------- ------ ------- ------
Average fair value of options
granted during the year......... $ 0.88 $ 6.73 $ 7.00
====== ====== ======
</TABLE>

The fair value of each option grant was estimated using the Black/Scholes
option pricing model with the following assumptions: (i) dividend yield of 8.0%;
(ii) expected volatility of 65.6%; (iii) risk-free rate of 6.3%; and (iv)
expected life of 8 years.

The Company applies APB Opinion 25 and Related Interpretations in accounting
for stock based compensation. Had the compensation expense for the Company's
stock-based compensation plans been determined based on the fair value at the
grant dates for awards under those plans consistent with the method described in
SFAS No. 123, the Company's net loss and earnings per share would have been
adjusted to the proforma amounts indicated below:

<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31, 1999 1998 1997
- ------------------------ --------- --------- ---------
U.S. DOLLARS IN THOUSANDS, EXCEPT
SHARE AND PER SHARE DATA
<S> <C> <C> <C>
Net (loss) income
As reported............................................... $(41,994) $14,522 $(5,096)
Pro forma................................................. (42,311) 12,526 (5,409)
-------- ------- -------
Net (loss) income per share
As reported............................................... $ (3.17) $ 1.04 $ (4.11)
Pro forma................................................. (3.19) 0.90 (4.37)
======== ======= =======
</TABLE>

58
<PAGE>
ESG RE LIMITED

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

YEARS ENDED DECEMBER 31, 1999, 1998, 1997

14. STOCK-BASED COMPENSATION (CONTINUED)
The weighted average remaining contractual life of options outstanding at
December 31, 1999, is presented below:

<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
NUMBER OF OPTIONS NUMBER OF OPTIONS REMAINING
RANGE OUTSTANDING EXERCISABLE CONTRACTUAL LIFE
- ----- ----------------- ----------------- ----------------
<S> <C> <C> <C>
$5.44 to $7.75................................ 465,000 453,750 10 years
$8.85......................................... 3,000 3,000 10 years
$14.75 to $20.25.............................. 706,289 398,289 9 years
$22.50 to $26.50.............................. 266,214 150,339 8 years
--------- --------- --------
1,440,503 1,005,378 9 years
========= ========= ========
</TABLE>

15. RELATED PARTIES

In 1997, the Company entered into an agreement with Head Asset Management
L.L.C. ("Head Asset Management"), an affiliate of Head & Company L.L.C. ("Head
Company"), relating to the provision of investment management services. The
Chairman of the Board of Directors and Chief Executive Officer is a Managing
Member of Head Company. Pursuant to this agreement, which is subject to the
Company's investment guidelines and other restrictions, the Company will pay
Head Asset Management a fee equal to the sum of (i) 0.25% per annum of the first
$200 million of assets under management; and (ii) 0.15% per annum of assets
under management in excess of $200 million. The Company incurred expenses of
$495 thousand and $549 thousand under this agreement for the years ended
December 31, 1999 and 1998, respectively.

In 1997, Head Company provided support and assistance in connection with the
planning, structuring and formation of the Company, as well as capital raising
in connection with the Direct Sales and IPO. For advisory services rendered by
Head Company, the Company incurred fees and expenses of $2.7 million of which
$2.5 million was paid in January 1998. These expenses were reflected as a
reduction of additional paid-in capital. In January 1998, the Company entered
into an agreement with Head Company to provide financial advisory services as
required by the Company for a monthly fee of $50 thousand. Under this agreement,
the Company incurred fees and direct expenses of $378 thousand in 1998. The
agreement was terminated in the second quarter of 1998. Certain former
shareholders of ESG Germany that participated in the Formation have agreed to
indemnify ESG Germany for certain contingent liabilities applicable to activity
prior to 1997. Management believes that the likelihood of incurring a loss
related to any of those contingent liabilities is remote.

16. SEGMENT INFORMATION

SFAS No. 131, "Disclosures about Segments of an Enterprise and Related
Information," requires that an enterprise disclose information about its
operating segments. The Company considers its reinsurance activities to
constitute a single operating segment on the basis that such activities are
monitored and evaluated primarily on a company wide basis. Investments are held
in support of reinsurance activities and are considered to be a part of the
reinsurance segment. In 1999, the Company established a Health Care division,
which management considers a separate segment under

59
<PAGE>
ESG RE LIMITED

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

YEARS ENDED DECEMBER 31, 1999, 1998, 1997

16. SEGMENT INFORMATION (CONTINUED)
SFAS No. 131. Assets and liabilities of the Health Care segment are immaterial,
as the only significant asset, loans to COMED, has been fully reserved. The
Company plans to divest the Health Care segment in 2000. The Company plans to
retain a significant, non-controlling equity interest in the venture. Segment
disclosures for years ended December 31, 1998 and 1997 have not been included as
the Company previously operated solely through its reinsurance division, which
management considered a single segment. Results for both segments in 1999 are
detailed below:

<TABLE>
<CAPTION>
SEGMENT REINSURANCE HEALTH CARE
- ------- ----------- -----------
U.S. DOLLARS IN THOUSANDS
<S> <C> <C>
REVENUES
Net premiums written.................................. $313,638 $ --
Change in unearned premiums........................... (64,085) --
-------- --------
Net premiums earned................................... 249,553 --
Management fee revenue................................ 2,283 249
Net investment income................................. 13,524 51
Loss on equity investments............................ (205) --
Net realized investment (losses) gains................ (1,974) --
-------- --------
263,181 300
EXPENSES
Losses and loss expenses.............................. 200,016 --
Acquisition costs..................................... 66,230 --
Class B Warrants expense (for related party).......... -- --
Personnel costs....................................... 9,393 1,163
Professional service fees............................. 8,166 2,456
Expenses associated with COMED........................ -- 5,997
Other expenses........................................ 8,931 2,308
-------- --------
292,736 11,924
======== ========

NET (LOSS) BEFORE TAXES............................... $(29,555) $(11,624)
======== ========
</TABLE>

60
<PAGE>
ESG RE LIMITED

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

YEARS ENDED DECEMBER 31, 1999, 1998, 1997

16. SEGMENT INFORMATION

The following table provides summary financial information by the Company's
lines of business and geographic regions of the reinsurance segment. Revenues
are allocated geographically on the basis of the location of the legal entity
that retains the reinsurance risk.

<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31, 1999 MEDICAL ACCIDENT SPECIAL RISK CREDIT LIFE OTHER TOTAL
- ----------------- --------- -------- ------------ -------- -------- -------- ---------
U.S. DOLLARS IN THOUSANDS
<S> <C> <C> <C> <C> <C> <C> <C>
Gross premiums written........... $ 252,412 $ 66,514 $ 2,559 $ 1,851 $ 6,934 $3,158 $ 333,428
Net premiums written............. 240,742 61,549 2,426 714 5,550 2,657 313,638
Net premiums earned.............. 188,444 42,443 2,811 3,933 9,593 2,329 249,553
Losses and loss expenses......... (154,879) (33,001) (834) (2,424) (8,015) (863) (200,016)
Acquisition costs................ (52,874) (9,287) (1,086) (795) (1,516) (672) (66,230)
Operating costs.................. (17,324) (4,393) (287) (421) (976) (263) (23,664)
--------- -------- ------- ------- ------- ------ ---------
Net underwriting income (loss)... $ (36,633) $ (4,238) $ 604 $ 293 $ (914) $ 531 $ (40,357)
========= ======== ======= ======= ======= ====== =========
</TABLE>

<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31, 1998 MEDICAL ACCIDENT SPECIAL RISK CREDIT LIFE OTHER TOTAL
- ----------------- -------- -------- ------------ -------- -------- -------- --------
U.S. DOLLARS IN THOUSANDS
<S> <C> <C> <C> <C> <C> <C> <C>
Gross premiums written.......... $119,157 $ 52,254 $5,120 $12,346 $10,995 $ -- $199,872
Net premiums written............ 117,353 50,814 4,943 11,910 10,558 -- 195,578
Net premiums earned............. 40,875 46,038 2,571 4,856 4,501 -- 98,841
Losses and loss expenses........ (24,646) (29,003) (859) (3,448) (3,408) -- (61,364)
Acquisition costs............... (14,241) (10,207) (906) (837) (523) -- (26,714)
Operating costs................. (3,584) (4,036) (228) (420) (534) -- (8,802)
-------- -------- ------ ------- ------- -------- --------
Net underwriting income
(loss)........................ $ (1,596) $ 2,792 $ 578 $ 151 $ 36 $ -- $ 1,961
======== ======== ====== ======= ======= ======== ========
</TABLE>

<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31, 1997 MEDICAL ACCIDENT SPECIAL RISK CREDIT LIFE OTHER TOTAL
- ----------------- -------- -------- ------------ -------- -------- -------- --------
U.S. DOLLARS IN THOUSANDS
<S> <C> <C> <C> <C> <C> <C> <C>
Gross premiums written.......... $ 9,989 $ 9,357 $ 396 $ 6,401 $ -- $ -- $ 26,143
Net premiums written............ 9,937 8,723 376 6,356 -- -- 25,392
Net premiums earned............. 5,964 3,778 243 3,426 -- -- 13,411
Losses and loss expenses........ (3,624) (1,907) (139) (1,779) -- -- (7,449)
Acquisition costs............... (2,099) (1,303) (85) (1,206) -- -- (4,693)
-------- -------- ------ ------- ------- -------- --------
Net underwriting income......... $ 241 $ 568 $ 19 $ 441 $ -- $ -- $ 1,269
======== ======== ====== ======= ======= ======== ========
</TABLE>

61
<PAGE>
ESG RE LIMITED

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

YEARS ENDED DECEMBER 31, 1999, 1998, 1997

16. SEGMENT INFORMATION (CONTINUED)

<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31, 1999 1998 1997
- ------------------------ -------- -------- --------
U.S. DOLLARS IN THOUSANDS
<S> <C> <C> <C>
REVENUE EARNED:
Bermuda........................................ $ 75,666 $ 43,839 $13,763
Ireland........................................ 173,860 59,281 --
Germany........................................ 12,397 8,812 3,989
Other.......................................... 1,558 3,895 87
-------- -------- -------
Total revenues................................. $263,481 $115,827 $17,839
======== ======== =======
</TABLE>

17. SIGNIFICANT CLIENTS

For the year ended December 31, 1999, one client contributed $64.1 million
to total revenue. For the year ended December 31, 1998, one significant client
relationship contributed $25.1 million to total revenue. For the year ended
December 31,1997, three significant client relationships contributed
$3.6 million, $2.6 million and $2.4 million to total revenue.

18. STATUTORY REQUIREMENTS AND DIVIDEND RESTRICTIONS

Under Bermuda law, the Company is prohibited from declaring or paying a
dividend if such payment would reduce the realizable value of its assets to an
amount less than the aggregate value of its liabilities, issued share capital
(common share capital) and share premium (additional paid-in capital) accounts.

Under the Bermuda Insurance Act, 1978, amendments thereto and Related
Regulations, ES Bermuda is required to maintain certain measures of solvency and
liquidity. For the years ended December 31, 1999 and 1998, these requirements
have been met. The statutory capital and surplus of ES Bermuda was $131.0
million and $137.1 million and the minimum required statutory capital and
surplus was $13.2 million and $8.7 million as of December 31, 1999 and 1998,
respectively. The minimum required level of liquid assets was $81.4 million and
$55.2 million with actual liquid assets of $138.5 million and $109.7 million as
of December 31, 1999 and 1998, respectively.

19. UNCERTAINTY DUE TO THE YEAR 2000 ISSUE

The Year 2000 issue arises because many computerized systems use two digits
rather than four to identify a year. Date-sensitive systems may recognize the
year 2000 as 1900 or some other date, resulting in errors when information using
year 2000 dates is processed. In addition, similar problems may arise in the
same systems that use certain dates in 1999 to represent something other than a
date.

Although the change in date has occurred, it is not possible to conclude
that all aspects of the Year 2000 issue that may affect the entity, including
those related to customers, suppliers, or other third parties, have been fully
resolved.

62
<PAGE>
ESG RE LIMITED

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

YEARS ENDED DECEMBER 31, 1999, 1998, 1997

20. UNAUDITED QUARTERLY FINANCIAL DATA

<TABLE>
<CAPTION>
FIRST SECOND THIRD FOURTH
1999 OPERATING DATA QUARTER QUARTER QUARTER QUARTER
- ------------------- ---------- ---------- ---------- ----------
U.S. DOLLARS IN THOUSANDS EXCEPT PER SHARE DATA
<S> <C> <C> <C> <C>
Net Premiums written................... $143,566 $40,304 $59,919 $69,850
Net Premiums earned.................... 58,124 67,522 67,626 56,282
Management fee revenue................. 817 1,123 (159) 751
Net investment income.................. 3,300 3,722 3,512 3,041
Losses and loss expenses............... 34,751 48,909 57,012 59,345
Acquisition costs...................... 18,810 14,108 19,761 13,552
Underwriting profit (loss)............. 4,563 4,505 (9,147) (16,615)
Net income (loss)...................... 3,991 3,472 (23,160) (26,299)
Earnings per common share:
Basic net income (loss) per share.... $ 0.29 $ 0.25 $ (1.68) $ (2.04)
Diluted net income (loss) per
share.............................. 0.29 0.25 (1.68) (2.04)
Weighted average shares
outstanding (000's):
Basic.............................. 13,924 13,923 13,792 12,907
Diluted............................ 13,934 13,924 13,792 12,907
</TABLE>

<TABLE>
<CAPTION>
FIRST SECOND THIRD FOURTH
1998 OPERATING DATA QUARTER QUARTER QUARTER QUARTER
- ------------------- ---------- ---------- ---------- ----------
U.S. DOLLARS IN THOUSANDS EXCEPT PER SHARE DATA
<S> <C> <C> <C> <C>
Net Premiums written.................... $84,156 $19,526 $53,915 $37,981
Net Premiums earned..................... 23,219 18,090 26,134 31,398
Management fee revenue.................. 970 229 181 514
Net investment income................... 3,020 3,211 3,359 3,340
Losses and loss expenses................ 15,642 11,340 15,940 18,442
Acquisition costs....................... 5,270 4,434 7,324 9,686
Underwriting profit..................... 2,307 2,316 2,870 3,270
Net income.............................. 3,251 3,247 3,994 4,030
Earnings per common share:
Basic net income per share............ $ 0.23 $ 0.23 $ 0.29 $ 0.29
Diluted net income per share.......... 0.23 0.23 0.29 0.29
Weighted average shares
outstanding (000's):
Basic............................... 13,924 13,924 13,924 13,924
Diluted............................. 14,374 14,231 13,925 13,926
</TABLE>

63
<PAGE>
ESG RE LIMITED

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

YEARS ENDED DECEMBER 31, 1999, 1998, 1997

20. UNAUDITED QUARTERLY FINANCIAL DATA (CONTINUED)

<TABLE>
<CAPTION>
FIRST SECOND THIRD FOURTH
1997 OPERATING DATA QUARTER QUARTER QUARTER QUARTER
- ------------------- ---------- ---------- ---------- ----------
U.S. DOLLARS IN THOUSANDS EXCEPT PER SHARE DATA
<S> <C> <C> <C> <C>
Net Premiums written.................... $ -- $ -- $ -- $25,392
Net Premiums earned..................... -- -- -- 13,411
Management fee revenue.................. 2,378 217 356 879
Net investment income................... -- 15 6 577
Losses and loss expenses................ -- -- -- 7,449
Acquisition costs....................... -- -- -- 4,693
Underwriting profit..................... -- -- -- 1,269
Net income (loss)....................... $ 450 $ (252) $ (310) $(4,984)
Earnings per common share:
Basic net income (loss) per share..... $ 2.50 $ (1.40) $ (0.40) $ (1.32)
Diluted net income (loss) per share... 2.50 (1.40) (0.40) (1.32)
Weighted average shares outstanding
(000's):............................ 180 180 783 3,778
------- ------- ------- -------
</TABLE>

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE

None.

64
<PAGE>
PART III.

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY

EXECUTIVE OFFICERS

The table below sets forth the names, ages and titles of the persons who are
executive officers of the Company and/or its principal operating subsidiaries as
of March 15, 2000.

<TABLE>
<CAPTION>
NAME AGE POSITION
- ---- -------- ----------------------------------
<S> <C> <C>
John C Head III................... 51 Chairman and Chief Executive
Officer
Steven H. Debrovner............... 62 Chief Executive
Officer--Reinsurance Division
Gerald Moeller.................... 56 Chief Executive Officer--Health
Division
Joan H. Dillard................... 48 Chief Financial Officer
Margaret L. Webster............... 49 Chief Administration Officer and
Corporate Secretary
Cormac Treacy..................... 35 Controller
</TABLE>

John C Head III has served as Chairman of the Board since the inception of
the Company. He was appointed Chief Executive Officer of the Company in
September 1999 upon the resignation of Wolfgang M. Wand. Mr. Head has been a
Managing Member of Head & Company L.L.C., an investment banking firm
specializing in the insurance industry, since 1987. Mr. Head is also a director
of Partner Re Ltd., FFTW, Inc. and other private companies.

Steven H. Debrovner co-founded ESG Germany in 1993. From 1987 to 1992,
Mr. Debrovner served as the head of marketing for all non-life business at CIGNA
Worldwide headquarters in Philadelphia. In 1974, he created the European
accident and health activities for AFIA and, subsequently, CIGNA. Mr. Debrovner
has more than 30 years of insurance underwriting experience, having started with
American International Group, Inc. in 1967.

Gerald Moller joined the Company as Chief Executive Officer of its Health
Division on July 1, 1999. Prior thereto Dr. Moller was head of marketing and
development for Pharma, Roche and a member of the executive committee of Hoffman
La Roche, in Basel, from April 1998 to December 1998. From May 1995 to March
1998, he was Chief Executive Officer of Boehringer Mannheim Group, Amsterdam,
and a member of the Board of Corange Ltd., Bermuda. He served as Chief Executive
Officer of Boehringer Mannheim Therapeutics, Mannheim, from May 1994 to May
1995. Dr. Moller also serves as Director and Chairman of Morphosys AG in Munich.

Joan H. Dillard has been Chief Financial Officer of ESG Re since March 1998.
From 1993 to 1998, Ms. Dillard was Senior Vice President of TIG Insurance
Company in Dallas, Texas. During this time, she served in various positions such
as Chief Financial Officer of Personal Lines, Treasurer, and the Director of the
Alternative Distribution Business Unit. Between 1990 and 1993, Ms. Dillard acted
as Senior Vice President and Treasurer of USF&G Corporation in Baltimore,
Maryland. Prior to that, Ms. Dillard served as Treasurer of American General
Finance Company, Assistant Treasurer of American General Corporation and as
Financial Manager of The Johns Hopkins Hospital.

Margaret L. Webster has been Chief Administrative Officer since March 1999.
From November 1997 to March 1999, Ms. Webster was V.P. Systems of Lincoln
National Life Insurance in Ft. Wayne, Indiana. Between 1995 and 1997, she was
V.P. Systems of TIG Insurance Company in Dallas, Texas. Prior to that, Ms.
Webster served in various positions, such as Attorney, V.P. of Human Resources,
V.P. of Quality and Professional Standards at Alexander & Alexander in
Baltimore, Maryland.

65
<PAGE>
Cormac G. Treacy has been Controller of ESG Re Limited since November 1998.
Prior to that, he spent eleven years with American International Group, Inc. in
various positions, such as Controller Direct Marketing, American International
Underwriters and Financial Controller, Landmark Insurance Company (UK) Limited.

The information with respect to directors of the Company is contained under
the captions "Election of Directors" in the Proxy Statement and is incorporated
herein by reference in response to this item.

The information required in this item with respect to Section 16(a)
compliance disclosure is incorporated by reference from the Company's definitive
Proxy Statement for its 2000 Annual Meeting of Stockholders to be filed with the
Securities and Exchange Commission pursuant to Regulation 14A under the
Securities Exchange Act of 1934.

ITEM 11. EXECUTIVE COMPENSATION

The Information with respect to executive compensation is contained under
the caption "Executive Compensation" in the Proxy Statement and is incorporated
herein by reference in response to this item.

On February 25, 2000, a restricted stock plan "2000 Restricted Stock Plan"
was approved by the Board of Directors The purpose of the Plan is to provide an
incentive to the officers and certain other key employees of the Company and its
affiliates (as determined by the Compensation Committee of the Board of
Directors) to contribute to the Company's future success and prosperity by
making available to them an opportunity to acquire a proprietary interest or to
increase their proprietary interest in the Company and to enhance the ability of
the Company and its affiliates to attract and retain qualified individuals upon
whom, in large measure, the progress, growth, and profitability of the Company
depend. The Compensation Committee has discretionary authority to interpret the
2000 Restricted Stock Plan and to determine the terms of any awards, when, if
and to whom awards are granted, and the number of Common Shares covered by each
award.

An S-8 Registration Statement was filed and effective on March 13, 2000
covering this Plan. The Board of Directors made grants to 25 key employees of
the Company on March 14, 2000, totaling 616,400 shares. The shares will vest as
follows, assuming the employee remains in the employ of the Company until the
vest date: 25% on September 14, 2000; 25% on September 14, 2001; 25% on
September 14, 2002; and 25% on September 14, 2003. Mr. Head was awarded 350,000
shares pursuant to the terms of his employment agreement. Mr. Debrover was
awarded 41,200 shares. Ms. Dillard was awarded 30,600 shares. Ms. Webster was
awarded 25,000 shares. Mr. Treacy was awarded 13,200 shares.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The information with respect to security ownership of certain beneficial
owners and management is contained under the caption "Information Regarding the
Security Ownership of Certain Beneficial Owners, Management and Directors" in
the Proxy Statement and is incorporated herein by reference in response to this
item.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

The information with respect to certain relationships and related
transactions is contained under the caption "Certain Relationships and Related
Transactions" in the Proxy Statement and is incorporated herein by reference in
response to this item.

66
<PAGE>
PART IV.

ITEM 14. EXHIBITS, FINANCIAL STATEMENTS SCHEDULES AND REPORTS ON
FORM 8-K (A) 1. FINANCIAL STATEMENTS:
3. EXHIBITS:

<TABLE>
<S> <C>
2.1* Share Exchange Agreement between ESG Re Limited and European
Specialty Group (United Kingdom) Limited, dated as of
November 13, 1997

2.2* Share Exchange Agreement between the shareholders of
European Specialty Group Holding AG and European Specialty
Group (United Kingdom) Limited, dated as of November 13,
1997

3.1* Memorandum of Association

3.2* Bye-Laws

4.1* Specimen Common Share certificate

4.2* Form of Class A Warrant

4.3* Form of Class B Warrant

10.1* Form of Subscription Agreement, between ESG Re Limited and
certain Direct Purchasers, dated as of September 30, 1997

10.2* Employment Agreement between European Specialty Group
(United Kingdom) Limited, ESG Re Limited and Wolfgang M.
Wand, dated as of December 1, 1997

10.3* Employment Agreement between ESG Re Limited and Steven H.
Debrovner, dated as of December 1, 1997

10.4 Employment Agreement between ESG Re Limited and John C Head
III, dated as of September 1, 1999

10.5 Employment Agreement between ESG Re Limited and Joan H.
Dillard, dated as of March 23, 1998

10.6 Employment Agreement between ESG Re Limited and Margaret L.
Webster, dated as of March 1, 1999

10.6* Employment Agreement between European Specialty (North
America) Limited and Renate M. Nellich, dated as of December
1, 1997

10.7* Investment Advisory Agreement between ESG Re Limited and
Head Asset Management L.L.C., dated as of December 1, 1997

10.8* Investment Advisory Agreement between European Specialty
Ruckversicherung AG and Head Asset Management L.L.C., dated
as of December 1, 1997

10.9* Form of Registration Rights Agreement between ESG Re Limited
and the Direct Purchasers named therein

10.10** Form of Non-Management Directors' Compensation and Option
Plan, approved on December 3, 1997 between ESG Re Limited
and non-employee director optionees
</TABLE>

67
<PAGE>
<TABLE>
<S> <C>
10.11** Form of 1997 Stock Option Plan, approved on December 3, 1997
between ESG Re Limited and certain optionees

10.12*** Form of 2000 Restricted Stock Plan, approved on February 25,
2000 between ESG Re Limited and certain recipients

22.1* Subsidiaries of the Registrant

27.1 Financial Data Schedule
</TABLE>

- ------------------------

* Incorporated by reference to Amendment No. 1 to the Registration Statement
on Form F-1 of the Company, as filed with the Securities and Exchange
Commission on December 9, 1997 (registration No. 333-40341). The Consent by
the Company's independent auditors to incorporate by reference is set forth
in Exhibit 24.1(b) of this report.

** Incorporated by reference to Exhibit 10.9 of the Company's Form 10-K for the
year ended December 31, 1997, filed with the Securities and Exchange
Commission on March 31, 1998.

*** Incorporated by reference to the Registration Statement on Form S-8 of the
Company, as filed with the Securities and Exchange Commission on March 13,
2000 (registration No. 333-32302).

(b) Reports on Form 8-K. The Company filed reports on Form 8-K on September 15,
1999, October 22, 1999, December 16, 1999 and December 28, 1999. There were
no other reports on Form 8-K filed during the period from January 1, 1999,
to December 31, 1999.

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Company has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized, thereunto
authorized,on March 30, 2000.

<TABLE>
<S> <C> <C>
ESG RE LIMITED

BY: /S/ JOAN H. DILLARD
-----------------------------------------
Name: Joan H. Dillard
Title: Chief Financial Officer
</TABLE>

68
<PAGE>
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.

<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
/s/ JOHN C HEAD III Chairman of the Board,
-------------------------------------- Chief Executive Officer and March 30, 2000
John C Head III Director

/s/ STEVEN H. DEBROVNER Chief Executive
-------------------------------------- Officer--Reinsurance and Director March 30, 2000
Steven H. Debrovner

/s/ JOAN H. DILLARD Chief Financial Officer
-------------------------------------- March 30, 2000
Joan H. Dillard

/s/ GERALD MOLLER Chief Executive Officer--Health
-------------------------------------- March 30, 2000
Gerald Moller

/s/ DAVID L. NEWKIRK Director
-------------------------------------- March 30, 2000
David L. Newkirk

/s/ EDWARD A. TILLY Director
-------------------------------------- March 30, 2000
Edward A. Tilly
</TABLE>

69
<PAGE>
ESG RE LIMITED

INDEPENDENT AUDITORS' REPORT

To the Board of Directors and Shareholders of ESG Re Limited

We have audited the accompanying consolidated balance sheets of ESG Re
Limited and subsidiaries as of December 31, 1999 and 1998, and the related
consolidated statements of operations, changes in shareholders' equity, cash
flows and comprehensive income for each of the three years in the period ended
December 31, 1999. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.

We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.

In our opinion, such consolidated financial statements present fairly, in
all material respects, the financial position of the Company and its
subsidiaries as of December 31, 1999 and 1998, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1999, in conformity with accounting principles generally accepted
in the United States of America.

DELOITTE & TOUCHE

Chartered Accountants
Hamilton, Bermuda
March 10, 2000

<PAGE>
<ARTICLE> 7
<LEGEND>
This schedule contains summary financial information extracted from the
condensed consolidated balance sheet at December 31, 1999 and condensed
consolidated statement of operations for the year ended December 31, 1999, and
is qualified in its entirety by reference to such financial statements.
</LEGEND>

<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<DEBT-HELD-FOR-SALE> 177,170
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 3,985
<MORTGAGE> 0
<REAL-ESTATE> 0
<TOTAL-INVEST> 193,271
<CASH> 28,278
<RECOVER-REINSURE> 11,462
<DEFERRED-ACQUISITION> 57,807
<TOTAL-ASSETS> 605,684
<POLICY-LOSSES> 136,935
<UNEARNED-PREMIUMS> 181,127
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 0
<NOTES-PAYABLE> 0
0
0
<COMMON> 11,599
<OTHER-SE> 165,216
<TOTAL-LIABILITY-AND-EQUITY> 0
249,553
<INVESTMENT-INCOME> 13,575
<INVESTMENT-GAINS> (1,974)
<OTHER-INCOME> 2,327
<BENEFITS> 200,016
<UNDERWRITING-AMORTIZATION> 66,230
<UNDERWRITING-OTHER> 0
<INCOME-PRETAX> (41,179)
<INCOME-TAX> 815
<INCOME-CONTINUING> (41,994)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (41,994)
<EPS-BASIC> (3.17)
<EPS-DILUTED> (3.17)
<RESERVE-OPEN> 44,379
<PROVISION-CURRENT> 190,474
<PROVISION-PRIOR> 9,542
<PAYMENTS-CURRENT> 85,378
<PAYMENTS-PRIOR> 30,783
<RESERVE-CLOSE> 136,935
<CUMULATIVE-DEFICIENCY> 0

</TABLE>