Standard & Poor's today lowered its long-term counterparty credit and insurer financial strength ratings on European Specialty Reinsurance (Bermuda) Ltd., European Specialty Reinsurance (Ireland) Ltd., and European Specialty Ruckversicherung AG to double-'B'-plus from triple-'B', and removed them from CreditWatch, where they were placed with negative implications on March 1, 2000.

These three companies are core members of the ESG Re Ltd. (ESG) group.

The outlook on each entity is negative.

The ratings were placed on CreditWatch following concerns that the continuing difficult operating environment for the North American health reinsurance market would make earnings expectations formed in November 1999 difficult to achieve.

The downgrades reflect ESG's continued weak earnings performance, reduced capitalisation, concerns over internal control mechanisms, and the company's early departure from its original business development strategy.

ESG is a start-up reinsurance operation. Since 1994, the group has provided underwriting management services on behalf of certain reinsurers.

In 1997, ESG became a reinsurer, raising US$237 million through a successful IPO in December of that year.

Major rating factors: Weak earnings performance. Poor performance in the North American health reinsurance market from business written through ESG's Toronto and London offices, combined with underperformance of health care initiatives in the German health market, resulted in ESG posting significant losses in both the third and fourth quarters of 1999. Full-year losses are US$42 million. In light of these losses, ESG has taken steps to improve operational control of its underwriting activities.

The company has also reviewed its strategic investments in health care, and expects to divest its health care division during 2000. Therefore, ESG's results, have scope for future improvement.

Reduced capitalisation. ESG's poor 1999 results have led to a significant reduction in the company's capital position. At the end of 1999, capital adequacy had fallen to 130 percent according to Standard & Poor's capital model. This level of capitalisation offers the company little scope for expansion, or further significant deterioration in losses from business already on its books.

Concerns over internal control mechanisms and widespread changes in the management team. Standard & Poor's continues to have concerns over the lack of operational control exhibited by ESG so far, as evident in the group's poor 1999 underwriting results. The management team has also experienced significant changes for a start-up operation, with a number of senior executives -- including the original Chief Executive Officer -- being replaced during 1999.