SC Fundamental Calls for Shareholder Action on ESG Re, Releases Letter to Company's Board.

Business Editors

NEW YORK--(BUSINESS WIRE)--April 27, 2000

Private investment management firm SC Fundamental LLC today publicly released a copy of a letter that it mailed to the Board of Directors of ESG Re Limited and called on shareholders to take action to protect the value of their investments in ESG. SC Fundamental and its affiliates beneficially own nearly 5% of the ESG's outstanding shares. SC Fundamental's actions were triggered by a review of the company's recently released proxy statement and Form 10-K. These filings disclosed, for the first time, the compensation being paid to ESG Chairman John Head for acting as the company's Chief Executive Officer. Specifically, in exchange for 16 months of service, Mr. Head is to receive an outright grant of 350,000 shares, options to purchase an additional 350,000 shares at $5.44 per share, and a "golden parachute" payment of $5.8 million upon a change of control at ESG.

Head began acting as CEO in September of 1999 following the resignation of former CEO Wolfgang Wand. Since Head's appointment, ESG has announced net losses aggregating nearly $50 million.

SC Fundamental's President, Peter Collery, commented as follows: "ESG Re is John Head's creation. He organized the company, hired its management team, sold its shares to the public, manages its investment portfolio and has served as its Chairman since inception. For these services he and his affiliates have received cash compensation of nearly $4 million, in addition to warrants, options and expense reimbursement, while the share price has fallen by approximately 80%. Now, he proposes to serve as interim CEO for 16 months and to receive, by our estimate, a further $3 million worth of stock and options. Should the company be sold during his term as CEO, he stands to realize a further $5.8 million golden parachute payment and ESG may be obligated to pay him as much as $4 million more for his taxes. Indeed, were the company to be sold, the aggregate cost to ESG of these arrangements would represent an astonishing 35% of the company's current market capitalization."

Collery also observed: "Adding insult to injury, it is almost certain that the company's share price would rise considerably if ESG were to be sold or liquidated. The company's refusal to pursue these alternatives has likely depressed the share price even as it has created the 'need' to hire John Head as CEO. It is simply galling that Head, as CEO, should be overpaid in a currency - ESG equity - which is depressed by choices made by Head as Chairman. With respect to the golden parachute, it serves absolutely no business purpose and appears to represent nothing more than a $9.8 million 'tax' which John Head intends to collect for permitting a sale of ESG."

SC Fundamental is calling on all ESG shareholders to contact the company's Board of Directors to express their dismay at the Head compensation package and to demand that it be revoked. Additionally, the firm is urging that shareholders vote their proxy statements FOR the shareholder resolution advocating a sale of the company. Finally, SC Fundamental is calling for shareholders to WITHHOLD authority to vote for all of the company's nominees at this year's annual meeting to be held on May 8. Shareholders who have not already voted should do so by using the proxy form provided by their brokers or ESG. Investors who have voted and whose shares are held in "street name" can change their votes by contacting their brokers while investors whose shares are held in their own names may change their votes by calling the company's transfer agent, Boston EquiServe at [phone].

SC FUNDAMENTAL LETTER FOLLOWS:

April 27, 2000

The Board of Directors ESG Re Limited Skandia International House 16 Church St. Hamilton, HM 11 BERMUDA

By fax with originals to follow:

Gentlemen:

I am writing to express my dismay about the compensation package recently awarded by ESG Re Limited to John Head and, more generally, to ask whether the interests of shareholders have been paramount in your deliberations concerning the company. I first became aware of the Head compensation arrangements at the beginning of this month when I read ESG's proxy and 10-K filings. I then attempted to contact the three members of the committee which approved this arrangement (two of whom subsequently resigned from the company). William Poutsiaka, who returned my call promptly, explained that he had resigned before the Head package was determined and could not offer any insight into it. Kenneth Morse has yet to contact me. I finally spoke with David Newkirk on April 17, and, on the basis of our conversation and my review of the relevant documents, offer the following observations and questions:

The compensation package

To the best of my knowledge, the Head compensation package consists of three elements: (i) an outright grant of 350,000 shares of common stock (the four-year vesting of which accelerates upon a "Change in Control"); (ii) immediately vesting options on a further 350,000 shares struck at $5.44 per share; and (iii) a "golden parachute" entitling Mr. Head to a lump sum cash payment of $5.6 million upon a "Change in Control" of ESG. This latter payment is subject to a "gross-up" for excise taxes. My attempts to review this package were hindered by the company's tardy filing of Head's employment contract with the SEC.

The rationale

Mr. Newkirk described the package as having an aggregate value of $1.7 million per year, covering a 16 month period from September of 1999 to year-end 2000. The company evidently hired outside experts who opined that this was a reasonable level of compensation.

The question of "Reasonableness"

It seems extraordinary that ESG would feel a need to pay $1.7 million per year for a CEO, when the former CEO, Wolfgang Wand, was willing to work for less than half of this amount in 1998. (According to the company's SEC filings, in 1998 Wand received cash compensation of $535,000 and stock options worth about $250,000). ESG's Board of Directors evidently considered Wand fit for his job when he was hired, and they presumably knew what he was earning. Did it not strike the Board as odd that "reasonable" compensation for the company's CEO more than doubled in a year's time even as the company has shrunk in size and complexity?

In any event, according to my Bloomberg, a 10-year at-the-money option on ESG common stock is worth 56% of exercise price. This would imply that the option grant was worth $1.1 million, in addition to the stock grant having been worth $1.9 million. This aggregates to $3.0 million, or somewhat more than $2.2 million per year, rather than the $1.7 million Mr. Newkirk cited. What could possibly account for the extra $500,000 in annual compensation?

In view of ESG's unusual circumstances, there are a number of ways of determining reasonable compensation. While premium volume and capital may indicate one answer, market capitalization and profitability may indicate another. Indeed, I would venture to suggest that ESG is without precedent as a public reinsurer in granting its CEO compensation worth almost 5% of its market capitalization in exchange for 16 months of work. Did the Board consider the value of Head's compensation in this light?

The cynicism of using a market price for ESG's stock

ESG's book value at December 31, 1999 was $15.28 per share. The company writes mostly short-tailed business and its reserves were evidently scoured in the course of preparing the 1999 financial statements. The substantial majority of the company's capital remains undeployed. It is difficult to believe that ESG could not be sold or liquidated for at least $12 per share and the fact that the shares trade at much less than this amount evidences significant shareholder mistrust of ESG's Board and management. For the Board to award Head an extravagant compensation package - which is precisely the type of conduct shareholders fear - and then pay that package in shares which are depressed because of the Board's perceived indifference to shareholders is a masterpiece of cynicism.

We and, I suspect, most non-management shareholders believe that ESG should be sold or liquidated. Pursuing this course of action would not have required hiring John Head as CEO and would have resulted in an immediate and substantial increase in ESG's share price. If, say, $12 per share is readily available in a sale and the Board has chosen not to take that price, then surely the cost of Head's compensation should be figured in $12 shares. Really, as a matter of fairness, Head should be rewarded only for adding value above a currently available alternative. To do otherwise is to simply transfer wealth from the shareholders to Mr. Head.

The Golden Parachute

A decision to sell or liquidate ESG, which would likely be the choice of the company's shareholders, would not have required awarding Head common shares or options. Now that they have been awarded, he stands to receive a $6.5 million windfall if a sale occurs at $12 per share. That he should stand to reap an additional $5.6 million through the operation of the golden parachute is unconscionable. The normal justification for such arrangements is that valued employees who are foregoing other employment options need some assurances that their lives will not be interrupted by a takeover of their company. This scenario is wholly inapplicable to John Head who is acting, supposedly reluctantly, in an interim capacity at a company where he has de facto control.

Even worse, his arrangement indemnifies him against excise taxes, which, as I understand it, would likely apply in his case. As near as I can determine, the cost of this indemnity, assuming Head pays taxes at a 50% combined federal and local rate, would be $4 million. The end result is that a provision for which there is no business rationale has the prospect of costing ESG some $9.8 million if the company is sold. By what possible logic can the Board have concluded that affording Head this windfall benefits shareholders?

Alternatives

In the course of determining Head's compensation, did the Board consider alternatives? Specifically, were any other candidates for CEO interviewed? Did ESG retain a firm to identify such candidates, or to advise the Board on the need for a CEO at all? Did the company attempt to determine what value it might have in a sale, and weigh that against the value to be realized by enriching Head at company expense even as it made a sale of the company much less attractive? Did the Board ever attempt to negotiate with Head in order to induce him to work for less generous compensation?

Propriety

ESG is the creation of John Head. He staffed it, passed on its business plan, sold it to the public and serves as its Chairman. For this he was very generously rewarded with warrants, stock options, and - including fees paid for investment management - cash compensation of nearly $4 million to date. The company's performance on his watch has been nothing short of disastrous which certainly raises questions about his suitability as CEO. What cannot be questioned is the unseemliness of his enriching himself at shareholder expense for cleaning up a mess that he was well paid to prevent in the first place. That he should stand to reap yet another windfall, again at shareholder expense, upon a sale of the company is simply disgraceful.

Due care?

I believe that the actions taken by ESG for the benefit of its largest shareholder and Chairman would be unlikely to withstand legal scrutiny. In this regard, my conversation with Mr. Newkirk, who served as Chairman and, ultimately, the sole member of the committee which approved the Head compensation package, is particularly revealing. In our discussion, Mr. Newkirk knew neither the exercise price of the Head options, nor even that the "gross-up" provisions of the golden parachute existed. Inasmuch as these provisions can be expected to cost the company an additional $4 million or 8% of its current market capitalization, it is impossible to believe that ESG's Directors exercised due care in their approval of the Head arrangement.

Remedies

It is imperative that the Board renegotiate the Head compensation package in order to, at a minimum, eliminate the golden parachute and provide for compensation which is reasonable in light of the company's circumstances, history and depressed stock price. I believe that such modifications would greatly ease concerns that Mr. Head is attempting to advance his own interests at shareholder expense, and would afford the company maximum flexibility in considering its future course of action. If the requested modifications are not made, my firm intends to consider all available options to hold Directors accountable for the unwarranted transfer of shareholder wealth to John Head.

Sincerely,

Peter M. Collery