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================================================================================
 
                                 UNITED STATES
 
                       SECURITIES AND EXCHANGE COMMISSION
                            WASHINGTON, D. C. 20549
                            ------------------------
 
                                   FORM 10-K
 
(MARK ONE)
[X]      ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES AND
                      EXCHANGE ACT OF 1934 [FEE REQUIRED]
 
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997
 
                                          OR
 
[ ]         TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
             SECURITIES AND EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
 
FOR THE TRANSITION PERIOD FROM                  TO
 
                          COMMISSION FILE NO. 1-12800
 
                              EXECUTIVE RISK INC.
             (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
 
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<S>                                            <C>
                   DELAWARE                                      06-1388171
       (STATE OR OTHER JURISDICTION OF              (I.R.S. EMPLOYER IDENTIFICATION NO.)
        INCORPORATION OR ORGANIZATION)
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                  82 HOPMEADOW STREET, SIMSBURY, CT 06070-7683
                    (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
 
       REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (860) 408-2000
                            ------------------------
 
          SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
 
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                TITLE OF CLASS                      NAME OF EXCHANGE ON WHICH REGISTERED
---------------------------------------------- ----------------------------------------------
 
         Common Stock, $.01 par value                     New York Stock Exchange
</TABLE>
 
     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 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.  [ X ]
 
     The aggregate market value on March 17, 1998 of the voting stock held by
non-affiliates of the registrant was approximately $730,089,000. There were
10,886,987 shares of the registrant's Common Stock, $.01 par value outstanding,
as of March 17, 1998.
 
                      DOCUMENTS INCORPORATED BY REFERENCE
 
(1) Portions of the 1997 Annual Report to Shareholders, as indicated herein
    (Part II).
 
(2) Proxy Statement involving the election of directors and other matters which
    the registrant intends to file with the Commission within 120 days after
    December 31, 1997 (Part III).
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                              EXECUTIVE RISK INC.
 
                            ------------------------
 
                               TABLE OF CONTENTS
 
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                                                                      PAGE
ITEM                                                                 NUMBER
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                                  PART I
 1.    Business....................................................     1
 2.    Properties..................................................    17
 3.    Legal Proceedings...........................................    17
 4.    Submission of Matters to a Vote of Security Holders.........    18
 
                                  PART II
 5.    Market for the Registrant's Common Stock and Related
         Stockholder Matters.......................................    18
 6.    Selected Financial Data.....................................    18
 7.    Management's Discussion and Analysis of Financial Condition
         and Results of Operations.................................    18
 7A.   Quantitative and Qualitative Disclosures About Market
         Risk......................................................    19
 8.    Financial Statements and Supplementary Data.................    19
 9.    Changes in and Disagreements with Accountants on Accounting
         and Financial Disclosures.................................    19
 
                                 PART III
10.    Directors and Executive Officers............................    19
11.    Executive Compensation......................................    19
12.    Security Ownership of Certain Beneficial Owners and
         Management................................................    19
13.    Certain Relationships and Related Transactions..............    19
 
                                  PART IV
14.    Exhibits, Financial Statement Schedules and Reports on Form
         8-K.......................................................    19
 
Signatures.........................................................    20
 
Exhibit Index......................................................    21
 
Index to Financial Statements and Schedules........................    23
</TABLE>
 
     The Private Securities Litigation Reform Act of 1995 provides a "safe
harbor" for forward-looking statements. This Form 10-K, the Company's Annual
Report to Stockholders, any Form 10-Q or any Form 8-K of the Company or any
other written or oral statements made by or on behalf of the Company may include
forward-looking statements which reflect the Company's current views with
respect to future events and financial performance. These forward-looking
statements are subject to uncertainties and other factors that could cause
actual results to differ materially from such statements. These uncertainties
and other factors (which are described in more detail elsewhere in this Form
10-K) include, but are not limited to, uncertainties relating to cyclical
industry conditions, uncertainties relating to governmental and regulatory
policies, the legal environment, the uncertainties of the reserving process, the
competitive environment in which the Company operates, the uncertainties
inherent in international operations, interest rate fluctuations and
uncertainties related to the Company's possible entrance into new insurance
lines and new geographic markets. The words "believe," "expect," "anticipate,"
"project," and similar expressions identify forward-looking statements. Readers
are cautioned not to place undue reliance on these forward-looking statements,
which speak only as of their dates. The Company undertakes no obligation to
publicly update or revise any forward-looking statements, whether as a result of
new information, future events or otherwise.
<PAGE>   3
 
                                     PART I
 
ITEM 1.  BUSINESS
 
  The Specialty Insurance Industry
 
     General.  Executive Risk Inc. ("ERI" or the "Company") is a specialty
insurance holding company incorporated under the laws of Delaware. Through its
subsidiaries, ERI develops, markets and underwrites specialty insurance
products, principally professional liability coverages but also crime, inland
marine and other property-casualty lines. The Company's business is primarily
domestic, conducted in all United States jurisdictions, with a wholly-owned
Dutch subsidiary, Executive Risk N. V. ("ERNV"), marketing certain of the
Company's product lines internationally, principally in the European Community.
The core business lines are directors and officers liability insurance ("D&O")
and professional liability insurance, also known as errors and omissions
liability insurance ("E&O"), which includes malpractice for law firms and health
care providers. Company subsidiaries also offer fidelity bonds and fiduciary
liability insurance to financial institutions and other entities, employment
practices liability insurance for entities and their employees, media liability
coverage to publishing and broadcasting businesses, as well as some automobile
and general liability coverage in connection with program relationships.
 
     The Company is committed to diversifying its book of business both within
and outside the specialty liability arena. In 1996, the Company introduced a
product for technology maintenance and repair coverage for hospitals and
clinics, as well as health care stop-loss arrangements for medical professionals
and medical malpractice liability coverage for hospitals and other health care
institutions. In the last quarter of 1997, an agreement was entered into with an
unaffiliated California-based underwriting agency which issues, on behalf of a
Company subsidiary, automobile liability insurance on a limited basis in the
"non-standard" market. Though the Company intends that the sale of domestic D&O
and E&O products will remain the principal sources of Company revenue for the
foreseeable future, it is expected that such businesses will be supplemented
with other lines of property-casualty insurance in the United States, as well as
with increased writings of D&O and E&O through ERNV in the European Community.
There can be no assurance, however, as to whether the Company will in fact enter
into any such new lines of insurance or, if it does, as to the timing thereof.
 
     Both D&O and E&O are designed to protect insureds against lawsuits and
associated legal defense expenses. In connection with D&O coverage of for-profit
corporations, such liabilities can arise from claims by customers, vendors,
competitors and former employees, although the most severe liabilities have
historically arisen from lawsuits by stockholders alleging director or officer
failure to discharge duties to the corporation or violations of federal
securities laws. In the case of not-for-profit organizations, the Company's
coverage is often implicated in employment practices litigation. E&O is most
often sold to professionals, such as attorneys, health care providers,
psychologists and insurance agents, among others, where the principal sources of
potential claims are dissatisfied clients alleging breaches of professional
standards or ethical violations.
 
     Fiduciary liability coverages are intended primarily to protect those who
invest and administer benefit plan trusts, and fidelity insurance policies (or
crime coverage) insure against losses associated with employee theft and other
types of dishonesty. Employment practices liability insurance, which is
available to cover both the employing organization and its supervisors, insures
against losses associated with employee claims such as sexual harassment,
wrongful termination and discriminatory treatment. Non-standard automobile
insurance is offered to higher-risk insureds in states, like California, where
liability insurance is required in order to register a vehicle. The Company's
non-liability related products are Systems Rx, a service contract and cost
management product for owners of high-tech diagnostic equipment and related
health care technology, and providers' excess which is a stop-loss policy for
doctors enrolled in managed care organizations that receive revenues for
services under the capitation method, which limits such revenues on a per
patient basis.
 
     The D&O Industry.  Under various state laws, corporations are authorized to
indemnify their directors and officers against legal claims arising in
connection with their work on behalf of the corporation. In order to attract and
retain qualified directors and officers, corporations purchase D&O, which
typically covers the corporate entity, but only to the extent that it
indemnifies officers and directors. D&O policies have
 
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<PAGE>   4
 
traditionally also contained a provision that covers officers and directors
directly, in order to insure against losses for which the corporation is legally
or financially unable to indemnify. In recent years, many D&O insurers,
including the Company, have begun to offer another form of coverage, so-called
"entity coverage," which protects the corporation for limited classes of legal
liability, even when directors and/or officers are not named as defendants in
the claim.
 
     The demand for D&O insurance grew dramatically in response to increased
activity in corporate mergers and acquisitions during the late 1970's and the
1980's and the attendant increase in shareholder lawsuits. By the mid-1980's, a
number of carriers, having suffered large losses in this line of business, had
reduced their D&O activities or had ceased offering D&O coverage altogether,
resulting in a shortage of capacity or a "hard market" for D&O. The Company's
subsidiary, Executive Re Inc. ("Executive Re"), was formed in late 1986, largely
due to the decrease in D&O capacity. Today, the D&O market has softened
significantly, as competition has become robust during the 1990's. Company
management believes that a relatively small number of U.S. insurers, together
with Underwriters at Lloyd's ("Lloyd's"), currently dominate the D&O market for
larger and medium-sized domestic corporations. Demand within that market should
continue to be impacted by consolidating sectors, such as financial services and
technology, as well as by statutory, regulatory and case law developments that
affect executive liabilities. The Company has identified opportunities for
growth in D&O demand in the domestic not-for-profit sector, as well as among
non-bank financial institutions, corporations contemplating initial public
offerings, small, privately-held commercial entities and in the European
Community, where shareholder-initiated litigation is a relatively new, but
growing, phenomenon due principally to the increase in the trading of American
Depository Receipts ("ADRs") of foreign companies on U.S. exchanges.
 
     Historically, the single largest risk for which corporations purchased D&O
insurance coverage has involved shareholder-based suits, either in the form of
derivative actions under state corporation laws or in the form of class actions
for securities fraud under Rule 10b-5 of the Securities and Exchange Commission
("SEC"), promulgated under the Securities Exchange Act of 1934. In December
1995, Congress passed the Private Securities Litigation Reform Act of 1995,
which has a number of provisions purporting to affect the ability of private
litigants to prosecute securities fraud suits. The Company's management believes
that the effects of this legislation on the demand for D&O and upon the
frequency and severity of D&O claims have so far been negligible. It is likely
to be many years in the future before the actual impact of this legislation on
the D&O industry is known.
 
     E&O Insurance.  The E&O insurance industry tends to be more fragmented and
regionalized than the D&O industry, since the risks underwritten vary
significantly depending on the nature of the profession and the geographic area
in which it is practiced. Management believes that success in E&O is
particularly dependent on knowledgeable underwriting and on well-conceived
distribution and claims handling systems. ERI's subsidiaries offer E&O coverage
to a wide variety of professional classes, with major classes that include:
large and medium-size law firms, medium-size accounting firms, psychologists,
insurance agents, property managers, home inspectors, real estate title and
closing professionals and mortgage brokers. In addition, E&O products are
available to financial institutions and health care organizations.
 
     The Company's underwriting for E&O business is divided among the
Professional Firms unit, encompassing the Lawyers' Professional Liability
("LPL") and Accountants' Professional Liability ("APL") product lines, the
Health Care unit, which writes medical malpractice for hospitals and E&O for
managed care organizations ("MCOs"), and the Miscellaneous Professional
Liability ("MPL") unit, which encompasses a wide array of professionals
including insurance agents, real estate professionals and home inspectors. The
Professional Firms unit's LPL and APL policies are underwritten by
Company-employed professionals, most of whom have some large law firm
experience. Policies for hospitals and MCOs are underwritten by Company staff at
the Company's headquarters in Connecticut, as well as through Sullivan Kelly
Inc. ("Sullivan Kelly"), a California-based brokerage and underwriting
management firm acquired in September 1997. Policies issued through the MPL unit
are generally underwritten directly by Company-employed underwriters. However, a
growing percentage of Company E&O coverage is being written through outside
brokerage firms, known as program administrators, which have experience and
expertise with respect to a
 
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specific class of risk and with which the Company has entered into written
contractual agreements (see "Markets -- Errors and Omissions Insurance").
 
  The Company
 
     History.  The Company's subsidiary, Executive Re, was formed in 1986 by The
Aetna Casualty and Surety Company ("Aetna," now a subsidiary of Travelers
Property Casualty Corp.) and certain other institutional investors to capitalize
on the deficiency of insuring capacity which then existed in the D&O industry.
It commenced operations in 1987. During its first five years, Executive Re
established an underwriting and marketing infrastructure for the provision of
D&O coverage through an insurance facility (the "Facility") with Aetna.
Executive Risk Management Associates ("ERMA"), a Connecticut general partnership
initially owned 30% by Executive Re and 70% by Aetna, was formed to market and
underwrite D&O insurance policies. Executive Risk Indemnity Inc. ("ERII"), a
Delaware insurance company, was acquired to reinsure D&O policies for which
Aetna was the direct insurer. In 1991, Executive Re took steps to expand
domestically into E&O markets on a niche basis, and in 1993, began its overseas
marketing efforts through a joint venture, known as UAP Executive Partners
("UPEX"), owned 50% by the Company and 50% by Union de Assurance de
Paris -- Incendie Accidents, a large French insurance company. UPEX was
dissolved as of December 31, 1997, and the Company now utilizes ERNV for access
to the European markets (see below).
 
     Ownership and Structure.  The Company was formed in August 1993 in
anticipation of a reorganization transaction (the "1994 Transaction"),
consummated on January 1, 1994. As a result of the 1994 Transaction, ERI now
owns Executive Re, and together the two own 100% of ERMA. The Company is the
indirect holding company of the Executive Re subsidiaries, which now include
ERII, as well as ERII's Connecticut domiciled insurance company subsidiaries,
Executive Risk Specialty Insurance Company ("ERSIC") and Quadrant Indemnity
Company ("Quadrant"). ERII, ERSIC and Quadrant are referred to herein as the
"Insurance Subsidiaries," and Executive Re also owns Executive Risk (Bermuda)
Ltd. ("ER Bermuda"), a Bermuda insurer formed in 1997 primarily to reinsure ERII
business. Further, the 1994 Transaction modified the Facility, permitting the
Insurance Subsidiaries to underwrite D&O insurance directly. With the completion
of the 1994 Transaction and ERI's initial public stock offering in March 1994,
the Company became a publicly-owned insurance holding company, with Aetna owning
approximately 4.5 million shares and an option to purchase 100,000 shares at a
price of $12.00 per share (the "Aetna Option"), or approximately 40% of the
Company's capital stock.
 
     In March 1996, the Company entered into a Stock Purchase Agreement (the
"Stock Purchase Agreement") with Aetna and its then-parent, Aetna Life and
Casualty Company ("AL&C"). On March 26, 1996 (the "Repurchase Closing Date"),
the Company purchased from Aetna approximately 2.5 million shares of capital
stock at a price of $29.875 per share, or approximately $75 million in the
aggregate. For approximately two and a half months following the Repurchase
Closing Date, AL&C continued to own 2,000,000 shares of the Company's Common
Stock, representing approximately 22% of the then issued and outstanding amount.
In accordance with the Stock Purchase Agreement, the Company filed with the SEC
a Form S-3 Registration Statement, under which it registered for public sale all
2,000,000 of AL&C's remaining shares. In connection with this secondary
offering, the Company also registered 300,000 newly issued shares. The
underwritten public offering closed on June 7, 1996, on which date the 2,300,000
shares were sold at the price of $34.00 per share. Upon closure of such
secondary offering, neither Aetna nor AL&C have any ownership interest in the
Company, other than the Aetna Option.
 
     The 1997 Facility Restructuring.  Until early 1997, D&O business was
primarily conducted through the Facility, consisting of Aetna, ERII and ERSIC,
each of which acted as an insurer or reinsurer, and ERMA, which acted as the
product developer, marketer and managing underwriter. The Facility had operated
under the terms of a number of related agreements, under which Aetna had
authorized ERMA to underwrite and issue, on behalf of Aetna, policies of D&O
insurance, financial institution trust department errors and omissions insurance
("Trust E&O"), and certain other insurance ("Other Lines"; collectively with D&O
and Trust E&O, the "Aetna Lines"), all in accordance with prescribed
underwriting guidelines and within defined liability limits. Under this
arrangement, ERMA had the exclusive right and authority to issue D&O insurance
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<PAGE>   6
 
on behalf of Aetna in North America, an exclusivity binding on Aetna, but not
binding on Aetna's new parent, Travelers Property Casualty Corp. Generally,
where Aetna's policies had been issued, Aetna had ceded 50% of gross D&O
liability to ERII on a quota share basis, with other specified percentages
applicable to non-D&O policies. Where an Insurance Subsidiary's policy had been
issued, 12.5% of the gross D&O liability had been ceded to Aetna on a quota
share basis. For each reinsured policy, the reinsuring entity had received
premium from the reinsured entity and had been obligated to pay a ceding
commission to the reinsured entity.
 
     On February 13, 1997, the Company announced a restructuring (the
"Restructuring") of its relationship with Aetna. In connection with the
Restructuring, the Pre-restructuring agreements were terminated and replaced
with the following agreements: (a) a Restructuring Agreement, dated February 13,
1997 (the "Restructuring Agreement") by and among the Company, and its
subsidiaries, Executive Re, ERII, ERSIC and ERMA (collectively, the
"Subsidiaries"), and Aetna and its subsidiary, Aetna Casualty & Surety Company
of Canada; (b) an Agency and Insurance Services Agreement, dated as of January
1, 1997, between Aetna and ERMA (the "1997 Agency Agreement"); and (c) a Quota
Share Reinsurance Agreement, dated as of January 1, 1997, between Aetna and ERII
(the "1997 Reinsurance Agreement"). Pursuant to the 1997 Agency Agreement, ERMA
retains the right and authority, on a non-exclusive basis, to (i) renew on Aetna
paper all policies of Aetna Lines written or quoted prior to February 13, 1997,
and (ii) underwrite and issue new policies of Aetna D&O in the United States in
accordance with existing underwriting guidelines and specified limitations on
limits of liability. The 1997 Agency Agreement provides that annual gross
premium volume written by ERMA with respect to Aetna Lines must not exceed an
aggregate amount equal to the lesser of (x) 10% of the sum of the Company's
total direct gross D&O premiums plus the total direct gross D&O premiums written
by ERMA on Aetna policies under the 1997 Agency Agreement and (y) $25 million.
The Company currently expects that it will underwrite and issue Aetna policies
aggregating lower premium volumes than the maximums permitted under the 1997
Agency Agreement. Unless terminated sooner in accordance with its terms, the
1997 Agency Agreement will remain in effect through December 31, 1999 (subject
to possible extension; see paragraph (e) below).
 
     Prior to January 1, 1997, a 12.5% quota share participation had been ceded
to Aetna in generally all direct D&O business written on ERII and ERSIC
policies. Under the Restructuring Agreement, effective as of January 1, 1997,
Aetna no longer participates in the Company's direct D&O business by way of
reinsurance. During 1996, the Company's direct D&O business totaled
approximately $225 million. Additionally, under prior to January 1, 1997, ERII
had a 50% quota share participation in generally all business written on Aetna's
behalf by ERMA. Pursuant to the Restructuring Agreement, as of January 1, 1997,
ERII has a 100% quota share participation in all Aetna Lines business written by
ERMA on behalf of Aetna. Under the 1997 Reinsurance Agreement, Aetna receives a
ceding commission equal to actual producers' commissions plus 3.5% of gross
written premiums, less return premiums, as an allowance for premium taxes and
other costs and expenses incurred by Aetna in connection with the business
covered under that agreement.
 
     In addition to modifying the agency and reinsurance relationships, the
Restructuring Agreement provided for the following:
 
          (a) Mr. Joseph P. Kiernan, an officer of Aetna, resigned from the
     Boards of Directors and Partnership Committee, as the case may be, of the
     Company, the Insurance Subsidiaries and ERMA, and Aetna no longer has any
     election or nomination rights with respect to the Boards of Directors or
     Partnership Committee of the Company and its Subsidiaries;
 
          (b) all restrictions on the Company's premium volume (other than as to
     the business written on Aetna policies as described above) and any
     remaining Aetna consent requirements for the Company's corporate governance
     were terminated;
 
          (c) the Company agreed to secure a portion of Aetna's reinsurance
     receivable from ERII by means of providing Aetna with a standby letter of
     credit in an amount of not more than $25 million, subject to adjustment in
     the event of certain contingencies;
 
          (d) Aetna, on behalf of itself and its subsidiaries and certain
     affiliates, agreed that for a period of two years it will not solicit the
     Company's (or any Subsidiary's) underwriters for employment; and
 
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          (e) the parties have mutually agreed to meet in 1999 to discuss the
     possibility of entering into another agency relationship with respect to
     D&O beyond December 31, 1999.
 
     Under the Restructuring, the Company and its Subsidiaries relinquished the
exclusive right to underwrite and issue D&O on Aetna policies as discussed
above. Consequently, competition for D&O may increase due to the Restructuring.
Management is of the opinion that there are benefits to the Company by virtue of
the Restructuring, principally those flowing from the cessation of Aetna's 12.5%
quota share participation in ERII's and ERSIC's direct D&O business, as
described above.
 
  Markets
 
     Directors & Officers Insurance.  ERI's strategy continues to focus on
finding profitable niche opportunities, applying product-development skills and
industry knowledge to specific industry groups and market segments. In addition
to international D&O, which is now underwritten through ERNV, the Company's
domestic insurance subsidiaries market D&O products in the following principal
sectors: Commercial Entities, Financial Institutions, Health Care Entities and
Not-for-Profit Organizations. Based on the 1996 survey of the D&O industry
conducted by Watson Wyatt Worldwide, ERI's management believes that the Company
is one of the leading writers of primary D&O in the United States.
 
     The following table shows the gross D&O premiums written for each of these
sectors for the periods indicated:
 
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                                                     GROSS DOMESTIC D&O PREMIUMS WRITTEN
                      SECTOR                               YEAR ENDED DECEMBER 31,
                      ------                         -----------------------------------
                                                       1997         1996         1995
                                                     ---------    ---------    ---------
                                                               (IN THOUSANDS)
<S>                                                  <C>          <C>          <C>
Commercial Entities................................  $140,831     $135,418     $ 88,318
Financial Institutions.............................    55,006       52,579       44,347
Health Care Entities...............................    50,419       36,123       20,677
Not-for-Profit Organizations.......................    28,842       16,714        6,149
                                                     --------     --------     --------
          Total....................................  $275,098     $240,834     $159,491
                                                     ========     ========     ========
</TABLE>
 
     Within each of the principal D&O sectors, ERI has targeted subsectors and
developed specialized expertise, a strategy that management believes has allowed
ERMA and the Insurance Subsidiaries to develop and adapt their insurance
products more knowledgeably and to underwrite submissions and process claims
more professionally than competing companies. Management also believes that such
expertise, together with a strong reputation for prompt service and responsive
claims handling, alleviates some of the pressure to compete on the basis of
price during a "soft market," such as that which has prevailed within the
industry in recent years. (See "Competition.")
 
     The Commercial Entities sector has traditionally focused on publicly owned,
mid-sized companies, but a number of ancillary products have also emerged out of
this sector. ERI has provided secondary layers of insurance (called "excess
insurance") for larger public companies which purchase primary D&O coverage from
other insurers. Excess insurance covers large losses above the policy limit(s)
of the primary insurance and any lower layer excess policies. During 1997, the
Company introduced a new excess insurance product, known as the Flex(sm) policy,
which is designed to be layered above multiple primary policies covering diverse
liability risks in addition to D&O. Also, in 1993 the Company began to focus on
coverages for small commercial entities (assets under $100 million), and a
product (The Power(sm) policy) specifically designed for the small, non-public
commercial entity was introduced by the Company in late 1995. Another new
commercial product created during 1997 targets private companies about to engage
in an initial public offering.
 
     Within the Financial Institutions sector, the Company maintains
specializations in several sub-sectors, such as community banks (including small
depository institutions with under $250 million in assets), large depository
institutions, investment advisors, mutual fund companies and broker-dealers. The
underwriting of these D&O products is closely aligned with the underwriting of
professional liability, fiduciary and related
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<PAGE>   8
 
coverages for providers of financial services, all of which are encompassed
within the Company's Financial Institutions unit. The remaining sectors, Health
Care Entities and Not-for-Profit Organizations, include primarily nonprofit
hospitals, MCOs and a wide variety of social service/charitable organizations
(such as foundations, chambers of commerce, etc.).
 
     Errors & Omissions Insurance.  Underwriting of E&O, other than professional
firms E&O, has historically been performed within the MPL group, which was
formed in 1992 and oversees the Company's basic line of E&O products. Through
the MPL unit, the Company offers E&O products providing up to $5 million in
coverage to a variety of smaller to medium-sized, independent professionals in a
wide variety of service sectors, including the insurance agency, financial
services and real estate sectors. (Negotiations currently in progress with
reinsurers will likely permit the Company to write up to $25 million in MPL
limits by the second quarter of 1998.) During 1996, the Company refocused its
efforts with respect to financial institution E&O products, such as policies for
mutual fund sponsors, financial advisory firms and related financial industry
participants. As noted above, such products are underwritten with Financial
Institutions D&O by the Financial Institutions unit of the Underwriting
Department.
 
     Following a research and development program, the Company formed the LPL
underwriting group in 1993. Using only attorney-underwriters, this group
initially underwrote E&O only for large law firms (generally those with at least
35 lawyers) on a primary or excess coverage basis. The LPL unit has evolved to
become a Professional Firms unit, the staff of which underwrites risks for
medium size law firms as well as medium size accounting firms. The Company
believes that the use of experienced professionals (including lawyers and
accountants as applicable) in the marketing and underwriting process has proven
to be a successful tactic for approaching firms in the target market. Beginning
in January 1996, a reinsurance program, involving a number of domestic and
international reinsurance markets, became effective, and the Company began to
market LPL policies up to limits of $50 million each loss and $100 million in
the aggregate. (See "Reinsurance.")
 
     The Company's combined D&O and E&O product for health care entities was
introduced in 1996 in recognition of the evolving liability profile of hospital
and MCO managements. In September 1997, the assets of Sullivan Kelly &
Associates, Inc., Insurance Brokers ("SKA"), a writer of malpractice coverage
for health care entities, became available through a bankruptcy, and the Company
acquired such assets for $2.3 million in cash. With principal offices in
Pasadena, and satellite branches in Dallas and Phoenix, this acquisition is
expected by management to help leverage the Company's position as a leading
provider of insurance products to the hospital and health care industry. A new
subsidiary of Executive Re, Sullivan Kelly, was formed to acquire the assets of
SKA and conduct the institutional medical malpractice business, which involves
placing Insurance Subsidiary and third party insurance policies.
 
     Program administration involves contracting with third party producers who,
with special expertise in a specific class of risk, agree to underwrite and, in
most cases, to issue Insurance Subsidiary policies, all within carefully defined
parameters. The Company plans to increase its distribution capabilities through
the use of program administrators. Program administration arrangements could
become a bigger part of the distribution methodology in the coming year. (See
"Marketing.")
 
     International.  In December 1997, the Company announced that the UPEX joint
venture, which had been formed in 1993, would terminate as of December 31, 1997.
In connection with the termination, the former joint venture partner has paid to
the Company the amount of $0.7 million in exchange for an agreement by the
Company not to solicit a list of UPEX insureds for a period of one year. The
UPEX facility had been formed to write only D&O in Europe, and during 1997 gross
written premiums by UPEX totaled $21.3 million, in which the Company had a 50%
participation.
 
     The Company plans to continue to serve the European market through policies
underwritten and issued by ERNV. The Dutch subsidiary was founded in 1995,
primarily to participate in a Netherlands-based D&O pool, which participation
ended on December 31, 1996. In February 1998, the Company restructured ERNV,
through the formation of a Netherlands insurance holding company, Executive Risk
International Holdings BV ("ERBV"), to take ownership of ERNV. ERBV was
capitalized in February 1998 through a $6.0 million investment of equity capital
and a $34.0 million loan from Executive Re, which total of $40 million was in
turn
                                        6
<PAGE>   9
 
contributed to ERNV as equity capital. In addition, the Company applied for and
obtained a group rating for ERNV from A.M. Best and Company Inc. ("Best's"),
thereby extending to it the benefit of the Insurance Subsidiaries' "A
(Excellent)" Best's rating.
 
     With the new capital and surplus and above-referenced Best's rating, the
Company believes that ERNV is positioned to compete for liability insurance
business within the European Community. Offices have been opened in London,
Paris and Rotterdam, and executive and underwriting personnel have been hired.
The re-positioning of ERNV as the Company's outlet in Europe confers several
long-term strategic benefits, including the ability to sell E&O, as well as D&O,
products which was not permitted by the UPEX structure. However, it is not
anticipated that gross written premiums for ERNV in 1998 will equal those
underwritten through UPEX during 1997.
 
  Marketing
 
     The Company's products are distributed principally through licensed
independent property and casualty brokers, excess and surplus lines brokers and
licensed wholesalers. In all, Company policies are produced through several
thousand brokers. In recent years, there have been several mergers involving
large, national insurance firms, and distribution within certain segments of the
Company's business has become more concentrated as a result of such
consolidation. Nonetheless, no single office of any broker or organization
accounted for a material portion of the gross premiums written through ERMA, and
the Company was not dependent on any one broker. Until recently, the Company
serviced domestic brokers only from its Simsbury, Connecticut headquarters and
from a small, health care oriented branch office in metropolitan Chicago.
Beginning in the fourth quarter of 1997, however, the Company has commenced a
new distribution plan, with the opening of small branch offices in New York,
Atlanta, Dallas and San Francisco. Plans for additional offices, including
near-term plans for an additional presence in Chicago, are proceeding. Together
with ERNV's European offices and the offices of Sullivan Kelly, the Company is
substantially increasing its local presence in important regional markets.
Improvements to the Company's product distribution system are regularly under
review to ensure optimal relations with producers and insureds across the
country.
 
     Marketing is conducted in a variety of ways, but is generally targeted at
the agent and broker audience. The Company produces a periodic newsletter which
contains articles of interest to the D&O and E&O industry and which is widely
distributed. Additionally, specific product areas publish newsletters with a
narrower focus which are targeted to insurance issues touching their respective
industries or professions. Advertisements, articles in trade publications,
seminar participations and convention sponsorships are among the other methods
used to market the Company's products. In certain lines, arrangements with
national industry groups or associations have been useful in presenting the
Company's products to target markets. An in-house marketing and communications
staff produces (or oversees production of) all of the Company's public relations
materials. The Company believes that these efforts have resulted in widespread
name recognition of the Company and its products within target markets.
 
     Beginning in 1995, the Company commenced a strategy to create relationships
with insurance agencies with national or regional books of E&O program business.
Under such a "program administration" relationship, the third party entity
becomes the Company's agent to underwrite and issue policies within guidelines
specified by the Company. Program administrators are not authorized to handle or
pay claims or bind reinsurance. The Company conducts due diligence procedures
with respect to potential program administrators prior to entering such
contractual relationships, and it exercises on-going audit rights under the
program administration agreements. As of year-end 1997, seven program
administration relationships were in effect, most of which were for E&O
products. Additional programs are actively being investigated.
 
  Underwriting
 
     The Company's general underwriting philosophy stresses two factors: expert
consideration of complex insurance submissions, and profitability over premium
growth. Accordingly, while the Company seeks to be competitive within its
markets, premiums are based primarily upon specific risk exposure, including
loss experience, rather than primarily upon market factors. The table below sets
forth statutory loss ratios and
 
                                        7
<PAGE>   10
 
combined ratios for the periods indicated for the Insurance Subsidiaries and the
property/casualty industry. The Insurance Subsidiaries' specialty products
business is not directly comparable to the business of the property/casualty
industry as a whole.
 
<TABLE>
<CAPTION>
                                                      YEAR ENDED DECEMBER 31,
                                              ----------------------------------------
                                              1997    1996     1995     1994     1993
                                              ----    -----    -----    -----    -----
<S>                                           <C>     <C>      <C>      <C>      <C>
STATUTORY ACCOUNTING
PRACTICES DATA
--------------------------------------------
 
Insurance Subsidiaries
  Loss Ratio................................  67.1%    67.6%    67.4%    67.6%    67.6%
  Combined Ratio............................  95.2     92.7     90.7     97.6    102.1
Industry(1)
  Loss Ratio................................     *     78.3     78.9     81.1     79.5
  Combined Ratio(2).........................     *    105.9    105.0    107.2    105.7
</TABLE>
 
---------------
 *  Not available
 
(1) Source: Best's Aggregates & Averages -- Property-Casualty.
 
(2) Excludes policyholder dividends.
 
     The Company emphasizes industry specialization within its underwriting
staff, which includes a number of professionals with operational experience from
the industries being underwritten. ERMA's staff of approximately 190
underwriters (at February 28, 1998) are under the supervision of John F.
Kearney. Mr. Kearney has been with the Company since 1987, and is currently
Senior Vice President and Chief Underwriting Officer of ERMA and the Insurance
Subsidiaries. In addition to consulting with members of the underwriting
management team, underwriters regularly consult with members of the Company's
actuarial, claims and legal departments, as they analyze various aspects of a
prospective insured's risk profile. Except with respect to the Company's higher
volume, lower risk not-for-profit business (not including hospitals, where a
Company-developed ratings system is utilized), submissions for D&O and E&O
insurance are underwritten on a risk-by-risk basis.
 
     A large portion of the Company's policies have a one-year term, though the
number of multi-year policies has been growing in recent years. One-year terms
offer the insurer the advantage of re-underwriting and repricing a risk, to take
more frequent account of claims or other changes in the exposure. Multi-year
terms are offered in several situations. The most typical multi-year term is
three years, although for "run-off" insurance coverage, which is often purchased
to protect the directors and officers of an acquired corporation, the policy
will usually be written for the three to six year period following a merger or
acquisition. Most submissions for renewal of an expiring policy are
re-underwritten and re-priced in accordance with the standard underwriting
practices and procedures, which generally do not distinguish between new and
renewal policies.
 
     In all aspects of its operations, and particularly in the underwriting
process, the Company relies heavily on advanced computer technology, including
both purchased and proprietary software. By utilizing down-loaded and on-line
data from government and commercial resources, sophisticated financial modeling
tasks can be performed. Such utilization of technology provides the Company with
what it believes to be a competitive advantage in information-intensive industry
segments, such as banking and large commercial accounts. For not-for-profit D&O
and certain E&O business lines, the use of technology focuses primarily on
maximizing efficiencies in submissions handling and response.
 
  Claims
 
     Claims arising under insurance policies underwritten by the Company are
managed by the Company's Claims department. Because of the nature of the
Company's policies and the persons covered by D&O insurance, claims tend to be
reported soon after the occurrence of a loss or an event representing a
potential loss. Claims personnel are assigned to handle claims based, in part,
on industry specialization. To assist its staff
 
                                        8
<PAGE>   11
 
in claims management, the Company has developed a comprehensive automated
electronic claim file system (the "Claims Information System") for administering
and investigating claims, and calculating and updating case reserves. When the
Company receives notice of a loss or potential loss, a claims handler is
assigned to the claim and a claim file is created in the Claims Information
System. This system electronically attaches a copy of the policy file to the
claim file and can also help determine whether there are obvious claim issues,
such as a claim being made outside the policy period. The Claims Information
System automatically composes certain routine correspondence to the insured. All
outgoing correspondence, reports from monitoring counsel and other relevant data
are entered in the Claims Information System claim file.
 
     In reviewing the claim, the Claims Information System, utilizing
staff-entered severity code information relating to various claim
characteristics, helps to ensure objectivity, and consequently consistency, of
claims evaluation. The severity classification assigned to a particular claim
assists in determining the frequency and manner in which the claim is
administered. All significant claims are reviewed at least quarterly. Claims
assigned a high severity code are monitored more frequently and typically
assigned to outside legal counsel for review and monitoring. The Company's
insurance policies have not generally contained a "duty to defend" provision
requiring it to hire attorneys to defend its insureds, although duty to defend
types of policies are becoming an increasingly important part of the Company's
product mix. Even where there is no duty to defend, however, the Company does in
certain instances become closely involved with defense counsel in evaluating
claims and developing litigation management and settlement strategies. The
Company believes that its experience in resolving claims and its proactive
approach to claims management has contributed to the advantageous resolution of
many cases.
 
     Based in part on the claims severity code and other factors developed by
the claims handler (assisted by the Claims Information System), the Claims
department recommends a case reserve for each claim. As more information is
discovered with respect to a claim, the claims handler may recommend an increase
or decrease in case reserves. The Company believes that the claims analysis
permitted by the Claims Information System helps the Company to evaluate claims
and make informed judgments with respect to case reserves promptly. (See
"Reserves.")
 
  Reinsurance
 
     The Insurance Subsidiaries utilize a pooling arrangement to obtain the
benefits of risk diversification. The pooling arrangement also permits the
Insurance Subsidiaries to obtain a pooled rating from Best's and S&P. The
pooling is achieved through interaffiliated reinsurance agreements. ER Bermuda
also provides internal reinsurance to ERII.
 
     The Company has historically used external reinsurance arrangements to
limit the amount of risk retained under policies written or reinsured by the
Insurance Subsidiaries. In general, the Company will more heavily reinsure
(i.e., retain less net risk with respect to) new lines or market segments, until
claims and loss assumptions for the product can be validated. As product lines
become more mature, reinsurance arrangements will evolve toward the Company
retaining a greater share of the loss exposure and the premium.
 
     With respect to D&O, which comprises the majority the risks insured by the
Company, ERI purchased excess-of-loss reinsurance coverage in 1995, 1996 and
1997, which provided 100% reinsurance protection (subject to aggregate limits
and other restrictions) on losses incurred in excess of $2.5 million up to a
limit of $10 million. The treaty was renewed effective January 1, 1998 under
substantially the same terms and conditions as applied in 1997. The Insurance
Subsidiaries have also entered into a D&O quota share reinsurance treaty, with
various reinsurers, covering 90% of losses in excess of $10 million up to (i)
$25 million through February 28, 1997 and (ii) $35 million from and after March
1, 1997, subject in both cases to certain limitations.
 
     By the nature of its market, the LPL product has historically carried the
highest policy limits offered by the Company, i.e., $50 million. This line is
reinsured, through a number of domestic and international markets, in a
combination quota share and excess of loss reinsurance program whereby the
Company retains more of the risk insured on lower limit policies and cedes more
of the risk insured on higher limit policies. The
 
                                        9
<PAGE>   12
 
LPL reinsurance program limits the Company's exposure to slightly under $5
million on a policy with a maximum limit of $50 million.
 
     Since the Company, in its role as ceding insurer, remains responsible for
policy claims without regard to the extent the reinsurer does or does not pay
such claims, reinsurers are carefully selected, taking into consideration the
financial stability of a potential reinsurer and its service and claims paying
history. While the Company endeavors to diversify its reinsurance relationships
and to reinsure with financially sound reinsurers, there can be no assurance
that the Company will not experience difficulties in the future in recovering
under these arrangements should one or more of its reinsurers experience
financial difficulties.
 
     The Company's reinsurance programs include material exposure to Lloyd's,
which is a collection of investors (known as "Names") who group together
annually to form syndicates. Lloyd's syndicates have experienced substantial
underwriting losses and decreases in underwriting capacity in the past, and they
underwent a restructuring of liabilities during 1996. The long-term success or
failure of such restructuring could affect Lloyd's syndicates' ability to meet
their reinsurance obligations. The Company, together with its reinsurance
brokers, performs a periodic security analysis of its Lloyd's exposure, and
management believes that the syndicates supporting the Company's reinsurance
programs are financially stable.
 
     For the year ended December 31, 1997, the Company's total ceded premiums
were approximately $169.5 million, of which approximately $57.3 million were
ceded to Lloyd's syndicates. To date, the Company has experienced no reinsurance
recoverable defaults. The availability and cost of reinsurance arrangements are
subject to prevailing market conditions, which are beyond the Company's control.
As a result of these or other factors, the Company may in the future choose to
revise further its reinsurance practices to increase, decrease or eliminate
entirely the amount of risk it cedes to reinsurers.
 
     Primarily due to expense considerations and in light of past experience,
the Company does not purchase "clash" reinsurance protection. Clash coverage
protects the ceding insurer in situations where there are multiple losses --
either in a single line of business or multiple lines of business -- arising out
of a single event.
 
  Reserves
 
     The Company is liable for losses and loss adjustment expenses ("LAE") under
its insurance policies and reinsurance treaties. Both D&O and E&O policies are
generally written on a "claims made" form. In general, a claims made policy
provides for payment with respect to any claim made against the insured during
the policy period with respect to a covered act. In many cases, several years
may elapse between the reporting of the claim or covered act to the Company and
the Company's payment on a related loss. The Company reflects its liability for
the ultimate payment of incurred losses and LAE by establishing loss and LAE
reserves, which are balance sheet liabilities representing estimates of future
amounts needed to pay claims and related expenses with respect to insured events
that have occurred.
 
     The Company maintains two classes of reserves. When a claim is reported,
the Company establishes an initial case reserve for the estimated amount of the
Company's ultimate losses and LAE. This estimate reflects a judgment, based on
the Company's reserving practices and the experience of the Company's claims
staff, regarding the nature and value of the reported claim. The Company may
periodically adjust the amount of case reserves as additional information
becomes known or partial payments are made. The Company also establishes
incurred but not reported reserves ("IBNR reserves") on an aggregate basis to
provide for future developments on case reserves, as well as for claims reported
to the insured or to the Company but not yet recorded by the Company. IBNR
reserves are established based on the experience of the Company and the
insurance industry generally with respect to the average frequency and severity
of insured events.
 
     Reserves are estimates involving actuarial and statistical projections of
the cost of the ultimate settlement and administration of claims, based on known
facts and circumstances, predictions of future events, estimates of future
trends in claims severity and other variable factors such as inflation and new
concepts of liability. It may be necessary in the future to revise estimated
potential loss exposure, and therefore the Company's loss reserves. During the
claim settlement period, which may be years in duration, additional facts
regarding claims and trends may become known. As the Company becomes aware of
new information, it may refine and adjust its estimates of its ultimate
liability. The revised estimates of ultimate liability may prove to be less than
or greater than the actual settlement or award amount for which the claim is
finally discharged. As a
 
                                       10
<PAGE>   13
 
consequence, actual losses and LAE paid may deviate, perhaps substantially, from
estimates reflected in the Company's reserves in its financial statements.
 
     The Company's Insurance Subsidiaries, like other insurance companies, are
subject to the risk of severe or multiple losses, which could significantly
exceed the maximum loss previously assumed. To the extent reserves prove to be
inadequate after taking into account available reinsurance coverage, the Company
augments its reserves, resulting in a current-year charge to earnings. In
addition, loss reserves may prove to be inadequate in the event that a major
part of the Company's reinsurance coverage was to become uncollectible. See
"Reinsurance."
 
     Since 1988, the Company has retained the services of an independent
actuarial consulting firm to provide opinions regarding reserves as required for
state regulatory filings. The Company intends to retain such services in the
future. Although the Company believes that its reserves are adequate, there can
be no assurance that ultimate loss experience will not exceed the Company's
reserves, which may result in a material adverse effect on the Company's
financial condition and results of operations. The following table sets forth a
reconciliation of beginning and ending reserves for unpaid losses and LAE, net
of reserves for reinsured losses and LAE for the years indicated.
 
<TABLE>
<CAPTION>
                                                                 YEAR ENDED DECEMBER 31,
                                                             --------------------------------
                                                               1997        1996        1995
                                                             --------    --------    --------
                                                                      (IN THOUSANDS)
<S>                                                          <C>         <C>         <C>
Reserves for losses and LAE at beginning of period,
  gross....................................................  $457,063    $324,416    $254,758
Reinsurance recoverable at beginning of period.............   (76,916)    (33,531)     (8,958)
                                                             --------    --------    --------
Reserves for losses and LAE at beginning of period, net....   380,147     290,885     245,800
Provision for losses and LAE for current year claims.......   152,042     112,107      83,775
Decrease in estimated ultimate losses and LAE for prior
  year claims..............................................   (10,269)     (6,772)     (5,245)
                                                             --------    --------    --------
Total incurred losses and LAE..............................   141,773     105,335      78,530
Adjustment for foreign exchange loss on unpaid loss and
  LAE......................................................      (469)        (23)         58
Loss and LAE payments for claims attributable to:
  Current year.............................................     4,495       2,239         792
  Prior years..............................................    36,193      13,811      32,711
                                                             --------    --------    --------
Total payments.............................................    40,688      16,050      33,503
                                                             --------    --------    --------
Reserves for losses and LAE at end of period, net..........   480,763     380,147     290,885
Reinsurance recoverable at end of period...................   157,166      76,916      33,531
                                                             --------    --------    --------
     Reserves for losses and LAE at end of period, gross...  $637,929    $457,063    $324,416
                                                             ========    ========    ========
</TABLE>
 
     As shown above, as a result of the Company's normal reserving review, which
includes a reevaluation of the adequacy of reserve levels for prior-years'
claims, the Company reduced its unpaid loss and LAE reserves in 1997 for prior
report years by approximately $10.3 million. The Company does not consider
reserve reductions to represent a trend, and there can be no assurance
concerning future adjustments of reserves, positive or negative, for
prior-years' claims. The procedures used in determining appropriate reserves at
December 31, 1997 were consistent with prior-years' reserving methodologies.
 
     Except for the last seven lines, the following "Development of Reserves"
table presents the development of unpaid loss and LAE reserves, net of
reinsurance, from 1988 through 1997. The last seven lines of the table present
that type of development on a "gross-of-reinsurance" basis for the periods
following the Company's adoption of Statement of Financial Standards No. 113,
"Accounting and Reporting For Reinsurance of Short-Duration and Long-Duration
Contracts," as of January 1, 1993. The top line of the table shows the reserves
for unpaid losses and LAE, net of reinsurance recoverables on unpaid claims, at
the end of each of the indicated years. That net reserve represents the amount
of unpaid losses and LAE for claims arising in the current year and all prior
years that were unpaid at the balance sheet date, including IBNR reserves. The
upper portion of the table also shows the re-estimated amount of the previously
recorded reserves based on experience as of the end of each succeeding year. The
estimate changes as more information becomes known about the frequency and
severity of claims for individual years.
 
                                       11
<PAGE>   14
 
                            DEVELOPMENT OF RESERVES
                             (DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
                                                          YEAR ENDED DECEMBER 31,
                                  ------------------------------------------------------------------------
                                   1988      1989       1990       1991       1992       1993       1994
                                  -------   -------   --------   --------   --------   --------   --------
<S>                               <C>       <C>       <C>        <C>        <C>        <C>        <C>
Reserves for losses and LAE,
  net...........................  $43,273   $76,277   $111,987   $157,131   $188,438   $209,098   $245,800
  Reserves re-estimated as of
    end of year:
    1 year later................   42,140    74,787    112,710    156,773    185,391    204,965    240,555
    2 years later...............   38,653    70,708    112,333    153,726    181,258    199,720    233,783
    3 years later...............   23,846    56,919    111,178    149,593    176,013    192,948    223,687
    4 years later...............   10,057    55,764    110,597    144,348    169,241    182,852
    5 years later...............    8,899    55,183    105,352    137,576    159,145
    6 years later...............    8,916    49,938    100,368    127,480
    7 years later...............    8,916    49,236     94,269
    8 years later...............    8,916    47,903
    9 years later...............    7,583
Cumulative redundancy
  (deficiency)..................   35,690    28,374     17,718     29,651     29,293     26,246     22,113
Cumulative paid as of:
    1 year later................  $    50   $ 1,088   $  9,491   $ 20,075   $ 25,838   $ 26,909   $ 32,711
    2 years later...............      449     4,815     26,321     44,814     47,270     56,823     42,851
    3 years later...............    1,936    17,977     44,759     61,562     73,100     59,760     63,386
    4 years later...............    2,072    26,483     56,572     78,916     75,751     73,053
    5 years later...............    2,134    31,157     68,277     79,675     88,198
    6 years later...............    4,421    38,435     68,671     84,507
    7 years later...............    4,426    38,477     73,558
    8 years later...............    4,441    38,749
    9 years later...............    4,920
Net reserve -- December 31......                                                       $209,098   $245,800
Reinsurance recoverables........                                                          6,053      8,958
                                                                                       --------   --------
Gross reserve -- December 31....                                                       $215,151   $254,758
                                                                                       ========   ========
Net re-estimated reserve........                                                        182,852    223,687
Re-estimated reinsurance
  recoverables..................                                                          2,339      9,006
                                                                                       --------   --------
Gross re-estimated reserve......                                                       $185,191   $232,693
                                                                                       ========   ========
Gross cumulative redundancy.....                                                       $ 29,960   $ 22,065
                                                                                       ========   ========
 
<CAPTION>
                                     YEAR ENDED DECEMBER 31,
                                  ------------------------------
                                    1995       1996       1997
                                  --------   --------   --------
<S>                               <C>        <C>        <C>
Reserves for losses and LAE,
  net...........................  $290,885   $380,147   $480,763
  Reserves re-estimated as of
    end of year:
    1 year later................   284,113    369,878
    2 years later...............   274,017
    3 years later...............
    4 years later...............
    5 years later...............
    6 years later...............
    7 years later...............
    8 years later...............
    9 years later...............
Cumulative redundancy
  (deficiency)..................    16,868     10,269
Cumulative paid as of:
    1 year later................  $ 13,811   $ 36,194
    2 years later...............    41,484
    3 years later...............
    4 years later...............
    5 years later...............
    6 years later...............
    7 years later...............
    8 years later...............
    9 years later...............
Net reserve -- December 31......  $290,885   $380,147   $480,763
Reinsurance recoverables........    33,531     76,916    157,166
                                  --------   --------   --------
Gross reserve -- December 31....  $324,416   $457,063   $637,929
                                  ========   ========   ========
Net re-estimated reserve........   274,017    369,878
Re-estimated reinsurance
  recoverables..................    33,536     76,984
                                  --------   --------
Gross re-estimated reserve......  $307,553   $446,862
                                  ========   ========
Gross cumulative redundancy.....  $ 16,863   $ 10,201
                                  ========   ========
</TABLE>
 
     In the Company's early years of operation, the Company had little or no
actual loss experience upon which to calculate reserves. As a result, its
reserving methodologies were based largely on industry data. In recent years,
the Company has developed reserves based upon its own loss experience. While the
Company believes it is now better able to estimate future losses and reserves
than in its early years of operations, there can be no assurance that the
Company's reserves will be sufficient to cover ultimate losses.
 
  Investments
 
     The Company's investment philosophy is to seek optimum total return. This
is done in a manner consistent with what management believes is a generally
conservative investment approach, as evidenced by the portfolio's quality
characteristics, liquidity and diversification. The Company has established
investment guidelines and policies and oversees management of the investment
portfolio through the Finance Committee of the Company's Board of Directors.
Investment policies are approved by its Board of Directors or Finance Committee.
All investments are reviewed periodically by the Finance Committee, and
exceptional investment decisions are submitted for advance approval. In addition
to the specifications in the investment policy statements, all investments of
the Insurance Subsidiaries must meet the applicable state statutory
requirements.
 
                                       12
<PAGE>   15
 
     The Company's investment policies specify limitations as to type of
investment and exposure to single issuers. Investments currently consist
principally of U.S. Government and Agency securities, corporate and municipal
obligations, mortgage-backed and asset-backed securities, partnership interests,
preferred stocks and common equities (including mutual fund shares). At December
31, 1997, the Company had no direct investments in mortgages or equity real
estate, other than its headquarters building in Simsbury, Connecticut.
Investments in securities backed by the full faith and credit of the U.S.
Government and U.S. Government agencies may be made without limitation.
Additionally, the current Board of Directors guidelines permit 5% of the
Company's invested assets to be in the form of non-investment grade fixed income
securities. At December 31, approximately 2% of the Company's investment
portfolio was allocated to below investment grade bonds.
 
     The following table summarizes the investment portfolio of the Company, by
asset class, as of December 31, 1997.
 
<TABLE>
<CAPTION>
                                                            DECEMBER 31, 1997
                                                  --------------------------------------
                                                  FAIR VALUE     COST(1)      PERCENT(2)
                                                  ----------    ----------    ----------
                                                          (DOLLARS IN THOUSANDS)
<S>                                               <C>           <C>           <C>
U.S. Treasury or agency securities..............  $   50,621    $   50,237        4.7%
Municipal securities............................     557,353       532,839       51.4%
Corporate fixed income securities...............     180,401       178,382       16.6%
Mortgage and other asset backed securities......     121,520       119,203       11.2%
Foreign government securities...................       1,310         1,297        0.1%
Sinking fund preferred stocks...................      23,776        23,092        2.2%
                                                  ----------    ----------      -----
          Total fixed maturities................     934,981       905,050       86.2%
Equity securities...............................      61,732        42,787        5.7%
Short-term investments and cash.................      88,505        88,505        8.1%
                                                  ----------    ----------      -----
          Total investments and cash............  $1,085,218    $1,036,342      100.0%
                                                  ==========    ==========      =====
</TABLE>
 
---------------
(1) Amortized cost for fixed maturities and short-term investments.
 
(2) Percent of total portfolio, based on fair value.
 
     Except with respect to the 5% allocation approved by the Board of
Directors, new investments in publicly-traded fixed income securities, both
short- and long-term, are restricted to issues that maintain a quality rating
equal or equivalent to BBB/Baa or better from Standard & Poor's ("S&P") or
Moody's Investors Service, Inc. ("Moody's"). Should an investment in the
portfolio be downgraded below this rating, the investment is not necessarily
sold immediately but is closely monitored for further deterioration of credit
quality and the need to write down the book value of the investment. Private
placements or other investments with lower ratings or investments not rated by
those agencies are permitted, if approved by the Finance Committee and reported
to the Board of Directors. Cash and publicly-traded fixed income securities
comprised 88.3% (based on fair value) of the total investment portfolio as of
December 31, 1997. At December 31, 1997, approximately 98% of the Company's
publicly-traded bond portfolio was rated investment grade. The following table
sets forth the composition of the Company's publicly-traded fixed income
securities, by quality rating, as of December 31, 1997.
 
<TABLE>
<CAPTION>
                          RATINGS                             DECEMBER 31,
                       (S&P/MOODY'S)                            1997(1)
                       -------------                          ------------
<S>                                                           <C>
  AAA/Aaa...................................................      50.6%
  AA/Aa.....................................................      21.6
  A/A.......................................................      17.6
  Other.....................................................      10.2
                                                                 -----
          Total.............................................     100.0%
                                                                 =====
</TABLE>
 
---------------
(1) Based on fair value.
 
                                       13
<PAGE>   16
 
     The National Association of Insurance Commissioners ("NAIC") has a fixed
income securities rating system that assigns to investment securities certain
ratings, called "NAIC designations," that are used by insurers when preparing
their annual statutory financial statements. The NAIC assigns designations to
publicly-traded and privately-placed securities. Designations assigned by the
NAIC range from 1 to 6, with 1 representing securities of the highest quality.
As of December 31, 1997, 90.8% (based on amortized cost) of the Insurance
Subsidiaries' fixed income investment portfolio was invested in securities rated
1 by the NAIC.
 
     The investment portfolio is designed to provide sufficient liquidity to
enable the Company to satisfy its obligations on a timely basis. Although the
investment guidelines permit investments with a maturity range of up to 30
years, the Company generally invests in the five to fifteen year maturity range.
The following table indicates the composition of the Company's fixed maturity
investments, based on fair value, by time to maturity as of December 31, 1997.
 
<TABLE>
<CAPTION>
                        TIME TO                           DECEMBER 31,
                        MATURITY                              1997
                        --------                          ------------
<S>                                                       <C>
0 - 1 year..............................................       7.9%
1 - 5 years.............................................      33.2
5 - 10 years............................................      51.8
10+ years...............................................       7.1
                                                             -----
          Total.........................................     100.0%
                                                             =====
</TABLE>
 
     The investment policies of the Company permit hedging activities to
mitigate losses associated with fluctuations in foreign currency. At this point,
the Company has no material foreign currency exposure. The Company's initial
investment of 3 million Dutch guilders in ERNV (see "International") is viewed
as a long-term capital commitment and, as such, is not hedged against
fluctuations in the dollar value of the foreign currency. On February 24, 1998
the Company invested an additional $40 million in ERNV. These funds were
subsequently converted and invested in fixed income securities denominated in
pounds sterling. The Company, in conjunction with its asset managers, closely
monitors relevant foreign exchange market levels given their importance to the
investment performance of non-dollar denominated securities. The Company also
maintains, in twelve different European currencies, $4.2 million (as translated
to U.S. dollars) of loss reserves, which are not hedged against fluctuations in
the value of these currencies. The Company may determine at a future date to
engage in hedging transactions with respect to any foreign currency risk
associated with its international operations, including ERNV.
 
     The Company's assets are invested, subject to the above mentioned statutory
constraints and guidelines, to maximize after-tax investment returns. The
Company attempts to optimize the blend of income from tax-exempt/taxable
securities to achieve maximization of after-tax investment income. The following
table illustrates the breakdown of the portfolio between taxable and tax-exempt
securities as of December 31, 1997.
 
<TABLE>
<CAPTION>
                                                                   DECEMBER 31, 1997
                                                            --------------------------------
                                                                 FAIR VALUE          PERCENT
                                                                 ----------          -------
                                                            (DOLLARS IN MILLIONS)
<S>                                                         <C>                      <C>
Tax-exempt securities.....................................        $  555.6             51.2%
Taxable securities........................................           529.6             48.8
                                                                  --------            -----
          Total...........................................        $1,085.2            100.0%
                                                                  ========            =====
</TABLE>
 
     The Company's investments are managed by Conning Asset Management, Black
Rock Financial Management and Hyperion Capital Management. In addition, the
Company utilizes the investment management services of Vanguard Group.
 
  Regulation
 
     General.  As insurance companies, ERII, ERSIC and Quadrant are subject to
supervision and regulation in the states in which they transact business. Such
supervision and regulation, which is designed primarily for the protection of
policyholders and not shareholders, relates to most aspects of an insurance
 
                                       14
<PAGE>   17
 
company's business and includes such matters as authorized lines of business;
underwriting standards; financial condition standards; licensing of insurers;
investment standards; premium levels; policy provisions; the filing of annual
and other financial reports prepared on the basis of Statutory Accounting
Practices; the filing and form of actuarial reports; the establishment and
maintenance of reserves for unearned premiums, losses and LAE; transactions with
affiliates; dividends; changes in control; and a variety of other financial and
nonfinancial matters. Additionally, each of ERMA and Sullivan Kelly is subject
to supervision and regulation under state insurance agency laws in the states in
which it does business as an insurance agent. Insurance regulatory authorities
have broad administrative powers to regulate trade practices and in that
connection to restrict or rescind licenses to transact business and to levy
fines and monetary penalties against insurers and insurance agents found to be
in violation of applicable laws and regulations.
 
     Licenses.  The Company has obtained insurance company licenses for ERII in
all states other than Colorado, where the application is pending, and
Connecticut, where ERSIC is the licensed entity. ERSIC is licensed as an
insurance company in Connecticut, its state of domicile, and is an eligible
surplus lines insurer in all other states and the District of Columbia. Quadrant
is licensed in Connecticut, its state of domicile, and in the District of
Columbia, with applications pending in numerous additional states. In a small
number of states, the Company's ability to write insurance is limited to its
core liability lines, and the Company is seeking to expand its authority to
include all property/casualty lines in such states. Future flexibility with
respect to certain new products could be limited to the extent that the Company
is unable to secure additional authorized lines of business in these remaining
states.
 
     ERMA, Sullivan Kelly and a number of their employees are licensed under the
insurance agency and brokerage regulations of the various states in which their
operations require such licensure. Such regulations have not limited the
Company's ability to write insurance; however, ERMA's and Sullivan Kelly's
ability to do business in the future is subject to their ability to secure
necessary licenses.
 
     Regulation of Insurance Holding Companies.  ERII is incorporated under the
laws of Delaware, and ERSIC and Quadrant are incorporated under the laws of
Connecticut. Delaware and Connecticut, like many other states, have laws
governing insurance holding companies (such as ERI). Under Delaware and
Connecticut law, ERII, ERSIC and Quadrant are each required to register annually
and file certain reports with their respective domiciliary State Insurance
Commissioners. Such reports must include current information concerning the
capital structure, ownership, management, financial condition and general
business operations of the filing subsidiary and must also disclose certain
agreements and transactions between such subsidiary and its affiliates, which
agreements must satisfy certain standards specified in the respective insurance
laws.
 
     Under Delaware law, no person may acquire control of ERII or a corporation
controlling ERII unless such person has filed a statement containing specified
information with the Insurance Commissioner of the State of Delaware (the
"Delaware Commissioner") and the Delaware Commissioner has approved such
acquisition of control. Under Connecticut law, no person may acquire control of
ERSIC or Quadrant or a corporation controlling either of them unless such person
has filed a statement containing specified information with the Insurance
Commissioner of the State of Connecticut (the "Connecticut Commissioner") and
the Connecticut Commissioner has approved such acquisition of control. Under
both Delaware and Connecticut law, any person acquiring, directly or indirectly,
or holding proxies with respect to, 10% or more of the voting stock of any other
person is presumed to have acquired "control" of such person. Accordingly, any
purchase resulting in the purchaser owning 10% or more of the outstanding Common
Stock of ERI would require prior approval of the Delaware and Connecticut
Commissioners. Such prior approval requirement also would apply to an
acquisition of proxies to vote 10% or more of the outstanding Common Stock of
ERI and, therefore, in a proxy contest could delay or prevent a stockholder from
acquiring such proxies. No assurance can be given as to whether or not the
Company would seek to invoke these laws and regulations in the event of a
contested solicitation of proxies.
 
     Under Delaware and Connecticut law, neither ERII, ERSIC nor Quadrant may
enter into certain transactions, including certain reinsurance agreements,
management agreements and service contracts, with members of their insurance
holding company system unless they have notified the applicable State Insurance
 
                                       15
<PAGE>   18
 
Commissioner of their intention to enter into such a transaction and the
applicable State Insurance Commissioner has not disapproved of such transaction
within 30 days of such notice. Among other things, such transactions are subject
to the requirements that their terms be fair and reasonable, that charges or
fees for services performed must be reasonable and that the interests of
policyholders not be adversely affected.
 
     Dividend Restrictions.  As an insurance holding company, the Company is
dependent on dividends and other permitted payments from the Insurance
Subsidiaries to pay its cash dividends to stockholders, as well as interest and
principal on debt instruments. The ability of ERII, ERSIC or Quadrant to pay
dividends to the Company is subject to Delaware and Connecticut insurance laws,
respectively. See Note 10 of the Notes to Consolidated Financial Statements in
the Company's 1997 Annual Report to Stockholders.
 
     Regulatory Examinations.  As part of its routine regulatory process, the
Delaware Insurance Department conducts, typically once every three years, an
examination of ERII. The report with respect to the most recent completed
examination of ERII was issued in December 1995, and covered the period January
1990 through December 1993. The report contained no material adverse findings.
Another triennial examination is scheduled to commence on during the second
quarter of 1998.
 
     ERSIC was incorporated in October 1991, and Quadrant was incorporated in
April 1998. As part of its routine regulatory process, the Connecticut Insurance
Department conducts at the point of initial licensure and, typically once every
five years thereafter, an examination of insurance companies domiciled in
Connecticut. An examination of ERSIC by the Connecticut Insurance Department
commenced in March 1995 and was completed in October 1995. Such examination
covered the period from ERSIC's incorporation through December 31, 1993. There
were no material adverse findings. In addition, an initial examination of
Quadrant was conducted by the Connecticut Insurance Department in July 1997 in
connection with Quadrant's licensure by Connecticut. There were no adverse
findings.
 
     Insurance regulatory authorities of other states in which the Insurance
Subsidiaries hold insurance company licenses may examine the Insurance
Subsidiaries' market conduct within their jurisdictions, and such authorities
are empowered to impose fines or other sanctions where such examinations reveal
deficiencies. To date, only California has completed a market conduct exam. That
exam in 1996 resulted in no material adverse findings. Examiners from the State
of Connecticut conducted a market conduct exam in 1997, but the results thereof
are not yet available. As of the date of this Report, the State of Missouri is
conducting a market conduct examination. Management believes that these
examinations are all in the ordinary course and should not result in material
adverse findings.
 
     The National Association of Insurance Commissioners.  In addition to
state-imposed insurance laws and regulations, the Insurance Subsidiaries are
subject to accounting practices and reporting formats established by the NAIC.
The NAIC also promulgates model insurance laws and regulations relating to
insurance companies, which may or may not be adopted by state legislatures or
departments of insurance. However, NAIC model laws and regulations have become
increasingly important in recent years, due primarily to the NAIC's state
regulatory accreditation program. Under this program, virtually all states have
adopted certain required model laws and regulations and meet various staffing
and other requirements and are "accredited" by the NAIC. Because the adoption of
certain model laws and regulations is a prerequisite to accreditation, the
NAIC's initiatives have taken on a greater level of practical importance in
recent years.
 
     IRIS Ratios.  The NAIC annually calculates 11 financial ratios to assist
state insurance departments in monitoring the financial condition of insurance
companies. Results are compared against a "usual range" of results for each
ratio, established by the NAIC. Due primarily to their rate of premium growth,
the Insurance Subsidiaries routinely report one or more IRIS ratios outside the
usual range. In addition, it is likely that ERII's entry into an intercompany
quota share reinsurance arrangement with ER Bermuda may cause one or more loss
reserve-based IRIS ratios to be outside the usual range. Management does not
believe that the Insurance Subsidiaries' IRIS ratio results will adversely
affect their ability to write new business.
 
     Capital and Surplus Requirements.  The NAIC has developed risk-based
capital ("RBC") formulas to be applied to all insurance companies, which
formulas are used to calculate a minimum required statutory net worth, based on
the underwriting, investment and other business risks inherent in an individual
company's
 
                                       16
<PAGE>   19
 
operations. Any insurance company which does not meet threshold RBC levels
ultimately could become subject to increasing levels of regulatory scrutiny and
regulatory action. Implementation of these requirements was required for the
first time in regulatory filings covering fiscal 1994. The formulas for
determining the amount of risk-based capital specify various weighting factors
that are applied to financial balances or various levels of activity based on
the perceived degree of risk. Regulatory compliance is determined by a ratio of
the insurance company's regulatory total adjusted capital to its authorized
control level risk-based capital, both as defined by the NAIC. At December 31,
1997, the total adjusted capital (as defined by the NAIC) of ERII, ERSIC and
Quadrant was in excess of all risk-based capital action levels. The insurance
laws of Delaware and Connecticut limit the retained exposure on any one risk to
10% of capital and surplus. The insurance laws of the Netherlands and Bermuda
impose capital requirements for ERNV and ER Bermuda, respectively, and may limit
these subsidiaries' ability to pay dividends.
 
  Competition
 
     The insurance industry is highly competitive. ERI competes with domestic
and foreign insurers and reinsurers, some of which have greater financial,
marketing and management resources than ERI, and it may compete with new market
entrants in the future. The Company believes its major competitors are American
International Group, Inc. and The Chubb Corporation, who the Company believes
are dominant competitors in the industry. Other competitors include ACE Limited,
Associated Electric & Gas Insurance Services Limited, CNA Financial Corp., EXEL
Limited, Great American Insurance Company, Gulf Insurance Company, Lloyd's
syndicates, PHICO Insurance Company, Reliance Group Holdings, Inc. and Zurich-
American Insurance Company. Competition is based on many factors, including the
perceived financial strength of the insurer, pricing and other terms and
conditions, services provided, ratings assigned by independent rating
organizations (including Best's and S&P), the speed of claims payment and the
reputation and experience of the insurer. Ultimately, this competition could
affect ERI's ability to attract business on terms having the potential to yield
appropriate returns.
 
  Employees
 
     At December 31, 1997 the Company employed approximately 480 full-time
employees. None of the employees is subject to collective bargaining agreements
and the Company knows of no current efforts to implement such agreements. The
Company believes it has a good relationship with its employees.
 
ITEM 2.  PROPERTIES
 
     ERI's executive offices occupy an approximately 120,000 square foot,
two-story office building that the Company owns in Simsbury, Connecticut. The
Company believes that the premises provide adequately for its near-term space
requirements in Connecticut. A four-story 130,000 square foot addition to this
headquarters building is currently under construction to provide for the
long-term needs of the Company. With the new addition, which is expected to cost
approximately $20 million and to be completed in 1999, the Company's
headquarters building will be able to accommodate a total of approximately 1,200
employees.
 
     In addition, the Company leases office space for ERNV in London, Paris and
Rotterdam, and for satellite domestic operations in Atlanta, Chicago, Dallas,
New York, Pasadena, Phoenix and San Francisco. Except for Pasadena, where the
leased premises are 15,700 square feet and provide adequate office space for
approximately 40 employees, the domestic branch offices are generally less than
1,000 square feet and are intended for only two or three employees. The
operations of the Company are supported by local area networks of personal
computers. The local networks are interconnected via telecommunications and
provide services such as electronic mail, desktop faxing, real-time data
communications and batch file transfers.
 
ITEM 3.  LEGAL PROCEEDINGS
 
     The Company is subject to routine legal proceedings in connection with its
general operations and insurance business. The Company does not believe that
these legal proceedings will have a material adverse effect on the Company.
 
                                       17
<PAGE>   20
 
ITEM 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
 
     There were no matters submitted to a vote of security holders during the
fourth quarter of 1997.
 
                                    PART II
 
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
 
  Market Information
 
     The Common Stock, $.01 par value, of Executive Risk Inc. was initially
listed for trading on the New York Stock Exchange ("NYSE") on March 15, 1994
under the symbol "ER". For the periods presented below, the high and low sales
prices of the Registrant's Common Stock on the NYSE were as follows:
 
<TABLE>
<CAPTION>
                                                        THREE MONTHS ENDED
                                        --------------------------------------------------
                                        MARCH 31    JUNE 30    SEPTEMBER 30    DECEMBER 31
                                        --------    -------    ------------    -----------
<S>                                     <C>         <C>        <C>             <C>
1997
-----
High sales price......................  $48.750     $56.000      $68.375         $72.000
Low sales price.......................  $35.625     $43.375      $49.813         $63.500
</TABLE>
 
<TABLE>
<CAPTION>
                                                        THREE MONTHS ENDED
                                       -----------------------------------------------------
                                       MARCH 31    JUNE 30     SEPTEMBER 30     DECEMBER 31
                                       --------    --------    -------------    ------------
<S>                                    <C>         <C>         <C>              <C>
1996
-----
High sales price.....................  $33.625     $38.250        $38.500         $42.375
Low sales price......................  $26.125     $29.250        $33.375         $33.875
</TABLE>
 
<TABLE>
<CAPTION>
                                                        THREE MONTHS ENDED
                                       -----------------------------------------------------
                                       MARCH 31    JUNE 30     SEPTEMBER 30     DECEMBER 31
                                       --------    --------    -------------    ------------
<S>                                    <C>         <C>         <C>              <C>
1995
-----
High sales price.....................  $17.125     $19.000        $23.875         $29.000
Low sales price......................  $13.625     $16.625        $18.375         $22.000
</TABLE>
 
  Stockholders
 
     There were 95 holders of record of shares of the Company's Common Stock as
of March 1, 1998. Approximately 90% of the Registrant's outstanding shares of
Common Stock were held of record by Cede & Co., for an unknown number of
beneficial owners.
 
  Dividends
 
     The Company paid cash dividends of $.02 per share in each quarter of 1997,
1996 and 1995. There is presently no intention to either increase or decrease
the cash dividend on the Company's Common Stock in the foreseeable future.
Future dividends will be dependent upon, among other things, the Company's
earnings, financial condition, capital requirements and general business
conditions.
 
ITEM 6.  SELECTED FINANCIAL DATA
 
     Financial Highlights on the inside front cover of the Company's 1997 Annual
Report to Shareholders is incorporated herein by reference.
 
ITEM 7.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
         OF OPERATIONS
 
     Management's Discussion and Analysis of Financial Condition and Results of
Operations on pages 24 through 30 of the 1997 Annual Report to Stockholders is
incorporated herein by reference. See Exhibit 13 hereto.
 
                                       18
<PAGE>   21
 
ITEM 7A.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
 
     Not applicable to the Company at this time.
 
ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
 
     The following consolidated financial statements of Executive Risk Inc. and
its subsidiaries, included on pages 35 through 52 of the Company's 1997 Annual
Report to Stockholders (see Exhibit 13), are incorporated herein by reference:
 
        -- Consolidated Balance Sheets at December 31, 1997 and 1996.
 
        -- Consolidated Statements of Income for the years ended December 31,
           1997, 1996 and 1995.
 
        -- Consolidated Statements of Stockholders' Equity for the years ended
           December 31, 1997, 1996 and 1995.
 
        -- Consolidated Statements of Cash Flows for the years ended December
           31, 1997, 1996 and 1995.
 
        -- Notes to Consolidated Financial Statements.
 
ITEM 9.  CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
         FINANCIAL DISCLOSURES
 
     Not applicable.
 
                                    PART III
 
ITEM 10.  DIRECTORS AND EXECUTIVE OFFICERS
 
     Information concerning the Company's directors and executive officers is
incorporated herein by reference to the caption "Item 1. Election of Directors"
in the definitive Proxy Statement involving the election of directors and other
matters (the "Proxy Statement") which the Company intends to file with the
Commission pursuant to Regulation 14A under the Securities Exchange Act of 1934
not later than 120 days after December 31, 1997.
 
ITEM 11.  EXECUTIVE COMPENSATION
 
     Incorporated herein by reference to the caption "Executive Compensation" in
the Proxy Statement.
 
ITEM 12.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
 
     Incorporated by reference to the caption "Beneficial Ownership of Stock" in
the Proxy Statement.
 
ITEM 13.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
 
     Incorporated by reference to the captions "Certain Relationships and
Related Transactions" in the Proxy Statement.
 
                                    PART IV
 
ITEM 14.  EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
 
  Financial Statements and Schedules
 
     The Financial Statements and schedules listed in the accompanying Index to
Financial Statements and Schedules are filed as part of this Report.
 
  Exhibits
 
     The exhibits listed on the accompanying Index to Exhibits are filed as part
of this report.
 
  Reports on Form 8-K
 
     The Company filed no Current Reports on Form 8-K during the quarter ended
December 31, 1997.
 
                                       19
<PAGE>   22
 
                                   SIGNATURES
 
     PURSUANT TO THE REQUIREMENTS OF SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934, THE REGISTRANT HAS DULY CAUSED THIS REPORT TO BE SIGNED ON
ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED.
 
                                         EXECUTIVE RISK INC.
                                             (REGISTRANT)
 
                                          By:     /s/ STEPHEN J. SILLS
                                            ------------------------------------
                                                     STEPHEN J. SILLS,
                                               PRESIDENT AND CHIEF EXECUTIVE
                                                           OFFICER
 
     PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THIS
REPORT HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS ON BEHALF OF THE
REGISTRANT AND IN THE CAPACITIES AND ON THE DATES INDICATED:
 
<TABLE>
<CAPTION>
                      SIGNATURE                                     TITLE                    DATE
                      ---------                                     -----                    ----
<C>                                                    <S>                              <C>
                 /s/ Gary G. Benanav                   Director                         March 25, 1998
-----------------------------------------------------
                   GARY G. BENANAV
 
                /s/ Barbara G. Cohen                   Director                         March 25, 1998
-----------------------------------------------------
                  BARBARA G. COHEN
 
                 /s/ John G. Crosby                    Director                         March 25, 1998
-----------------------------------------------------
                   JOHN G. CROSBY
 
                /s/ Robert V. Deutsch                  Executive Vice President,        March 25, 1998
-----------------------------------------------------    Treasurer, Chief Financial
                  ROBERT V. DEUTSCH                      and Accounting Officer, Chief
                                                         Actuary and Director
 
               /s/ Patrick A. Gerschel                 Director                         March 25, 1998
-----------------------------------------------------
                 PATRICK A. GERSCHEL
 
                 /s/ Peter Goldberg                    Director                         March 25, 1998
-----------------------------------------------------
                   PETER GOLDBERG
 
                /s/ Robert H. Kullas                   Chairman and Director            March 25, 1998
-----------------------------------------------------
                  ROBERT H. KULLAS
 
                 /s/ Michael D. Rice                   Director                         March 25, 1998
-----------------------------------------------------
                   MICHAEL D. RICE
 
                /s/ Joseph D. Sargent                  Director                         March 25, 1998
-----------------------------------------------------
                  JOSEPH D. SARGENT
 
                /s/ Stephen J. Sills                   President, Chief Executive       March 25, 1998
-----------------------------------------------------    Officer and Director
                  STEPHEN J. SILLS
 
               /s/ Irving B. Yoskowitz                 Director                         March 25, 1998
-----------------------------------------------------
                 IRVING B. YOSKOWITZ
</TABLE>
 
                                       20
<PAGE>   23
 
                               INDEX TO EXHIBITS
 
<TABLE>
<CAPTION>
EXHIBIT NO.
-----------
<C>           <S>    <C>
    (3)       -- Articles of incorporation and bylaws:
 
              3.1    Amended and Restated Certificate of Incorporation of
                     Executive Risk Inc., incorporated herein by reference to
                     Exhibit 3.1 to the Registrant's Current Report on Form 8-K,
                     filed June 5, 1997.
 
              3.2    Restated Bylaws of Executive Risk Inc., incorporated herein
                     by reference to Exhibit 3.2 to Registrant's Current Report
                     on Form 8-K, filed June 5, 1997.
 
   (10)       -- Material contracts
 
              10.1   Stock Purchase Option between Executive Risk Inc. and The
                     Aetna Casualty and Surety Company, incorporated herein by
                     reference to Exhibit 10.3 to the Registration Statement on
                     Form S-1 (No. 33-70820) of the Company (herein the
                     "Registration Statement").
 
              10.2   Rights Agreement between Executive Risk Inc. and Mellon
                     Bank, N.A., as Rights Agent, incorporated herein by
                     reference to Exhibit 10.19 to the Registration Statement.
 
              10.3   Executive Risk Inc. Nonqualified Stock Option Plan, as
                     amended and restated, incorporated by reference to Exhibit
                     10.7 to the Annual Report on Form 10-K for the fiscal year
                     ended December 31, 1996 (the "1996 10-K").
 
              10.4   Executive Risk Inc. Employee Incentive Nonqualified Stock
                     Option Plan, as amended and restated, incorporated by
                     reference to Exhibit 10.8 to the 1996 10-K.
 
              10.5   Executive Risk Inc. Incentive Compensation Plan,
                     incorporated herein by reference to Exhibit 10.19 to the
                     1994 10-K.
 
              10.6   Executive Risk Inc. Retirement Plan, incorporated herein by
                     reference to Exhibit 10.27 to the Registration Statement.
 
              10.7   Executive Risk Inc. Nonemployee Directors Stock Option Plan,
                     as amended and restated, filed herewith.
 
              10.9   Supplemental Pension Agreement by and among the Company,
                     Aetna Life and Casualty Company and LeRoy A. Vander Putten,
                     dated as of March 31, 1995, incorporated herein by reference
                     to Exhibit 10.3 to Quarterly Report on Form 10-Q for the
                     period ended March 31, 1995.
 
              10.10  Executive Risk Inc. Stock Incentive Plan, incorporated
                     herein by reference to Exhibit 10.25 to the 1996 10-K.
 
              10.11  Executive Risk Inc. Performance Share Plan, incorporated
                     herein by reference to Exhibit 10.26 to the 1996 10-K.
 
              10.12  Restructuring Agreement, dated as of February 13, 1997, by
                     and among Executive Risk Inc., Executive Re Inc., Executive
                     Risk Indemnity Inc., Executive Risk Specialty Insurance
                     Company, Executive Risk Management Associates, The Aetna
                     Casualty and Surety Company and Aetna Casualty and Surety of
                     Canada, incorporated by reference to Exhibit 10.1 to Current
                     Report on Form 8-K dated February 18, 1997 (the "February
                     1997 8-K").
 
              10.13  Agency and Insurance Services Agreement, dated as of January
                     1, 1997, by and between The Aetna Casualty and Surety
                     Company and Executive Risk Management Associates,
                     incorporated by reference to Exhibit 10.2 to the February
                     1997 8-K.
</TABLE>
 
                                       21
<PAGE>   24
 
<TABLE>
<CAPTION>
EXHIBIT NO.
-----------
<C>           <S>    <C>
              10.14  Quota Share Reinsurance Agreement, dated as of January 1,
                     1997, by and between The Aetna Casualty and Surety Company
                     and Executive Risk Indemnity Inc., incorporated by reference
                     to Exhibit 10.3 to the February 1997 8-K.
 
              10.15  Retirement Agreement, dated as of June 1, 1997, between the
                     Company and LeRoy A. Vander Putten, filed herewith.
 
              10.16  Consulting and Non-Competition Agreement, dated as of June
                     1, 1997, between the Company and LeRoy A. Vander Putten,
                     filed herewith.
 
              Executive Risk Inc. 1997 Annual Report to Stockholders; except for
   (13)       those portions thereof which are expressly incorporated by
              reference in the Annual Report on Form 10-K for the year ended
              December 31, 1997, the Report to Stockholders is furnished for the
              information of the Securities and Exchange Commission only and is
              not to be deemed "filed" as part of this Annual Report on Form
              10-K.
 
   (21)       Subsidiaries of Executive Risk Inc.
 
   (23)       Consents of experts and counsel
 
              23.1   Consent of Ernst & Young LLP
 
              23.2   Consent of Ernst & Young LLP
</TABLE>
 
                                       22
<PAGE>   25
 
                  INDEX TO FINANCIAL STATEMENTS AND SCHEDULES
 
<TABLE>
<CAPTION>
                                                                   PAGES
                                                                   -----
<S>  <C>                                                           <C>
Financial Statements of Executive Risk Inc.
     Report of Independent Auditors on Financial Statements......     *
     Consolidated Balance Sheets at December 31, 1997 and 1996...     *
     Consolidated Statements of Income for the years ended            *
       December 31, 1997, 1996 and 1995..........................
     Consolidated Statements of Stockholders' Equity for the          *
       years ended December 31, 1997, 1996 and 1995..............
     Consolidated Statements of Cash Flows for the years ended        *
       December 31, 1997, 1996 and 1995..........................
     Notes to Consolidated Financial Statements..................     *
Schedule(s)
II   Condensed Financial Information of Registrant
     -- Balance Sheets...........................................   S-1
     -- Statements of Income.....................................   S-2
     -- Statements of Cash Flows.................................   S-3
</TABLE>
 
Schedules not listed above have been omitted because they are not applicable or
are not required, or the information required to be set forth therein is
included in the Consolidated Financial Statements or Notes thereto.
---------------
* Incorporated by reference to the Executive Risk Inc. 1997 Annual Report to
  Stockholders; see Exhibit 13 to this Annual Report on Form 10-K.
 
                                       23
<PAGE>   26
 
                   EXECUTIVE RISK INC. (PARENT COMPANY ONLY)
          SCHEDULE II -- CONDENSED FINANCIAL INFORMATION OF REGISTRANT
                                 BALANCE SHEETS
 
<TABLE>
<CAPTION>
                                                                  DECEMBER 31,
                                                              --------------------
                                                                1997        1996
                                                              --------    --------
<S>                                                           <C>         <C>
(In thousands)
ASSETS
  Fixed maturities available for sale.......................  $ 69,243    $     --
  Equity securities available for sale......................         8          --
  Cash and short-term investments...........................    49,684         109
                                                              --------    --------
          TOTAL CASH AND INVESTED ASSETS....................   118,935         109
  Accrued investment income.................................     1,058          --
  Intercompany receivable...................................     1,376         815
  Investment in subsidiaries and equity investees...........   353,587     206,366
  Deferred income taxes.....................................     4,963       3,275
  Other assets..............................................     5,942       6,413
                                                              --------    --------
          TOTAL ASSETS......................................  $485,861    $216,978
                                                              ========    ========
LIABILITIES
  Senior notes payable......................................    75,000          --
  Note payable to bank......................................        --      70,000
  Debentures payable to Executive Risk Capital Trust........   128,866          --
  Accrued expenses and other liabilities....................     5,812       2,203
                                                              --------    --------
          TOTAL LIABILITIES.................................   209,678      72,203
STOCKHOLDERS' EQUITY
  Common Stock..............................................       120         104
  Additional paid-in capital................................   176,234      93,651
  Unrealized gain on investments, net of tax................    31,769      18,382
  Currency translation adjustments..........................      (481)       (186)
  Retained earnings.........................................   101,101      65,384
  Cost of shares in treasury................................   (32,560)    (32,560)
                                                              --------    --------
          TOTAL STOCKHOLDERS' EQUITY........................   276,183     144,775
                                                              --------    --------
          TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY........  $485,861    $216,978
                                                              ========    ========
</TABLE>
 
                                       S-1
<PAGE>   27
 
                   EXECUTIVE RISK INC. (PARENT COMPANY ONLY)
          SCHEDULE II -- CONDENSED FINANCIAL INFORMATION OF REGISTRANT
                              STATEMENTS OF INCOME
 
<TABLE>
<CAPTION>
                                                                 YEAR ENDED DECEMBER 31,
                                                              -----------------------------
                                                               1997       1996       1995
                                                              -------    -------    -------
<S>                                                           <C>        <C>        <C>
(In thousands)
REVENUES
  Net investment income.....................................  $ 1,162    $   624    $   779
  Net realized capital gains................................       --        503         --
                                                              -------    -------    -------
     TOTAL REVENUES.........................................    1,162      1,127        779
 
EXPENSES
  General and administrative expenses.......................    2,385      3,460      2,321
  Long-term incentive compensation..........................       --        187      1,458
  Interest expense..........................................   11,911      4,335      1,893
                                                              -------    -------    -------
     TOTAL EXPENSES.........................................   14,296      7,982      5,672
                                                              -------    -------    -------
     LOSS BEFORE TAXES AND EARNINGS OF SUBSIDIARIES.........  (13,134)    (6,855)    (4,893)
 
  Federal income tax benefit................................   (4,145)    (2,543)    (2,100)
                                                              -------    -------    -------
     LOSS BEFORE EARNINGS OF SUBSIDIARIES...................   (8,989)    (4,312)    (2,793)
 
  Equity in earnings of subsidiaries........................   45,514     32,417     28,079
                                                              -------    -------    -------
     NET INCOME.............................................  $36,525    $28,105    $25,286
                                                              =======    =======    =======
</TABLE>
 
                                       S-2
<PAGE>   28
 
                   EXECUTIVE RISK INC. (PARENT COMPANY ONLY)
          SCHEDULE II -- CONDENSED FINANCIAL INFORMATION OF REGISTRANT
                            STATEMENTS OF CASH FLOWS
 
<TABLE>
<CAPTION>
                                                                 YEAR ENDED DECEMBER 31,
                                                             --------------------------------
                                                               1997        1996        1995
                                                             --------    --------    --------
<S>                                                          <C>         <C>         <C>
(In thousands)
OPERATING ACTIVITIES
  Net income...............................................  $ 36,525    $ 28,105    $ 25,286
  Adjustments to reconcile net income to net cash provided
     by (used in) operating activities:
     Amortization of bond premium..........................       119          16          36
     Equity used in earnings of subsidiaries...............   (45,514)    (32,417)    (28,079)
     Net realized gains on investments                             --        (503)         --
     Deferred income taxes.................................    (1,662)     (1,073)       (622)
     Amortization of loan arrangement fees.................       910          --          --
     Other.................................................       877        (635)     (1,450)
     Change in:
       Accrued investment income...........................    (1,058)        263        (146)
       Intercompany receivable/payable.....................     5,593       6,737       3,099
       Accrued expenses and other liabilities..............     9,363         587       1,476
                                                             --------    --------    --------
          Net Cash Provided by (Used in) Operating
            Activities.....................................     5,153       1,080        (400)
INVESTING ACTIVITIES
  Purchase of fixed maturities available for sale..........   (72,448)     (1,379)    (10,481)
  Proceeds from sales of fixed maturities held for sale....     3,000      17,661          --
  Contribution of capital to Executive Risk Indemnity
     Inc...................................................   (65,000)    (10,870)         --
  Contribution of capital to Executive Risk Capital
     Trust.................................................    (3,866)         --          --
  Contribution of capital to ER (Bermuda) Ltd..............   (20,000)         --          --
  Distributions from subsidiaries..........................       303      15,104      14,387
                                                             --------    --------    --------
          Net Cash (Used in) Provided by Investing
            Activities.....................................  (158,011)     20,516       3,906
FINANCING ACTIVITIES
  Proceeds from exercise of options........................     4,122         423         241
  Cost of repurchase of Common Stock.......................        --     (75,025)     (3,119)
  Placement fees and other.................................    (2,827)     (1,172)         --
  Repayment of note payable to bank........................   (70,000)    (25,000)         --
  Note payable to bank.....................................        --      70,000          --
  Proceeds from issuance of Senior Notes Payable...........    75,000          --          --
  Proceeds from issuance of Common Stock...................    68,080          --          --
  Proceeds from Capital Securities offering................   128,866          --          --
  Proceeds from over-allotment option exercise.............        --       9,675          --
  Dividends paid on Common Stock...........................      (808)       (789)       (919)
                                                             --------    --------    --------
Net Cash Provided by (Used in) Financing Activities........   202,433     (21,888)     (3,797)
                                                             --------    --------    --------
          Net Increase (Decrease) in Cash and Short-Term
            Investments....................................    49,575        (292)       (291)
Cash and short-term investments at beginning of period.....       109         401         692
                                                             --------    --------    --------
          Cash and Short-Term Investments at End of
            Period.........................................  $ 49,684    $    109    $    401
                                                             ========    ========    ========
Supplemental Cash Flow Disclosures:
  Income taxes paid (received).............................  $    325    $   (763)   $     70
  Interest paid on debt....................................     6,826       4,131       1,888
</TABLE>
 
                                       S-3