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                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549
                                 --------------

                                    FORM 10-K
                                 --------------

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

FOR THE FISCAL YEAR ENDED DECEMBER 31, 1996            COMMISSION FILE # 1-13816

                       EVEREST REINSURANCE HOLDINGS, INC.
             (Exact name of registrant as specified in its charter)

                   DELAWARE                              22-3263609
         (State or other jurisdiction)                (I.R.S. Employer
       of incorporation or organization)             Identification No.)

                                3 GATEWAY CENTER
                                NEWARK, NJ 07102
                                 (201) 802-8000
    (Address, including zip code, and telephone number, including area code,
                   of registrant's principal executive office)
                                 --------------


           SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:

                                                     NAME OF EACH EXCHANGE
        TITLE OF EACH CLASS                           ON WHICH REGISTERED
        -------------------                          ---------------------
COMMON STOCK, $.01 PAR VALUE PER SHARE              NEW YORK STOCK EXCHANGE
                                 --------------

        SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT: NONE
                                 --------------

     Indicate by check mark  whether the  registrant:  (1) has filed all reports
required to be filed by Section 13 or 15(d) of the  Securities  Exchange  Act of
1934  during  the  preceding  12 months  (or for such  shorter  period  that the
registrant  was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.

                                Yes X No
                                   ---  ---

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

     The  aggregate  market  value on March 3, 1997 of the voting  stock held by
non-affiliates of the registrant was $1,584 million.

     At March 3, 1997,  the  number of shares  outstanding  of the  registrant's
common stock was 50,490,273.

                       DOCUMENTS INCORPORATED BY REFERENCE

     Certain  information  required  by Items 10, 11, 12, and 13 of Form 10-K is
incorporated  by  reference  into Part III hereof  from the  registrant's  proxy
statement for the 1997 Annual  Meeting,  which will be filed with the Securities
and Exchange  Commission within 120 days of the close of the registrant's fiscal
year ended December 31, 1996.

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<PAGE>


TABLE OF CONTENTS

ITEM                                                                        PAGE
----                                                                        ----

PART I

 1.  Business .............................................................   1
 2.  Properties ...........................................................  23
 3.  Legal Proceedings ....................................................  23
 4.  Submission of Matters to a Vote of Security Holders ..................  23

PART II

 5.  Market for Registrant's Common Equity and Related Stockholder Matters   24
 6.  Selected Financial Data ..............................................  24
 7.  Management's Discussion and Analysis of Financial Condition and
      Results of Operation ................................................  27
 8.  Financial Statements and Supplementary Data ..........................  33
 9.  Changes in and Disagreements with Accountants on Accounting and
      Financial Disclosure ................................................  33

PART III

10.  Directors and Executive Officers of the Registrant ...................  33
11.  Executive Compensation ...............................................  33
12.  Security Ownership of Certain Beneficial Owners and Management .......  33
13.  Certain Relationships and Related Transactions .......................  34

PART IV

14.  Exhibits, Financial Statement Schedules, and Reports on Form 8-K .....  34


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 certain  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
general  economic  conditions and cyclical  industry  conditions,  uncertainties
relating to  government  and  regulatory  policies,  volatile and  unpredictable
developments (including catastrophes),  the legal environment, the uncertainties
of the  reserving  process,  the  competitive  environment  in which the Company
operates, the uncertainties inherent in international  operations,  and interest
rate fluctuations.  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>


PART I

UNLESS  OTHERWISE  INDICATED,  (I) ALL FINANCIAL DATA IN THIS DOCUMENT HAVE BEEN
PREPARED USING GENERALLY ACCEPTED ACCOUNTING  PRINCIPLES ("GAAP"),  AND (II) ALL
STATUTORY  FINANCIAL  DATA  REFERRED  TO IN THIS  DOCUMENT  REFER  TO  STATUTORY
FINANCIAL  DATA OF  EVEREST  RE. AS USED IN THIS  DOCUMENT,  "EVEREST  RE" MEANS
EVEREST REINSURANCE COMPANY (FORMERLY  PRUDENTIAL  REINSURANCE  COMPANY) AND ITS
SUBSIDIARIES (UNLESS THE CONTEXT OTHERWISE  REQUIRES);  "HOLDINGS" MEANS EVEREST
REINSURANCE HOLDINGS, INC. (FORMERLY PRUDENTIAL REINSURANCE HOLDINGS, INC.); AND
THE "COMPANY" MEANS HOLDINGS AND ITS SUBSIDIARIES.


ITEM 1.  BUSINESS

THE COMPANY
Everest Reinsurance Holdings,  Inc., a Delaware corporation,  was established in
1993 to serve as the  parent  holding  company of  Everest  Reinsurance  Company
(formed in 1973), a property and casualty reinsurance  operation.  Until October
6, 1995, the Company was an indirect  wholly-owned  subsidiary of The Prudential
Insurance  Company  of America  ("The  Prudential").  On  October  6, 1995,  The
Prudential  sold its entire  interest in Holdings'  shares of common stock in an
initial public offering (the "IPO"), with the result that Holdings'  outstanding
common stock became publicly owned.

Holdings, through its wholly-owned subsidiary,  Everest Re, underwrites property
and casualty  reinsurance  on a treaty and  facultative  basis to insurance  and
reinsurance companies in the United States and selected  international  markets.
Everest Re writes  reinsurance  both through  brokers and  directly  with ceding
insurance companies,  giving it the flexibility to pursue business regardless of
the ceding company's  preferred  reinsurance  purchasing method. The Company had
gross premiums written in 1996 of $1,044.0 million and  stockholders'  equity at
December 31, 1996 of $1,086.0  million and Everest Re had  statutory  surplus at
December 31, 1996 of $772.7 million. Based on industry data at December 31, 1996
published by the Reinsurance  Association of America ("RAA"),  Everest Re is the
seventh largest  reinsurance  company in the United States,  ranked by statutory
surplus and is rated "A"  (Excellent)  by A.M.  Best, an  independent  insurance
industry  rating  organization  which rates  insurance  companies  on factors of
concern to policyholders.

Everest Re has three  subsidiaries:  Everest  Reinsurance Ltd.  ("Everest Ltd.",
formerly  Le  Rocher  Reinsurance  Ltd.),  Everest  National  Insurance  Company
("Everest National", formerly Prudential National Insurance Company) and Everest
Insurance Company of Canada ("Everest  Canada").  Everest Ltd., a United Kingdom
reinsurance  company, is authorized to engage in the reinsurance business in the
United Kingdom and, prior to January 1, 1997, it reinsured risks  worldwide.  In
1996, Everest Re obtained authorization to engage in the reinsurance business in
the United  Kingdom,  and the  operations of Everest Ltd. have been converted to
branch operations of Everest Re, effective January 1, 1997. Everest National, an
Arizona insurance company, is licensed in 38 states and the District of Columbia
and writes primary insurance.  On December 31, 1996, Everest Re acquired Everest
Insurance Company of Canada (formerly  OTIP/RAEO  Insurance Company Inc.) from a
subsidiary of The Prudential.  All  liabilities  incurred before the acquisition
date,  including  insurance  obligations  under  expired  as  well  as  in-force
business,  were  assumed by  Prudential  of America  General  Insurance  Company
(Canada),  a subsidiary of The Prudential which was subsequently sold to Liberty
Mutual Insurance Company,  whereupon it was renamed Liberty Insurance Company of
Canada.  Everest Canada is federally  licensed to write primary  insurance under
the Insurance Companies Act of Canada and provincially licensed in Ontario.


REINSURANCE INDUSTRY OVERVIEW
Reinsurance  is an  arrangement  in which an insurance  company,  the reinsurer,
agrees to indemnify another insurance company,  the ceding company,  against all
or a portion of the insurance risks underwritten by the ceding company under one
or more  insurance  contracts.  Reinsurance  can provide a ceding  company  with
several  benefits,  including a reduction in net liability on individual  risks,
catastrophe   protection  from  large  or  multiple  losses  and  assistance  in
maintaining  acceptable  financial  ratios.  Reinsurance  also provides a ceding
company with additional  underwriting capacity by permitting it to accept larger
risks and write more  business  than  would be  possible  without a  concomitant
increase in capital and surplus.  Reinsurance,  however,  does not discharge the
ceding company from its liability to policyholders.

<PAGE>

There are two basic types of reinsurance  arrangements:  treaty and  facultative
reinsurance. In treaty reinsurance,  the ceding company is obligated to cede and
the  reinsurer is obligated to assume a specified  portion of a type or category
of risks insured by the ceding company. Treaty reinsurers, including Everest Re,
do not  separately  evaluate  each of the  individual  risks assumed under their
treaties and, consequently,  after a review of the ceding company's underwriting
practices,  are largely  dependent on the original risk  underwriting  decisions
made by the ceding  company.  Such  dependence  subjects  reinsurers in general,
including  Everest Re, to the  possibility  that the ceding  companies  have not
adequately evaluated the risks to be reinsured and, therefore, that the premiums
ceded in connection  therewith may not  adequately  compensate the reinsurer for
the risk  assumed.  The  reinsurer's  evaluation  of the ceding  company's  risk
management  and  underwriting  practices,  therefore,  will  usually  impact the
pricing of the treaty. In facultative reinsurance,  the ceding company cedes and
the reinsurer assumes all or part of the risk under a single insurance contract.
Facultative  reinsurance is negotiated  separately  for each insurance  contract
that is  reinsured.  Facultative  reinsurance  normally is  purchased  by ceding
companies for individual risks not covered by their  reinsurance  treaties,  for
amounts in excess of the dollar  limits of their  reinsurance  treaties  and for
unusual risks.  Underwriting  expenses and, in particular,  personnel costs, are
higher on facultative  business  because each risk is individually  underwritten
and  administered.  The  ability to  separately  evaluate  each risk  reinsured,
however,  increases the probability that the reinsurer can price the contract to
more accurately reflect the risks involved.

Both  treaty  and  facultative  reinsurance  can be written on either a pro rata
basis or an excess of loss  basis.  With  respect to pro rata  reinsurance,  the
ceding  company and the  reinsurer  share the premiums as well as the losses and
expenses  in an agreed  proportion.  In the case of  reinsurance  written  on an
excess of loss basis,  the reinsurer  indemnifies the ceding company against all
or a specified  portion of losses and  expenses in excess of a specified  dollar
amount, known as the ceding company's retention or reinsurer's attachment point,
generally subject to a negotiated reinsurance contract limit.

Premiums  payable  by the  ceding  company  to a  reinsurer  for  excess of loss
reinsurance  are not  directly  proportional  to the  premiums  that the  ceding
company receives because the reinsurer does not assume a proportionate  risk. In
contrast,  premiums  that the ceding  company pays to the reinsurer for pro rata
reinsurance are  proportional to the premiums that the ceding company  receives,
consistent  with the  proportional  sharing of risk.  In  addition,  in pro rata
reinsurance the reinsurer generally pays the ceding company a ceding commission.
The  ceding  commission  generally  is based  on the  ceding  company's  cost of
acquiring the business being reinsured (commissions,  premium taxes, assessments
and miscellaneous  administrative  expense) and also may include a profit factor
for producing the business.

Reinsurers  typically  purchase  reinsurance  to cover their own risk  exposure.
Reinsurance  of a  reinsurer's  business is called a  retrocession.  Reinsurance
companies cede risks under retrocessional agreements to other reinsurers,  known
as  retrocessionaires,  for reasons similar to those that cause primary insurers
to purchase  reinsurance:  to reduce net liability on individual risks,  protect
against  catastrophic  losses,  stabilize financial ratios and obtain additional
underwriting capacity.

Reinsurance can be written through professional  reinsurance brokers or directly
for  ceding  companies.  From a ceding  company's  perspective,  both the broker
market  and the  direct  market  have  advantages  and  disadvantages.  A ceding
company's decision to select one market over the other will be influenced by its
perception of such  advantages  and  disadvantages  relative to the  reinsurance
coverage being placed.


BUSINESS STRATEGY
Under the direction of Joseph V. Taranto, who joined the Company in October 1994
as  Chairman,  Chief  Executive  Officer and  President,  the Company  initiated
actions to increase the Company's  profitability and reduce earnings volatility.
These actions included  strengthening  the Company's  management team,  reducing
operating   expenses,   improving   management  of  catastrophe   exposures  and
implementing a new underwriting  strategy.  Since 1994, the Company's management
team has pursued and  continues to pursue these actions which seek to capitalize
on the Company's staff resources and its flexibility to offer multiple  products
through multiple production sources in a cost-efficient manner.

The  Company's  products  include  the  full  range  of  property  and  casualty
coverages,  including marine,  aviation,  surety,  errors & omissions  liability
("E&O"), directors'  & officers'  liability  ("D&O"),  medical  malpractice  and


2
<PAGE>

other  specialty  lines.  The Company's  distribution  sources  include both the
direct and broker  reinsurance  markets,  international and domestic markets and
reinsurance, both treaty and facultative, and insurance.

The Company's underwriting strategy emphasizes underwriting profitability rather
than premium  volume,  writing  specialized  risks and improving  integration of
existing  underwriting  expertise across all underwriting units. Key elements of
this strategy are prudent risk  selection,  appropriate  pricing  through strict
underwriting  discipline and adjusting the Company's  business mix to respond to
changing market conditions.  Management intends to focus on reinsuring companies
that  effectively  manage the  underwriting  cycle through  proper  analysis and
pricing of underlying  risks and whose  underwriting  guidelines and performance
are compatible with the Company's profitability objectives.

The  Company's   underwriting   strategy   also   emphasizes   flexibility   and
responsiveness  to  changing  market  conditions,  such as  increased  demand or
favorable  pricing  trends.  Management  believes  that  Everest  Re's  existing
strengths,  including its broad underwriting  expertise,  international presence
and  substantial  capital,  will  facilitate  adjustments to its mix of business
geographically,  by line of  business  and by type of  coverage,  allowing it to
capitalize on those market opportunities that provide the greatest potential for
underwriting profitability.  The Company's primary insurance infrastructure will
facilitate  this  strategy by  allowing  the  Company to develop  business  that
requires the Company to issue primary insurance policies.  The Company will also
continue  to  carefully  monitor  its mix of  business  to  avoid  inappropriate
concentrations of geographic or other risk.

Everest Re has increased its  reinsurance  of specialty  risks,  which require a
higher degree of underwriting, actuarial and claims expertise than more standard
risks. This type of reinsurance includes  professional  liability lines, such as
medical  malpractice,  D&O and E&O. Management believes that these risks offer a
greater profit potential than standard  underwriting  risks, which are generally
more subject to competitive pricing.  Specialty risks, however, are usually more
difficult to assess than more  standard  risks and can be subject to higher loss
severity and greater  volatility.  Management  believes that it can successfully
manage  these  complex  risks  through  disciplined  underwriting,   appropriate
pricing,  actuarial  projections,  loss monitoring and  underwriting  and claims
audits of ceding companies.  The emphasis on specialty underwriting has built on
the  Company's  existing  expertise in writing such  specialty  lines as marine,
aviation and surety.

The Company has revised its underwriting guidelines to limit the accumulation of
known risks in exposed  areas and to require that  business  which is exposed to
catastrophe  losses be written with greater geographic spread and to implement a
more cost-effective  retrocession program. The Company's underwriting guidelines
have also been revised to better reflect the  relationship  between premiums and
risk  assumed  while   maintaining  the  Company's   probable  maximum  loss  at
appropriate levels.

Efforts to control  expenses  and to  operate  in a more  cost-efficient  manner
continue to be a focus of the  Company.  These  efforts  have  resulted in a 41%
reduction  in  employees  to 410 at December 31, 1996 from 694 at June 30, 1994,
the restructuring of the Company's facultative operations in 1995 and changes in
certain  vendor  relationships.   These  changes  were  implemented  to  improve
efficiency  and eliminate  redundant  positions.  Additionally,  the Company has
begun to implement a plan to improve the cost  effectiveness  of its information
systems.


MARKETING
The  Company  writes  its  business  on a  worldwide  basis  for many  different
customers  and for many lines of property  and casualty  business.  Its products
provide a broad array of coverages.  The Company is not materially  dependent on
any single customer, small group of customers,  line of business or geographical
area.  The Company  believes  the loss of any single  customer  would not have a
material adverse affect on the Company. Approximately 65.4% and 34.6% of Everest
Re's 1996 gross  premiums  written were written in the broker and direct market,
respectively. Everest Re's ability to write reinsurance both through brokers and
directly  with ceding  companies  gives it the  flexibility  to pursue  business
regardless of the ceding company's preferred reinsurance purchasing method.

The  reinsurance   broker  market  consists  of  several  substantial   national
and  international  brokers  and  a  number  of  smaller  specialized   brokers.
Brokers   do   not   have   the    authority   to    bind   Everest   Re    with
respect to  reinsurance  agreements,  nor  does  Everest  Re  commit in  advance
to  accept  any   portion  of  the   business  that   brokers   submit   to  it.
Reinsurance  business  from  any  ceding   company,  whether  new  or   renewal,
is subject to acceptance  by Everest Re.  Brokerage  fees  generally are paid by
reinsurers.  The  Company's  largest ten brokers  accounted  for an aggregate of


                                                                               3
<PAGE>

approximately  44.7% of gross  premiums  written in 1996 with the largest broker
accounting  for  approximately  15.9% of gross  premiums  written  in 1996.  The
Company  does not believe  that the loss of the support of any one broker  would
have a material  adverse affect on the Company due to the Company's  competitive
position in the  marketplace  and  relationships  with ceding  companies and the
continuing availability of other sources of business.

The direct  market  remains an  important  distribution  system for  Everest Re.
Direct  placement  enables  Everest Re to access  clients  who  prefer  building
long-term   relationships   directly  with  their   reinsurers  based  upon  the
reinsurer's in-depth understanding of the ceding company's needs.

Everest  National's primary insurance  business is written  principally  through
general agency relationships.  The Company evaluates each business relationship,
based  upon the  underwriting  expertise  and  experience  of each  distribution
channel selected, and performs an analysis to evaluate financial security.


UNDERWRITING UNITS
The following  table  presents the  distribution  of Everest Re's gross premiums
written by its U.S. broker treaty, U.S. direct treaty reinsurance and insurance,
marine,  aviation and surety, U.S. facultative and international  operations for
the years  ended  December  31,  1996,  1995,  1994,  1993 and 1992,  classified
according to whether such premium is derived from property or casualty  business
and whether it represents pro rata or excess of loss business:



4
<PAGE>

<TABLE>
<CAPTION>

                            GROSS PREMIUMS WRITTEN BY UNDERWRITING UNIT


                                                  Years Ended December 31,
                   -----------------------------------------------------------------------------------
                         1996              1995             1994             1993             1992
                   ---------------    -------------    -------------    -------------    -------------
                       $       %         $      %         $      %         $      %         $      %
                   --------  -----    ------  -----    ------  -----    ------  -----    ------  -----
(Dollars in millions)
<S>                <C>       <C>      <C>     <C>      <C>     <C>      <C>     <C>      <C>     <C>
U.S. Broker Treaty
  Property
    Pro Rata(1)    $   45.4    4.4%   $ 51.7    5.4%   $ 59.7    6.3%   $ 80.3    8.7%   $ 96.4   11.5%
    Excess             60.4    5.8      59.0    6.2      53.9    5.7      88.8    9.7      67.9    8.1
  Casualty
    Pro Rata(1)        63.4    6.1      18.5    1.9      29.6    3.1      28.2    3.1      29.4    3.5
    Excess            137.5   13.2     122.6   12.9     113.5   11.9     103.7   11.3      98.5   11.8
                   --------  -----    ------  -----    ------  -----    ------  -----    ------  -----
  Total(2)            306.8   29.4     251.8   26.5     256.6   26.9     301.0   32.8     292.2   34.9
                   --------  -----    ------  -----    ------  -----    ------  -----    ------  -----
U.S. Direct Treaty
  Reinsurance and
  Insurance
  Property
    Pro Rata(1)        12.6    1.2       3.3    0.3       5.4    0.6      17.3    1.9       8.9    1.0
    Excess              8.9    0.9       9.1    1.0      12.5    1.3      10.9    1.2      11.4    1.4
  Casualty
    Pro Rata(1)       114.5   11.0      99.8   10.5      83.2    8.7      56.2    6.1      52.7    6.3
    Excess             12.5    1.2      10.0    1.1      38.6    4.0      46.3    5.0      41.9    5.0
                   --------  -----    ------  -----    ------  -----    ------  -----    ------  -----
  Total(2)            148.6   14.2     122.2   12.9     139.7   14.7     130.7   14.2     114.9   13.7
                   --------  -----    ------  -----    ------  -----    ------  -----    ------  -----
Marine, Aviation
  and Surety
  Property
    Pro Rata(1)        94.6    9.1      89.2    9.4      74.1    7.8      67.3    7.3      57.5    6.9
    Excess             17.8    1.7      18.7    2.0      16.8    1.8      16.3    1.8      17.3    2.1
  Casualty
    Pro Rata(1)        43.1    4.1      53.0    5.6      66.0    6.9      48.6    5.3      43.7    5.2
    Excess              5.6    0.5       6.0    0.6       4.8    0.5      10.5    1.1       7.8    0.9
                   --------  -----    ------  -----    ------  -----    ------  -----    ------  -----
  Total(2)            161.1   15.4     166.9   17.6     161.7   17.0     142.7   15.5     126.3   15.1
                   --------  -----    ------  -----    ------  -----    ------  -----    ------  -----
U.S. Facultative
  Property
    Pro Rata(1)          --     --        --     --        --     --        --     --        --     --
    Excess             26.9    2.6      22.3    2.3      27.4    2.9      20.9    2.3      14.4    1.7
  Casualty
    Pro Rata(1)          --     --        --     --        --     --        --     --        --     --
    Excess             61.8    5.9      46.6    4.9      39.3    4.1      35.0    3.8      35.2    4.2
                   --------  -----    ------  -----    ------  -----    ------  -----    ------  -----
  Total(2)             88.7    8.5      68.8    7.2      66.7    7.0      55.9    6.1      49.6    5.9
                   --------  -----    ------  -----    ------  -----    ------  -----    ------  -----
Total U.S.
  Property
    Pro Rata(1)       152.6   14.6     144.2   15.2     139.2   14.6     164.9   18.0     162.8   19.4
    Excess            114.0   10.9     109.1   11.5     110.6   11.6     136.9   14.9     111.0   13.2
  Casualty
    Pro Rata(1)       221.1   21.2     171.3   18.0     178.8   18.8     133.0   14.5     125.8   15.1
    Excess            217.6   20.8     185.2   19.5     196.1   20.6     195.5   21.3     183.4   21.9
                   --------  -----    ------  -----    ------  -----    ------  -----    ------  -----
  Total(2)            705.2   67.5     609.7   64.2     624.7   65.5     630.3   68.7     583.0   69.5
                   --------  -----    ------  -----    ------  -----    ------  -----    ------  -----
International
  Property
    Pro Rata(1)       124.2   11.9     136.2   14.3     147.0   15.4     122.1   13.3     104.5   12.5
    Excess             79.8    7.6      84.9    8.9      89.2    9.4      81.5    8.9      80.1    9.6
  Casualty
    Pro Rata(1)        90.5    8.7      66.4    7.0      49.6    5.2      44.4    4.8      40.6    4.8
    Excess             44.4    4.3      52.3    5.5      42.7    4.5      39.8    4.3      29.6    3.5
                   --------  -----    ------  -----    ------  -----    ------  -----    ------  -----
  Total(2)            338.8   32.5     339.8   35.8     328.5   34.5     287.8   31.3     254.8   30.4
                   --------  -----    ------  -----    ------  -----    ------  -----    ------  -----
Total Company
  Property
    Pro Rata(1)       276.7   26.5     280.4   29.5     286.2   30.0     287.0   31.3     267.3   31.9
    Excess            193.8   18.6     194.0   20.4     199.8   21.0     218.4   23.8     191.1   22.8
  Casualty
    Pro Rata(1)       311.6   29.8     237.6   25.0     228.4   24.0     177.4   19.3     166.4   19.9
    Excess            261.9   25.1     237.5   25.0     238.8   25.1     235.3   25.6     213.0   25.4
                   --------  -----    ------  -----    ------  -----    ------  -----    ------  -----
  Total(2)         $1,044.0  100.0%   $949.5  100.0%   $953.2  100.0%   $918.1  100.0%   $837.8  100.0%
                   ========  =====    ======  =====    ======  =====    ======  =====    ======  =====
</TABLE>

-------------
(1) For  purposes  of  the  presentation   above,  pro  rata  reinsurance  means
    reinsurance  attaching to the first dollar of loss  incurred  by the  ceding
    company. 

(2) Certain totals and subtotals may not reconcile due to rounding.

                                 

                                                                               5
<PAGE>

U.S. BROKER TREATY OPERATIONS.  Everest Re's U.S. broker treaty operations write
both property and casualty  reinsurance through reinsurance brokers. The Company
targets certain brokers and, through the broker market,  specialty companies and
small  to  medium  sized  standard  lines  companies.  The  U.S.  broker  treaty
operations  also write  portions of  reinsurance  programs for larger,  national
insurance  companies.  The U.S.  broker treaty  operations also include a treaty
multi-line  unit, which targets small to medium sized ceding companies where the
Company  seeks to write a  substantial  portion of the ceding  company's  entire
property and casualty reinsurance program.

In 1996,  $105.8 million of gross premiums written were attributable to domestic
property  business,  of which  57.1% was  written on an excess of loss basis and
42.9%  was  written  on a pro  rata  basis.  This  unit  utilizes  sophisticated
underwriting  methods  which  management  believes are  necessary to analyze and
price property business,  particularly that segment of the property market which
has catastrophe exposure.

Domestic  casualty  business  accounted  for $200.9  million  of gross  premiums
written in 1996, of which 68.5% was written on an excess of loss basis and 31.5%
was  written  on a pro  rata  basis.  The  treaty  casualty  portfolio  consists
principally  of  professional  liability,   directors'  &  officers'  liability,
workers' compensation,  excess and surplus lines, and other liability coverages.
As a  result  of the  complex  technical  nature  of most of  these  risks,  the
Company's casualty  underwriters tend to specialize by line of business and work
closely with the Company's pricing actuaries.

DIRECT TREATY REINSURANCE AND INSURANCE OPERATIONS.  The Company's direct treaty
reinsurance  operation writes a full line of property and casualty business.  In
1996,  direct treaty  business  accounted  for $90.6  million of gross  premiums
written,  of which  23.2% was  written  on an excess of loss basis and 76.8% was
written  on a pro  rata  basis.  The  U.S.  direct  treaty  underwriters  target
companies  which  place  their  business  predominantly  in the  direct  market,
including small to medium sized regional ceding  companies,  and seek to develop
long-term  relationships  with such  companies.  A broad array of coverages  are
offered.

The Company's  insurance  operation  consists of $56.8 million of gross premiums
written  through  Everest  National,  which is  licensed  in 38  states  and the
District of Columbia to write  primary  insurance,  and $1.2  million,  which is
assumed from former  affiliates  which write business in states in which Everest
National is not  licensed.  Everest  National  targets  commercial  property and
casualty   business   written   through   agency   relationships   with  program
administrators.  With respect to primary  insurance written through such agents,
the Company  supplements the initial  underwriting  process with periodic claims
and underwriting reviews.

MARINE,  AVIATION AND SURETY OPERATIONS.  The Company's marine and aviation unit
focuses on ceding  companies with a particular  expertise in marine and aviation
business.  The marine and aviation business is written primarily through brokers
and contains a  significant  international  component  written  primarily in the
London market.  Surety business  underwritten by the Company  consists mainly of
reinsurance of contract surety bonds written directly with ceding companies.

Gross  premiums  written by the marine and aviation unit in 1996 totaled  $100.4
million,  substantially  all of which was written on a treaty basis and 73.5% of
which was sourced through reinsurance brokers. Marine treaties represented 51.4%
of marine and aviation gross premiums  written in 1996 and consisted of hull and
liability coverage. Approximately 79.6% of the marine unit premiums in 1996 were
written  on a pro rata  basis and 20.4% as  excess  of loss.  Aviation  premiums
accounted for 48.6% of marine and aviation  gross  premiums  written in 1996 and
included   reinsurance   for   airlines,   general   aviation  and   satellites.
Approximately  88.5% of the aviation  unit's  premiums in 1996 were written on a
pro rata basis and 11.5% as excess of loss.

In 1996, gross premiums  written by the surety unit totaled $60.7 million.  Most
of the portfolio is reinsurance of contract  surety bonds written  directly with
ceding  companies,  with the  remainder  being  credit  reinsurance,  mostly  in
international   markets.   The  unit's   strategy  is  to   maintain   long-term
relationships  with major surety and fidelity  writers and to continue to expand
its international business.

FACULTATIVE  OPERATIONS.  The Company's U.S.  facultative unit conducts business
both   through   brokers   and   directly  with   ceding   companies.  The  U.S.
facultative   operations  consist  of  three   underwriting  units  representing
property,   casualty   and   specialty   lines   of   business.    Business   is
written  from  a  facultative  headquarters  office  in New York  and  satellite
offices in Chicago and San Francisco.  The  Company's  facultative  underwriters
continue  to  narrow   the  focus  of  the  types  of  business   solicited   to
improve the  quality of the  Company's facultative  portfolio.  In  1996,  $26.9


6
<PAGE>

million,  $39.9  million,  and $21.9  million  of gross  premiums  written  were
attributable  to property,  general  casualty and  specialty  lines of business,
respectively.

INTERNATIONAL.  Everest Re's international  operations are designed to enable it
to  capitalize  on the growth  opportunities  in the  international  reinsurance
market. The Company targets several international markets, including: Europe and
the London  market,  which are serviced by  operations  in London and  Brussels;
Canada,  with  operations  headquartered  in Toronto;  Asia and Australia,  with
operations  headquartered  in Hong Kong;  and Latin America and the Middle East,
which  business is  serviced  from  Everest  Re's New Jersey  headquarters.  The
Company also writes "home-foreign"  business,  which provides reinsurance on the
international  portfolios of U.S. insurers, from its headquarters in New Jersey.
Approximately 60.2% of the gross premiums written by the Company's international
underwriters  in  1996  represented   property   business,   while  the  balance
represented  casualty  business.  As with  its  U.S.  operations,  Everest  Re's
international   operations  focus  on  building  long-term   relationships  with
financially  sound  companies  that  have  strong  management  and  underwriting
discipline and  expertise.  Approximately  81.8% of the Company's  international
business was written through brokers,  with the remainder  written directly with
ceding companies.

In 1996,  Everest  Ltd.'s gross  premiums  written  totaled  $142.2  million and
consisted  of pro rata  property  (19.3%),  excess  property  (33.4%),  pro rata
casualty (33.8%) and excess casualty (13.5%). The Brussels office focuses on the
continental  European  reinsurance  markets,  while  the  London  office  covers
international business written through the London market. Gross premiums written
in 1996 from the Brussels and London  offices  totaled  $63.2  million and $79.0
million, respectively.

Gross premiums written by Everest Re's Canadian  operation totaled $62.9 million
in 1996 and consisted of pro rata property (13.0%),  excess property (3.9%), pro
rata multi-line (50.4%) and excess casualty (32.7%).  Approximately 77.4% of the
Canadian  premiums  consisted of treaty  reinsurance while 22.6% was facultative
reinsurance.

Everest  Re's Hong Kong  office  covers  the Asian and  Australian  markets  and
accounted  for $46.1 million of gross  written  premiums in 1996.  This business
consisted of pro rata treaty property  (82.2%),  excess treaty property (15.7%),
pro rata  treaty  casualty  (0.2%),  excess  treaty  casualty  (0.6%) and excess
facultative casualty (1.3%).

International  business  written out of Everest Re's New Jersey office accounted
for $87.7 million of Everest Re's 1996 gross  premiums  written and consisted of
pro rata treaty  property  (57.7%),  pro rata treaty  casualty  (12.1%),  excess
treaty property  (16.7%),  excess treaty  casualty  (2.4%),  excess  facultative
property (8.4%) and excess  facultative  casualty (2.7%). Of this business 46.6%
was sourced from Latin America, 16.6% was sourced from the Middle East and 10.8%
was "home-foreign" business.


UNDERWRITING PROCESS
Everest Re offers ceding companies full service capability, including actuarial,
claims,  accounting and systems  support,  either directly or through the broker
community.  Everest Re's capacity for both casualty and property risks allows it
to underwrite  entire  contracts or major portions  thereof that might otherwise
need to be syndicated among several reinsurers.  Everest Re's strategy is to act
as  "lead"  reinsurer  in the  reinsurance  treaties  it  underwrites.  The lead
reinsurer on a treaty generally accepts one of the largest  percentage shares of
the  treaty  and  is in a  stronger  position  to  negotiate  price,  terms  and
conditions  than is a  reinsurer  which  takes a  smaller  position.  Management
believes this strategy  enables it to influence more  effectively  the terms and
conditions  of the treaties on which it  participates.  When Everest Re does not
lead the  treaty,  it may still  suggest  changes to any  aspect of the  treaty.
Everest Re may decline to  participate  in a treaty based upon its assessment of
all relevant factors.

Everest  Re's treaty  underwriting  process  emphasizes  a team  approach  among
Everest Re's underwriters, actuaries and claims staff. Treaties are reviewed for
compliance with Everest Re's general  underwriting  standards and certain larger
treaties  are  evaluated  in part based upon  actuarial  analyses  conducted  by
Everest Re. The actuarial models used in such analyses are tailored in each case
to the  exposures and  experience  underlying  the specific  treaty and the loss
experience  for  the  risks  covered  by such  treaties.  Everest  Re  does  not
separately  evaluate  each of the  individual  risks assumed under its treaties.
Everest Re does, however,  generally evaluate the underwriting guidelines of its
ceding  companies to determine  their  adequacy prior to entering into a treaty.
Everest Re, when appropriate,  also conducts  underwriting audits at the offices
of  ceding  companies  to  ensure  that  the ceding   companies  operate  within


                                                                               7
<PAGE>

such  guidelines.  Underwriting  audits focus on the quality of the underwriting
staff,  the selection and pricing of risks and the price  monitoring  system and
the client's claims handling ability and financial stability.

Everest  Re's  domestic  facultative   underwriters  operate  within  guidelines
specifying  acceptable  types of  risks,  limits  and  maximum  risk  exposures.
Specified classes of risks and large premium risks are referred to the Company's
New York facultative  headquarters for specific review before premium quotations
are given to clients. In addition, Everest Re's guidelines require certain types
of  risks  to be  submitted  for  review  because  of  their  aggregate  limits,
complexity or volatility  regardless of premium amount or size of the insured on
the underlying contract.

Everest National writes property,  casualty and professional liability coverages
for  homogeneous  risks  through  select  program  managers.   Everest  National
evaluates  these  commercial  programs  based upon  actuarial  analysis  and the
program manager's capabilities. Everest National's rates, forms and underwriting
guidelines are tailored to specific risk types.


RISK MANAGEMENT AND RETROCESSION ARRANGEMENTS
Everest Re manages its risk of loss through a combination of aggregate  exposure
limits,  underwriting  guidelines  that  take into  account  risks,  prices  and
coverage, and retrocessional arrangements.

Everest  Re is  exposed  to  multiple  insured  losses  arising  out of a single
occurrence,  whether a natural  event such as a hurricane or an  earthquake,  or
other catastrophe,  such as a riot or an explosion at a major factory.  Any such
catastrophic  event could generate insured losses in one or many of Everest Re's
treaties or lines of business. Everest Re employs various techniques,  including
licensed  software  modelling,  to assess its  accumulated  exposure to property
catastrophe losses and summarizes that exposure in terms of the probable maximum
loss ("PML").  The Company defines PML as its anticipated  maximum loss,  taking
into account contract limits,  caused by a single catastrophe  affecting a broad
contiguous  geographic area, such as that caused by a hurricane or earthquake of
such a magnitude that it is expected to occur once in every 100 years.

Management  estimates that the Company's greatest catastrophe exposure worldwide
from any single event is to hurricanes and earthquakes in the coastal regions of
the United  States,  where  Everest Re estimates it has a PML  exposure,  before
reinsurance,  of  approximately  $200  million in each such region  based on its
current  book of  business.  Similarly,  management  estimates  that the largest
current PML exposure  outside the United States is  approximately  $112 million.
There can be no assurance that Everest Re will not experience losses from one or
more  catastrophic  events that exceed,  perhaps by a  substantial  amount,  its
estimated PML.

Underwriting  guidelines  have been  established  for each business unit.  These
guidelines  place  dollar  limits on the amount of business  that can be written
based on a variety of  factors,  including  ceding  company,  line of  business,
geographical  location and risk hazards.  In each case, those guidelines  permit
limited exceptions, which must be authorized by the Company's senior management.

Everest Re does not typically retrocede individual risks, but does, from time to
time, purchase  retrocessional  protections where the underwriter deems it to be
prudent to reinsure a portion of the specific risk being  assumed.  In addition,
Everest Re has a property  facultative  retrocession  program which allows it to
provide up to $30.5 million of coverage for a single  facultative  risk,  with a
maximum  net  retention  of  $12.5  million  per  risk,   and  purchases   three
retrocessional  workers' compensation excess of loss treaties which collectively
provide $115  million of coverage in excess of $5 million of retained  losses on
accidental death and dismemberment claims resulting from a catastrophe loss.

The Company also  purchases  catastrophe  retrocessions  covering the  potential
accumulation  of all  property  exposures  that  may  be  involved  in the  same
catastrophe,  such as an earthquake or hurricane.  In 1996, the attachment point
of the first layer of the worldwide  catastrophe  retrocession program was $25.0
million per catastrophe and the Company could have retroceded  70.0% of the next
$75.0  million of losses in excess of the  attachment  point  incurred  on a per
catastrophe   and  aggregate   basis.   The  second  layer  of  the  catastrophe
retrocession  program  provided  coverage  from June 15, 1995  through  June 15,
1996  and,  effective  January 1, 1996, allowed  the  cession  of  30.0%  ($10.0
million) of $33.3 million  per  occurrence in excess of $60.0 million in losses.
In addition, for the period from May 1, 1996 through May 1, 1997,  the Company's
catastrophe  retrocession  program provides coverage of 51.0% of $15 million per
occurrence in excess of $10 million in losses  incurred  by the Company  outside


8
<PAGE>

of the United  States.  And, in 1996,  Everest Re  purchased  an  accident  year
aggregate  excess of loss  retrocession  agreement  which  provided up to $100.0
million of limit if Everest Re's statutory loss ratio had exceeded 81.0% for the
1996 accident year.

Effective January 1, 1997, the worldwide  catastrophe  retrocession  program was
amended to provide  coverage  in each of the three  years,  1997  through  1999,
subject to the  retrocessionaire's  right to cancel on  November  1,  1998.  The
attachment  point of the  catastrophe  retrocession  program is $25  million per
catastrophe  and,  in 1997,  the  Company  can  retrocede  75.0% of the next $75
million  of  losses  in  excess  of  the  attachment  point  incurred  on a  per
catastrophe and aggregate basis. Fifty percent of the unused portion of the 1997
year's coverage  increases the limit of coverage for 1998 (up to 75.0% of $112.5
million)  and 50% of the  unused  portion of the 1997 and 1998  years'  coverage
increases the limit of coverage for 1999 (up to 75.0% of $168.75  million).  The
maximum  recoverable  under  the  catastrophe   retrocession  program  over  the
three-year period is $126.56 million. Also effective January 1, 1997, Everest Re
purchased an accident year aggregate excess of loss retrocession agreement which
provides up to $100 million of protection if Everest Re's  statutory  loss ratio
exceeds 79.0% for the 1997 accident year.

Although the catastrophe and aggregate excess of loss  retrocessions  have terms
which provide for additional premiums to be paid to the  retrocessionaire in the
event that losses are ceded, all aspects of the Company's retrocessional program
have  been  structured  to  permit  these  agreements  to be  accounted  for  as
reinsurance under Statement of Financial  Accounting Standards ("SFAS") No. 113.
If a single  catastrophe  were to occur in the United  States  that  resulted in
$200.0 million of gross losses and allocated loss adjustment  expenses  ("ALAE")
in 1997 (an amount  equivalent to Everest Re's PML),  management  estimates that
the effect (including  additional  premiums and retained losses and ALAE) on the
Company's  income  before taxes would be $118.9  million.  This pre-tax net loss
estimate  assumes  that Everest  Re's  aggregate  losses and ALAE for 1997 would
exceed the 79.0% loss ratio requirement in the aggregate excess of loss cover by
at least $100.0 million.

In addition,  Everest Re purchased an aggregate stop loss retrocession agreement
(the "Stop Loss Agreement") from Gibraltar  Casualty Company  ("Gibraltar"),  an
affiliate of The Prudential. See "Stop Loss Agreement".

As of December 31, 1996,  Everest Re had  retrocessional  arrangements  with 367
retrocessionaires,  and it carried  as an asset  $749.1  million in  reinsurance
receivables with respect to losses ceded to retrocessionaires, substantially all
of which  will not be due to Everest  Re until  Everest Re makes  payment on the
underlying claims. Of this amount, $397.0 million, or 53.0%, was receivable from
Gibraltar  ($137.9  million,  net of collateral held and liability  balances for
which  Everest Re has a  contractual  right of  offset).  An  additional  $150.0
million,   or  20.0%,   was  receivable  from  Continental   Insurance   Company
("Continental").   None  of  the  reinsurance   receivables  from  Gibraltar  or
Continental  was in  dispute  or more  than 90 days  in  arrears.  Everest  Re's
arrangement with Continental is managed on a funds held basis,  which means that
Everest Re did not release premium payments to the  retrocessionaire  but rather
retains such payments to secure  obligations  of the  retrocessionaire,  records
them as a liability and reduces the liability account as payments become due. As
of December  31,  1996,  such funds had  reduced  Everest  Re's net  exposure to
Continental to $99.8 million. No other retrocessionaire  accounted for more than
$21.3 million of Everest Re's receivables.

No assurance can be given that Everest Re will be able to obtain  retrocessional
coverage similar to that currently in place in the future.  Although  management
carefully  selects its  retrocessionaires,  Everest Re is subject to credit risk
with   respect   to  its   retrocessions   because   the   ceding   of  risk  to
retrocessionaires  does not relieve the  reinsurer  of its  liability  to ceding
companies.


RELATIONSHIPS WITH GIBRALTAR
During its early years,  Everest Re also wrote some direct  insurance.  In 1978,
Everest Re expanded its direct  insurance  operation  by forming  Gibraltar as a
subsidiary.  In 1985,  Gibraltar  and Everest Re ceased  writing new and renewal
direct insurance, and Gibraltar was put into run-off.

While Gibraltar actively wrote direct insurance, it was able to reinsure certain
business through Everest Re's management underwriting facility ("MUF"). Begun in
1977,  MUF was a  reinsurance  arrangement  pursuant  to which  Everest Re ceded
certain  business to a number of insurance and  reinsurance  companies (the "MUF
Participants"),  many of them  domiciled  outside the United  States.  Gibraltar
ceded its  MUF-qualifying  business first to Everest Re, which then  immediately
and  entirely  retroceded  it to the MUF  Participants.  As a  result  of  these


                                                                               9
<PAGE>

cessions to Everest Re, Everest Re became, and remains, a reinsurer of Gibraltar
with respect to the Gibraltar MUF cessions. As of December 31, 1996, Gibraltar's
reinsurance  receivables  from  Everest Re totaled  $143.5  million.  MUF became
inactive with respect to new business in 1991.

Following the 1985 decision to put Gibraltar in runoff, Everest Re and Gibraltar
entered into the following  agreements  pursuant to which Gibraltar became,  and
remains, a reinsurer of Everest Re (the "Gibraltar Contracts"):

*  In 1986, Gibraltar reinsured all insurance obligations of Everest Re pursuant
   to certain  insurance  contracts written by Everest Re's former direct excess
   insurance  operations,  which  ceased  writing  business  in 1985 (the "Ceded
   Direct Insurance") (the "Direct Excess Retrocession").

*  In 1989, Gibraltar reinsured  Everest  Re's  medical  malpractice  and  other
   professional liability reinsurance  written  in  1988  and  prior  years (the
   "Professional Liability Retrocession").

*  During 1985 through 1990, Gibraltar and  Everest Re commuted the  obligations
   of a number of MUF Participants.  In exchange  for a cash  payment  from each
   commuted  MUF  Participant,  Gibraltar  assumed  the  obligations of such MUF
   Participant.  The commuted business included  assumed reinsurance  originally
   retroceded to MUF  Participants by Everest  Re and direct  insurance ceded by
   Everest Re and Gibraltar.

In 1991, Everest Re distributed the stock of Gibraltar to PRUCO, Inc., a direct,
wholly-owned subsidiary of The Prudential ("PRUCO").  Simultaneously,  PRUCO and
Gibraltar entered into a surplus  maintenance  agreement pursuant to which PRUCO
agreed to purchase  such amount of surplus notes as may be necessary to maintain
Gibraltar's  statutory  surplus at no less than $15 million at all times.  PRUCO
shortly thereafter distributed the stock of Gibraltar to The Prudential.

The Direct Excess  Retrocession can be terminated by either Gibraltar or Everest
Re upon 90 days' notice,  whereas The  Professional  Liability  Retrocession can
only be  terminated  by Everest Re. A total of $119.6  million of the  Gibraltar
receivables is  attributable  to the Direct Excess  Retrocession.  If the Direct
Excess Retrocession is terminated,  all outstanding  claims,  including incurred
but not  reported  losses  ("IBNR"),  will be  commuted  with the  value of such
claims,  which may not exceed Everest Re's then  outstanding  loss reserves with
respect thereto,  to be mutually agreed upon or, if no agreement can be reached,
determined  by an actuary or appraiser  mutually  appointed.  At the time of the
IPO,  the  parties  agreed  that  if  Gibraltar  terminates  the  Direct  Excess
Retrocession  and the  parties  cannot  agree on the  value of the  claims to be
commuted,  Everest Re's chief actuary will determine such value. Gibraltar could
arbitrate the actuary's determination. If the Direct Excess Retrocession were to
be so terminated and Everest Re's ultimate losses on the Ceded Direct  Insurance
were to exceed the commutation  amount,  the resulting  reserve  increases would
constitute  adverse  development  eligible  for  coverage  under  the Stop  Loss
Agreement (described below), subject to the applicable limits thereof.


STOP LOSS AGREEMENT
On October 5, 1995, Everest Re and Gibraltar entered into an aggregate stop loss
retrocession  agreement (the "Stop Loss Agreement").  The Stop Loss Agreement is
intended to mitigate  the impact on the  Company's  future  earnings  that could
result  from the  adverse  development,  if any,  of Everest  Re's  consolidated
reserves for losses, allocated LAE and uncollectible  reinsurance as of June 30,
1995,  including  IBNR;  provided,  that  adverse  development,  if any, of such
reserves  relating to catastrophes  (as defined in the Stop Loss Agreement) will
only be covered to the extent that the catastrophe  event to which such reserves
relate occurred prior to January 1, 1995.  Such adverse  development is referred
to  herein  as  "Adverse  Development".  For a  description  of  the  Stop  Loss
Agreement,  see Note 5 of Notes to Consolidated  Financial Statements.  Also See
Note 6F of Notes to the Consolidated Financial Statements.


STANDBY CAPITAL CONTRIBUTION AGREEMENT AND PRUCO INDEMNITY
On   October  5,  1995,  Holdings   agreed,   pursuant  to  a  Standby   Capital
Contribution    Agreement    (the   "Capital    Contribution   Agreement"),   to
make  certain  capital   contributions  ("Capital  Contributions")  to   Everest
Re.   And, on  October  5, 1995,  PRUCO  agreed  to  make  payments  ("Indemnity
Payments")  to  Holdings,  pursuant  to  an  Indemnity   Agreement  (the  "PRUCO
Indemnity"),  in  an  amount   equal  to  the  Capital   Contributions.   For  a


10
<PAGE>

description of the Capital Contribution  Agreement and the PRUCO Indemnity,  see
Note 6A of Notes to the Consolidated Financial Statements.


PRUDENTIAL GUARANTEES
On  October 5,  1995,  The  Prudential  guaranteed  (i) up to $775.0  million of
Gibraltar's  obligations to Everest Re, and (ii) PRUCO's  obligation to make the
Indemnity Payments (the "Prudential Guarantees"). The Prudential agreed, subject
to  the  terms  and  conditions  thereof,   to  guarantee   Gibraltar's  payment
obligations  with  respect  to (i) the Stop Loss  Agreement,  subject to maximum
aggregate  payments of $375.0 million,  and (ii) payment  obligations  under the
Gibraltar  Contracts,  subject to maximum aggregate  payments of $400.0 million.
The maximum  aggregate  payments under the  Prudential  Guarantee of Gibraltar's
obligations will be reduced in certain circumstances to take account of payments
made and collateral provided in respect of the guaranteed obligations.

As of December 31, 1996, based on publicly available information, The Prudential
had statutory basis total assets of $178.6 billion and statutory surplus of $9.4
billion.


CLAIMS
Claims  are  managed  by  the   Company's   professional   claims   staff  whose
responsibilities  include  reviewing  initial loss reports and coverage  issues,
monitoring  claims handling  activities of ceding  companies,  establishing  and
adjusting proper case reserves and approving  payment of claims.  In addition to
claims assessment, processing and payment, the claims staff selectively conducts
comprehensive   claims  audits  of  both  specific  claims  and  overall  claims
procedures at the offices of selected ceding companies.


RESERVES FOR UNPAID LOSSES AND LOSS ADJUSTMENT EXPENSES
Significant  periods of time may elapse  between  the  occurrence  of an insured
loss,  the reporting of the loss to the ceding company and the reinsurer and the
ceding  company's  payment of that loss and  subsequent  payments  to the ceding
company by the reinsurer.  To recognize  liabilities  for unpaid losses and loss
adjustment expenses ("LAE"),  insurers and reinsurers establish reserves,  which
are balance sheet liabilities representing estimates of future amounts needed to
pay  reported  and  unreported  claims and related  expenses on losses that have
already occurred. Actual losses and LAE paid may deviate, perhaps substantially,
from such reserves.  To the extent  reserves prove to be  insufficient  to cover
actual  losses  and LAE  after  taking  into  account  available  retrocessional
coverage,  including the reinsurance  provided  through the Stop Loss Agreement,
Everest Re would have to augment  such  reserves  and incur a charge to earnings
which could be material in the period such augmentation takes place. See ITEM 7,
"Management's  Discussion  and  Analysis of Financial  Condition  and Results of
Operations -- Loss and LAE Reserves".

While  the  reserving  process  is  difficult  and  subjective  for  the  ceding
companies,  the inherent  uncertainties  of  estimating  such  reserves are even
greater for the reinsurer,  due primarily to the longer time between the date of
an occurrence and the reporting of any attendant  claims to the  reinsurer,  the
diversity of development  patterns among different types of reinsurance treaties
or facultative  contracts,  the necessary  reliance on the ceding  companies for
information  regarding reported claims and differing  reserving  practices among
ceding  companies.  In  addition,  trends  that  have  affected  development  of
liabilities  in  the  past  may  not  necessarily   occur  or  affect  liability
development  to the same degree in the future.  Thus,  actual losses and LAE may
deviate,  perhaps  substantially,  from  estimates of reserves  reflected in the
Company's consolidated financial statements.

Like many other  property  and casualty  insurance  and  reinsurance  companies,
Everest Re has  experienced  adverse loss  development for prior accident years,
which has led to  adjustments  in  losses  and LAE  reserves.  The  increase  in
reserves for prior  accident  years  reduced net income for the periods in which
the adjustments  were made.  There can be no assurance that adverse  development
from  prior  years  will  not  continue  in the  future  or  that  such  adverse
development  will not have a  material  adverse  effect on net  income.  Adverse
Development  will be reinsured under the Stop Loss Agreement,  up to the maximum
limits  thereunder  and subject to the other terms and conditions  thereof.  See
"Relationships with Gibraltar" and "Stop Loss Agreement".


CHANGES IN HISTORICAL RESERVES
The  following  table shows  changes in statutory  historical  loss reserves for
Everest Re for 1986 and subsequent  years.  The top line of each table shows the
estimated  reserves  for unpaid  losses and LAE  recorded at each year end date.


                                                                              11
<PAGE>

Each amount in the top line  represents the estimated  amount of future payments
for  losses and LAE on claims  occurring  in that year and in prior  years.  The
upper (paid) portion of the table  presents the cumulative  amounts paid through
each  subsequent year on those claims for which reserves were carried as of each
specific  year  end.  The  lower  (liability  re-estimated)  portion  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 actual  claims  for which the  initial  reserves  were
carried.  The cumulative  redundancy/deficiency  line  represents the cumulative
change in estimates  since the initial reserve was  established.  It is equal to
the latest liability re-estimated amount less the initial reserve.

Each amount other than the original  reserves in the top half of the table below
includes the effects of all changes in amounts for prior  periods.  For example,
if a loss settled in 1989 for $100,000 was first reserved in 1986 at $60,000 and
remained  unchanged until settlement,  the $40,000 deficiency (actual loss minus
original estimate) would be included in the cumulative  redundancy  (deficiency)
in each of the years in the period 1986 through 1988 shown below. Conditions and
trends  that  have  affected  development  of  liability  in the  past  may  not
necessarily  occur in the  future.  Accordingly,  it may not be  appropriate  to
extrapolate future redundancies or deficiencies based on this table.
                                                 



12
<PAGE>

<TABLE>
<CAPTION>

            TEN YEAR STATUTORY LOSS DEVELOPMENT TABLE PRESENTED NET OF REINSURANCE WITH SUPPLEMENTAL GROSS DATA(1)(2)

                                                                 Years Ended December 31,
                       ------------------------------------------------------------------------------------------------------------
                         1986      1987      1988      1989      1990      1991      1992      1993      1994      1995      1996
(Dollars in millions)  --------  --------  --------  --------  --------  --------  --------  --------  --------  --------  --------
<S>                    <C>       <C>       <C>       <C>       <C>       <C>       <C>       <C>       <C>       <C>       <C>

Reserves for unpaid
  loss and LAE         $1,258.0  $1,676.7  $1,775.8  $1,766.7  $1,891.9  $1,752.9  $1,854.7  $1,934.2  $2,104.3  $2,327.7  $2,626.3
Paid (cumulative)
  as of:
  One year later          115.1     345.7     299.1     321.9     597.1     333.3     461.5     403.5     359.5     282.1
  Two years later         307.1     582.3     522.3     829.5     785.9     550.4     740.1     627.7     638.0
  Three years later       505.3     757.0     984.3     966.3     933.1     758.3     897.0     820.5
  Four years later        655.5   1,189.1   1,096.1   1,078.2   1,096.9     868.1   1,036.0
  Five years later      1,068.0   1,278.7   1,189.5   1,209.0   1,176.9     970.0
  Six years later       1,142.3   1,358.6   1,308.9   1,276.3   1,257.3
  Seven years later     1,212.1   1,478.7   1,367.9   1,346.6
  Eight years later     1,312.0   1,532.0   1,430.7
  Nine years later      1,367.7   1,591.1
  Ten years later       1,424.8
Liability re-estimated
  as of:
  One year later        1,336.9   1,767.0   1,794.6   1,835.4   1,866.3   1,737.8   1,929.2   2,008.5   2,120.8   2,298.1
  Two years later       1,421.3   1,841.5   1,813.2   1,834.3   1,872.8   1,775.7   1,988.9   2,015.4   2,233.7
  Three years later     1,563.0   1,839.6   1,805.6   1,849.5   1,907.5   1,843.3   2,010.0   2,119.0
  Four years later      1,607.1   1,879.1   1,867.6   1,913.6   1,976.5   1,855.7   2,111.9
  Five years later      1,659.8   1,942.2   1,934.5   1,982.3   1,984.3   1,955.1
  Six years later       1,714.4   2,029.1   2,007.6   1,984.1   2,080.0
  Seven years later     1,819.6   2,118.0   2,008.0   2,089.4
  Eight years later     1,910.7   2,125.2   2,122.6
  Nine years later      1,926.6   2,243.1
  Ten years later       2,037.0

Cumulative redundancy/
  (deficiency)         $ (779.0) $ (566.4) $ (346.8) $ (322.7) $ (188.1) $ (202.2) $ (257.2) $ (184.8) $ (129.4) $   29.6
                       ========  ========  ========  ========  ========  ========  ========  ========  ========  ========

Gross liability-end of year                                                        $2,476.7  $2,576.0  $2,752.8  $3,016.9  $3,298.2
Reinsurance receivable                                                                622.0     641.8     648.5     689.2     671.9
                                                                                   --------  --------  --------  --------  --------
Net liability-end of year                                                           1,854.7   1,934.2   2,104.3   2,327.7   2,626.3
                                                                                   --------  --------  --------  --------  ========
Gross re-estimated
  liability at December 31,
  1996                                                                              3,058.7   2,988.4   3,019.8   3,184.6
Re-estimated receivable
  at December 31, 1996                                                                946.8     869.4     786.1     886.5
                                                                                   --------  --------  --------  --------
Net re-estimated liability
  at December 31, 1996                                                              2,111.9   2,119.0   2,233.7   2,298.1
                                                                                   --------  --------  --------  --------
Gross cumulative
  redundancy/(deficiency)                                                          $ (582.0) $ (412.4) $ (267.0) $ (167.7)
                                                                                   ========  ========  ========  ========
</TABLE>

----------
(1) Includes Gibraltar data through September 31, 1991

(2) Includes  Everest  Re Ltd. data which  was previously  excluded.  All  prior
    period amounts have been restated for this change.


                                                                              13
<PAGE>
                                                                           
For years  prior to 1987,  management  believes  that two  factors  had the most
significant impact on loss development.  First, through the mid-1980's, a number
of industry  and external  factors,  such as the  propensity  of courts to award
large damage awards in liability cases,  combined to increase loss frequency and
severity to unexpectedly  high levels.  Second,  contracts written prior to 1986
contained coverage terms which, for Everest Re and the industry in general, have
been  interpreted by courts to provide  coverage for asbestos and  environmental
exposures not contemplated by either the pricing or the initial reserving of the
contracts.  Legal  developments  during the mid-1980's  necessitated  additional
reserving  for such  exposures  on both a case and IBNR  basis.  No losses  were
incurred net of reinsurance with respect to asbestos and environmental claims in
1996 or 1995.  Incurred  losses net of reinsurance  with respect to asbestos and
environmental  claims were $40.5  million,  $70.6  million and $35.4  million in
1994, 1993 and 1992, respectively.  Substantially all of these losses related to
pre-1986 exposures.

To the extent loss reserves on assumed reinsurance need to be increased, Everest
Re would be  entitled to certain  payments  under the Stop Loss  Agreement.  See
"Stop Loss Agreement".  Additionally,  Holdings may be required to make payments
under the  Capital  Contribution  Agreement  for which it would be  entitled  to
indemnification  under the PRUCO Indemnity.  See "Standby  Capital  Contribution
Agreement and PRUCO Indemnity".  To the extent loss reserves on the Ceded Direct
Insurance  need to be  increased  and  subject  to the  terms  of the  Gibraltar
Contracts,  Everest Re will be entitled to 100%  protection from Gibraltar under
the Gibraltar  Contracts,  which  reinsurance  obligations are guaranteed by The
Prudential  subject to the terms and  conditions  of the  applicable  Prudential
Guarantee.  See  "Relationships  with  Gibraltar" and  "Prudential  Guarantees".
Management  believes that adequate provision has been made for Everest Re's loss
and LAE reserves  regardless of the  availability of any such payments under the
Stop  Loss  Agreement,  the  PRUCO  Indemnity,  and the  Prudential  Guarantees.
Additionally,  while there can be no assurance that reserves for and losses from
these claims will not increase in the future,  management  believes that Everest
Re's existing reserves and  retrocessional  arrangements and payments  available
under the Stop Loss Agreement, the PRUCO Indemnity and the Prudential Guarantees
lessen the probability  that such increases would have a material adverse effect
on the Company's financial condition, results of operations or cash flows.

The Ten Year Statutory  Loss  Development  Table  includes  Gibraltar data until
September 30, 1991 at which time Everest Re  distributed  the stock of Gibraltar
to PRUCO.  Thus the  1986-1990  "Reserves  for unpaid loss and LAE" includes the
Gibraltar  liability.  Similarly,  the "Paid  (cumulative) as of" and "Liability
re-estimated as of" data include Gibraltar  experience until September 30, 1991.
At the time of the distribution of Gibraltar, Gibraltar still had $288.5 million
of reserves  outstanding.  To more accurately reflect reserve  development,  the
Gibraltar reserves were removed from the reserves for unpaid losses and LAE line
for periods  after 1991 and the $288.5  million was treated as a paid loss.  The
amounts so treated as paid in 1991 were $281.1  million  and $285.6  million for
the years  1986 and 1987,  respectively,  and  $288.5 for each of the years 1988
through  1990.  The  following   table   identifies   the   cumulative   reserve
redundancy/(deficiency)   relating  to  Gibraltar  only,  Everest  Re  excluding
Gibraltar and the consolidated group.

<TABLE>
<CAPTION>

                         CUMULATIVE RESERVE REDUNDANCY/(DEFICIENCY) ATTRIBUTABLE TO GIBRALTAR

                                                             Years Ended December 31,
                       ------------------------------------------------------------------------------------------------
                          1986      1987       1988      1989      1990      1991      1992      1993      1994    1995
(Dollars in millions)  -------   -------    -------   -------   -------   -------   -------   -------   -------   -----
<S>                    <C>       <C>        <C>       <C>       <C>       <C>       <C>       <C>       <C>       <C>      
Everest Re excluding
  Gibraltar            $(573.1)  $(389.8)   $(216.9)  $(224.6)  $(158.1)  $(202.2)  $(257.2)  $(184.8)  $(129.4)  $29.6
Gibraltar               (205.9)   (176.6)    (129.9)    (98.1)    (30.0)       --        --        --        --      --
                       -------   --------   -------   -------   -------   -------   -------   -------   -------   -----
Consolidated           $(779.0)  $(566.4)   $(346.8)  $(322.7)  $(188.1)  $(202.2)  $(257.2)  $(184.8)  $(129.4)  $29.6
                       =======   ========   =======   =======   =======   =======   =======   =======   =======   =====
</TABLE>



14
<PAGE>
                               
The  following  table is derived from the Ten Year  Statutory  Loss  Development
Table  above  and  summarizes  the  effect  of  reserve  re-estimates,   net  of
reinsurance,  on calendar  year  operations  for the same ten year period  ended
December 31, 1996.  Each column  represents  the amount of reserve  re-estimates
made in the indicated  calendar  year and shows the accident  years to which the
re-estimates  are  applicable.  The amounts in the total accident year column on
the far right represent the cumulative  reserve  re-estimates  for the indicated
accident years.

<TABLE>
<CAPTION>

                                   EFFECT OF RESERVE REESTIMATES ON CALENDAR YEAR OPERATIONS

                                                                                                               Cumulative 
                                                                                                             Re-estimates 
                                            Calendar Year Ended December 31,                                     for each
                 ------------------------------------------------------------------------------------------      Accident
                  1987     1988      1989     1990     1991     1992      1993     1994     1995      1996           Year
                 ------   ------   -------   ------   ------   ------   -------   ------   ------   -------  ------------
(Dollars in millions)
<S>              <C>      <C>      <C>       <C>      <C>      <C>      <C>       <C>      <C>      <C>           <C>
Accident Years
1986 & prior     $(78.9)  $(84.4)  $(141.8)  $(44.1)  $(52.7)  $(54.6)  $(105.2)  $(91.0)  $(18.9)  $(107.4)      $(779.0)
1987                        (7.0)     68.3     46.1     13.2     (8.5)     18.3      2.1     11.7     (10.4)        133.8
1988                                  54.8    (20.6)    47.1      1.1      20.0     15.8      6.8       3.3         128.3
1989                                          (50.1)    (6.5)    46.9       2.8      4.4     (1.4)      9.2           5.3
1990                                                    24.5      8.7      29.4     (0.4)    (6.0)      9.7          65.9
1991                                                             21.6      (3.2)     1.4     (4.6)     (3.8)         11.4
1992                                                                      (36.6)     7.9     (8.7)     (2.5)        (39.9)
1993                                                                               (14.5)    14.2      (1.7)         (2.0)
1994                                                                                         (9.8)     (9.2)        (19.0)
1995                                                                                                  142.4         142.4
Total calendar
  year effect    $(78.9)  $(91.4)  $ (18.7)  $(68.7)  $ 25.6   $ 15.2   $ (74.5)  $(74.3)  $(16.7)  $  29.6       $(352.8)
</TABLE>

                                          
As illustrated by this table, the factors which caused the deficiencies shown in
the Ten Year Statutory Loss Development Table relate almost entirely to accident
years  prior to 1986.  With the  exception  of the  1992  accident  year,  which
included Hurricane Andrew,  the original reserves  established for each accident
year since 1986 have  developed  either  positively  or in a manner  that is not
materially adverse. Adverse development relating to accident years prior to July
1, 1995  (prior to  January 1, 1995 for  catastrophe  losses)  is  mitigated  by
recoveries under the Stop Loss Agreement. As the Stop Loss Agreement was entered
into in 1995,  recoveries  thereunder  are  reflected in the 1995  accident year
rather  than  in  the  accident  year  which  included  the  underlying  adverse
development.

The following  table presents a  reconciliation  of beginning and ending reserve
balances for the years indicated on a GAAP basis:

<TABLE>
<CAPTION>

                  RECONCILIATION OF RESERVES FOR LOSSES AND LAE

                                                   Years Ended December 31,
                                              ----------------------------------
(Dollars in millions)                             1996         1995         1994
                                              --------     --------     --------
<S>                                           <C>          <C>          <C>    
Reserves at beginning of period               $2,969.3     $2,706.4     $2,540.1
                                              --------     --------     --------
Incurred related to:
  Current year                                   745.6        658.0        646.5
  Prior years                                    (29.6)        16.7         74.3
                                              --------     --------     --------
         Total incurred losses                   716.0        674.7        720.8
                                              --------     --------     --------

Paid related to:
  Current year                                   139.1         92.9        157.7
  Prior years                                    282.1        359.5        403.5
                                              --------     --------     --------
         Total paid losses                       421.2        452.4        561.2
                                              --------     --------     --------
Change in reinsurance receivables
  on unpaid losses and LAE                       (17.3)        40.6          6.7
                                              --------     --------     --------
Reserves at end of period                     $3,246.9     $2,969.3     $2,706.4
                                              ========     ========     ========
</TABLE>


                                                                              15
<PAGE>

The  reconciliation  of  reserves  on a GAAP  basis to  reserves  reported  on a
statutory  basis for each of the three years in the period  ended  December  31,
1996 is shown below:

<TABLE>
<CAPTION>
                                             
RECONCILIATION OF RESERVES FOR LOSSES AND LAE FROM STATUTORY BASIS TO GAAP BASIS

                                                     Years Ended December 31,
                                                 -------------------------------
(Dollars in millions)                                1996       1995       1994
                                                 --------   --------   --------
<S>                                              <C>        <C>        <C>    
Statutory reserves-net                           $2,387.7   $2,120.0   $1,934.6
Statutory retroactive reinsurance reserves           15.4        5.4         --
Financing arrangement                               (10.3)     (10.3)     (10.3)
                                                 --------   --------   --------
Subtotal                                          2,392.8    2,115.1    1,924.3
Foreign subsidiary reserves                         233.5      212.6      180.0
  Subtotal-net reserves as shown in loss
    development schedule                          2,626.3    2,327.7    2,104.3
Reinsurance receivable on unpaid losses             671.9      689.2      648.5
                                                 --------   --------   --------
  Subtotal-gross reserves as shown in loss
    development schedule                          3,298.2    3,016.9    2,752.8
                                                 --------   --------   --------
Foreign translation effect of Canadian reserves     (51.3)     (47.6)     (46.4)
                                                 --------   --------   --------
Reserves on a GAAP basis                         $3,246.9   $2,969.3   $2,706.4
                                                 ========   ========   ========
</TABLE>

Statutory  reserves are presented net of reinsurance  receivables on unpaid loss
and LAE for years ended  December 31, 1996,  1995 and 1994. The amounts shown as
financing arrangement in 1996, 1995 and 1994 relate to a single treaty which did
not qualify for reinsurance accounting under GAAP.


RESERVES FOR ASBESTOS AND ENVIRONMENTAL LOSSES AND LOSS ADJUSTMENT EXPENSES
Everest Re's reserves include an estimate of Everest Re's ultimate liability for
asbestos and  environmental  claims for which ultimate value cannot be estimated
using traditional reserving techniques.  There are significant  uncertainties in
estimating  the  amount of Everest  Re's  potential  losses  from  asbestos  and
environmental  claims.  See ITEM 7,  "Management's  Discussion  and  Analysis of
Financial  Condition  and Results of  Operations  -- Asbestos and  Environmental
Exposures" and Note 8 of Notes to Consolidated Financial Statements.

The following  table  summarizes the  composition of Everest Re's total reserves
for asbestos and  environmental  losses,  gross and net of  reinsurance  for the
years ended December 31, 1996, 1995, 1994 and 1993:

<TABLE>
<CAPTION>

                                                      Years Ended December 31,
                                                    ----------------------------
(Dollars in millions)                                  1996      1995      1994
                                                    -------   -------   -------
<S>                                                 <C>       <C>       <C>    
Case reserves reported by ceding companies          $ 101.2   $ 108.5   $ 112.9
Additional reserves established by Everest Re
  (assumed reinsurance)                                50.1      43.8      39.8
Case reserves established by Everest Re
  (Ceded Direct Insurance)                             52.8      50.3      52.3
IBNR reserves                                         219.2     225.9     240.6
                                                    -------   -------   -------
Gross reserves                                        423.3     428.5     445.5
Reinsurance receivable                               (222.3)   (230.8)   (241.9)
                                                    -------   -------   -------
Net reserves                                        $ 201.0   $ 197.7   $ 203.7
                                                    =======   =======   =======
</TABLE>


Everest Re's  asbestos and  environmental  claims are managed by an  experienced
staff consisting of seven people. This claims unit works closely with members of
Everest Re's in-house  legal staff on legal  developments.  The claims unit also
meets with the  management of primary  insurance  companies to understand  their
asbestos and environmental exposures and reserving practices.

Additional  losses,  the type or  magnitude  of which  cannot be foreseen by the
Company, or the reinsurance  industry generally,  may emerge in the future. Such
future  emergence,   to  the  extent  not  covered  by  existing  retrocessional


16
<PAGE>

contracts,  including  the Stop Loss  Agreement,  could  have  material  adverse
effects on the Company's future financial  condition,  results of operations and
cash flows.


INVESTMENTS
Everest Re's overall financial  strength and results of operations are, in part,
dependent  on the quality  and  performance  of its  investment  portfolio.  Net
investment  income and net  realized  capital  gains  (losses)  on Everest  Re's
invested assets constituted 16.9%, 21.1% and 13.5% of the Company's revenues for
the years ending December 31, 1996, 1995 and 1994,  respectively.  The Company's
cash and invested assets totalled $3,624.6 million at December 31, 1996 of which
95.0% were cash or investment grade fixed maturities.

Everest  Re's  investment  strategy   emphasizes   maintaining  a  high  quality
investment  portfolio while maximizing  long-term  after-tax  investment income.
Everest Re's current  investment  strategy  seeks to maximize  after-tax  income
through a high quality, diversified,  taxable bond and tax-exempt municipal bond
portfolio, while maintaining an adequate level of liquidity. Everest Re's mix of
taxable and  tax-preferenced  investments is adjusted  continuously,  consistent
with Everest Re's current and projected operating results, market conditions and
tax position.  Additionally,  Everest Re invests in marketable equity securities
which it believes will enhance the risk-adjusted  total return of the investment
portfolio.

The Investment  Committee of Everest Re's Board of Directors is responsible  for
establishing   investment  policy  and  guidelines  and,  together  with  senior
management, for overseeing their execution. Everest Re's investment portfolio is
in compliance with the insurance laws of the state of Delaware,  its domiciliary
state, and of other jurisdictions in which it is regulated. These laws prescribe
the  kind,  quality  and  concentration  of  investments  which  may be  made by
insurance companies. In general, these laws permit investments, within specified
limits  and  subject  to  certain  qualifications,  in  government  obligations,
corporate  bonds,  preferred and common stocks,  real estate  mortgages and real
estate.  An independent  investment  advisor is utilized to manage the Company's
investment portfolio within the established guidelines and is required to report
activities  on a  current  basis and to meet with the  Company  periodically  to
review and discuss the portfolio structure, securities selection and performance
results.

Everest Re's investment  guidelines include a duration guideline of three to six
years.  The duration of an  investment  is based on the maturity of the security
but also reflects the possibility of early prepayment of such security without a
prepayment  penalty.  This investment duration guideline is sensitive to Everest
Re's average duration of potential  liabilities which, at December 31, 1996, was
approximately  five  years.  Liability  duration  is  determined  based  on  the
estimated   payouts  of  underwriting   liabilities   using  standard   duration
calculations.

Approximately  13.2% of the Company's  consolidated  reserves for losses and LAE
and  unearned   premiums   represents   estimated  amounts  payable  in  foreign
currencies.  For each currency in which the Company has established  substantial
reserves,  the Company seeks to maintain  invested  assets  denominated  in such
currency in an amount approximately equal to the estimated liabilities which are
denominated in such currency.

As of December 31, 1996,  99.4% of Everest  Re's fixed  maturities  consisted of
investment  grade  securities.  The average maturity of fixed maturities was 7.8
years at December  31, 1996,  and their  overall  duration was 5.2 years.  As of
December 31, 1996,  Everest Re did not have any material holdings of issuers who
management  believes are experiencing cash flow difficulty to an extent that the
ability of the obligor to meet debt service payments is threatened. Everest Re's
current  investment  strategy  does not  contemplate  additional  investment  in
non-investment  grade securities or any investments in commercial real estate or
direct commercial  mortgages.  Also,  investments in derivative  products (i.e.,
products which include features such as futures,  forwards,  swaps,  options and
other  investments  with  similar  characteristics)  are  generally  prohibited,
without the prior approval of Everest Re's Investment Committee. At December 31,
1996, the Company had no investments in derivative products.

As of December 31, 1996, the common stock portfolio was $147.3 million at market
value, is managed with a growth and income  orientation and consisted  primarily
of investments in dividend paying mid and large  capitalization companies.  Also
included in the stock portfolio are strategic  minority interests in Corporacion
MAPFRE S.A. ("MAPFRE"),  an insurance group in Spain, and three other companies.
These  companies  accounted for $42.5 million (of which $35.8 million related to
MAPFRE) or 28.8% of Everest  Re's total  equity  investments  as of December 31,
1996 and 1.2% of total cash and investments.


                                                                              17
<PAGE>

The following table reflects  investment  results for Everest Re for each of the
five years in the period ended December 31, 1996:


<TABLE>

                                                                        Pre-Tax
                                            Pre-Tax                Realized Net
                               Average   Investment   Effective   Capital Gains
                        Investments(1)   Income(2)     Yield(3)        (Losses)
                        --------------   ----------   ---------   -------------
Years Ended December 31,
  (Dollars in millions) 
<S>                           <C>            <C>           <C>             <C> 
1996                          $3,416.4       $191.9        5.62%           $5.7
1995                           2,894.9        166.0        5.73            33.8
1994                           2,620.9        143.6        5.48           (10.5)
1993                           2,532.2        141.1        5.57            78.8
1992                           2,407.2        159.3        6.62            87.5
</TABLE>

----------------
(1) Average  of the  beginning and ending  carrying  values of  investments  and
    cash, less net  funds  held and non-interest bearing cash. Common stocks and
    nonredeemable  preferred  stocks are carried at fair market value. Bonds and
    redeemable  preferred  stocks  are  carried at  amortized  cost except that,
    effective   December  31,  1993,   bonds  and  redeemable   preferred  stock
    available for sale are carried at fair market value.

(2) After investment expenses, excluding realized net capital gains (losses).

(3) Pre-tax  net   investment   income   for  the  period  divided   by  average
    investments for the same period and annualized for interim periods.


The  following  table  summarizes  fixed  maturities as of December 31, 1996 and
1995:

<TABLE>

                                              Amortized    Unrealized    Unrealized      Market
                                                   Cost  Appreciation  Depreciation       Value
(Dollars in millions)                         ---------  ------------  ------------    --------
<S>                                            <C>             <C>             <C> 
December 31, 1996:
  U.S. Treasury securities and obligations
    of U.S. government agencies and
    corporations                               $  192.6        $  1.2          $1.4    $  192.4
  Obligations of states and political
    subdivisions                                1,309.9          56.1           1.0     1,365.0
  Corporate Securities                            740.0          11.4           0.3       751.1
  Mortgage-backed securities                      487.1           7.7           2.0       492.8
  Foreign debt securities                         545.2          24.7           0.9       569.0
                                               --------        ------          ----    --------
         Total                                 $3,274.8        $101.1          $5.6    $3,370.3
                                               ========        ======          ====    ========

December 31, 1995:
  U.S. Treasury securities and obligations
    of U.S. government agencies and
    corporations                               $  101.7        $  2.4          $0.4    $  103.7
  Obligations of states and political
    subdivisions                                1,185.4          65.0           0.4     1,250.0
  Corporate Securities                            773.4          25.0           0.7       797.7
  Mortgage-backed securities                      355.7           9.9           0.4       365.2
  Foreign debt securities                         455.5          17.7           3.7       469.5
                                               --------        ------          ----    --------
         Total                                 $2,871.8        $120.0          $5.7    $2,986.1
                                               ========        ======          ====    ========

</TABLE>


18
<PAGE>

The following  table  presents the credit quality  distribution  by the National
Association  of Insurance  Commissioners  ("NAIC")  rating of Everest Re's fixed
maturities as of December 31, 1996:

<TABLE>

                                                          Held to  Available
(Dollars in millions)                                    Maturity   For Sale
  NAIC                                                 (Amortized    (Market             Percent of
Rating(1)  Standard and Poor's Equivalent Description       Cost)     Value)      Total       Total
---------  ------------------------------------------  ----------  ---------   --------  ----------                                 
<S>                                                         <C>     <C>        <C>            <C>    
    1      AAA/AA/A                                         $78.3   $2,622.4   $2,700.7        80.3%
    2      BBB                                                1.8      310.3      312.1         9.3
    3      BB                                                  --       19.4       19.4         0.6
    4      B                                                   --         --         --          --
    5      CCC/CC/C                                           0.4         --        0.4         0.0
    6      CI/D                                                --        1.4        1.4         0.0
           Foreign subsidiary investments(2)                   --      328.5      328.5         9.8
                                                            -----   --------   --------       -----
                    Total(3)                                $80.5   $3,282.0   $3,362.5       100.0%
                                                            =====   ========   ========       =====
</TABLE>

------------
(1) The Securities Valuation Office of the NAIC  maintains a security  valuation
    system  that  assigns  a  numerical  rating  to  securities.  The  numerical
    ratings  generally  correspond  to S & P's  classifications,  as  indicated,
    although  S & P's has  not  necessarily   rated  the  securities  indicated.
    Rating  categories 1 and 2 are considered  investment grade and categories 3
    through 6 are considered non-investment grade.

(2) Foreign  subsidiary  investments are not subject to NAIC ratings but, in the
    opinion of the investment manager, are of high investment grade.

(3) Certain totals may not reconcile due to rounding.


The following table summarizes  fixed  maturities by contractual  maturity as of
December 31, 1996:
<TABLE>

                                 Held to Maturity   Available For Sale           Total      Percent of
                                 (Amortized Cost)       (Market Value)   Balance Sheet   Balance Sheet
(Dollars in millions)            ----------------   ------------------   -------------   -------------
<S>                                         <C>               <C>             <C>                <C>       
Maturity category:
  Less than one year                        $10.7             $   75.7        $   86.4             2.6%
  Due after 1-5 years                        26.8                655.1           681.9            20.3%
  Due after 5-10 years                        7.2                963.1           970.3            28.9%
  Due after 10 years                         35.8              1,095.3         1,131.1            33.6%
                                            -----             --------        --------           -----
        Subtotal                             80.5              2,789.2         2,869.7            85.3%
  Mortgage-backed securities(1)                --                492.8           492.8            14.7%
                                            -----             --------        --------           -----
        Total(2)                            $80.5             $3,282.0        $3,362.5           100.0%
                                            =====             ========        ========           =====
</TABLE>

------------
(1) Mortgage-backed  securities  generally are  more  likely to be  prepaid than
    other  fixed  maturities.  Therefore  contractual  maturities  are  excluded
    from this table since they may not be indicative of actual maturities.
(2) Certain totals may not reconcile due to rounding.


RATINGS
Everest  Re  currently  has a rating  of "A"  (Excellent)  from  A.M.  Best,  an
independent  insurance  industry  rating  organization  which rates companies on
factors of concern to  policyholders.  A.M. Best states that the "A" (Excellent)
rating is assigned to those  companies  which,  in its  opinion,  have  achieved
excellent overall performance when compared to the standards established by A.M.
Best and have  demonstrated  a  strong  ability  to meet  their  obligations  to
policyholders  over a long  period of time.  The "A"  (Excellent)  rating is the
third highest of fifteen ratings  assigned by A.M. Best,  which range from "A++"
(Superior)  to  "F"  (In  liquidation).   Additionally,  A.M.  Best  has  eleven
classifications within the "Not Assigned" category.

Everest  Re  currently  has  a  claims-paying  ability  rating  of  "A+"  (Good)
from  Standard & Poor's, an  independent  rating  organization  which  rates  an
insurance   company's  financial   capacity  to  meet  the  obligations  of  its
insurance policies in accordance with their terms. Standard & Poor's states that
the "A+" rating is assigned  to those  companies  which,  in its  opinion,  have
secure  financial capacity to meet policyholder obligations.  The "A+" rating is


                                                                              19
<PAGE>

the fifth highest of eighteen ratings assigned by Standard & Poor's, which range
from "AAA"  (Superior) to "R" (Regulatory  Action).  Ratings from AA to B may be
modified  by the use of a plus or minus sign to show  relative  standing  of the
insurer within those rating categories.

Everest Re currently has an insurance  financial  strength rating of "A2" (Good)
from  Moody's.  Moody's  states that  insurance  companies  rated "A" offer good
financial   security.   However,   elements  may  be  present  which  suggest  a
susceptibility to impairment  sometime in the future.  Moody's rating gradations
are shown through the use of nine distinct symbols,  each symbol  representing a
group of ratings in which the financial  security is broadly the same.  The "A2"
(Good) rating is the sixth highest of ratings  assigned by Moody's,  which range
from "Aaa"  (Exceptional)  to "C" (Lowest).  Moody's further  distinguishes  the
ranking of an insurer within its generic rating classification from Aa to B with
1, 2 and 3 ("1" being the highest).

A.M.  Best's,  Standard & Poor's and Moody's  ratings are based upon  factors of
concern to  policyholders  and should not be  considered  an  indication  of the
degree or lack of risk involved in an equity investment in an insurance company.
Each of these rating agencies reviews its ratings periodically, and there can be
no assurance that Everest Re's ratings will be maintained in the future.


COMPETITION
The  property  and  casualty   reinsurance   business  is  highly   competitive.
Competition  with  respect to the types of  reinsurance  in which  Everest Re is
engaged is based on many  factors,  including the  perceived  overall  financial
strength of the reinsurer,  A.M.  Best's and/or  Standard & Poor's rating of the
reinsurer, underwriting expertise, the states where the reinsurer is licensed or
otherwise  authorized,  premiums  charged,  other  terms and  conditions  of the
reinsurance  offered,  services offered,  speed of claims payment and reputation
and  experience  in lines  written.  Everest Re competes for its business in the
United States and international  reinsurance markets with numerous international
and  domestic  reinsurance  companies,  some of  which  have  greater  financial
resources than Everest Re.

Everest Re's competitors include independent reinsurance companies, subsidiaries
or  affiliates  of  established   worldwide  insurance  companies,   reinsurance
departments   of  certain   primary   insurance   companies   and  domestic  and
international  underwriting  operations.  Some of these competitors have greater
financial resources than Everest Re, have been operating for longer than Everest
Re,  and  have  established  long-term  and  continuing  business  relationships
throughout  the  industry,  which can be a  significant  competitive  advantage.
Although most U.S.  reinsurance  companies operate in the broker market, most of
Everest Re's largest competitors work directly with ceding companies,  competing
with brokers.  Management believes that Everest Re's major competitors are large
U.S. and foreign reinsurance companies.

Since 1987, the industry has experienced  increased global  competition.  During
this period,  primary insurers retained an increasing portion of their business,
which,  together  with the  competitive  market  conditions,  resulted in excess
reinsurance  capacity and  generally low rates of premium  growth.  In the early
1990s,  several  well-capitalized  new Bermuda-based  companies have entered the
reinsurance  industry,  and  added  significant  capacity,  particularly  in the
catastrophe  reinsurance market, and rendered future rate improvement uncertain.
In  addition,  Lloyd's of London has  relaxed  its  requirement  that  syndicate
members have unlimited  liability for losses and has allowed  limited  liability
investors to join  syndicates,  thereby  increasing the reinsurance  capacity at
Lloyd's.  In 1996,  Lloyd's has also implemented its  reconstruction and renewal
plan in an attempt to separate past losses from the current market  participants
and to provide a more secure market going forward.

Management  believes  that since  1987,  a number of factors,  including  global
competition,  the emergence of significant reinsurance capacity from the Bermuda
and  rejuvenated  Lloyds'  markets,   higher  retentions  by  primary  insurance
companies  and  consolidation  in  the  insurance  industry,  have  resulted  in
increasingly  competitive  market  conditions  across most lines of business and
have  influenced  the  softening  of prices and  contract  terms in the  current
marketplace.

The  Company  may,  in  the  future,  face  additional  competition  from  other
well-capitalized  companies or from market  participants that may devote more of
their capital to the reinsurance business or from the capital markets entry into
insurance and reinsurance  investment  products.  And, the Company believes that
the  insurance  and  reinsurance  industries  will  continue to undergo  further
consolidation,  including reinsurance brokers,  whose role will become stronger,
and that reinsurers will need significant size and financial strength to compete
effectively.


20
<PAGE>

EMPLOYEES
As of March 3, 1997, Everest Re employed 400 persons.  Management  believes that
its employee  relations are good.  None of Everest Re's employees are subject to
collective  bargaining  agreements,  and the Company is not aware of any current
efforts to implement such agreements at Everest Re.


INFORMATION RELATING TO DOMESTIC AND FOREIGN OPERATIONS
Financial  information  relating  to industry  segments  set forth in Note 10 of
Notes to Consolidated Financial Statements of the Company is incorporated herein
by reference.


REGULATORY MATTERS
The Company is subject to  regulation  under the  insurance  statutes of various
jurisdictions, including Delaware, the domiciliary state of Everest Re, Arizona,
the domiciliary state of Everest National,  the United Kingdom,  the domiciliary
jurisdiction  of Everest  Ltd.,  and Canada,  the  domiciliary  jurisdiction  of
Everest Canada.

INSURANCE  HOLDING  COMPANY  REGULATION.  Insurance  holding  company  laws  and
regulations  generally require the holding company to register with the relevant
state  regulatory  authorities  and file certain  reports which include  current
information concerning the capital structure, ownership,  management,  financial
condition and general business  operations of the insurance  holding company and
its  subsidiaries  licensed in the state.  State  regulators  also require prior
notice or regulatory approval of changes in control of an insurer or its holding
company and of certain material inter-affiliate  transactions within the holding
company structure. See "-Dividends by Everest Re".

Under the  Delaware and Arizona  Codes and  regulations  thereunder,  no person,
corporation  or other entity may acquire a controlling  interest in the Company,
unless such person, corporation or entity has obtained the prior approval of the
Delaware  and Arizona  Insurance  Commissioners  for such  acquisition.  For the
purposes of the Delaware and Arizona Codes,  any person  acquiring,  directly or
indirectly,  10% or more of the voting  securities  of an  insurance  company is
presumed to have acquired  "control" of such company.  To obtain the approval of
any such change in control,  the proposed acquirer must file an application with
the Delaware and Arizona Insurance Commissioners.  This application requires the
acquirer  to  disclose  its  background,   financial  condition,  the  financial
condition  of its  affiliates,  the  source and amount of funds by which it will
effect the  acquisition,  the criteria used in determining the nature and amount
of  consideration  to be  paid  for the  acquisition,  proposed  changes  in the
management  and  operations  of the  insurance  company  and any  other  related
matters.

The United Kingdom  Insurance  Companies Act 1982 requires the prior approval by
the  Department  of  Trade  and  Industry  of  anyone   proposing  to  become  a
"controller" of any insurance  company  regulated under such Act. Any company or
individual that directly or indirectly exercises 15% or more of the voting power
at a general meeting of a regulated insurance company incorporated in the United
Kingdom which only engages in reinsurance business is considered a "controller".
The  Insurance  Companies  Act of Canada  also  requires  prior  approval by the
Minister of Finance of anyone acquiring a significant  interest in an authorized
Canadian insurance company. In addition, the Company is subject to regulation by
the insurance  regulators of other states and foreign  jurisdictions in which it
does  business.  Certain  of  these  states  and  foreign  jurisdictions  impose
regulations  regulating  the  ability  of any  person to  acquire  control of an
insurance  company  without  appropriate  regulatory  approval  similar to those
described above.

DIVIDENDS BY EVEREST RE.  Because the  operations  of the Company are  conducted
through Everest Re and its subsidiaries, the Company is dependent upon dividends
and other  permissible  payments from Everest Re to meet its  obligations and to
pay dividends in the future should Holdings' Board of Directors decide to do so.
The payment of  dividends  to  Holdings by Everest Re is subject to  limitations
imposed by Delaware law.

Under  the  Delaware  Code, before  a  Delaware  domiciled  insurer  may pay any
dividend  it  must  give  10  days  prior  notice  to  the  Delaware   Insurance
Commissioner.  During  this  10-day  period,  the  Commissioner  may, by  order,
limit  or disallow  the  payment  of  ordinary  dividends  if  the  Commissioner
finds the  insurer  to  be  presently  or  potentially  in  financial  distress.
A  Delaware  domiciled  insurer may only pay  cash  dividends from  the  portion
of its  available  and  accumulated  surplus  funds  derived from  realized  net
operating profits and realized capital gains. Additionally, a Delaware domiciled
insurer  may  not  pay  any  "extraordinary"  dividend  or  distribution   until
(i) 30 days  after  the Delaware Insurance Commissioner has received notice of a
declaration thereof and has not within such  period  disapproved  such a payment
or (ii) the Delaware Insurance Commissioner has approved such payment within the


                                                                              21
<PAGE>

30-day  period.  Under the  Delaware  Code,  an  "extraordinary"  dividend  of a
property and casualty  insurer is a dividend the amount of which,  together with
all other dividends and distributions  made in the preceding 12 months,  exceeds
the greater of (i) 10% of an  insurer's  statutory  surplus as of the end of the
prior  calendar year or (ii) the insurer's  statutory net income,  not including
realized capital gains, for the prior calendar year. Under this definition,  the
maximum amount that will be available for the payment of dividends by Everest Re
in 1997 without  triggering  the  requirement  for prior  approval of regulatory
authorities in connection with an extraordinary dividend is $84.4 million. As of
December 31, 1996, Everest Re's accumulated  statutory surplus from realized net
operating profits and realized gains was $399.7 million.

STATE  INSURANCE  REGULATION.  U.S.  domestic  property and  casualty  insurers,
including  reinsurers,  are subject to regulation by their state of domicile and
by those  states in which  they are  licensed.  The rates  and  policy  terms of
reinsurance   agreements   generally  are  not  subject  to  regulation  by  any
governmental  authority.  This  contrasts  with primary  insurance  policies and
agreements,  the rates and policy terms of which are generally regulated closely
by state insurance departments.

Everest Re is subject  primarily to regulation  and  supervision  that relate to
licensing   requirements,   solvency  requirements,   investment   requirements,
restrictions  on the size of risks which may be insured,  deposit of  securities
for  the  benefit  of  ceding   companies   and/or   policyholders,   accounting
requirements, periodic examinations of financial condition and affairs, the form
and content of financial  statements  that must be filed with regulators and the
level of minimum reserves necessary to cover unearned premiums, losses and other
purposes.  In general,  such  regulation is designed to protect ceding  insurers
and, ultimately, their policyholders,  rather than stockholders.  The operations
of Everest  Re's  foreign  branch  offices  in Canada,  Hong Kong and the United
Kingdom are subject to regulation by the insurance regulatory officials of those
jurisdictions.  Management  believes that the Company is in material  compliance
with applicable laws and regulations pertaining to its business and operations.

Everest National is subject to similar regulation and, in addition,  must comply
with substantial  regulatory  requirements in each state where it does business.
These additional  requirements  include, but are not limited to, rate and policy
form requirements,  requirements with regard to licensing,  agent  appointments,
participation  in  residual  markets  and  claims  handling  procedures.   These
regulations are primarily designed for the protection of policyholders.

LICENSES.  Ordinarily,  in the United States,  a primary insurer will only enter
into  reinsurance  agreements if it can obtain credit for the reinsurance on its
statutory financial statements.  Credit is usually granted when the reinsurer is
licensed or  accredited in a state where the primary  insurer is  domiciled.  In
addition, many states permit credit for reinsurance ceded to a reinsurer that is
domiciled  and  licensed in another  state.  Such a reinsurer  must meet certain
financial  requirements and, in some instances,  the domiciliary state of such a
reinsurer must have substantially similar reinsurance credit law requirements as
the domiciliary state of the primary insurer or if credit for reinsurance is not
available,  the primary  insurer  may reduce its  liabilities  on its  statutory
financial statements if it is provided with collateral to secure the reinsurer's
obligations.

Everest Re is a  licensed  property/casualty  insurer  and/or  reinsurer  in all
states  and the  District  of  Columbia  with the  exception  of  Nevada,  North
Carolina,  West Virginia and Wyoming.  In New Hampshire and Puerto Rico, Everest
Re is licensed for reinsurance only.

Everest Re is licensed as a  property/casualty  reinsurer in Canada.  It is also
authorized to conduct reinsurance  business in the United Kingdom and Hong Kong.
Everest Re can also write reinsurance in other foreign  countries.  Because some
jurisdictions  require a  reinsurer  to  register  in order to be an  acceptable
market for local insurers,  Everest Re is registered as a foreign insurer and/or
reinsurer in the  following  countries:  Argentina,  Bolivia,  Chile,  Colombia,
Ecuador, Guatemala, Mexico, Peru, Venezuela and the Philippines. Everest Ltd. is
authorized  to engage in the  reinsurance  business  in the United  Kingdom  and
reinsures  risks  worldwide.  Everest  National is licensed in 38 states and the
District of Columbia.  Everest Canada is federally  licensed under the Insurance
Companies Act of Canada and provincially licensed in Ontario.

PERIODIC    EXAMINATIONS.      Everest    Re    and   Everest    National    are
subject  to   examination  of  their   affairs  by  the  insurance   departments
of  the  states  in   which   they  are  licensed,   authorized  or  accredited.
Delaware  and   Arizona,  the  domiciliary  states  of  Everest  Re  and Everest
National,   respectively,    usually    conduct    examinations   of    domestic


22
<PAGE>

companies  every  3  years  and  may do so at such  other  times  as are  deemed
advisable by the  respective  insurance  commissioner.  Everest Re's and Everest
National's last examination reports were as of December 31, 1994. Neither report
contained any material recommendations.

NAIC  RISK-BASED  CAPITAL  REQUIREMENTS.  The NAIC has  instituted  a formula to
measure the amount of capital  appropriate for a property and casualty insurance
company to support its overall business operations in light of its size and risk
profile.  The major  categories of a company's  risk profile are its asset risk,
credit risk, and underwriting  risk. The new standards are an effort by the NAIC
to prevent insolvencies,  to ward off other financial  difficulties of insurance
companies,  and to establish uniform regulatory  standards among state insurance
departments.

Under the approved  formula,  a company's  statutory  surplus is compared to its
risk based capital (RBC). If this ratio is above a minimum threshold,  no action
is necessary.  Below this  threshold are four distinct  action levels at which a
regulator can intervene  with  increasing  degrees of authority  over a domestic
insurer as the ratio of  surplus  to RBC  decreases.  The  mildest  intervention
requires the company to submit a plan of  appropriate  corrective  actions.  The
most severe action requires the company to be rehabilitated or liquidated.

Based upon Everest Re's and Everest National's  financial  positions at December
31, 1996, Everest Re and Everest National exceed the minimum thresholds. Various
proposals to change the RBC formula have been proposed. The Company is unable to
predict  whether any such proposal  will be adopted,  the form in which any such
proposals  would be adopted or the  effect,  if any,  the  adoption  of any such
proposal or change in the RBC calculations would have on the Company.

LEGISLATIVE AND REGULATORY PROPOSALS. Various regulatory and legislative changes
have from time to time been proposed that could affect  reinsurers and insurers.
Among  the  proposals  that  have  in the  past  been  or are at  present  being
considered are the possible  introduction of federal  regulation in addition to,
or in lieu of, the current  system of state  regulation  of insurers,  Superfund
re-authorization,  state  and  federal  involvement  in  insuring  catastrophes,
limitations on the ability of primary insurance  carriers to effect premium rate
increase  or  to  cancel  or  not  renew  existing  policies,  modifications  to
investment  limitations,  and creation of  interstate  compacts for  multi-state
insurer  receivership  proceedings  or  multi-state  insurance  regulation.  The
Company is unable to predict whether any of these proposals will be adopted, the
form in which any such proposals would be adopted,  or the impact,  if any, such
adoption would have on the Company.


ITEM 2.  PROPERTIES
Everest Re's  corporate  offices are located in Newark,  New Jersey,  and occupy
approximately  130,000  square feet of office  space  under a sublease  with The
Prudential that expires on December 31, 2004,  subject to Everest Re's option to
terminate the sublease with no penalty under certain circumstances.  On December
3, 1996,  Everest Re entered into a new sublease with The Prudential for 112,000
square feet of office space in Liberty  Corner,  New Jersey.  On or about May 1,
1997,  Everest Re will move its corporate  offices to this new location and will
terminate  its sublease of the Newark,  New Jersey  office on a date to coincide
with the  commencement  of rent  payments  under the  sublease  for the  Liberty
Corner,  New Jersey  office,  without any  penalties.  Everest  Re's other eight
office  locations occupy a total of 57,500 square feet, all of which are leased.
Management  believes that the above  described  office space is adequate for its
current and anticipated needs.


ITEM 3.  LEGAL PROCEEDINGS
The Company is involved in litigation  and  arbitration  in the normal course of
its business.  Management  does not believe that any such pending  litigation or
arbitration  will have a material  adverse  effect on the  Company's  results of
operations,  financial  condition and cash flows.  However,  no assurance can be
given as to the  decisions  that may be  rendered  by the courts or  arbitration
panels in any of such litigation and arbitration matters.


ITEM 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.


                                                                              23
<PAGE>

PART II

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

(a)   MARKET INFORMATION
Since  October 3, 1995,  the common  stock of the Company has been traded on the
New York Stock  Exchange  under the symbol "RE".  Quarterly  high and low market
prices of the Company's common stock in 1995 and 1996 were as follows:
<TABLE>

                                                               High         Low
                                                              -----       ------
<S>                                                           <C>         <C>   
From October 3 to December 31, 1995:                          23.50       18.50
First Quarter 1996:                                           25.125      20.125
Second Quarter 1996:                                          26.50       21.375
Third Quarter 1996:                                           26.50       22.50
Fourth Quarter 1996:                                          29.50       23.875

</TABLE>

(b)   NUMBER OF HOLDERS OF COMMON STOCK
The number of record  holders of common  stock as of March 1, 1997 was 84.  That
number  excludes the beneficial  owners of shares held in "street" names or held
through participants in depositories, such as The Depository Trust Company.


(c)   DIVIDEND HISTORY AND RESTRICTIONS
In 1995, the Board of Directors of the Company established a policy of declaring
regular  quarterly cash dividends.  The first such dividend was $0.03 per share,
declared and paid in the fourth quarter of 1995.  The Company  declared and paid
its regular quarterly cash dividend of $0.03 per share for each quarter of 1996.
On February 24, 1997,  the Board of Directors  raised the quarterly  dividend to
$0.04 per share and declared a dividend, payable on or before March 27, 1997, to
shareholders of record on March 7, 1997.

The declaration and payment of future dividends,  if any, by the Company will be
at the  discretion  of the Board of Directors and will depend upon many factors,
including  the  Company's  earnings,  financial  condition  and business  needs,
capital  and  surplus  requirements  of the  Company's  operating  subsidiaries,
regulatory  considerations  and other factors,  and the ability of Everest Re to
pay dividends to the Company.

As an insurance holding company, the Company depends on payments from Everest Re
to pay cash dividends to stockholders. The payment of dividends by Everest Re is
subject to certain  limitations  imposed by the Delaware Code.  See  "Regulatory
Matters  --  Dividends  by  Everest  Re" and Note 7A of  Notes  to  Consolidated
Financial Statements.


ITEM 6.  SELECTED CONSOLIDATED FINANCIAL DATA

The following selected consolidated GAAP financial data of the Company as of and
for the years ended December 31, 1996,  1995,  1994,  1993 and 1992 were derived
from  consolidated  financial  statements  of the Company  which were audited by
Coopers and Lybrand  L.L.P.  (1996) and  Deloitte  and Touche LLP (1992 - 1995),
independent  auditors.  The  statutory  data have been  derived  from  statutory
financial  statements  filed  with  the  Delaware  Insurance  Department.   Such
statutory financial statements are prepared in accordance with SAP, which differ
from GAAP. The statutory financial statements are unconsolidated and reflect the
results of  operations  of Everest Re's  subsidiaries,  Everest Ltd. and Everest
National on the equity  method.  The following  financial data should be read in
conjunction with the Consolidated  Financial  Statements and accompanying notes.
The  supplemental  information  for 1995 excludes the effects of an  IPO-related
premium  charge of $140.0  million ($91.0 million after taxes) for the Stop Loss
Agreement and an IPO-related  compensation expense charge of $13.3 million ($8.7
million  after  taxes)  principally  for  stock  awards to the  Company's  Chief
Executive Officer.  Such  supplemental  information  is  presented to facilitate
an  understanding  of  the  impact on the  Company's  results of  operations  of


24
<PAGE>

these  non-recurring  charges,  but should not,  however,  be  considered  as an
alternative to the respective  amounts  determined in accordance with GAAP as an
indicator of the Company's operating performance.
<TABLE>

                                                                   Years Ended December 31,
                                                  --------------------------------------------------------
(Dollars in millions, except per share amounts)       1996        1995        1994        1993        1992
                                                  --------    --------    --------    --------    --------
<S>                                               <C>         <C>         <C>         <C>         <C>    
Operating data:
  Gross premiums written                          $1,044.0    $  949.5    $  953.2    $  918.1    $  837.8
  Net premiums written                             1,030.5       783.2       863.2       892.3       767.6
  Net premiums earned                                973.6       753.3       853.3       883.2       753.2
  Net investment income                              191.9       166.0       143.6       141.1       159.3
  Net realized capital gains (losses)(1)               5.7        33.8       (10.5)       78.8        87.5
  Total revenue                                    1,169.3       948.9       982.8     1,098.3       998.1
  Losses and LAE incurred (including
    catastrophes)                                    716.0       674.7       720.8       687.4       853.1
    Catastrophe losses(2):
      Hurricane Andrew(3)                               --         0.5         3.9        30.4       247.2
      Northridge earthquake                             --          --        70.9          --          --
      Other(4)                                         7.1        30.9         7.1        (7.8)       59.6
    Total catastrophe losses(5)                        7.1        31.4        81.9        22.7       306.8
  Commission and brokerage expenses                  252.9       226.8       197.9       189.6       202.0
  Other underwriting expenses                         56.5        60.6        68.3        64.7        56.7
  Compensation related to public offering               --        13.3          --          --          --
  Restructuring and early retirement costs              --          --         7.8          --          --
  Total expenses(5)                                1,025.5       975.4       994.8       941.7     1,111.8
  Income (loss) before taxes(5)                      143.8       (26.6)      (12.0)      156.5      (113.8)
  Income tax (benefit)                                31.8       (27.3)      (22.6)       30.2       (52.2)
  Net income (loss)(5)                            $  112.0    $    0.7    $   10.7    $  126.4    $  (61.6)
                                                  ========    ========    ========    ========    ========
  Net income (loss) per share(6)                  $   2.22    $   0.01    $   0.21    $   2.53    $  (1.23)
                                                  ========    ========    ========    ========    ========
  Dividends paid per share                        $   0.12    $   0.14    $   0.15    $     --    $     --
                                                  ========    ========    ========    ========    ========

Certain GAAP financial ratios:
  Loss and LAE ratio(7)                               73.5%       89.6%       84.5%       77.8%      113.3%
  Underwriting expense ratio(8)                       31.8        39.9        31.2        28.8        34.3
                                                  --------    --------    --------    --------    --------
  Combined ratio                                     105.3%      129.5%      115.7%      106.6%      147.6%
                                                  ========    ========    ========    ========    ========

Certain SAP data(9):
  Ratio of net premiums written to surplus(10)         1.2x        1.0x        1.2x        1.3x        1.4X
  Statutory surplus                               $  772.7    $  686.9    $  600.7    $  607.7    $  519.0
  Loss and LAE ratio(11)                              71.2%       92.2%       85.8%       81.0%      112.7%
  Underwriting expense ratio(12)                      31.7        38.9        32.6        29.1        33.0
                                                  --------    --------    --------    --------    --------

  Combined ratio                                     102.9%      131.1%      118.4%      110.1%      145.7%
                                                  ========    ========    ========    ========    ========

Balance sheet data (at end of period):
  Total investments and cash                      $3,624.6    $3,238.3    $2,573.2    $2,610.8    $2,347.1
  Total assets                                     5,039.4     4,647.8     4,040.6     3,920.6     3,705.5
  Loss and LAE reserves                            3,246.9     2,969.3     2,706.4     2,540.1     2,443.9
  Total liabilities                                3,953.3     3,664.2     3,299.6     3,045.2     3,002.3
  Stockholder's equity(13)                         1,086.0       983.6       741.0       875.4       703.2
  Book value per share(14)                           21.51       19.36       14.82       17.51       14.06
Supplemental information, excluding IPO-related
  charges:
  Net premiums written                                        $  923.2
  Net premiums earned                                            893.3
  Income before taxes                                            126.8
  Net income                                                  $  100.4
                                                              ========
  Net income per share                                        $   2.00
                                                              ========
  Supplemental GAAP financial ratios:
    Loss and LAE ratio                                            75.5%
    Underwriting expense ratio                                    32.2
                                                              --------
    Combined ratio                                               107.7%
                                                              ========
  Supplemental SAP data:
    Ratio of net premiums written to surplus                       1.2X
    Loss and LAE ratio                                            75.5%
    Underwriting expense ratio                                    32.0
                                                              --------
    Combined ratio                                               107.5%
                                                              ========

</TABLE>

                                                                              25
<PAGE>

------------
 (1)  After-tax  operating  income (loss), before after-tax net realized capital
      gains  or  losses,  was  $108.3   million  (or $2.14 per  share),  ($21.2)
      million  (or ($0.42)per share), $17.5  million (or $0.35 per share), $75.2
      million (or $1.50 per share) and  ($119.4)  million (or ($2.39) per share)
      for  the  years  ended  December  31,  1996,  1995,  1994,  1993 and 1992,
      respectively.   Supplemental  after-tax  operating   income,   before  net
      realized  capital  gains  and  excluding  IPO-related  charges,  was $78.4
      million (or $1.56 per share) for the year ended December 31, 1995.
 
 (2)  Catastrophe  losses are net  of reinsurance. A catastrophe is defined, for
      purposes of  the Selected  Consolidated  Financial  Data, as an event that
      causes  a pre-tax  loss  before  reinsurance  of at least $5.0 million and
      has an event date of January 1, 1988 or later.

 (3)  Losses  with  respect  to  Hurricane  Andrew  are  net of a $100.0 million
      aggregate excess of loss reinsurance recovery in 1992.

 (4)  Other  catastrophe  losses include adverse (favorable) development on loss
      reserves for other catastrophes occurring on or after January 1, 1988.

 (5)  Some amounts may not reconcile due to rounding.

 (6)  Based on 50.6 million  weighted  average shares outstanding for 1996, 50.2
      million  weighted  average shares  outstanding  for 1995, and 50.0 million
      shares outstanding for 1994, 1993 and 1992.

 (7)  GAAP losses  and LAE incurred as a percentage of GAAP net premiums earned.

 (8)  GAAP  underwriting  expenses  as a percentage of GAAP net premiums earned.
      Including  restructuring  and early  retirement  costs,  incurred  in  the
      fourth quarter of 1994, the  Company's GAAP  underwriting expense ratio in
      1994 was 32.1%.

 (9)  Statutory  results are on a Everest Re  legal entity  basis; consequently,
      investments in subsidiary operations are accounted for on an equity basis.

(10)  Statutory net premiums written as a percentage of period-end surplus.

(11)  Statutory  losses  and LAE  incurred  as a percentage  of SAP net premiums
      earned.

(12)  Statutory  underwriting  expenses  as a  percentage  of  SAP net  premiums
      written.

(13)  Excluding  net  unrealized  appreciation  (depreciation)  of  investments,
      stockholder's  equity  was  $1,008.3   million,  $899.9   million,  $799.1
      million,  $794.6  million  and $675.0  million  as  of December  31, 1996,
      1995, 1994, 1993 and 1992, respectively.

(14)  Based  on 50.5 million  shares  outstanding  for  December 31, 1996,  50.8
      million   shares   outstanding  for  December  31, 1995  and 50.0  million
      shares outstanding for December 31, 1994, 1993 and 1992, respectively.


26
<PAGE>
             
ITEM 7.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
         OF OPERATIONS

RESULTS OF OPERATIONS
INDUSTRY  CONDITIONS.   Since  1987,  a  number  of  factors,  including  global
competition,  the emergence of significant reinsurance capacity from the Bermuda
and  rejuvenated  Lloyds'  markets,   higher  retentions  by  primary  insurance
companies and consolidation in the insurance industry,  have caused increasingly
competitive  market conditions across most lines of business and have influenced
the  softening of prices and contract  terms in the current  market  place.  The
Company cannot predict with any reasonable certainty, if, when or to what extent
market  conditions  as a whole will  change.  See  "Business-Competition"  for a
further discussion.

INITIAL  PUBLIC  OFFERING.  On October  6, 1995 the  Company's  former  ultimate
parent,  The  Prudential  Insurance  Company  of  America,  ("The  Prudential"),
completed an initial public offering ("IPO") of 100% of the outstanding stock of
the Company.  In connection  with the IPO, the company  incurred a non-recurring
premium charge of $140.0 million ($91.0 million  after-tax) for aggregate excess
of loss reinsurance  coverage (THE "STOP LOSS AGREEMENT")  provided by Gibraltar
Casualty Company  ("Gibraltar") an affiliate of the former parent. This coverage
protects the Company's consolidated earnings against up to $375.0 million of the
first  $400.0  million  of  adverse  development,   if  any,  on  the  Company's
consolidated  reserves  for  losses,  allocated  loss  adjustment  expenses  and
uncollectible  reinsurance at June 30, 1995  (December 31, 1994 for  catastrophe
losses). At the same time, The Prudential paid $140.0 million to the Company, of
which amount $91.0 million was a contribution to capital and $49.0 million was a
payment  in respect of the tax  benefit  of the  premium  paid for the Stop Loss
Agreement.  In  addition,  the Company  incurred  $13.3  million  ($8.7  million
after-tax) of  non-recurring  compensation  expense,  including $12.5 million in
connection with IPO-related stock awards to the Chief Executive Officer.  All of
these IPO-related  transactions had the effect of reducing cash flow for 1995 by
$0.8 million and increasing  stockholders' equity by $3.8 million. The following
table  shows the  Company's  1995  results  of  operations  as  reported  in the
accompanying   statement  of  operations   and  as  adjusted  to  exclude  these
IPO-related charges:
<TABLE>

                                                                 IPO
                                                             related
                                             As reported     charges   As adjusted
                                             -----------    --------   -----------                       
<S>                                             <C>         <C>         <C>   
Revenues:
Net earned premiums                             $753,321    $140,000    $  893,321
Net investment income                            166,023                   166,023
Other income (loss)                               (4,315)                   (4,315)
Net realized capital gains                        33,835                    33,835
                                                --------    --------    ----------
                                                 948,864     140,000     1,088,864
                                                --------    --------    ----------

Claims and expenses:
Incurred losses and loss adjustment expenses     674,696                   674,696
Commission and brokerage  expenses               226,819                   226,819
Other underwriting expenses                       60,574                    60,574
Compensation related to public offering           13,343     (13,343)           --
                                                --------    --------    ----------
                                                 975,432     (13,343)      962,089
                                                --------    --------    ----------
INCOME (LOSS)BEFORE TAXES                        (26,568)    153,343       126,775
Income tax (benefit)                             (27,315)     53,670        26,355
                                                --------    --------    ----------    
NET INCOME                                      $    747    $ 99,673    $  100,420
                                                ========    ========    ==========
</TABLE>


YEAR ENDED DECEMBER 31, 1996 COMPARED TO YEAR ENDED DECEMBER 31, 1995
The following discussion and analysis is focused on a comparison of 1996 results
of  operations  to 1995  results of  operations,  as  adjusted  to  exclude  the
IPO-related charges.

PREMIUMS.   Gross  premiums  written  increased  10.0% to  $1,044.0  million  in
1996  from $949.5  million  in  1995.  Factors  contributing  to  this  increase
included  a  21.8% ($55.0 million)  increase  in  U.S. broker  treaty  premiums,
principally from increased writings in specialty casualty, workers  compensation
and  substandard   automobile  lines,  a  21.6%  ($26.4  million)   increase  in
U.S.  direct  treaty  reinsurance and  insurance due  to the  growth  in primary


                                                                              27
<PAGE>

insurance written through Everest National,  a subsidiary of the Company,  and a
28.9% ($19.9 million) increase in U.S. facultative  premiums,  reflecting growth
in casualty and specialty  casualty  lines, as the unit completed its first full
year after its major restructuring and took advantage of significant dislocation
in the market.  These  increases were partially  offset by a 3.5% ($5.8 million)
decrease  in marine,  aviation  and surety  premiums  and a 0.3% ($0.9  million)
decrease in international premiums.

Ceded  premiums,  as adjusted,  decreased by 48.7% to $13.5 million in 1996 from
$26.3  million in 1995,  principally  as a result of a return  premium under the
Company's catastrophe retrocessional  protection,  partially offset by increases
in common account retrocessions by ceding sources.

Net premiums  written,  as adjusted,  increased by 11.6% to $1,030.5  million in
1996 from $923.2  million in 1995,  reflecting the growth in U.S.  broker,  U.S.
direct treaty  reinsurance and insurance and facultative  gross written premiums
coupled with decreased retrocessional costs.

REVENUES. Net premiums earned, as adjusted,  increased by 9.0% to $973.6 million
in 1996 from $893.3 million in 1995, generally consistent with the change in net
premiums written.

Net  investment  income  increased  15.6% to $191.9 million  in 1996 from $166.0
million in 1995,  reflecting  the effect of investing the $414.0 million of cash
flow from operating  activities in 1996. The Company's  pre-tax yield on average
cash and invested assets  decreased to 5.6% in 1996 from 5.7% in 1995 reflecting
the dilutive effect of new money investment rates.

Net realized  capital gains  decreased  83.1% to $5.7 million in 1996 from $33.8
million  in  1995,  principally  reflecting  the sale in 1995 of one half of the
Company's  investment in the common stock of Corporacion MAPFRE S.A. ("MAPFRE"),
an  insurance  group in  Spain.  Realized  capital  gains on the sale of  equity
securities totalled $17.4 million, as generally favorable  conditions  continued
in the U.S. equity securities market, and were partially offset by $11.7 million
in realized capital losses on the sale of fixed maturities.

EXPENSES. Incurred losses and loss adjustment expenses ("LAE") increased by 6.1%
to $716.0  million in 1996 from $674.7  million in 1995.  Catastrophe  losses on
events  with  ultimate  gross  losses  estimated  at  $5.0  million  or  greater
("CATASTROPHE  LOSSES") in 1996 were $7.1 million,  which included $10.0 million
estimated for Hurricane  Fran and $2.9 million of net favorable  development  on
prior year  occurrences,  compared  with $31.4 million in 1995,  which  included
$30.9 million  estimated for the Kobe, Japan  earthquake and Hurricanes  Marilyn
and Opal and $0.5 million of net adverse  development on prior year occurrences.
The  Company's  loss and LAE ratio,  as adjusted,  decreased  by 2.0  percentage
points to 73.5% in 1996 from 75.5% in 1995. This  improvement  was  attributable
principally  to the  lower  catastrophe  losses  and  changes  in the  Company's
business mix in line with the new underwriting strategy. Net incurred losses and
LAE for 1996 reflected ceded losses and LAE of $206.0 million,  including $116.5
million ceded under the Stop Loss Agreement, compared to ceded losses and LAE of
$119.1 million in 1995.

Underwriting expenses, as adjusted,  increased by 7.7% to $309.5 million in 1996
from $287.4  million in 1995.  Commission  and brokerage  expenses  increased by
$26.1 million attributable primarily to increases in written premium and changes
in the Company's  business mix. Other  underwriting  expenses  decreased by $4.0
million, as the impact of the significant reduction in employees over the course
of 1995 and 1996 and other  cost  reduction  initiatives  more than  offset  the
impact of salary and other expense  increases  that were  generally in line with
inflation. The Company's expense ratio, as adjusted,  decreased by 0.4 points to
31.8% in 1996 from 32.2% in 1995 as the  increase of  premiums  earned more than
offset the increases in underwriting expenses.

The Company's combined ratio, as adjusted,  decreased by 2.4 points to 105.3% in
1996  from  107.7%  in 1995,  reflecting  the lower  loss  ratio  and  increased
premiums.

INCOME TAXES. The Company had income tax expense, as adjusted,  of $31.8 million
in 1996 compared to $26.4  million in 1995,  with the  difference  substantially
attributable to the improvement in pre-tax income to $143.8 million in 1996 from
$126.8  million in 1995.

NET INCOME. Net income was $112.0 million in 1996 compared to $100.4 million, as
adjusted,  in 1995. This  improvement  mainly  reflects higher premiums  earned,
higher  investment  income and a lower combined ratio,  offset by lower realized
capital gains and higher income taxes.


28
<PAGE>

YEAR ENDED DECEMBER 31, 1995 COMPARED TO YEAR ENDED DECEMBER 31, 1994
The following discussion and analysis is focused on a comparison of 1995 results
of operations,  as adjusted to exclude the IPO-related  charges, to 1994 results
of operations.

PREMIUMS.  Gross premiums written  decreased 0.4% to $949.5 million in 1995 from
$953.2 million in 1994.  Factors  contributing to this decrease included a 12.5%
decrease in U.S. direct treaty reinsurance and insurance,  where the non-renewal
of certain  larger  contracts,  because  the ceding  companies  did not agree to
pricing terms that satisfied the Company's revised underwriting guidelines, more
than  offset  the  growth  of the  primary  insurance  written  through  Everest
National, a subsidiary of the Company, and a 1.9% decrease in U.S. broker treaty
premiums  resulting  from efforts to improve  underwriting  standards and better
control catastrophe  exposures.  These decreases were partially offset by growth
in international  premiums (which increased by 3.4%), U.S.  facultative premiums
(which  increased by 3.2%),  marine and aviation  premiums  (which  increased by
1.8%) and surety premiums (which increased by 6.0%).

Ceded  premiums,  as adjusted,  decreased by 70.8% to $26.3 million in 1995 from
$90.0  million  in 1994 as a  result  of the  lower  premiums  ceded  under  the
Company's significantly restructured corporate-level retrocessional protection.

Net premiums written,  as adjusted,  increased by 6.9% to $923.2 million in 1995
from  $863.2  million in 1994,  mainly as a result of  decreased  retrocessional
costs.

REVENUES. Net premiums earned, as adjusted,  increased by 4.7% to $893.3 million
in 1995 from $853.3 million in 1994, generally consistent with the change in net
premiums written.

Net  investment  income  increased  15.6% to $166.0  million in 1995 from $143.6
million in 1994,  reflecting  both the effect of investing the $397.9 million of
cash flow from  operating  activities,  as adjusted,  in 1995 and higher  yields
earned on the investment  portfolio.  In the fourth quarter of 1993, the Company
sold $530.4 million in appreciated  bonds to realize capital gains sufficient to
offset the impact on statutory  surplus of a $30.0 million  increase to asbestos
and environmental  incurred but not reported ("IBNR") reserves in that year (the
"1993 Bond Sale").  At year-end  1993 and through  most of the first  quarter of
1994, a significant  portion of the proceeds from the 1993 Bond Sale was held in
short-term  investments in anticipation of rising interest rates. As a result of
the higher than normal amount of short-term  investments  in 1994, the Company's
pre-tax yield on average cash and invested  assets improved to 5.7% in 1995 from
5.5% in 1994.

Net realized capital gains were $33.8 million in 1995, principally from the sale
of one half of the  Company's  investment  in the  common  stock of  MAPFRE  and
generally  favorable  conditions  in the  U.S.  equity  securities  market.  Net
realized  capital  losses were $10.5 million in the year ended December 31, 1994
as sales of securities  were limited due to the then  declining  market value of
the Company's fixed maturities.

EXPENSES.  Incurred  losses and LAE decreased by 6.4% to $674.7  million in 1995
from  $720.8  million in 1994.  Catastrophe  losses in 1995 were $31.4  million,
including $30.9 million  estimated for the Kobe, Japan earthquake and Hurricanes
Marilyn  and Opal and $0.5  million  of net  adverse  development  on prior year
occurrences. These losses compared to the $81.9 million of catastrophe losses in
1994, including $70.9 million estimated for the Northridge  earthquake and $11.0
million of net adverse development on prior year occurrences. The Company's loss
and LAE ratio, as adjusted,  decreased by 9.0 percentage points to 75.5% in 1995
from 84.5% in 1994. This improvement was  attributable  principally to the lower
catastrophe  losses,  the absence of adverse  development  on net  asbestos  and
environmental  reserves,  the lower  premiums  ceded  under the  Company's  1995
corporate-level  retrocession  program and changes in the Company's business mix
in line with the new underwriting strategy. Net incurred losses and LAE for 1995
reflected ceded losses and LAE of $119.1 million,  including $23.7 million ceded
under  the Stop  Loss  Agreement,  compared  to ceded  losses  and LAE of $119.7
million in 1994.

Underwriting  expenses,  as  adjusted,  increased  by  8.0%  to  $287.4  million
in  1995  from  $266.2  million  in  1994.  Commission  and  brokerage  expenses
increased  by  $29.0  million,  which  was  partly  attributable  to  the  $14.5
million  of  profit  commission  income  in  1994 on  the  1994  corporate-level
retrocession  program;  (the  adjustable  features  of the 1995  corporate-level
retrocession  program  provide  for   the   return  of  premiums   rather   than
profit  commissions).  The  balance  was  attributable   primarily   to  changes
in  the  Company's  business  mix.  Other underwriting   expenses  decreased  by
$7.7  million,  as  the  impact  of  the  significant  reduction  in   employees
over  the  course  of  1994  and  1995 more than offset the impact of salary and
other expense  increases  that  were  generally  in  line  with  inflation.  The


                                                                              29
<PAGE>

Company's  expense ratio, as adjusted,  increased to 32.2% in 1995 from 31.2% in
1994 as the reduction of other underwriting expenses was more than offset by the
increase in commission and brokerage expenses.

The  Company's  combined  ratio,  as adjusted,  decreased to 107.7% in 1995 from
115.7% in 1994, largely attributable to lower catastrophe losses and lower ceded
premiums.

INCOME TAXES. The Company had income tax expense, as adjusted,  of $26.4 million
in 1995  compared  to an income tax benefit of $22.6  million in 1994,  with the
difference  substantially  attributable to the improvement in pre-tax income, as
adjusted, to $126.8 million in 1995 from a $12.0 million pre-tax loss in 1994.

NET INCOME.  Net income,  as adjusted,  was $100.4  million in 1995  compared to
$10.7 million in 1994.  This  improvement  mainly  reflected  lower  catastrophe
losses,  the absence of adverse  development  on net asbestos and  environmental
reserves,  lower  premiums  ceded  under the 1995  corporate-level  retrocession
program, higher investment income, lower operating expenses and realized capital
gains.


FINANCIAL CONDITION
CASH  AND  INVESTED  ASSETS.  Aggregate  invested  assets,  including  cash  and
short-term  investments,  were $3,624.6  million at December 31, 1996,  $3,238.3
million at December  31, 1995 and $2,573.2  million at December  31,  1994.  The
change in invested  assets  resulted  primarily from cash flows from  operations
generated  during the period  together  with net realized and  unrealized  gains
(losses) on investments.


LOSS AND LAE  RESERVES  
GENERAL.  Gross loss and LAE reserves  totaled  $3,246.9 million at December 31,
1996, $2,969.3 million at December 31, 1995 and $2,706.4 million at December 31,
1994. These increases were consistent with the continued growth in the Company's
book of  business  and,  in 1994,  adverse  development  of gross loss  reserves
principally related to asbestos and environmental  exposures,  most of which was
ceded.  In  addition,  the steady  decline in paid  losses  that the Company has
experienced  since 1992  continued  with paid losses in 1996 $31.2 million lower
than in 1995, which were $108.8 million lower than in 1994.

Everest Re maintains  reserves to cover its  estimated  ultimate  liability  for
losses and LAE with respect to reported and unreported claims.  Because reserves
are estimates of ultimate losses and LAE,  management  monitors reserve adequacy
over  time,  evaluating  new  information  as it  becomes  known  and  adjusting
reserves, as necessary. Management considers many factors when setting reserves,
including:  (i) current legal  interpretations  of coverage and liability;  (ii)
economic  conditions;  (iii) internal  methodologies  which analyze Everest Re's
experience with similar cases,  information from ceding companies and historical
trends,  such as reserving  patterns,  loss  payments,  pending levels of unpaid
claims and product mix; and (iv) the  uncertainties  discussed  below  regarding
reserve  requirements  for asbestos  and  environmental  claims.  Based on these
considerations,  management  believes that adequate  provision has been made for
Everest Re's loss and LAE reserves,  which were $3,246.9  million as of December
31, 1996. Actual losses and LAE paid may deviate,  perhaps  substantially,  from
such reserves.

ASBESTOS AND ENVIRONMENTAL EXPOSURES.  Everest  Re's  asbestos claims  typically
involve  liability  or  potential  liability  for  bodily  injury from  exposure
to  asbestos  or  liability  for  property  damage  resulting  from  asbestos or
asbestos containing  materials.  Everest  Re's  environmental  claims  typically
involve   potential   liability   for   the   mitigation   or   remediation   of
environmental  contamination  or  bodily  injury  or  property  damages   caused
by  the  release  of  hazardous  substances  into  the  land,  air  or water. In
addition  to  the   previously  described  general   uncertainties   inherent in
estimating  reserves,  there are  significant  uncertainties  in estimating  the
amount  of  Everest  Re's  potential  losses  from  asbestos  and  environmental
claims.  Among  the  complications  are: (i)  potentially  long waiting  periods
between  exposure and  manifestation  of any  bodily injury or property  damage;
(ii)  difficulty   in   identifying   sources  of   asbestos  or   environmental
contamination; (iii) difficulty   in properly allocating  responsibility  and/or
liability for asbestos or  environmental  damage;  (iv)  changes  in  underlying
laws  and   judicial   interpretation  of  those  laws; (v)  potential  for   an
asbestos or environmental  claim to  involve many  insurance providers over many
policy  periods ; (vi) long reporting  delays, both  from insureds  to insurance
companies  and  ceding  companies  to  reinsurers; (vii) limited historical data
concerning  asbestos  and  environmental  losses;  (viii)  questions  concerning
interpretation  and  application  of  insurance  and  reinsurance  coverage; and
(ix) uncertainty  regarding  the  number and identity of insureds with potential
asbestos  or  environmental  exposure.  Management  believes  that  these issues


30
<PAGE>

are not  likely  to be  resolved  in the near  future.  Everest  Re  establishes
reserves  to the extent  that,  in the  judgment  of  management,  the facts and
prevailing law reflect an exposure for Everest Re or its ceding company.  Due to
the uncertainties  discussed above, the ultimate losses may vary materially from
current  loss  reserves  and, if  coverage  under the Stop Loss  Agreement  were
exhausted,  could  have  a  material  adverse  effect  on the  Company's  future
financial condition, results of operations and cash flows.

The  table  below  summarizes  reserves  and claim  activity  for  asbestos  and
environmental  claims, on both a gross and net of ceded  reinsurance  basis, for
the periods indicated:
<TABLE>

                                                         Asbestos and
                                                    Environmental Reserves
                                                   Years Ended December 31,
                                               --------------------------------
                                                 1996         1995         1994
                                               ------       ------       ------
(Dollars in millions)                          
<S>                                            <C>          <C>          <C>    
Gross Basis:
Beginning of period reserves                   $428.5       $445.5       $421.5
                                               ------       ------       ------
Incurred losses and LAE:
Reported losses                                  36.7         31.9         52.8
Change in IBNR                                   (6.7)       (14.6)        74.3
                                               ------       ------       ------
Total                                            30.0         17.3        127.1
Paid losses                                     (35.2)       (34.3)      (103.1)
                                               ------       ------       ------
End of period reserves                         $423.3       $428.5       $445.5
                                               ======       ======       ======

Net Basis:
Beginning of period reserves                   $197.7       $203.7       $214.6
                                               ------       ------       ------
Incurred losses and LAE:
Reported losses                                  (4.4)         5.5         29.5
Change in IBNR                                    4.4         (5.5)        11.0
                                               ------       ------       ------
Total (1)                                         0.0          0.0         40.5
Paid losses (1)                                   3.3         (6.0)       (51.4)
                                               ------       ------       ------
End of period reserves                         $201.0       $197.7       $203.7
                                               ======       ======       ======
</TABLE>

----------
(1) Net of $24,196 in 1996 and  $16,687 in 1995 ceded  under the  incurred  loss
    reimbursement feature of the Stop Loss Agreement.

The $222.3  million of  reinsurance  receivables  as of  December  31,  1996 was
attributable principally to two retrocessional arrangements:  (i) $116.4 million
was due from various insurance and reinsurance  companies,  including Gibraltar,
in connection with their  participation in Everest Re's management  underwriting
facility  ("MUF"),  a  reinsurance  arrangement  begun in 1977 pursuant to which
Everest Re ceded certain reinsurance and direct excess insurance  business;  and
(ii) $105.9  million was due as a result of the  Company's  former direct excess
insurance  operations,  which ceased writing business in 1985 and which has been
100% ceded to Gibraltar since 1986. Paid losses for 1994 reflects the settlement
of all  asbestos-related  claims  from  one  ceding  company,  which  management
believes  represents  a  settlement  of Everest  Re's  largest  asbestos-related
exposure to any one ceding company.

STOP  LOSS  AGREEMENT  AND  PRUDENTIAL  GUARANTEES.   To   the  extent  reserves
as  of  June 30,  1995  (December 31, 1994 for  catastrophe  losses) for losses,
allocated  LAE and  uncollectible  reinsurance  experience  adverse  development
("Adverse  Development"),  Everest  Re  is   entitled,  at  the   time  reserves
are  increased,  to  payments  under  the  Stop  Loss  Agreement,   subject   to
the  limit  and  other  terms   thereof.   Gibraltar's   obligations   to   make
payments to Everest Re  under the Stop  Loss  Agreement  are  guaranteed  by The
Prudential.  Management  expects  that  the general  effect  of  the  Stop  Loss
Agreement  will  be  to  protect  the  Company's consolidated  earnings  against
up  to  $375.0  million  of  the  first  $400.0 million  of Adverse Development.
There  can  be  no  assurance,  however,  that  the   Company's  net   liability
for such Adverse  Development  will be limited to $25.0  million.  With  respect
to  liquidity,  the incurred loss  reimbursement  features  of these  agreements
provide  the  Company  with  cash  on  or prior  to the  time it is  required to


                                                                              31
<PAGE>

make payment on account of such Adverse Development.  Through December 31, 1996,
cessions under the Stop Loss Agreement have aggregated $140.2 million.

STOCKHOLDER'S  EQUITY.  Holdings'  stockholder's  equity  increased  to $1,086.0
million as of  December  31, 1996 from  $983.6  million as of December  31, 1995
principally  reflecting  $106.0  million  in  retained  earnings  for the  year.
Stockholder's  equity as of December 31, 1995  increased to $983.6  million from
$741.0 million as of December 31, 1994,  principally  reflecting the addition to
paid in capital that offset the impact of non-recurring  IPO related charges and
an increase  of $141.9  million in  unrealized  appreciation  (depreciation)  on
investments,  net of deferred taxes. Dividends of $6.1 million, $7.0 million and
$7.5  million  were  declared  and  paid by  Holdings  in 1996,  1995 and  1994,
respectively.

Holdings'  stockholder's equity exceeded Everest Re's statutory-basis surplus by
$313.3  million at December 31, 1996. The primary  differences  between GAAP and
SAP as they relate to the Company  are: (i) the  deferral of  acquisition  costs
under GAAP,  which are  immediately  expensed  under SAP; (ii) the provision for
deferred taxes on temporary tax differences under GAAP, which are excluded under
SAP; and (iii) the carrying at market value of fixed  maturities  available  for
sale under GAAP, as compared to at amortized cost under SAP.


LIQUIDITY AND CAPITAL RESOURCES
EVEREST RE.  Everest Re's  liquidity  requirements  are met on both a short- and
long-term basis by funds provided by premiums  collected,  investment income and
collected reinsurance  receivables  balances,  and from the sale and maturity of
investments.  Everest Re's net cash flows from operating  activities were $414.0
million, $397.9 million, as adjusted, and $192.9 million in 1996, 1995 and 1994,
respectively.  The increases over 1994 in cash provided by operating  activities
were principally a result of decreases in net paid losses,  including recoveries
under the Stop Loss Agreement, and improved profitability.  Recoveries under the
Company's Stop Loss Agreement with Gibraltar contributed $53.4 million and $12.0
million of such net cash flows in 1996 and 1995, respectively.

Proceeds and applications  from sales and acquisitions of investment assets were
$1,632.9  million  and  $2,034.8  million,  respectively,  in 1996,  compared to
$1,113.4  million  and  $1,494.7  million,  respectively,  in 1995 and  $1,362.5
million and  $1,572.7  million,  respectively,  in 1994.  Everest  Re's  current
investment  strategy seeks to maximize  after-tax income through a high quality,
diversified,  duration  sensitive,  taxable bond and  tax-exempt  municipal bond
portfolio, while maintaining an adequate level of liquidity.

EXPOSURE TO  CATASTROPHES.  As with other  reinsurers,  Everest  Re's  operating
results and  financial  condition  can be  adversely  affected  by volatile  and
unpredictable  natural  and other  disasters,  such as  hurricanes,  windstorms,
earthquakes, floods, fires and explosions. Although Everest Re attempts to limit
its exposure to acceptable  levels,  it is possible that an actual  catastrophic
event or multiple  catastrophic  events could have a material  adverse effect on
the financial condition, results of operations and cash flows of the Company.

The Company maintains a corporate-level retrocessional protection program, above
and beyond  retrocessions  purchased with respect to specific assumed coverages,
to mitigate the  potential  impact of  catastrophe  losses.  At December 31, the
attachment  point of this program was $25.0 million per  catastrophe in the U.S.
and $10.0  million per  catastrophe  outside the U.S. No losses were ceded under
the corporate-level retrocession program during 1996 or 1995. All aspects of the
retrocession  program have been structured to permit the program to be accounted
for as reinsurance under SFAS No. 113.

HOLDINGS. Holdings is a holding company whose only material asset is the capital
stock of Everest Re. Holdings' cash flow will consist primarily of dividends and
other permissible  payments from Everest Re. Holdings depends upon such payments
for funds for general corporate purposes and for the payment of any dividends on
its common  stock.  Holdings  expects to finalize a $50.0  million  bank line of
credit as a means of expanding the liquidity options of the Company's  operating
subsidiaries.

The payment of  dividends  to  Holdings by Everest Re is subject to  limitations
imposed   by   the  Delaware  Code.   Based   upon   these   restrictions,   the
maximum   amount  that  will  be   available  for   payment   of   dividends  to
Holdings  by Everest  Re  in  1997  without  the  prior  approval of  regulatory
authorities  is  $84.4  million.   Everest  Re's  future  cash  flow   available
to  Holdings may be influenced  by  a  variety  of  factors,  including cyclical
changes  in  the   property  and  casualty   reinsurance  market,  Everest  Re's
financial  results,  insurance  regulatory   changes  and  changes  in   general


32
<PAGE>

economic  conditions.  The availability of such cash flow to Holdings could also
be influenced by, among other things,  changes in the limitations imposed by the
Delaware Code on the payment of dividends by Everest Re. Holdings  expects that,
absent  significant  catastrophe  losses,  such  restrictions  should not affect
Everest  Re's  ability  to  declare  and pay  dividends  sufficient  to  support
Holdings' current dividend policy.

During 1996 and 1995,  Holdings  declared and paid dividends of $6.1 million and
$7.0 million, respectively.

On March 21, 1996 the Holdings' Board of Directors  approved a stock  repurchase
plan  authorizing the repurchase of an aggregate amount of 2.5 million shares of
common stock from time to time in open market  transactions.  To date, no shares
have been repurchased pursuant to this plan.


TAX CONSOLIDATION WITH THE PRUDENTIAL
The Internal  Revenue  Service  ("IRS") has  completed its  examinations  of The
Prudential's  tax  returns for all years  through  1992.  As those  examinations
relate to Everest  Re, the IRS has  disallowed  that  portion of the fresh start
benefit  which  relates  to 1986  reserve  strengthening  as defined by the IRS.
Consistent  with case law  favorable  to  taxpayers  on the issue,  the  Company
believes  that,  because  there  were no  changes in  reserving  assumptions  or
methodologies between 1985 and 1986, all increases to reserves in 1986 for which
a fresh start benefit was taken are normal  reserve  additions  and,  therefore,
pursuant to the case law, does not constitute reserve  strengthening that is not
eligible for the fresh start benefit. If the IRS position prevails,  the Company
will be required to reimburse The  Prudential,  thereby  incurring an additional
charge of approximately  $8.8 million,  including the after-tax cost of interest
through December 31, 1996.


ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial  statements  and  schedules  listed in the  accompanying  Index to
Financial Statements and Schedules on page F-1 are filed as part of this report.


ITEM 9.  CHANGES  IN  AND  DISAGREEMENTS  WITH  ACCOUNTANTS  ON  ACCOUNTING  AND
         FINANCIAL  DISCLOSURE 
On August 9, 1996, the Company filed a Form 8-K with the Securities and Exchange
Commission  reporting that Coopers & Lybrand L.L.P.  replaced  Deloitte & Touche
LLP on August 6, 1996 as the Company's independent accountants.

During the Company's two most recent fiscal years,  there were no  disagreements
with Deloitte & Touche LLP on any matter of accounting  principles or practices,
financial   statement   disclosure  or  auditing   scope  or  procedure,   which
disagreements,  if not  resolved to the  satisfaction  of Deloitte & Touche LLP,
would  have  caused  them  to  make  reference  to  the  subject  matter  of the
disagreement  in their  reports.  Also,  there were no reportable  events of the
nature  described in Regulation S-K Item  304(a)(1)(v)  during the Company's two
most recent fiscal years.


PART III

ITEM 10.  DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Reference is made to "Election of Directors",  "Information Concerning Nominees"
and "Information  Concerning Continuing Directors and Executive Officers" in the
Company's  proxy  statement for the 1997 Annual Meeting of  Stockholders,  which
will be filed with the Commission  within 120 days of the close of the Company's
fiscal  year ended  December  31, 1996 (the  "Proxy  Statement"),  and which are
incorporated herein by reference.


ITEM 11.  EXECUTIVE COMPENSATION
Reference is made to "Directors'  Compensation"  and  "Compensation of Executive
Officers" in the Proxy  Statement,  which is  incorporated  herein by reference,
except that the Compensation  Committee Report and the Performance Graph are not
so incorporated.


ITEM 12.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Reference  is made  to  "Common  Stock  Ownership  by  Directors  and  Executive
Officers" and "Principal Holders of Common Stock" in the Proxy Statement,  which
are incorporated herein by reference.


                                                                              33
<PAGE>

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Reference  is  made  to  "Certain  Transactions  with  Directors"  in the  Proxy
Statement, which is incorporated herein by reference.


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 on page F-1 are filed as part of this report.


EXHIBITS
The exhibits listed on the accompanying  Index to Exhibits on page E-1 are filed
as part of this report.


REPORTS ON FORM 8-K
No reports on Form 8-K were filed during the last quarter of 1996.



34
<PAGE>

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 on March 20, 1997.


                                     EVEREST REINSURANCE HOLDINGS, INC.



                                     By:       /s/ JOSEPH V. TARANTO
                                        ----------------------------------------
                                                   JOSEPH V. TARANTO
                                         (CHAIRMAN 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.


                                                                
    /s/ JOSEPH V. TARANTO          Chairman and Chief Executive   March 20, 1997
---------------------------------      Officer and Director
        JOSEPH V. TARANTO                                 

                                                                
    /s/ ROBERT P. JACOBSON         Chief Financial Officer and    March 20, 1997
---------------------------------   Comptroller and Director
        ROBERT P. JACOBSON                                 


    /s/ MARTIN ABRAHAMS            Director                       March 20, 1997
---------------------------------
        MARTIN ABRAHAMS


    /s/ KENNETH J. DUFFY           Director                       March 20, 1997
---------------------------------
        KENNETH J. DUFFY


    /s/ JOHN R. DUNNE              Director                       March 20, 1997
---------------------------------
        JOHN R. DUNNE


    /s/ THOMAS J. GALLAGHER        Director                       March 20, 1997
---------------------------------
        THOMAS J. GALLAGHER


    /s/ WILLIAM F. GALTNEY, JR.    Director                       March 20, 1997
---------------------------------
        WILLIAM F. GALTNEY, JR.


    /s/ ROBERT A. MULDERIG         Director                       March 20, 1997
---------------------------------
        ROBERT A. MULDERIG




                                                                              35
<PAGE>
                                       
INDEX TO FINANCIAL STATEMENTS AND SCHEDULES

                                                                           PAGES
                                                                           -----
EVEREST REINSURANCE HOLDINGS, INC.

  Reports of Independent Auditors on Financial Statements and Schedules...  F-2
  Consolidated Balance Sheets at December 31, 1996 and 1995...............  F-4
  Consolidated Statements of Operations for the years ended December 31,
    1996, 1995 and 1994...................................................  F-5
  Consolidated Statements of Changes in Stockholders' Equity for the
    years ended December 31, 1996, 1995 and 1994..........................  F-6
  Consolidated Statements of Cash Flows for the years ended December 31,
    1996, 1995 and 1994...................................................  F-7
  Notes to Consolidated Financial Statements..............................  F-8
                                                                            

SCHEDULES

  I   Summary of Investments Other Than Investments in Related Parties at
        December 31, 1996.................................................  S-1
                                                                            
 II   Condensed Financial Information of Registrant:
          Balance Sheets as of December 31, 1996 and 1995.................  S-2
          Statements of Operations for the Years Ended December 31, 1996,
            1995 and 1994.................................................  S-3
          Statements of Cash Flows for the Years Ended December 31, 1996,
            1995 and 1994.................................................  S-4
                                                                            
III   Supplementary Insurance Information as of December 31, 1996 and 1995
        and for the years ended December 31, 1996, 1995 and 1994..........  S-5
                                                                            
 IV   Reinsurance for the years ended December 31, 1996, 1995 and 1994....  S-6
                                                                           
                                                                                
Schedules other than those listed above are omitted for the reason that they are
not  applicable  or the  information  is otherwise  contained  in the  Financial
Statements.





                                                                             F-1
<PAGE>

INDEPENDENT AUDITOR'S REPORT


The Stockholders and Board of Directors
Everest Reinsurance Holdings, Inc.

We have  audited the  accompanying  consolidated  financial  statements  and the
financial  statement  schedules  of  Everest  Reinsurance  Holdings,   Inc.  and
subsidiaries  ("the  Company")  as of  December  31,  1996 and for the year then
ended,  as listed in the  accompanying  index on page  F-1.  These  consolidated
financial statements and financial statement schedules are the responsibility of
the Company's  management.  Our responsibility is to express an opinion on these
consolidated financial statements and financial statement schedules based on our
audit.

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

In our opinion,  the financial  statements  referred to above present fairly, in
all  material   respects,   the  consolidated   financial  position  of  Everest
Reinsurance  Holdings,  Inc. and  subsidiaries  as of December 31, 1996, and the
results of their operations and their cash flows for the year ended December 31,
1996, in conformity with generally accepted accounting principles.  In addition,
in our  opinion,  the  financial  statement  schedules  referred to above,  when
considered in relation to the basic consolidated financial statements taken as a
whole,  present fairly in all material respects,  the information required to be
included therein.



COOPERS & LYBRAND L.L.P.
New York, New York
February 13, 1997







F-2
<PAGE>

INDEPENDENT AUDITORS' REPORT

To the Board of Directors and Stockholders of
Everest Reinsurance Holdings, Inc. (formerly
Prudential Reinsurance Holdings, Inc.)
Newark, New Jersey

We  have  audited  the  accompanying   consolidated  balance  sheet  of  Everest
Reinsurance  Holdings,  Inc.  and  subsidiaries  as of December 31, 1995 and the
related consolidated statements of income,  stockholders' equity, and cash flows
for the years ended  December  31, 1995 and 1994.  Our audits also  included the
financial  statement  schedules listed in the Index at Item 8 for the years then
ended.  These  financial  statements and financial  statement  schedules are the
responsibility of the Company's management.  Our responsibility is to express an
opinion on the financial  statements and financial  statement schedules based on
our audits.

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

In our opinion,  such consolidated  financial  statements present fairly, in all
material respects, the financial position of Everest Reinsurance Holdings,  Inc.
and  subsidiaries  as of December 31, 1995, and the results of their  operations
and  their  cash  flows  for the  years  ended  December  31,  1995  and 1994 in
conformity with generally accepted accounting principles.  Also, in our opinion,
such financial  statement  schedules,  when  considered in relation to the basic
consolidated  financial  statements  taken as a  whole,  present  fairly  in all
material respects the information set forth therein.



DELOITTE & TOUCHE LLP
Parsippany, New Jersey
February 23, 1996



                                                                                


                                                                             F-3
<PAGE>

<TABLE>
<CAPTION>
             
EVEREST REINSURANCE HOLDINGS, INC.

CONSOLIDATED BALANCE SHEETS

-------------------------------------------------------------------------------------
As of December 31, (Dollars in thousands, except par value per share)
                                                                   1996          1995
ASSETS:                                                      ----------    ----------                            
<S>                                                          <C>           <C>    
Fixed maturities - held to maturity, at amortized cost
  (market value: 1996, $88,374; 1995, $100,043)              $   80,522    $   87,903
Fixed maturities- available for sale, at market value
  (amortized cost: 1996, $3,194,246; 1995, $2,783,903)        3,281,972     2,886,070
Equity securities, at market value (cost: 1996, $115,367;
  1995, $105,176)                                               147,280       131,192
Short-term investments                                           49,486        76,649
Other invested assets                                            12,750         5,566
Cash                                                             52,595        50,912
                                                             ----------    ----------
  Total investments and cash                                  3,624,605     3,238,292
Accrued investment income                                        50,211        48,423
Premiums receivable                                             218,087       265,205
Reinsurance receivables                                         749,062       712,002
Funds held by reinsureds                                        173,386       171,384
Deferred acquisition costs                                       84,123        80,019
Prepaid reinsurance premiums                                      5,265         2,334
Deferred tax asset                                              124,664       112,599
Other assets                                                      9,949        17,504
                                                             ----------    ----------
TOTAL ASSETS                                                 $5,039,352    $4,647,762
                                                             ==========    ==========

LIABILITIES:
Reserve for losses and adjustment expenses                   $3,246,858    $2,969,341
Unearned premium reserve                                        355,908       294,291
Funds held under reinsurance treaties                           177,921       195,864
Losses in the course of payment                                  24,343        44,853
Contingent commissions                                           83,279        66,725
Other net payable to reinsurers                                   8,779         9,203
Current federal income taxes                                     25,879        20,843
Other liabilities                                                30,362        63,048
                                                             ----------    ----------
  Total liabilities                                           3,953,329     3,664,168
                                                             ----------    ----------

Commitments and contingencies (Note 8)

STOCKHOLDERS' EQUITY:
Preferred stock, par value: $0.01; 50 million shares
  authorized; no shares issued and outstanding                       --            --
Common stock, par value: $0.01; 200 million shares
  authorized; 50.8 million shares issued                            508           508
Paid-in capital                                                 389,196       387,349
Unearned compensation                                              (374)         (692)
Net unrealized appreciation (depreciation) of investments,
  net of deferred income taxes                                   77,766        83,726
Cumulative foreign currency translation adjustment, net of
  deferred income taxes                                            (354)       (7,838)
Retained earnings                                               626,501       520,541
Treasury stock, at cost; 0.3 million shares in 1996              (7,220)           --
                                                             ----------    ----------
  Total stockholders' equity                                  1,086,023       983,594
                                                             ----------    ----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY                   $5,039,352    $4,647,762
                                                             ==========    ==========

The accompanying notes are an integral part of the consolidated financial statements.
</TABLE>


F-4
<PAGE>

<TABLE>
<CAPTION>

EVEREST REINSURANCE HOLDINGS, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

----------------------------------------------------------------------------------
Years Ended December 31, (Dollars in thousands, except per share amounts)
                                                      1996        1995        1994
                                                ----------    --------    --------
<S>                                             <C>           <C>         <C>    
REVENUES:
Premiums earned:
  Before stop loss premium                      $  973,611    $893,321    $853,346
  Stop loss premium                                     --     140,000          --
                                                ----------    --------    --------
  Net premiums earned                              973,611     753,321     853,346
Net investment income                              191,901     166,023     143,609
Net realized capital gain/(loss)                     5,695      33,835     (10,499)
Other income/(loss)                                 (1,867)     (4,315)     (3,654)
                                                ----------    --------    --------
                                                 1,169,340     948,864     982,802
                                                ----------    --------    --------

CLAIMS AND EXPENSES:
Incurred losses and loss adjustment expenses       716,033     674,696     720,800
Commission and brokerage expenses                  252,928     226,819     197,859
Other underwriting expenses                         56,540      60,574      68,292
Compensation related to public offering                 --      13,343          --
Restructuring and early retirement costs                --          --       7,833
                                                ----------    --------    --------
                                                 1,025,501     975,432     994,784
                                                ----------    --------    --------
INCOME (LOSS)  BEFORE TAXES                        143,839     (26,568)    (11,982)
Income tax (benefit)                                31,812     (27,315)    (22,644)
                                                ----------    --------    --------
NET INCOME                                      $  112,027    $    747    $ 10,662
                                                ==========    ========    ========

PER SHARE DATA:
  Weighted average shares outstanding (000's)       50,567      50,189      50,000
  Net income per share                          $     2.22    $   0.01    $   0.21
                                                ==========    ========    ========


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

</TABLE>

                                                                             F-5
<PAGE>

<TABLE>
<CAPTION>

EVEREST REINSURANCE HOLDINGS, INC.

CONSOLIDATED STATEMENTS OF CHANGES
IN STOCKHOLDERS' EQUITY

-----------------------------------------------------------------------------------------
Years Ended December 31, (Dollars in thousands, except per share amounts)
                                                       1996           1995           1994
                                                -----------    -----------    -----------
<S>                                             <C>             <C>           <C>    
COMMON STOCK (SHARES OUTSTANDING):
Balance, beginning of period                     50,792,869     50,000,000     50,000,000
Issued during the period                              3,800        792,869             --
Treasury stock acquired during period              (306,396)            --             --
                                                -----------    -----------    -----------
Balance, end of period                           50,490,273     50,792,869     50,000,000
                                                ===========    ===========    ===========

COMMON STOCK (PAR VALUE):
Balance, beginning of period                    $       508    $       500    $       500
Issued during the period                                 --              8             --
                                                -----------    -----------    -----------
Balance, end of period                                  508            508            500
                                                -----------    -----------    -----------

ADDITIONAL PAID IN CAPITAL:
Balance, beginning of period                        387,349        283,076        281,467
Contributions during the period                       1,783         91,000          1,609
Common stock issued during the period                    64         13,273             --
                                                -----------    -----------    -----------
Balance, end of period                              389,196        387,349        283,076
                                                -----------    -----------    -----------

UNEARNED COMPENSATION:
Balance, beginning of period                           (692)            --             --
Net increase (decrease) during the period               318           (692)            --
                                                -----------    -----------    -----------
Balance, end of period                                 (374)          (692)            --
                                                -----------    -----------    -----------

NET UNREALIZED APPRECIATION(DEPRECIATION) OF
  INVESTMENTS, NET OF DEFERRED INCOME TAXES:
Balance, beginning of period                         83,726        (58,172)        80,768
Net increase (decrease) during the period            (5,960)       141,898       (138,940)
                                                -----------    -----------    -----------
Balance, end of period                               77,766         83,726        (58,172)
                                                -----------    -----------    -----------

CUMULATIVE TRANSLATION ADJUSTMENTS, NET OF
  DEFERRED INCOME TAXES:
Balance, beginning of period                         (7,838)       (11,255)       (11,034)
Net increase (decrease) during the period             7,484          3,417           (221)
                                                -----------    -----------    -----------
Balance, end of period                                 (354)        (7,838)       (11,255)
                                                -----------    -----------    -----------

RETAINED EARNINGS:
Balance, beginning of period                        520,541        526,818        523,656
Net income (loss)                                   112,027            747         10,662
Dividends declared ( $0.12 per share in 1996,
  $0.14 per share in 1995 and $0.15 per share
  in 1994)                                           (6,067)        (7,024)        (7,500)
                                                -----------    -----------    -----------
Balance, end of period                              626,501        520,541        526,818
                                                -----------    -----------    -----------

TREASURY STOCK AT COST:
Balance, beginning of period                             --             --             --
Treasury stock acquired during period                (7,220)            --             --
                                                -----------    -----------    -----------
Balance, end of period                               (7,220)            --             --
                                                -----------    -----------    -----------

TOTAL STOCKHOLDERS' EQUITY, END OF PERIOD       $ 1,086,023    $   983,594    $   740,967
                                                ===========    ===========    ===========


The accompanying notes are an integral part of the consolidated financial statements.
</TABLE>


F-6
<PAGE>

<TABLE>
<CAPTION>

EVEREST REINSURANCE HOLDINGS, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

--------------------------------------------------------------------------------------------------------------
Years Ended December 31, (Dollars in thousands)
                                                                            1996           1995           1994
                                                                     -----------    -----------    -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
<S>                                                                  <C>            <C>            <C>        
Net income                                                           $   112,027    $       747    $    10,662
  Adjustments to reconcile net income (loss) to net cash
    provided by operating activities:
    (Increase) decrease in premiums receivable                            46,700         24,986           (526)
    (Increase) decrease in funds held by reinsureds, net                 (21,606)        31,511         62,217
    (Increase) in reinsurance receivables                                (37,084)       (20,656)       (22,761)
    (Increase) in deferred tax asset                                     (13,065)        (8,143)       (15,536)
    Increase in reserve for losses and loss adjustment expenses          281,590        248,789        154,552
    Increase in unearned premiums                                         60,293         30,268         11,288
    (Increase) decrease in other assets and liabilities                   (9,479)        16,343        (26,087)
    Non cash compensation expense                                            318         12,589             --
    Accrual of bond discount/amortization of bond premium                    (46)         4,264          8,555
    Realized capital (gains) losses                                       (5,695)       (33,835)        10,499
                                                                     -----------    -----------    -----------
Net cash provided by operating activities                                413,953        306,863        192,863
                                                                     -----------    -----------    -----------

CASH FLOWS FROM INVESTING ACTIVITIES :
Proceeds from fixed maturities matured/called - held to maturity          20,582         30,961          5,934
Proceeds from fixed maturities matured/called - available for sale       143,114        145,543         69,394
Proceeds from fixed maturities sold - available for sale               1,281,882        699,869        970,050
Proceeds from equity securities sold                                     160,429        164,723         64,038
Proceeds from other invested assets sold                                      --             --          3,811
Cost of fixed maturities acquired - held to maturity                     (17,378)           (10)          (850)
Cost of fixed maturities acquired - available for sale                (1,836,274)    (1,370,981)    (1,506,358)
Cost of equity securities acquired                                      (150,861)      (121,569)       (56,859)
Cost of other invested assets acquired                                    (7,184)        (2,133)        (1,837)
Net sales of short-term securities                                        26,890         58,408        241,804
Net increase (decrease) in unsettled securities transactions              (3,166)         1,526         (6,746)
Net increase (decrease) in collateral for loaned securities              (19,897)        12,372          7,377
                                                                     -----------    -----------    -----------
Net cash provided by (used in) investing activities                     (401,863)      (381,291)      (210,242)
                                                                     -----------    -----------    -----------

CASH FLOWS FROM FINANCING ACTIVITIES:
Purchase of treasury stock                                                (7,220)            --             --
Contributions during the period                                            1,847         91,000             --
Dividends paid to stockholders                                            (6,067)        (7,024)        (7,500)
                                                                     -----------    -----------    -----------
Net cash used in financing activities                                    (11,440)        83,976         (7,500)
                                                                     -----------    -----------    -----------

EFFECT OF EXCHANGE RATE CHANGES ON CASH:                                   1,033         (3,044)         4,594
                                                                     -----------    -----------    -----------

Net increase (decrease) in cash                                            1,683          6,504        (20,285)
Cash, beginning of period                                                 50,912         44,408         64,693
                                                                     -----------    -----------    -----------
Cash, end of period                                                  $    52,595    $    50,912    $    44,408
                                                                     ===========    ===========    ===========

SUPPLEMENTAL CASH FLOW INFORMATION:
Cash transactions:
  Income taxes paid (received), net                                  $    38,055    $   (50,944)   $     8,153
NON-CASH FINANCING TRANSACTION:
  Issuance of common stock in connection with public offering        $       318    $    12,589    $        --


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

</TABLE>

                 
                                                                             F-7
<PAGE>

EVEREST REINSURANCE HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

Years Ended December 31, 1996, 1995 and 1994

For  purposes  of footnote  presentation,  all dollar  values,  except per share
amounts where otherwise indicated, are presented in thousands.


1.  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

A.  BUSINESS AND BASIS OF PRESENTATION
Everest Reinsurance Holdings,  Inc.  ("Holdings")  (formerly known as Prudential
Reinsurance  Holdings,  Inc.), is a holding company incorporated in the state of
Delaware.  Prior to an initial public offering  ("IPO") of all 50 million shares
outstanding on October 6, 1995, Holdings was a direct wholly owned subsidiary of
PRUCO, Inc. ("PRUCO"), which is wholly owned by The Prudential Insurance Company
of  America  ("The  Prudential").  The  stock  of  Everest  Reinsurance  Company
("Everest  Re")  (formerly   known  as  Prudential   Reinsurance   Company)  was
contributed by PRUCO to Holdings  effective  December 31, 1993. The contribution
has been accounted for at historical  cost in a manner similar to the pooling of
interest method of accounting as the entities were under common control. Everest
Re's  principal  business is reinsuring  property and casualty risks of domestic
and foreign insurance companies under excess and pro rata reinsurance contracts.

The preparation of financial  statements in conformity  with generally  accepted
accounting principles requires management to make estimates and assumptions that
affect the  reported  amounts  of assets  and  liabilities  (and  disclosure  of
contingent  assets and liabilities) at the date of the financial  statements and
the  reported  amounts of revenues  and expenses  during the  reporting  period.
Actual results could differ from those estimates.

The  consolidated   financial   statements  include  the  domestic  and  foreign
subsidiaries  of  Everest  Re:  Everest  National  Insurance  Company  ("Everest
National")  (formerly known as Prudential National Insurance  Company),  Everest
Reinsurance Ltd.  ("Everest Re Ltd.")  (formerly known as Le Rocher  Reinsurance
Ltd.) and Everest Insurance Company of Canada ("Everest Canada") (formerly known
as OTIP/RAEO  Insurance  Company,  Inc.), which was acquired from The Prudential
for $3,700 on December  31, 1996.  The  acquisition  of Everest  Canada has been
accounted  for by the  purchase  method.  Had this  acquisition  occurred at the
beginning  of either 1995 or 1996,  there would have been no material  effect on
the Company's  results of  operations.  All material  intercompany  balances and
transactions have been eliminated in consolidation.

Certain  reclassifications  have  been  made  to the  1994  and  1995  financial
statements to conform to the 1996 presentation.


B.  INVESTMENTS
SFAS No. 115, "Accounting for Certain Investments in Debt and Equity Securities"
requires that a company segment its fixed maturity investment  portfolio between
held to maturity  (carried at amortized  cost),  available  for sale (carried at
market value,  with unrealized  appreciation or depreciation,  net of applicable
deferred  income  taxes,  reflected  as a separate  component  of  stockholder's
equity) and trading  (carried at market value with  unrealized  appreciation  or
depreciation  reflected in income).  Investments that are available for sale are
expected to be held for an  indefinite  period but may be sold  depending on tax
position,  interest rates and other considerations.  Short-term  investments are
stated at cost, which approximates  market value.  Equity securities are carried
at  market  value  with  unrealized   appreciation  or  depreciation  of  equity
securities,  net of applicable deferred income tax, credited or charged directly
to  stockholder's  equity.  Realized gains or losses on sale of investments  are
determined on the basis of identified cost. With respect to securities which are
not publicly  traded,  market value has been determined based on pricing models.
For publicly traded  securities,  market value is based on quoted market prices.
Cash includes  cash and bank time  deposits  with original  maturities of ninety
days or under.


C.  UNCOLLECTIBLE REINSURANCE RECOVERABLE BALANCES
The Company provides  reserves for uncollectible  reinsurance  balances based on
management's  assessment of the collectibility of the outstanding balances. Such
reserves  were  $14,267 and $14,267 at December  31, 1996 and December 31, 1995,
respectively. See also Note 5.


F-8
<PAGE>

D.  DEFERRED ACQUISITION COSTS
Acquisition costs,  consisting principally of commissions and brokerage expenses
incurred at the time a contract or policy is issued,  are deferred and amortized
over the period in which the related  premiums are earned,  generally  one year.
Deferred  policy  acquisition  costs are limited to their  estimated  realizable
value  based on the  related  unearned  premiums,  anticipated  claims and claim
expenses and anticipated investment income. Deferred acquisition costs amortized
to  income  were  $252,812,  $224,340  and  $201,200  in 1996,  1995  and  1994,
respectively.


E.  LOSS AND LOSS ADJUSTMENT EXPENSE RESERVE
The  reserve  for  unpaid  losses  and  loss  adjustment  expenses  is  based on
individual  case  estimates  and  reports  received  from  ceding  companies.  A
provision is included for losses and loss adjustment  expenses  incurred but not
reported  ("IBNR")  based on past  experience.  A provision is also included for
certain potential liabilities relating to asbestos and environmental  exposures,
which liabilities cannot be estimated with traditional reserving techniques. The
reserves are reviewed  continually and any changes in estimates are reflected in
earnings in the period the adjustment is made. Management believes that adequate
provision has been made for the  Company's  loss and loss  adjustment  expenses.
Accruals for contingent  commission  liabilities  are estimated based on carried
loss and loss adjustment expense reserves.


F.  PREMIUM REVENUES
Premiums  written are earned  ratably over the periods of the related  insurance
and reinsurance contracts or policies. Unearned premium reserves are established
to cover the  remainder of the  unexpired  contract  period.  Such  reserves are
established  based upon reports received from ceding companies or computed using
pro rata methods based on statistical data. Written and earned premiums, and the
related costs, which have not yet been reported to the Company are estimated and
accrued. Premiums are net of retrocessions (ceded reinsurance).


G.  INCOME TAXES
Prior to the IPO,  the Company was a member of a group of  affiliated  companies
which  joined  in  filing  a  consolidated  federal  tax  return.   Current  tax
liabilities  were determined for individual  companies based upon their separate
return basis taxable  income.  Members with taxable income incurred an amount in
lieu of the  separate  return  basis  federal  tax.  Members with a loss for tax
purposes  recognized  a current  benefit  in  proportion  to the amount of their
losses utilized in computing  consolidated  taxable  income.  Since the IPO, the
Company and its  subsidiaries  file their own federal tax returns and  calculate
their  current  tax  provisions  accordingly.  Deferred  income  taxes have been
recorded  to  recognize  the tax effect of  temporary  differences  between  the
financial reporting and income tax bases of assets and liabilities.


H.  FOREIGN CURRENCY TRANSLATION
Assets and liabilities  relating to foreign  operations are translated into U.S.
dollars at the exchange rates in effect at the balance sheet date;  revenues and
expenses are translated into U.S.  dollars using average  exchange rates.  Gains
and losses resulting from translating foreign currency financial statements, net
of  deferred  income  taxes,   are  excluded  from  income  and  accumulated  in
stockholder's equity.


I.  EARNINGS PER SHARE
Earnings  per common share are based on the  weighted  average  number of common
shares outstanding during the relevant period and, if dilutive,  shares issuable
under stock option plans.


                                                                             F-9
<PAGE>

2.  INVESTMENTS
The  amortized  cost,  market  value,  and  gross  unrealized  appreciation  and
depreciation of fixed maturity investments are presented in the tables below:
<TABLE>

                                         Amortized    Unrealized   Unrealized      Market
                                              Cost  Appreciation Depreciation       Value
                                        ----------  ------------ ------------  ----------  
<S>                                     <C>          <C>          <C>          <C>  
As of December 31, 1996:
Fixed maturities - held to maturity
  U.S. Treasury securities and
    obligations of U.S. government
    agencies and corporations           $   30,182   $      307   $       54   $   30,435
  Obligations of states and
    political subdivisions                  50,340        7,824          225       57,939
                                        ----------   ----------   ----------   ----------
TOTAL                                   $   80,522   $    8,131   $      279   $   88,374
                                        ==========   ==========   ==========   ==========

Fixed maturities - available for sale
  U.S. Treasury securities and
    obligations of U.S. government
    agencies and corporations           $  162,406   $      909   $    1,361   $  161,954
  Obligations of states and
    political subdivisions               1,259,544       48,277          733    1,307,088
  Corporate securities                     739,997       11,440          315      751,122
  Mortgage-backed securities               487,145        7,692        2,007      492,830
  Foreign debt securities                  545,154       24,660          836      568,978
                                        ----------   ----------   ----------   ----------

TOTAL                                   $3,194,246   $   92,978   $    5,252   $3,281,972
                                        ==========   ==========   ==========   ==========


As of December 31, 1995:
Fixed maturities - held to maturity
  U.S. Treasury securities and
    obligations of U.S. government
    agencies and corporations           $   29,238   $      686   $      129   $   29,795
  Obligations of states and
    political subdivisions                  58,665       11,668           85       70,248
                                        ----------   ----------   ----------   ----------

TOTAL                                   $   87,903   $   12,354   $      214   $  100,043
                                        ==========   ==========   ==========   ==========

Fixed maturities - available for sale
  U.S. Treasury securities and
    obligations of U.S. government
    agencies and corporations           $   72,495   $    1,678   $      224   $   73,949
  Obligations of states and
    political subdivisions               1,126,694       53,390          316    1,179,768
  Corporate securities                     773,446       24,986          703      797,729
  Mortgage-backed securities               355,725        9,911          475      365,161
  Foreign debt securities                  455,543       17,673        3,753      469,463
                                        ----------   ----------   ----------   ----------

TOTAL                                   $2,783,903   $  107,638   $    5,471   $2,886,070
                                        ==========   ==========   ==========   ==========

</TABLE>

F-10
<PAGE>

The  amortized  cost  and  market  value of fixed  maturities  are  shown in the
following  table by  contractual  maturity.  Actual  maturities  may differ from
contractual  maturities  because  securities  may be called or  prepaid  with or
without call or prepayment penalties.
<TABLE>

                                                           December 31, 1996
                                                       -------------------------
                                                        Amortized         Market
                                                             Cost          Value
                                                       ----------     ----------
<S>                                                    <C>            <C>    
Fixed maturities - held to maturity
  Due in one year or less                              $   10,657     $   11,042
  Due after one year through five years                    26,793         26,980
  Due after five years through ten years                    7,243          7,096
  Due after ten years                                      35,829         43,256
                                                       ----------     ----------
TOTAL                                                  $   80,522     $   88,374
                                                       ==========     ==========

Fixed maturities - available for sale
  Due in one year or less                              $   74,025     $   75,699
  Due after one year through five years                   644,792        655,055
  Due after five years through ten years                  930,000        963,056
  Due after ten years                                   1,058,284      1,095,332
  Mortgage-backed securities                              487,145        492,830
                                                       ----------     ----------
TOTAL                                                  $3,194,246     $3,281,972
                                                       ==========     ==========
</TABLE>

Proceeds from sales of fixed  maturity  investments  during 1996,  1995 and 1994
were  $1,281,882,  $699,869 and $970,050,  respectively.  Gross gains of $9,146,
$7,058 and  $5,482,  and gross  losses of  $20,952,  $12,058  and  $26,692  were
realized on those sales during 1996, 1995 and 1994, respectively.

The cost,  market value and gross  unrealized  appreciation  and depreciation of
investments in equity securities is presented in the table below:
<TABLE>

                                                              December 31,
                                                      --------------------------
                                                          1996              1995
                                                      --------          --------                                     
<S>                                                   <C>               <C>     
Cost                                                  $115,367          $105,176
Unrealized appreciation                                 33,015            30,033
Unrealized depreciation                                  1,102             4,017
                                                      --------          --------

Market Value                                          $147,280          $131,192
                                                      ========          ========
</TABLE>

The  changes in net  unrealized  gains  (losses) of  investments  of the Company
(including  unrealized  gains and losses on fixed  maturities  not  reflected in
stockholders' equity) are derived from the following sources:
<TABLE>

                                                  Years Ended December 31,
                                            ------------------------------------
                                                 1996         1995          1994
                                            ---------    ---------    ----------
<S>                                         <C>          <C>          <C>   
Increase (decrease) during the period
  between the market value and cost of
  investments carried at market value,
  and deferred tax thereon:
  Equity securities                         $   5,897    $  (8,153)   $ (24,843)
  Fixed maturities                            (14,440)     226,459     (188,507)
  Other invested assets                          --           --           (404)
  Deferred taxes                                2,583      (76,408)      74,814
                                            ---------    ---------    ---------
Increase (decrease) in unrealized
  appreciation, net of deferred taxes,
  included in stockholder's equity             (5,960)     141,898     (138,940)
                                            ---------    ---------    ---------
Increase (decrease) during the period
  between the market value and cost of
  fixed maturities carried at amortized
  cost                                         (4,288)       3,294       (9,247)
                                            ---------    ---------    ---------

TOTAL                                       $ (10,248)   $ 145,192    $(148,187)
                                            =========    =========    =========
</TABLE>


                                                                            F-11
<PAGE>

The components of net investment income are presented in the table below:
<TABLE>

                                                  Years Ended December 31,
                                            ------------------------------------
                                                1996          1995          1994
                                            --------      --------      --------
<S>                                         <C>           <C>           <C>     
Fixed maturities                            $198,947      $168,268      $137,284
Equity securities                              2,835         2,017         3,301
Short-term investments                         5,357         9,005         8,658
Other interest income                          1,450           860         3,555
                                            --------      --------      --------
Total gross investment income                208,589       180,150       152,798
                                            --------      --------      --------
Interest on funds held                        12,294         9,451         4,995
Other investment expenses                      4,394         4,676         4,194
                                            --------      --------      --------
Total investment expenses                     16,688        14,127         9,189
                                            --------      --------      --------
Total net investment income                 $191,901      $166,023      $143,609
                                            ========      ========      ========
</TABLE>

The  components of realized  capital  gains  (losses) are presented in the table
below:
<TABLE>

                                                 Years Ended December 31,
                                         ---------------------------------------
                                             1996           1995            1994
                                         --------       --------       ---------
<S>                                      <C>            <C>            <C>      
Fixed maturities                         $(11,805)      $ (5,000)      $(21,994)
Equity securities                          17,443         38,833         11,516
Short-term investments                         57              2            (21)
                                         --------       --------       --------
Total                                    $  5,695       $ 33,835       $(10,499)
                                         ========       ========       ========
</TABLE>

In addition,  in 1994,  the Company sold to The  Prudential all of the remaining
privately  placed equity  securities  and fixed  maturities in its available for
sale investment portfolio. Proceeds from this sale were $71,191, with the amount
in excess of book value, $2,476 ($1,609 net of deferred income taxes), reflected
in the accompanying financial statements as an increase to paid in capital.

Securities with a carrying value amount of $295,607 at December 31, 1996 were on
deposit with various state or governmental  insurance  departments in compliance
with insurance  laws.  The Company had no  investments  in derivative  financial
instruments for the years ended December 31, 1996, 1995 and 1994.


3.  RESERVE FOR LOSSES AND LOSS ADJUSTMENT EXPENSES
Activity in the reserve for losses and loss adjustment expenses is summarized as
follows:
<TABLE>

                                                Years Ended December 31,
                                        ----------------------------------------
                                               1996           1995          1994
                                        -----------    -----------   -----------
<S>                                     <C>            <C>           <C>        
Reserves at January 1                   $ 2,969,341    $ 2,706,429   $ 2,540,129
  Less reinsurance recoverables             689,190        648,550       641,824
                                        -----------    -----------   -----------
  Net balance at January 1                2,280,151      2,057,879     1,898,305
                                        -----------    -----------   -----------
Incurred related to:
  Current year                              745,594        658,039       646,534
  Prior years                               (29,561)        16,657        74,266
                                        -----------    -----------   -----------
    Total incurred losses and
      loss adjustment expenses              716,033        674,696       720,800
                                        -----------    -----------   -----------
Paid related to:
  Current year                              139,073         92,949       157,688
  Prior years                               282,134        359,475       403,538
                                        -----------    -----------   -----------
    Total paid losses and loss
      adjustment expenses                   421,207        452,424       561,226
                                        -----------    -----------   -----------
Net balance at December 31                2,574,977      2,280,151     2,057,879
  Plus reinsurance recoverables             671,881        689,190       648,550
                                        -----------    -----------   -----------

    Balance at December 31              $ 3,246,858    $ 2,969,341   $ 2,706,429
                                        ===========    ===========   ===========
</TABLE>


F-12
<PAGE>

4.  INCOME TAXES
The components of income taxes for the periods presented are as follows:
<TABLE>

                                                    Years Ended December 31,
                                               ---------------------------------
                                                   1996        1995         1994
                                               --------    --------    ---------
<S>                                            <C>         <C>         <C>    
Current tax (benefit):
  U.S                                          $ 24,363    $(35,435)   $(21,683)
  Foreign                                        20,735      18,351      14,575
                                               --------    --------    --------
  Total current tax (benefit)                    45,098     (17,084)     (7,108)
Total deferred U.S. tax (benefit)               (13,286)    (10,231)    (15,536)
                                               --------    --------    --------
  Total income tax (benefit)                   $ 31,812    $(27,315)   $(22,644)
                                               ========    ========    ========
</TABLE>

A reconciliation of the U.S. Federal income tax rate to the Company's  effective
tax rate is as follows:
<TABLE>

                                                      Years Ended December 31,
                                                      ------------------------
                                                      1996      1995      1994
                                                      ----      ----      ----
<S>                                                   <C>      <C>       <C>    
Federal income tax rate                               35.0%    (35.0)%   (35.0)%
Increase (reduction) in taxes resulting from:
   Tax exempt income                                 (15.1)    (73.4)   (160.8)
   Other, net                                          2.2       5.6       6.8
                                                      ----     -----     -----
   Effective tax rate                                 22.1%   (102.8)%  (189.0)%
                                                      ====     =====     =====
</TABLE>

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

                                                                December 31,
                                                           ---------------------
                                                               1996         1995
                                                           --------     --------
<S>                                                        <C>          <C>    
Deferred tax assets:
  Reserve for losses and loss adjustment
    expenses                                               $164,477     $141,917
  Unearned premium reserve                                   24,545       18,575
  Foreign currency translation                                  232        4,179
  Net operating loss carryforward                             1,579        5,019
  Restricted stock                                             --          4,406
  Other assets                                                6,569       12,767
                                                           --------     --------
Total deferred tax assets                                   197,402      186,863
                                                           --------     --------

Deferred tax liabilities:
  Deferred acquisition costs                                 29,443       27,734
  Net unrealized appreciation of investments                 41,874       44,864
  Other liabilities                                           1,421        1,666
                                                           --------     --------
Total deferred tax liabilities                               72,738       74,264
                                                           --------     --------
Net deferred tax assets                                    $124,664     $112,599
                                                           ========     ========
</TABLE>

Pursuant to the terms of a separation agreement, The Prudential retained the net
operating loss  carryforward  attributable to the Company at the date of the IPO
and has paid the Company for the tax benefit thereof in 1996. Holdings has total
net operating  loss  carryforwards  of $4,510,  of which $323 expire in 2011 and
$4,187 expire in 2012.  Management believes that it is more likely than not that
the  Company  will  generate  sufficient  future  taxable  income to realize the
benefits of the other net  deferred  tax assets and,  accordingly,  no valuation
allowance has been recorded for the periods presented.

Everest Re  has not  provided for  U.S. Federal  income or  foreign  withholding
taxes on $9,393 of pre-1987  undistributed  earnings of  non-U.S.  subsidiaries,
because   such   earnings  are   intended  to  be   retained   by  the   foreign


                                                                            F-13
<PAGE>

subsidiaries  indefinitely.  If these  earnings  were  distributed,  foreign tax
credits  should  become  available  under current law to reduce or eliminate any
resulting income tax liability.

The Internal  Revenue  Service  ("IRS") has  completed its  examinations  of The
Prudential's  tax  returns for all years  through  1992.  As those  examinations
relate to Everest  Re, the IRS has  disallowed  that  portion of the fresh start
benefit  which  relates  to 1986  reserve  strengthening  as defined by the IRS.
Consistent  with case law  favorable  to  taxpayers  on the issue,  the  Company
believes  that,  because  there  were no  changes in  reserving  assumptions  or
methodologies between 1985 and 1986, all increases to reserves in 1986 for which
a fresh start benefit was taken are normal  reserve  additions  and,  therefore,
pursuant to the case law, does not constitute reserve  strengthening that is not
eligible for the fresh start benefit. If the IRS position prevails,  the Company
will be required to reimburse The  Prudential,  thereby  incurring an additional
charge of approximately $8,777, including the after-tax cost of interest through
December 31, 1996.


5.  RETROCESSIONS
The  Company  utilizes  retrocessional  (reinsurance)  agreements  to reduce its
exposure to large claims and  catastrophic  loss  occurrences.  These agreements
provide  for  recovery  from  retrocessionaires  of a portion of losses and loss
expenses  under  certain  circumstances.  Losses  and loss  adjustment  expenses
incurred and earned premiums are after deduction for retrocessions. In the event
retrocessionaires  were  unable to meet  their  obligations  under  retrocession
agreements,  the  Company  would not be able to  realize  the full  value of the
reinsurance  recoverable balances. The Company may hold partial collateral under
these  agreements  and has  never  suffered  a  significant  loss  because  of a
retrocessionaire's default. See Note 1(C) and the following paragraph.

Effective  October 5, 1995,  Everest Re entered into a stop loss  agreement (the
"Stop Loss Agreement") with Gibraltar  Casualty Company  ("Gibraltar") (see Note
6). This agreement,  for a premium of $140 million,  provides protection against
100% of the first $150  million of adverse  development,  if any, and 90% of the
next $250 million of adverse  development,  if any, of Everest Re's consolidated
reserves for losses and uncollectable reinsurance as of June 30, 1995, including
allocated loss adjustment expense and incurred but not reported losses, provided
that adverse development,  if any, relating to catastrophes will be covered only
to the extent that the catastrophe  event occurred prior to January 1, 1995. All
such  adverse  development  is  referred  to  herein as  "Adverse  Development".
Payments  will be made to  Everest Re under the Stop Loss  Agreement  as Adverse
Development is incurred by Everest Re. The $375.0 million  aggregate limit under
the Stop  Loss  Agreement  will be  reduced  by an amount  equal to the  Adverse
Development  which is not ceded,  in accordance  with the terms of the Stop Loss
Agreement,  to Gibraltar  (See Note 6A).  Coverage under the Stop Loss Agreement
terminates on December 31, 2007,  or earlier if coverage is  exhausted.  Through
December  31,  1996 and  1995,  cessions  under  the Stop  Loss  Agreement  have
aggregated $140,231 and $23,687, respectively.

Written and earned premiums are comprised of the following:
<TABLE>

                                             Years Ended December 31,
                                  ----------------------------------------------
                                         1996             1995              1994
                                  -----------      -----------      ------------
<S>                               <C>              <C>              <C>    
Written premium:
  Direct                          $    59,691      $    16,064      $     6,821
  Assumed                             984,340          933,436          946,397
  Retroceded                          (13,497)        (166,309)         (90,013)
                                  -----------      -----------      -----------
  Net written premium             $ 1,030,534      $   783,191      $   863,205
                                  ===========      ===========      ===========

Earned premium:
  Direct                          $    37,963      $    10,784      $     6,234
  Assumed                             945,698          907,995          942,419
  Retroceded                          (10,050)        (165,458)         (95,307)
                                  -----------      -----------      -----------
  Net earned premium              $   973,611      $   753,321      $   853,346
                                  ===========      ===========      ===========
</TABLE>

The amounts  deducted  from losses and loss  adjustment  expenses  incurred  for
retrocessional  recoveries  were  $206,032,  $119,115 and $119,710 for the years
ended December 31, 1996, 1995 and 1994, respectively.


F-14
<PAGE>

6.  TRANSACTIONS WITH FORMER AFFILIATES

A.  INDEMNITY AGREEMENT
On October 5, 1995, Holdings agreed,  pursuant to a Standby Capital Contribution
Agreement (the "Capital Contribution Agreement"),  to make capital contributions
("Capital  Contributions")  to Everest Re in respect of the first $375.0 million
of  Adverse  Development  experienced  by  Everest  Re  that  is not  ceded,  in
accordance with the terms of the Stop Loss Agreement, to Gibraltar. Each Capital
Contribution,  if any,  will  equal  the  amount  of such  Adverse  Development,
adjusted to reflect an assumed tax rate of 36%,  although the  Company's  actual
tax rate may be  greater  than or less than 36%.  Holdings'  obligation  to make
Capital  Contributions shall be limited to an aggregate maximum amount of $240.0
million,  which  amount  shall  be  reduced  by  64% of the  amount  of  Adverse
Development ceded to Gibraltar under the Stop Loss Agreement.

Also on October 5, 1995, PRUCO agreed to make payments ("Indemnity Payments") to
Holdings,  pursuant to an Indemnity  Agreement  (the "PRUCO  Indemnity"),  in an
amount  equal  to the  Capital  Contributions  at such  times  as  such  Capital
Contributions,  if any,  are  required to be paid by Holdings to Everest Re. The
Capital Contribution  Agreement and the PRUCO Indemnity are intended to mitigate
the  impact of up to the first  $375.0  million of  Adverse  Development  on the
Company's earnings not otherwise covered by the Stop Loss Agreement.


B.  REINSURANCE
The Company engages in reinsurance  activities with certain Prudential entities,
including Prudential Property and Casualty Insurance Company, Gibraltar, and The
Prudential.

The following  summarizes the financial  statement impact of certain reinsurance
transactions  with  Gibraltar  and  other  former  affiliates,  while  they were
affiliated, for the periods presented.
<TABLE>

                                                        January 1
                                                          Through     Year Ended
                                                       October 5,   December 31,
                                                             1995           1994
                                                       ----------   ------------
<S>                                                      <C>            <C>   
Income statement:
Premiums earned - assumed
  Gibraltar                                              $     --       $     --
  Other                                                    24,298         37,179
Premiums earned - retroceded
  Gibraltar                                               140,000           --
Incurred losses and loss adjustment
  expenses - assumed
  Gibraltar                                                37,877         41,490
  Other                                                    13,587         28,436
Incurred losses and loss adjustment
  expenses - retroceded
  Gibraltar                                                27,640        112,011
  Other                                                        16           --
</TABLE>

The Prudential has guaranteed all of Gibraltar's obligations under the Stop Loss
Agreement,  all of PRUCO's  obligations under the PRUCO Indemnity and up to $400
million of Gibraltar's net obligations that became due after June 30, 1995 under
all other reinsurance  agreements  between Gibraltar and Everest Re. At December
31, 1996,  Gibraltar's net obligations under such other  reinsurance  agreements
consisted of the following balances:
<TABLE>

<S>                                                                   <C>      
Reinsurance receivables from Gibraltar                                $ 322,266
Reserve for losses and loss adjustment expenses assumed
  from Gibraltar                                                       (141,700)
Losses in the course of payment assumed from Gibraltar                   (1,765)
Funds held by Everest Re under reinsurance treaties with    
  with Gibraltar                                                       (115,694)                                                  
                                                                      ---------
     Net obligations of Gibraltar                                     $  63,107
                                                                      =========
</TABLE>

In addition,  since June 30, 1995,  Gibraltar  has paid $65,472 to Everest Re in
respect of such other reinsurance agreements.


                                                                            F-15
<PAGE>


C.  EXPENSES
Everest Re has service and lease  agreements  with The  Prudential.  Under these
agreements,  The  Prudential has furnished  services of its employees,  provided
supplies,  use of equipment and office space,  and made payment to third parties
for general expenses on behalf of Everest Re. The agreements obligate Everest Re
to reimburse The Prudential for disbursements made on Everest Re's behalf and to
pay for  providing  these  services.  The cost of such  services  for the period
January 1 through  October 5, 1995 and for the year ended December 31, 1994 were
$10,789 and $14,273, respectively.


D.  EMPLOYEE RETIREMENT PLAN
The  Prudential   sponsored  a  defined   benefit  pension  plan  which  covered
substantially  all of the employees of Everest Re through  October 6, 1995.  The
benefits are generally based on average earnings over a period prescribed by the
plan and credited length of service. In connection with the IPO, the Company has
established its own employee  retirement plan which is substantially the same as
The   Prudential's   plan.  In  September  1996,  The  Prudential   completed  a
plan-to-plan  asset  transfer of $13,270 to fully fund the  Company's  projected
benefit obligations as of the IPO date, plus interest from the IPO date.

No pension expense for  contributions to the Prudential plan has been charged to
Everest Re for the years ended December 31, 1995 and 1994 because the Prudential
plan was  subject  to the full  funding  limitation  under  the IRS  guidelines.
Pension  expense for the Company's plan for the year ended December 31, 1996 and
for the period of October 6, 1995  through  December 31, 1995 was $901 and $312,
respectively.

The following table summarizes the plan's funded status:
<TABLE>

                                                                    December 31,
                                                                            1996
                                                                    ------------
<S>                                                                    <C>
Accumulated benefit obligation
  Vested                                                               $ (7,985)
  Non-vested                                                                  0
                                                                       --------
  Total                                                                  (7,985)
  Additional benefits based on estimated
    future salary levels                                                 (7,146)
                                                                       --------
  Projected benefit obligation                                          (15,131)
Fair value of plan assets                                                14,610
                                                                       --------
Unfunded projected benefit obligation                                      (521)
Unrecognized net loss or (gain)                                            (692)
                                                                       --------
Unfunded (accrued) or prepaid pension
  cost in the financial statements                                     $ (1,213)
                                                                       ========
</TABLE>

Plan assets are comprised of shares in investment trusts with  approximately 70%
and 30% of the  underlying  assets  consisting  of equity  securities  and fixed
maturities, respectively.

Net periodic pension cost included the following components:
<TABLE>

                                                                      October 6
                                                      Year Ended        Through
                                                    December 31,   December 31,     
                                                            1996           1995
                                                    ------------   ------------
<S>                                                      <C>            <C>    
Service cost                                             $ 1,102        $   382
Interest cost                                                948            328
Actual return on assets                                   (1,841)          (638)
Net asset gain during period deferred
  for later recognition                                      692            240
                                                         -------        -------
Net periodic pension cost                                $   901        $   312
                                                         =======        =======
</TABLE>

The weighted  average  discount rate and rate of  compensation  increase used to
determine the actuarial  present value of the projected  benefit  obligation are
7.3% and  4.5%,  respectively.  The  expected  long-term  rate of return on plan
assets is 9.0%.


F-16
<PAGE>

In 1994, an early retirement  incentive program was offered to certain employees
of The Prudential and its  subsidiaries who were eligible to retire after adding
any  combination  of seven years to their service and/or their age. The one-time
1994  expense  allocated  to Everest Re in  connection  with its  employees  who
accepted this program was $777.


E.  POSTRETIREMENT BENEFIT PLANS
The  Prudential  sponsors  postretirement  defined  benefit  plans which provide
certain life insurance and health care benefits ("postretirement  benefits") for
Everest  Re's  employees  eligible to retire at October 6, 1995.  The Company is
considering establishing its own plan for its employees who were not eligible to
retire at October 6, 1995. The expense  allocated to the Company for the cost of
these  benefits  incurred by The  Prudential  was $239 and $1,370 for the period
ending October 6, 1995 and the year ended December 31, 1994, respectively.


F.  CAPITAL CONTRIBUTION
Immediately  prior to the IPO, The Prudential  paid $140,000 to the Company,  of
which amount $91,000 was a contribution  to capital and $49,000 was a payment in
respect of the tax benefit of the premium paid for the Stop Loss Agreement.


7.  DIVIDEND RESTRICTIONS AND STATUTORY FINANCIAL INFORMATION

A.  DIVIDEND RESTRICTIONS
Delaware law provides  that an insurance  company,  which is either an insurance
holding  company or a member of an insurance  holding system and is domiciled in
the state,  shall not pay dividends without giving prior notice to the Insurance
Commissioner  of Delaware and may not pay dividends  without the approval of the
Insurance Commissioner if the value of the proposed dividend,  together with all
other dividends and distributions  made in the preceding twelve months,  exceeds
the greater of (1) 10% of  statutory  surplus or (2) net income,  not  including
realized  capital gains,  each as reported in the prior year's  statutory annual
statement.  In addition,  no dividend may be paid in excess of unassigned earned
surplus.  At December 31, 1996,  Everest Re had $84,415 available for payment of
dividends in 1997 without prior regulatory approval.


B.  STATUTORY FINANCIAL INFORMATION
Everest Re prepares  its  statutory  financial  statements  in  accordance  with
accounting  practices  prescribed  by  the  National  Association  of  Insurance
Commissioners  ("NAIC")  and  the  Delaware  Insurance  Department.   Prescribed
statutory accounting practices are set forth in a variety of publications of the
NAIC, as well as state laws, regulations,  and general administrative rules. The
capital  and  statutory  surplus of  Everest Re was  $772,691  and  $686,857  at
December 31, 1996 and 1995,  respectively.  The  statutory  net income (loss) of
Everest Re was $88,517, $(736) and $2,987 for the years ended December 31, 1996,
1995 and 1994, respectively.


8.  CONTINGENCIES
Everest Re continues  to receive  claims under  expired  contracts  which assert
alleged injuries and/or damages relating to or resulting from toxic torts, toxic
waste and other hazardous  substances,  such as asbestos.  Everest Re's asbestos
claims typically involve liability or potential liability for bodily injury from
exposure to asbestos or for property damage  resulting from asbestos or products
containing  asbestos.   Everest  Re's  environmental  claims  typically  involve
potential  liability for (i) the  mitigation  or  remediation  of  environmental
contamination or (ii) bodily injury or property damages caused by the release of
hazardous substances into the land, air or water.

Everest Re's  reserves  include an estimate of Everest Re's  ultimate  liability
for  asbestos and  environmental  claims for  which  ultimate  value  cannot  be
estimated  using  traditional   reserving  techniques.   There  are  significant
uncertainties  in  estimating  the  amount  of  Everest  Re's  potential  losses
from  asbestos  and  environmental  claims.  Among  the  complications  are: (i)
potentially  long  waiting  periods  between  exposure and manifestation  of any
bodily  injury or  property  damage;  (ii)  difficulty  in  identifying  sources
of  asbestos  or  environmental  contamination;  (iii)  difficulty  in  properly
allocating  responsibility   and/or  liability  for  asbestos  or  environmental
damage; (iv) changes in  underlying laws and  judicial  interpretation  of those
laws;  (v)  potential  for an asbestos or environmental  claim to  involve  many
insurance  providers  over  many  policy  periods;  (vi) long reporting  delays,
both from insureds to  insurance companies  and ceding  companies to reinsurers;
(vii) limited  historical  data  concerning  asbestos and environmental  losses;


                                                                            F-17
<PAGE>

(viii)  questions  concerning  interpretation  and  application of insurance and
reinsurance coverage;  and (ix) uncertainty regarding the number and identity of
insureds with potential asbestos or environmental exposure.

Management  believes that these issues are not likely to be resolved in the near
future.  Everest Re establishes  reserves to the extent that, in the judgment of
management,  the facts and  prevailing law reflect an exposure for Everest Re or
its ceding  company.  Due to the  uncertainties  discussed  above,  the ultimate
losses may vary materially from current loss reserves and, if coverage under the
Stop Loss  Agreement is exhausted,  could have a material  adverse effect on the
Company's future financial condition,  results of operations and cash flows. See
Note 5.

The  following   table  shows  the   development  of  prior  year  asbestos  and
environmental  reserves on both a gross and net of retrocessional  basis for the
years ended:

<TABLE>

                                             1996           1995            1994
                                        ---------      ---------      ----------
Gross Basis
<S>                                     <C>            <C>            <C>   
Beginning of period reserves            $ 428,495      $ 445,537      $ 421,528
Incurred losses                            30,028         17,269        127,058
Paid losses                               (35,187)       (34,311)      (103,049)
                                        ---------      ---------      ---------
End of period reserves                  $ 423,336      $ 428,495      $ 445,537
                                        =========      =========      =========

Net Basis

Beginning of period reserves            $ 197,668      $ 203,676      $ 214,600
Incurred losses (1)                          --             --           40,537
Paid losses (1)                             3,321         (6,008)       (51,461)
                                        ---------      ---------      ---------
End of period reserves                  $ 200,989      $ 197,668      $ 203,676
                                        =========      =========      =========
</TABLE>

------------
(1) Net of $24,196 and $16,687 ceded in 1996 and 1995,  respectively,  under the
incurred loss reimbursement feature of the Stop Loss Agreement.

At December 31, 1996, the gross reserves for asbestos and  environmental  losses
were comprised of $101.2 million  representing  case reserves reported by ceding
companies,  $50.1 million  representing  additional case reserves established by
Everest  Re on assumed  reinsurance  claims,  $52.8  million  representing  case
reserves  established by Everest Re on direct excess insurance claims and $219.2
million representing IBNR reserves.

To the extent loss reserves for claims  incurred on June 30, 1995  (December 31,
1994 for  catastrophe  losses)  or prior on  assumed  reinsurance  needed  to be
increased,  and  were  not  ceded  to  unaffiliated  reinsurers  under  existing
reinsurance  agreements,  Everest Re would be entitled to certain reimbursements
under the Stop Loss  Agreement  (see Note 5). To the  extent  loss  reserves  on
direct excess  insurance  policies  needed to be increased and were not ceded to
unaffiliated reinsurers under existing reinsurance agreements,  Everest Re would
be entitled to 100%  protection  under a 100% quota share  retrocession  entered
into with  Gibraltar in 1986.  While there can be no assurance that reserves for
and losses  from these  claims  would not  increase  in the  future,  management
believes that Everest Re's existing reserves and ceded reinsurance  arrangements
and   reimbursements   available  under  the  Stop  Loss  Agreement  lessen  the
probability that such increases, if any, would have a material effect on Everest
Re's financial condition, results of operations or cash flows.

Everest Re is also named in various legal  proceedings  incidental to its normal
business  activities.  In the opinion of Everest  Re, none of these  proceedings
would have a material  adverse effect upon the financial  condition,  results of
operations or cash flows of Everest Re.

The  Prudential  sells  annuities  which are  purchased by property and casualty
insurance   companies  to  settle   certain  types  of  claim   liabilities.  In
1993 and  prior, Everest Re, for a fee, accepted  the claim  payment  obligation
of the  property and  casualty  insurer, and,  concurrently,  became  the  owner
of the  annuity  or assignee of the  annuity  proceeds.  In these circumstances,
Everest Re  would be  liable if The Prudential  were  unable to make the annuity


F-18
<PAGE>

payments.  The estimated cost to replace all such annuities for which Everest Re
was contingently liable at December 31, 1996 and 1995 was $136,234 and $133,428,
respectively.

Everest Re has purchased  annuities from an unaffiliated  life insurance company
to settle  certain claim  liabilities  of Everest Re. Should the life  insurance
company become unable to make the annuity payments,  Everest Re would be liable.
The estimated  cost to replace such  annuities at December 31, 1996 and 1995 was
$9,208 and $8,506, respectively.


9.  STOCK BASED COMPENSATION PLANS
The Company has in place its 1995 Stock  Incentive  Plan for key employees  (the
"1995 Employee Plan") and its 1995 Stock Option Plan for Non-Employee  Directors
(the  "1995   Director   Plan")  and   applies   APB   Opinion  25  and  related
interpretations  in accounting  for these plans.  Accordingly,  no  compensation
expense has been recognized in the accompanying  financial statements in respect
of stock options granted under these plans.

Under the 1995 Employee  Plan, a total of 3,949,000  shares of common stock have
been authorized to be granted as stock options, stock awards or restricted stock
awards to officers and key employees of the Company. At December 31, 1996, there
were 2,423,031 remaining shares available to be granted. Under the 1995 Director
Plan,  a total of 50,000  shares  of common  stock  have been  authorized  to be
granted as stock options to non-employee  directors of the Company.  At December
31, 1996, there were 37,130  remaining  shares available to be granted.  Options
granted  under the 1995  Employee  Plan vest at 20% per year over five years and
options  granted  under  the 1995  Director  Plan  vest at 50% per year over two
years. All options are exercisable at fair market value of the stock at the date
of grant and expire ten years after the date of grant.  Restricted stock granted
under the 1995 Employee Plan vests,  beginning one year after the date of grant,
in equal annual installments over five years.

A summary of the status of the  Company's  stock options as of December 31, 1996
and 1995 and changes during the years ended on those dates is presented below:
<TABLE>

                                                      1996                       1995
                                          Weighted-Average           Weighted-Average
                                  Shares    Exercise Price   Shares    Exercise Price
                                 -------  ----------------  -------  ----------------
<S>                              <C>                <C>           <C>          <C>   
Outstanding, beginning of year   459,700            $16.93        0            $   xx
Granted                          286,270             24.10  459,700             16.93
Exercised                          3,800             16.75        0                xx
Forfeited                          9,600             18.25        0                xx
                                 -------                    -------
Outstanding, end of year         732,570            $19.72  459,700            $16.93
                                 =======                    =======

Options exercisable at year-end   89,340                          0
                                 =======                    =======
Weighted-average fair value of
  options granted during the year                   $11.55                     $ 7.92
                                                    ======                     ======
</TABLE>

The fair value of each option  grant is estimated on the date of grant using the
Black-Scholes option pricing model with the following assumptions:  (i) dividend
yield of 0.7%,  (ii) expected  volatility of 34.33%,  (iii)  risk-free  interest
rates ranging from a low of 5.90% to a high of 7.01%,  and (iv) expected life of
7.5 years.

The following table summarizes  information  about stock options  outstanding at
December 31, 1996:
<TABLE>

                         Options Outstanding                         Options Exercisable
                    -----------------------------                    -------------------
                         Number  Weighted-Average                                 Number
        Range of    Outstanding         Remaining  Weighted-Average          Exercisable  Weighted-Average
 Exercise Prices    at 12/31/96  Contractual Life    Exercise Price          at 12/31/96    Exercise Price
----------------    -----------  ----------------  ----------------  -------------------  ----------------
<C>       <C>           <C>            <C>                   <C>                  <C>               <C>   
$16.75 to $20.94        448,300        8.75 years            $16.94               89,340            $16.94
 22.56 to  26.63        284,270        9.66                   24.10                    0                xx
                        -------                                                   ------
$16.75 to $26.63        732,570        9.11                  $19.72               89,340            $16.94
                        =======                                                   ======      

</TABLE>

In conjunction with its initial public  offering,  the Company issued to certain
key  employees  of the  Company  746,269  shares of stock and 46,600  restricted
shares  of  stock,  respectively.  In 1995,  the  Company  expensed  $12,500  in


                                                                            F-19
<PAGE>

recognition  of the  unrestricted  stock  awards.  Upon  issuance of  restricted
shares, unearned compensation is charged to stockholder's equity for the cost of
the  restricted  stock and is amortized over the vesting  period.  The amount of
earned  compensation  recognized  as expense  with respect to  restricted  stock
awards was $318 and $89 for 1996 and 1995, respectively.

Had the compensation cost for the Company's stock based  compensation plans been
determined  based on the fair value at the grant  dates for awards  under  those
plans  consistent  with the method of SFAS No. 123, the Company's net income and
earnings  per share would have been reduced to the pro forma  amounts  indicated
below:
<TABLE>

                                                              1996          1995
                                                          --------         -----
<S>                                                       <C>              <C>  
Net Income                             As reported        $112,027         $ 747
                                       Pro forma          $110,850         $ 514
Earnings per share                     As reported        $   2.22         $0.01
                                       Pro forma          $   2.19         $0.01

</TABLE>

10.  SEGMENT INFORMATION
Everest Re's  principal  business is reinsuring  property and casualty  risks of
domestic and foreign insurance  companies.  The following table provides summary
financial information by geographic region for the periods disclosed.
<TABLE>

                                                   Years Ended December 31,
                                              ----------------------------------
                                                   1996        1995         1994
                                              ---------   ---------    ---------
<S>                                           <C>         <C>          <C>    
Premiums earned:
  Domestic                                    $ 655,097   $ 565,540    $ 548,832
  Canada                                         63,615      57,133       51,324
  Other international                           254,899     270,648      253,190
  Premium for Stop Loss Agreement                  --      (140,000)        --
                                              ---------   ---------    ---------
Total premiums earned                         $ 973,611   $ 753,321    $ 853,346
                                              =========   =========    =========

Net income (loss):
  Domestic                                    $  70,978   $  37,305    $ (22,684)
  Canada                                          8,548      17,774        8,062
  Other international                            32,501      45,341       25,284
  After-tax cost of Stop Loss Agreement and
    compensation related to public offering        --       (99,673)        --
                                              ---------   ---------    ---------
Total net income (loss)                       $ 112,027   $     747    $  10,662
                                              =========   =========    =========

</TABLE>
<TABLE>
                                                            December 31,
                                                   -----------------------------    
                                                         1996               1995
                                                   ----------         ----------
<S>                                                <C>                <C>    
Total identifiable assets:
  Domestic                                         $4,205,198         $3,895,209
  Canada                                              303,369            264,777
  Other international                                 530,785            487,776
                                                   ----------         ----------
Total identifiable assets                          $5,039,352         $4,647,762
                                                   ==========         ==========
</TABLE>


F-20
<PAGE>

11.  UNAUDITED QUARTERLY FINANCIAL DATA
Summarized quarterly financial data were as follows:
<TABLE>

                                          1st          2nd          3rd          4th
                                      Quarter      Quarter      Quarter      Quarter
                                    ---------    ---------    ---------    ---------
<S>                                 <C>          <C>          <C>          <C>      
1996 Operating data:
  Gross written premium             $ 229,963    $ 247,392    $ 282,399    $ 284,277
  Net written premium                 218,743      235,914      275,009      300,868
  Earned premium                      210,269      218,806      245,341      299,195
  Net  investment income               44,768       46,261       49,467       51,405
  Net realized capital gain(loss)       3,812        3,672       (6,505)       4,716
  Incurred losses and LAE             155,125      161,430      179,856      219,622
  Underwriting expenses                68,350       69,846       79,152       92,120
  Underwriting loss                   (13,206)     (12,470)     (13,667)     (12,547)
  Net income (loss)                 $  27,751    $  28,739    $  23,219    $  32,318
                                    =========    =========    =========    =========

Primary earnings per share:
  Weighted average shares
    outstanding (000's)                50,793       50,497       50,487       50,488
  Net income per common share       $    0.55    $    0.57    $    0.46    $    0.64

                                          1st          2nd          3rd          4th
                                      Quarter      Quarter      Quarter      Quarter
                                    ---------    ---------    ---------    ---------
1995 Operating data:
  Gross written premium             $ 217,581    $ 215,465    $ 268,031    $ 248,423
  Net written premium                 210,789      208,301      261,667      102,434
  Earned premium                      199,763      210,744      242,349      100,465
  Net  investment income               38,026       41,194       42,866       43,937
  Net realized capital gain(loss)       3,229       19,527         (609)      11,688
  Incurred losses and LAE             155,843      148,670      185,836      184,347
  Underwriting expenses                63,767       77,171       73,675       86,123
  Underwriting loss                   (19,847)     (15,097)     (17,162)    (170,005)
  Net income (loss)                 $  18,591    $  31,910    $  20,714    $ (70,468)
                                    =========    =========    =========    =========

Primary earnings per share:
  Weighted average shares
    outstanding (000's)                50,000       50,000       50,000       50,750
  Net income per common share       $    0.37    $    0.64    $    0.41    $   (1.39)
</TABLE>

In connection with the IPO, the Company  incurred  non-recurring  fourth quarter
1995 charges of $140,000  ($91,000 after taxes) for the Stop Loss Agreement (see
Note 5) and $13,343 ($8,673 after taxes) for compensation expense (see Note 9).


12.  RESTRUCTURING COSTS
In December 1994, the Company adopted a plan to restructure its operations.  The
plan,  which was  implemented  in January  1995,  included  the  termination  of
approximately  20% of the  Company's  employees and the closing of four of seven
domestic branch offices. The estimated cost of the restructuring,  consisting of
$6,243 for severance pay and benefits and $813 for remaining lease  obligations,
net of estimated sublease income of approximately $900, subsequent to the branch
closings,  was  accrued  in the  financial  statements  for  1994  and has  been
substantially paid.


13.  CAPITAL TRANSACTIONS
The  contribution  to the  Company's  paid in capital in the twelve months ended
December 31, 1996  represents  the tax benefits  attributable  to the difference
between the amount of  compensation  expense  deductible  for tax purposes  with
respect to stock awards and the amount of such compensation expense reflected in
the Company's financial  statements.  In addition, on April 4, 1996, pursuant to
the Company's stock incentive plan, the Company  acquired  306,231 shares of its
common stock at a cost of $7,216 from the Company's Chief  Executive  Officer to
fund required withholding taxes.


                                                                            F-21
<PAGE>

<TABLE>
<CAPTION>

EVEREST REINSURANCE HOLDINGS, INC.

SCHEDULE I - SUMMARY OF INVESTMENTS -
OTHER THAN INVESTMENTS IN RELATED PARTIES
DECEMBER 31, 1996

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

                Column A                     Column B     Column C     Column D
                --------                    ----------   ----------   ----------
                                                                          Amount
                                                                        Shown in
                                                             Market      Balance
 (Dollars in thousands)                           Cost        Value        Sheet
                                            ----------   ----------   ----------
<S>                                         <C>          <C>          <C>   
Fixed maturities-held to maturity:
Bonds:
  U.S. Government and government agencies   $   30,182   $   30,435   $   30,182
  State, municipalities and political
    subdivisions                                50,340       57,939       50,340
  Foreign bonds                                     --           --           --
  Public Utilities                                  --           --           --
  All other corporate bonds                         --           --           --
Mortgage pass-through securities                    --           --           --
                                            ----------   ----------   ----------
Total fixed maturities-held to maturity         80,522       88,374       80,522
                                            ----------   ----------   ----------

Fixed maturities-available for sale
Bonds:
  U.S. Government and government agencies      162,406      161,954      161,954
  State, municipalities and political
    subdivisions                             1,259,544    1,307,088    1,307,088
  Foreign bonds                                545,154      568,978      568,978
  Public Utilities                              26,007       26,590       26,590
  All other corporate bonds                    708,990      719,482      719,482
Mortgage pass-through securities               487,145      492,830      492,830
Redeemable preferred stock                       5,000        5,050        5,050
                                            ----------   ----------   ----------
Total fixed maturities-available for sale    3,194,246    3,281,972    3,281,972
Equity securities                              115,367      147,280      147,280
Short-term investments                          49,486       49,486       49,486
Other invested assets                           12,750       12,750       12,750
Cash                                            52,595       52,595       52,595
                                            ----------   ----------   ----------
Total investments and cash                  $3,504,966   $3,632,457   $3,624,605
                                            ==========   ==========   ==========
</TABLE>


                                                                             S-1
<PAGE>

<TABLE>
<CAPTION>

EVEREST REINSURANCE HOLDINGS, INC.

SCHEDULE II - 
CONDENSED FINANCIAL INFORMATION OF THE REGISTRANT
CONDENSED BALANCE SHEET

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

December 31, (Dollars in thousands, except par value per share)
                                                               1996        1995
                                                         ----------    --------
ASSETS
<S>                                                      <C>           <C>    
  Investment in subsidiary, at equity in the
    underlying net assets                                $1,080,131    $982,027
  Income tax receivable                                       4,606       3,634
  Receivable from affliate                                    3,431           0
  Cash                                                            0         442
                                                         ----------    --------
        Total assets                                     $1,088,168    $986,103
                                                         ==========    ========

LIABILITIES
  Other liabilities                                      $    2,145    $  2,509
                                                         ----------    --------

STOCKHOLDERS' EQUITY
  Preferred stock, par value: $0.01; 50 million shares
    authorized; no shares issued and outstanding                 --          --

  Common stock, par value: $0.01; 200 million shares
    authorized; 50.8 million shares issued                      508         508

  Paid-in capital                                           389,196     387,349
  Unearned compensation                                        (374)       (692)
  Net unrealized appreciation(depreciation) of
    investments                                              77,766      83,726
  Cumulative foreign currency translation adjustment           (354)     (7,838)
  Treasury Stock                                             (7,220)          0
  Retained earnings                                         626,501     520,541
                                                         ----------    --------
    Total stockholders' equity                            1,086,023     983,594
                                                         ----------    --------
           Total liabilities and stockholders' equity    $1,088,168    $986,103
                                                         ==========    ========


See notes to consolidated financial statements.
</TABLE>


S-2
<PAGE>

<TABLE>
<CAPTION>
EVEREST REINSURANCE HOLDINGS, INC.

SCHEDULE II - 
CONDENSED FINANCIAL INFORMATION OF THE REGISTRANT
CONDENSED STATEMENT OF OPERATIONS

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

For Years Ended December 31, (Dollars in thousands)
                                                     1996       1995       1994
                                                ---------    -------    -------    
REVENUES
<S>                                             <C>          <C>        <C>    
Dividends received from subsidiary              $  17,924    $13,722    $ 7,500
Equity in undistributed net income
  (loss) of subsidiary                             95,242     (9,956)     7,774
                                                ---------    -------    -------

  Total revenues                                  113,166      3,766     15,274
                                                ---------    -------    -------

EXPENSES
  Other expenses                                    1,752      4,612      7,095
                                                ---------    -------    -------

Income (loss) before taxes                        111,414       (846)     8,179
Income tax (benefit)                                 (613)    (1,593)    (2,483)
                                                ---------    -------    -------
  Net income                                    $ 112,027    $   747    $10,662
                                                =========    =======    =======

See notes to consolidated financial statements.
</TABLE>


                                                                             S-3
<PAGE>

<TABLE>
<CAPTION>
EVEREST REINSURANCE HOLDINGS, INC.

SCHEDULE II -
CONDENSED FINANCIAL INFORMATION OF THE REGISTRANT
CONDENSED STATEMENT OF CASHFLOWS

--------------------------------------------------------------------------------                                                    
                                                                                            
For Years Ended December 31, (Dollars in thousands)                                                                                 
                                                     1996       1995       1994
                                                 --------    -------    -------
CASH FLOWS FROM OPERATING ACTIVITIES:
<S>                                              <C>         <C>        <C>    
Net income                                       $112,027    $   747    $10,662
  Adjustments to reconcile net income to net
    cash provided by operating activities:
    Equity in undistributed (earnings) loss of
      subsidiary                                  (95,242)     9,956     (7,774)
    Increase (decrease) in other liabilities         (364)    (4,586)     7,095
    (Increase) in income taxes receivable            (972)    (1,151)    (2,483)
    (Increase) in receivable from affliates        (3,431)        --         --
    Non-cash compensation                             407      2,500         --
                                                 --------    -------    -------
Net cash provided by operating activities          12,425      7,466      7,500

CASH FLOWS FROM FINANCING ACTIVITIES:
Treasury Stock Purchase                            (7,220)        --         --
Contributions during period                           420         --         --
Dividends paid to stockholders                     (6,067)    (7,024)    (7,500)
                                                 --------    -------    -------
Net cash used in financing activities             (12,867)    (7,024)    (7,500)
Net increase in cash                                 (442)       442         --
Cash, beginning of period                             442         --         --
                                                 --------    -------    -------
Cash, end of period                              $     --    $   442    $    --
                                                 ========    =======    =======

SUPPLEMENTAL CASH FLOW INFORMATION:
Cash transaction:
  Income tax received                                  --    $   442         --
Non-cash operating transactions:
  Dividends received from subsidiary in the
    form of forgiveness of liabilities           $  1,767      6,698         --
Non-cash financing transaction:
  Issuance of common stock in connection with
    public offering                                    --     12,500         --


See notes to consolidated financial statements.
</TABLE>


S-4
<PAGE>

<TABLE>
<CAPTION>
EVEREST REINSURANCE HOLDINGS, INC.

SCHEDULE III - SUPPLEMENTARY INSURANCE INFORMATION

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

     Column A          Column B     Column C  Column D  Column F    Column G       Column H      Column I   Column J    Column K
------------------- -----------  -----------  --------  --------  ----------  -------------  ------------  ---------  ----------
                                 Reserve for                                         
                                      Losses                                       Incurred  Amortization
                       Deferred     and Loss  Unearned                   Net  Loss and Loss   of Deferred      Other   
                    Acquisition   Adjustment   Premium    Earned  Investment     Adjustment   Acquisition  Operating     Written 
      SEGMENT             Costs     Expenses  Reserves   Premium      Income       Expenses         Costs   Expenses     Premium
      -------       -----------  -----------  --------  --------  ----------  -------------  ------------  ---------  ----------
December 31, 1996
<S>                     <C>       <C>         <C>       <C>         <C>            <C>           <C>         <C>        <C>     
Domestic                $56,676   $2,751,282  $242,654  $655,097    $143,301       $508,247      $175,203    $45,712    $694,053
Canada                    7,640      142,346    25,835    63,615      17,489         37,896        15,781      2,408      65,030
Other international      19,807      353,230    87,419   254,899      31,111        169,890        61,828      8,536     271,451
                        -------   ----------  --------  --------    --------       --------      --------    -------  ----------
  Total                 $84,123   $3,246,858  $355,908  $973,611    $191,901       $716,033      $252,812    $56,656  $1,030,534
                        =======   ==========  ========  ========    ========       ========      ========    =======  ==========
December 31, 1995
Domestic                $55,743   $2,504,947  $200,886  $565,540    $125,676       $474,864      $151,909    $64,259    $590,717
Canada                    7,716      133,559    24,456    57,133      16,112         35,571        10,736      2,515      64,064
Other international      16,560      330,835    68,949   270,648      24,235        164,261        61,695      9,622     268,410
Premium for Stop
  Loss Agreement             --           --        --  (140,000)         --             --            --         --    (140,000)
                        -------   ----------  --------  --------    --------       --------      --------    -------  ----------
  Total                 $80,019   $2,969,341  $294,291  $753,321    $166,023       $674,696      $224,340    $76,396    $783,191
                        =======   ==========  ========  ========    ========       ========      ========    =======  ==========
December 31, 1994
Domestic                                                $548,832    $110,747       $529,305      $133,323    $62,469    $561,694
Canada                                                    51,324      14,268         32,314        11,199      2,221      53,149
Other international                                      253,190      18,594        159,181        56,678      8,095     248,361
                                                        --------    --------       --------      --------    -------  ----------
  Total                                                 $853,346    $143,609       $720,800      $201,200    $72,785    $863,204
                                                        ========    ========       ========      ========    =======  ==========


</TABLE>


                                                                             S-5
<PAGE>

<TABLE>
<CAPTION>
EVEREST REINSURANCE HOLDINGS, INC.

SCHEDULE IV - REINSURANCE

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

          Column A             Column B          Column C          Column D   Column E     Column F
----------------------------   --------   ---------------   ---------------   --------   ----------

                                  Gross          Ceded To      Assumed From        Net   Assumed to
                                 Amount   Other Companies   Other Companies     Amount          Net
(Dollars in thousands)         --------   ---------------   ---------------   --------   ----------
<S>                             <C>              <C>               <C>        <C>             <C>    
December 31, 1996
Total property and liability
  insurance earned premium      $37,963          $ 10,050          $945,698   $973,611         97.1%
                                =======          ========          ========   ========        =====
December 31, 1995
Total property and liability
  insurance earned premium      $10,784          $165,458          $907,995   $753,321        120.5%
                                =======          ========          ========   ========        =====
December 31, 1994
Total property and liability
  insurance earned premium      $ 6,234          $ 95,307          $942,419   $853,346        110.4%
                                =======          ========          ========   ========        =====
</TABLE>

S-6
<PAGE>
                       
INDEX TO EXHIBITS


EXHIBIT
    NO.                                                                     PAGE
-------                                                                     ----

   3.1    Certificate of Incorporation of Everest  Reinsurance  Holdings,
          Inc., incorporated  herein  by  reference  to  Exhibit  4.1  to
          the Registration Statement on Form S-8 (No. 333-05771)
   3.2    By-Laws  (as  amended  and  restated)  of  Everest  Reinsurance
          Holdings, Inc., incorporated  herein  by  reference to  Exhibit
          3.2 to the Registration Statement on Form S-1 (No. 33-71652)
  10.1    Sublease,   effective   as  of  January  1, 1994,  between  The
          Prudential Insurance Company of America and Everest Reinsurance
          Company, incorporated  herein by  reference to Exhibit  10.3 to
          the Registration Statement on Form S-1 (No. 33-71652)
  10.2    Stop  Loss  Agreement entered into between  Everest Reinsurance
          Company and Gibraltar Casualty Company, incorporated  herein by
          reference to Exhibit 10.6 to the Registration Statement on Form
          S-1 (No. 33-71652)
  10.3    Everest Reinsurance Holdings, Inc. Amended 1995 Stock Incentive
          Plan, incorporated  herein by reference to Exhibit  10.3 to the
          Annual Report on Form 10-K for the year ended December 31, 1995
          (the "1995 10-K")
  10.4    Everest Reinsurance  Holdings, Inc.  Amended  Annual  Incentive
          Plan, incorporated  herein by  reference to Exhibit 10.4 to the
          1995 10-K
  10.5    Sublease,   effective   as  of February  1,  1997  between  The 
          Prudential Insurance Company of America and Everest Reinsurance
          Company
 *10.6    Everest  Reinsurance Holdings, Inc. 1995 Stock  Option Plan for
          Non-Employee Directors, incorporated  herein  by  reference  to
          Exhibit  4.3  to the  Registration  Statement on  Form S-8 (No.
          333-05771)
 *10.7    Amended  and  Restated  Employment  Agreement  between  Everest
          Reinsurance Company and Joseph V. Taranto, incorporated  herein
          by reference to Exhibit 10.50 to the Registration  Statement on
          Form S-1 (No. 33-71652)
 *10.8    Letter, Dated April 20, 1995, from Everest Reinsurance  Company
          to  Sheldon  Rosenberg, incorporated  herein  by  reference  to 
          Exhibit  10.51 to the Registration  Statement on  Form S-1 (No.
          33-71652)
  10.9    Standby  Capital   Contribution   Agreement   between   Everest
          Reinsurance  Holdings,  Inc. and Everest  Reinsurance  Company,
          incorporated  herein  by  reference  to Exhibit  10.69  to  the
          Registration Statement on Form S-1 (No. 33-71652)
  10.10   Indemnification   Agreement  between  PRUCO,  Inc. and  Everest
          Reinsurance Holdings, Inc., incorporated herein by reference to
          Exhibit  10.70 to  the Registration  Statement on Form S-1 (No.
          33-71652)
  10.11   Guarantee  made by The Prudential  Insurance Company of America
          in favor of Everest Reinsurance  Company,  incorporated  herein 
          by reference to Exhibit 10.71 to the Registration  Statement on
          Form S-1 (No. 33-71652)
  10.12   Guarantee  made by The Prudential Insurance  Company of America
          in favor of  Everest  Reinsurance  Holdings, Inc., incorporated
          herein  by  reference  to  Exhibit 10.72  to  the  Registration
          Statement on Form S-1 (No. 33-71652)
  10.13   1995  Service  Contract  between  Everest  Reinsurance  Company
          and   Gibraltar   Casualty   Company,  incorporated  herein  by
          reference  to Exhibit  10.73 to  the Registration  Statement on
          Form S-1 (No. 33-71652)
  10.14   Separation  Agreement among The  Prudential  Insurance  Company
          of America,  Gibraltar  Casualty Company,  Everest  Reinsurance
          Company, PRUCO, Inc., and Everest Reinsurance  Holdings,  Inc.,
          incorporated  herein  by   reference  to  Exhibit  10.2 to  the
          Registration Statement on Form S-1 (No. 33-71652)
 *10.15   Form  of  Non-Qualified  Stock  Option  Award  Agreement  to be
          entered into  between  Everest Reinsurance  Holdings,  Inc. and
          participants  in the 1995  Stock  Incentive Plan,  incorporated
          herein by reference to Exhibit 10.15 to the 1995 10-K


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EXHIBIT
    NO.                                                                     PAGE
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 *10.16   Form  of   Restricted   Stock  Agreement  to  be  entered  into   
          between Everest Reinsurance Holdings, Inc. and  participants in
          the 1995 Stock Incentive Plan, incorporated herein by reference
          to Exhibit 10.16 to the 1995 10-K
 *10.17   Form of Stock Option Agreement (Version 1) to be  entered  into
          between Everest  Reinsurance  Holdings, Inc.  and  participants
          in the 1995  Stock  Option  Plan  for  Non-Employee  Directors,
          incorporated  herein by  reference to Exhibit 10.17 to the 1995
          10-K
 *10.18   Form of Stock Option Agreement (Version 2) to be  entered  into
          between Everest  Reinsurance  Holdings, Inc.  and  participants
          in the 1995  Stock  Option  Plan  for  Non-Employee  Directors, 
          incorporated  herein by reference to  Exhibit 10.18 to the 1995
          10-K
  11.1    Statement regarding computation of per share earnings
  16.1    Letter from  Deloitte  &  Touche  LLP,  dated  August  8, 1996,
          incorporated herein by reference to Exhibit 16 to the Form  8-K
          filed on August 9, 1996
  21.1    Subsidiaries of the registrant
  23.1    Consent of Deloitte & Touche LLP
  23.2    Consent of Coopers & Lybrand L.L.P.
  27.1    Financial Data Schedule
  28.1    Information   from   reports   furnished  to  state   insurance
          regulatory authorities

--------------
* Management contract or compensatory plan or arrangement.



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