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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, 1998       Commission file number 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.)

                              477 MARTINSVILLE ROAD
                               POST OFFICE BOX 830
                      LIBERTY CORNER, NEW JERSEY 07938-0830
                                 (908) 604-3000
    (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 9, 1999 of the voting stock held by
non-affiliates of the registrant was $1,685 million.

         At March 9, 1999, the number of shares  outstanding of the registrant's
common stock was 49,656,940.

                       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 1999 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, 1998.

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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 ...............................................   23
 6.   Selected Financial Data ............................................   24
 7.   Management's Discussion and Analysis of Financial 
       Condition and Results of Operation ................................   26
 7A.  Quantitative and Qualitative Disclosures About
       Market Risk .......................................................   38
 8.   Financial Statements and Supplementary Data ........................   38
 9.   Changes in and Disagreements with Accountants on 
       Accounting and Financial Disclosure ...............................   38

PART III

10.   Directors and Executive Officers of the Registrant .................   39 
11.   Executive Compensation .............................................   39
12.   Security Ownership of Certain Beneficial Owners
       and Management ....................................................   39
13.   Certain Relationships and Related Transactions .....................   39

PART IV

14.   Exhibits, Financial Statement Schedules, and 
       Reports on Form 8-K ...............................................   39 

<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 reinsurer.  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").

Holdings, through its wholly-owned subsidiary,  Everest Re, underwrites property
and casualty  reinsurance  on a treaty and  facultative  basis for 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. Everest Re and its
subsidiaries  also write  primary  insurance.  The  Company  had gross  premiums
written in 1998 of $1,045.9  million and  stockholders'  equity at December  31,
1998 of $1,479.2  million and Everest Re had  statutory  surplus at December 31,
1998 of $1,059.4 million.  Based on industry data at December 31, 1998 published
by the  Reinsurance  Association  of  America  ("RAA"),  Everest Re is the sixth
largest  reinsurance  company in the United States,  ranked by statutory surplus
and is rated "A+" ("Superior") by A.M. Best, an independent  insurance  industry
rating  organization  which rates  insurance  companies on factors of concern to
policyholders.

Everest Re has four direct  subsidiaries:  Everest Re Holdings,  Ltd.  ("Everest
Ltd.")  Everest  National  Insurance  Company  ("Everest   National",   formerly
Prudential  National  Insurance  Company),  Everest  Insurance Company of Canada
("Everest   Canada")  and  Everest   Indemnity   Insurance   Company   ("Everest
Indemnity").  Everest Ltd., a Bermuda company, was formed by Everest Re in 1998.
Following its formation, Everest Re contributed to Everest Ltd. its ownership of
Everest Re Ltd., a United  Kingdom  company which was  previously  authorized to
engage in the  reinsurance  business in the United Kingdom and, prior to January
1,  1997,  which  reinsured  risks  worldwide.  In  1996,  Everest  Re  obtained
authorization to engage in the reinsurance  business in the United Kingdom,  and
the operations of Everest Re Ltd. were converted to branch operations of Everest
Re,  effective  January  1,  1997.  The  assets  of  Everest  Re Ltd.  have been
transferred  to Everest  Ltd.  and  Everest Re Ltd.  is in the  process of being
dissolved.  Everest National,  an Arizona insurance  company,  is licensed in 42
states and the District of Columbia and writes primary  insurance on an admitted
basis.  On December  31,  1996,  Everest Re acquired  Everest  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 and 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 licensed in all Canadian  provinces  and  territories.  In 1997,  Everest Re
formed Everest Indemnity,  a Delaware insurance company, to engage in the excess
and surplus lines insurance business in the United States.  Everest Indemnity is
licensed  in Delaware  and is  eligible  to write  business in 37 states and the
District of Columbia on a non-admitted basis.

In 1997, Holdings formed Mt. McKinley Managers,  L.L.C. ("Mt. McKinley"),  a New
Jersey limited liability  company,  which is licensed as an insurance  producer,
including surplus lines authority,  in New Jersey. In 1998, the Company acquired
the assets of certain insurance agency operations in Alabama, Georgia and Texas,
which  previously  produced  business for Everest Re and Everest  National.  The
continuing insurance agency operations are now carried on by subsidiaries of Mt.
McKinley,  WorkCare  Southeast,  Inc., an Alabama  insurance agency and WorkCare
Southeast of Georgia, Inc., a Georgia insurance agency. Pursuant to an agreement
with Everest  National,  the  WorkCare  companies  produce  business for Everest
National.

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
The  Company's  business   strategies   include  effective   management  of  the
underwriting cycle, management of catastrophe exposures and retrocessional costs
and expense  control.  The  underwriting  strategies  seek to  capitalize on the
Company's staff expertise and its flexibility to offer multiple products through
multiple  production  sources  in a cost  efficient  manner.  Efforts to control
expenses and to operate in a more cost efficient  manner are a continuing  focus
of the Company.

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,  other
specialty lines, accident and health,  workers  compensation,  non-standard auto
and loss portfolios. The Company's distribution channels include both the direct
and broker reinsurance markets, international and domestic markets, reinsurance,
both treaty and facultative, and insurance, both admitted and non-admitted.

The Company's underwriting strategy emphasizes underwriting profitability rather
than premium volume,  writing  specialized risks and integration of 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.

2
<PAGE>
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,   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
further  facilitates  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.

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

SEGMENT INFORMATION
The Company, through its subsidiaries,  operates as a single segment focusing on
the coverage of property and casualty risks using an approach  which  emphasizes
central control and coordination of critical  business  elements.  The Company's
product is  distributed  globally  through  multiple  markets  and  distribution
channels including insurance and reinsurance, originated on a broker, direct and
program manager basis, accepting primary, proportional and excess layers, treaty
and  facultative  arrangements,  covering  virtually all lines of business.  The
management  approach  of the  Company  is to focus on the  enterprise's  overall
profitability as opposed to an analysis of the stand alone profitability results
of any unit.

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. For the 1998 calendar year, no single customer generated more than 4.6% of
the  Company's  gross  premiums  written.  The Company does not believe that the
reduction  of business  assumed  from any one  customer  will have a  materially
adverse effect on its future financial condition or results of operations due to
the  Company's  competitive  position  in the  market  place and the  continuing
availability of other sources of business.

Approximately  68.5% and 31.5% of Everest Re's 1998 gross premiums  written were
written in the broker and direct markets, 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  approximately  51.8% of gross  premiums
written in 1998 with the two largest brokers accounting for approximately  17.0%
and 8.3%, respectively,  of gross premiums written. The Company does not believe
that  the  reduction  of  business  assumed  from  any one  broker  will  have a
materially adverse effect on the Company due to its competitive  position in the
market  place,   relationships   with  ceding   companies  and  the   continuing
availability of other sources of business.

The direct  market  remains an  important  distribution  system for  reinsurance
business  written by Everest Re and primary  insurance  written  through Everest
National  and  Everest  Indemnity  in the United  States and  Everest  Canada in
Canada. Direct placement of reinsurance enables Everest Re to access clients who
prefer to place their reinsurance  directly with their reinsurers based upon the
reinsurer's in-depth  understanding of the ceding company's needs. The Company's
primary  insurance  business  is  written  principally  through  general  agency
relationships.  The Company evaluates each business relationship,  including the
underwriting  expertise and experience of each  distribution  channel  selected,
performs an analysis to evaluate financial security and monitors performance.


UNDERWRITING OPERATIONS
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,  1998,  1997,  1996,  1995 and 1994,  classified
according to whether such premium is derived from property or casualty  business
and whether it represents pro rata or excess of loss business:

                                                                               3
<PAGE>
<TABLE>
<CAPTION>
                                             GROSS PREMIUMS WRITTEN BY UNDERWRITING UNIT


                                                       YEARS ENDED DECEMBER 31,
                      ---------------------------------------------------------------------------------------
                              1998              1997              1996              1995            1994
                      ---------------------------------------------------------------------------------------
(Dollars In Millions)     $         %        $        %        $        %       $        %        $       %
                      ---------------------------------------------------------------------------------------
<S>                   <C>        <C>     <C>        <C>    <C>        <C>    <C>      <C>     <C>       <C>                         
U.S. Broker Treaty
  Property
    Pro Rata(1)       $    59.0     5.6% $    62.8    5.8% $    45.4    4.4% $  51.7     5.4% $   59.7    6.3%
    Excess                 41.3     3.9       53.3    5.0       60.4    5.8     59.0     6.2      53.9    5.7
  Casualty
    Pro Rata(1)           110.9    10.6       84.6    7.9       63.4    6.1     18.5     1.9      29.6    3.1
    Excess                149.0    14.2      124.3   11.6      137.5   13.2    122.6    12.9     113.5   11.9
                      ---------------------------------------------------------------------------------------
    Total(2)              360.2    34.4      325.0   30.2      306.8   29.4    251.8    26.5     256.6   26.9
                      ---------------------------------------------------------------------------------------
U.S. Direct Treaty
 Reinsurance and
 Insurance
  Property
    Pro Rata(1)             4.6     0.4       11.7    1.1       12.6    1.2      3.3     0.3       5.4    0.6
    Excess                  1.4     0.1        4.4    0.4        8.9    0.9      9.1     1.0      12.5    1.3
  Casualty
    Pro Rata(1)           148.6    14.2      128.0   11.9      114.5   11.0     99.8    10.5      83.2    8.7
    Excess                 14.6     1.4       14.3    1.3       12.5    1.2     10.0     1.1      38.6    4.0
                      ---------------------------------------------------------------------------------------
    Total(2)              169.2    16.2      158.4   14.7      148.6   14.2    122.2    12.9     139.7   14.7
                      ---------------------------------------------------------------------------------------
Marine, Aviation 
 and Surety
  Property
    Pro Rata(1)            62.5     6.0       92.9    8.6       94.6    9.1     89.2     9.4      74.1    7.8
    Excess                 15.6     1.5       16.9    1.6       17.8    1.7     18.7     2.0      16.8    1.8
  Casualty
    Pro Rata(1)            39.3     3.8       45.4    4.2       43.1    4.1     53.0     5.6      66.0    6.9
    Excess                  3.0     0.3        6.4    0.6        5.6    0.5      6.0     0.6       4.8    0.5
                      ---------------------------------------------------------------------------------------
    Total(2)              120.4    11.5      161.6   15.0      161.1   15.4    166.9    17.6     161.7   17.0
                      ---------------------------------------------------------------------------------------
U.S. Facultative
  Property
    Pro Rata(1)             -       -          -      -          -      -        -       -         -      -
    Excess                 22.5     2.2       29.0    2.7       26.9    2.6     22.3     2.3      27.4    2.9
  Casualty
    Pro Rata(1)             -       -          -      -          -      -        -       -         -      -
    Excess                 49.0     4.7       53.4    5.0       61.8    5.9     46.6     4.9      39.3    4.1
                      ---------------------------------------------------------------------------------------
    Total(2)               71.5     6.8       82.4    7.7       88.7    8.5     68.8     7.2      66.7    7.0
                      ---------------------------------------------------------------------------------------
Total U.S.
  Property
    Pro Rata(1)           126.1    12.1      167.4   15.6      152.6   14.6    144.2    15.2     139.2   14.6
    Excess                 80.8     7.7      103.6    9.6      114.0   10.9    109.1    11.5     110.6   11.6
  Casualty
    Pro Rata(1)           298.8    28.6      258.0   24.0      221.1   21.2    171.3    18.0     178.8   18.8
    Excess                215.6    20.6      198.4   18.5      217.6   20.8    185.2    19.5     196.1   20.6
                      ---------------------------------------------------------------------------------------
    Total(2)              721.3    69.0      727.4   67.7      705.2   67.5    609.7    64.2     624.7   65.5
                      ---------------------------------------------------------------------------------------
International
  Property
    Pro Rata(1)           141.9    13.6      144.2   13.4      124.2   11.9    136.2    14.3     147.0   15.4
    Excess                 45.7     4.4       62.9    5.9       79.8    7.6     84.9     8.9      89.2    9.4
  Casualty
    Pro Rata(1)            93.4     8.9       99.2    9.2       90.5    8.7     66.4     7.0      49.6    5.2
    Excess                 43.6     4.2       41.3    3.8       44.4    4.3     52.3     5.5      42.7    4.5
                      ---------------------------------------------------------------------------------------
    Total(2)              324.6    31.1      347.6   32.4      338.8   32.5    339.8    35.8     328.5   34.5
                      ---------------------------------------------------------------------------------------
Total Company
  Property
    Pro Rata(1)           268.0    25.6      311.6   29.0      276.7   26.5    280.4    29.5     286.2   30.0
    Excess                126.5    12.1      166.5   15.5      193.8   18.6    194.0    20.4     199.8   21.0
  Casualty
    Pro Rata(1)           392.2    37.5      357.2   33.2      311.6   29.8    237.6    25.0     228.4   24.0
    Excess                259.2    24.8      239.7   22.3      261.9   25.1    237.5    25.0     238.8   25.1
                      ---------------------------------------------------------------------------------------
    Total(2)          $ 1,045.9   100.0% $ 1,075.0  100.0% $ 1,044.0  100.0% $ 949.5   100.0% $  953.2  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.

4
<PAGE>                               
U.S. BROKER TREATY OPERATIONS.  Everest Re's U.S. broker treaty operations write
property,  accident  and health 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.

In 1998,  $100.3 million of gross premiums written were attributable to domestic
property  business  (which  in  1998  and  1997  included  accident  and  health
business),  of which  41.2% was written on an excess of loss basis and 58.8% 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.  Accident  and  health  underwriting  utilizes  both  third  party and
proprietary actuarial pricing techniques.

Domestic  casualty  business  accounted  for $259.9  million  of gross  premiums
written in 1998, of which 57.3% was written on an excess of loss basis and 42.7%
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
1998,  direct treaty  business  accounted  for $90.6  million of gross  premiums
written,  of which  17.7% was  written  on an excess of loss basis and 82.3% 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.

In 1998, the Company's domestic insurance  operation  consisted of $78.6 million
of gross premiums written primarily through Everest National,  which is licensed
in 42 states and the District of Columbia to write  primary  insurance.  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.

Gross  premiums  written by the marine and aviation  unit in 1998 totaled  $68.6
million,  substantially  all of which was written on a treaty basis and 66.7% of
which was sourced through reinsurance brokers. Marine treaties represented 38.3%
of marine and aviation gross premiums  written in 1998 and consisted of hull and
liability coverage. Approximately 82.5% of the marine unit premiums in 1998 were
written  on a pro rata  basis and 17.5% as  excess  of loss.  Aviation  premiums
accounted for 61.7% of marine and aviation  gross  premiums  written in 1998 and
included   reinsurance   for   airlines,   general   aviation  and   satellites.
Approximately  92.9% of the aviation  unit's  premiums in 1998 were written on a
pro rata basis and 7.1% as excess of loss.

In 1998,  gross  premiums  written by the surety  unit  totaled  $51.8  million.
Approximately  78.9% of the surety unit  premiums in 1998 were  written on a pro
rata  basis  and  21.1% on an excess of loss  basis.  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.  In 1998,  $22.0 million,  $25.2 million,  and $24.3 million of gross
premiums written were  attributable to property,  general casualty and specialty
lines of business, respectively.

                                                                               5
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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 branch  operations  in London  and
Brussels and a representative  office in Moscow;  Canada, with branch operations
in  Toronto;  Asia  and  Australia,  with  branch  operations  in Hong  Kong and
Singapore;  and Latin  America,  Africa and the Middle East,  which  business is
serviced from Everest Re's New Jersey headquarters and Miami office. 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 57.8% of the gross premiums written by the Company's international
underwriters  in  1998  represented   property   business,   while  the  balance
represented  casualty  business.  As with  its  U.S.  operations,  Everest  Re's
international  operations focus on financially  sound companies that have strong
management and underwriting discipline and expertise. Approximately 67.0% of the
Company's international business was written through brokers, with the remainder
written directly with ceding companies.

In 1998,  Everest  Re's  gross  premiums  written  by its  London  and  Brussels
operations  totaled $148.5  million and consisted of pro rata property  (31.0%),
excess property (21.1%),  pro rata casualty (35.9%) and excess casualty (12.0%).
Substantially  all of the  London  and  Brussels  premiums  consisted  of treaty
reinsurance. 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 1998 from the Brussels and London
offices totaled $69.3 million and $79.2 million, respectively.

Gross premiums written by Everest Re's Canadian  operation totaled $53.9 million
in 1998 and consisted of pro rata property (5.0%),  excess property (2.7%),  pro
rata multi-line  (47.1%),  excess casualty (35.7%) and primary insurance written
by Everest Canada (9.5%). Approximately 67.6% of the Canadian premiums consisted
of treaty  reinsurance  while  22.9% was  facultative  reinsurance  and 9.5% was
primary insurance.

Everest  Re's Hong Kong and  Singapore  offices  cover the Asian and  Australian
markets and accounted for $33.0 million of gross written  premiums in 1998. This
business consisted of pro rata property (86.1%),  excess property (8.7%) and pro
rata and excess casualty (5.2%).

International  business written out of Everest Re's New Jersey and Miami offices
accounted  for $89.2  million of Everest  Re's 1998 gross  premiums  written and
consisted of pro rata treaty property (68.2%), pro rata treaty casualty (13.3%),
excess  treaty  property  (10.4%),  excess  treaty  casualty  (2.0%)  and excess
facultative  property and casualty (6.1%). Of this international  business 52.9%
was sourced from Latin America, 23.7% was sourced from the Middle East, 2.3% was
sourced  from Europe,  5.6% was sourced from Africa,  1.0% was sourced from Asia
and 14.5% was "home-foreign" business.

GEOGRAPHIC AREAS
The Company  conducts its  business  both in the United  States,  its country of
domicile, and in a number of foreign countries. For select financial information
about  geographic  areas,  see Note 13 of Notes  to the  Consolidated  Financial
Statements.  Risks attendant to the foreign  operations of the Company  parallel
those attendant to the United States operations of the Company, with the primary
exception of foreign  exchange risks. See ITEM 7,  "Management's  Discussion and
Analysis  of  Financial  Condition  and  Results  of  Operations  - Safe  Harbor
Disclosure".

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 many of 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

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<PAGE>
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  such  guidelines.  Underwriting  audits  focus  on  the  quality  of the
underwriting  staff,  the selection  and pricing of risks and the  capability of
monitoring price levels over time. Claim audits, when appropriate, are performed
in order to evaluate the client's claims handling abilities and practices.

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 and Everest Canada write property,  casualty and  professional
liability coverages for homogeneous risks through select program managers. These
commercial  programs are evaluated based upon actuarial analysis and the program
manager's  capabilities.  The Company'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  modeling,  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  $170  million in each such region  based on its
current  book of  business.  Similarly,  management  estimates  that the largest
current  PML  exposure,  before  reinsurance,   outside  the  United  States  is
approximately  $86 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.  Everest Re
also  participates in "common account"  retrocessional  arrangements for certain
reinsurance treaties.  Common account reinsurance  arrangements are arrangements
whereby  the  ceding  company  purchases  a cover for the  benefit of the ceding
company  and  its   reinsurers  on  a   reinsurance   treaty.   Common   account
retrocessional  arrangements reduce the effect of individual or aggregate losses
to all participating  companies with respect to a reinsurance treaty,  including
the ceding company.

During  1998,  Everest  Re had  purchased  a  three-layer  property  facultative
retrocession  program  which  provided  $18  million of coverage in excess of $2
million of retained losses per facultative  certificate.  For 1999, this program
was  modified  and renewed and  provides  $16.6  million  part of $18 million of
coverage in excess of $2 million of retained losses per facultative certificate.
During 1998,  Everest Re purchased 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.  These   retrocessional
workers  compensation  treaties  were  renewed  for  1999.   During   1998,  the
Company  also  purchased  a  workers'  compensation  reinsurance  program  which

                                                                               7
<PAGE>
provided for statutory  limits  coverage in excess of $250,000 per occurrence on
the Company's primary workers' compensation  insurance business.  For 1999, this
program was renewed and  provides  for  statutory  limits  coverage in excess of
$75,000 per occurrence.

For 1999,  the Company  also  purchases  reinsurance  covering  certain  primary
insurance  programs  written by the  Company,  including an 85.0% quota share of
primary California  non-standard automobile business written by the Company. For
the period October 1, 1998 through October 1, 1999, the Company  purchased a 50%
quota  share of $1 million  net  retained  liability  and $4  million  excess $1
million of automatic property facultative protection covering Texas property and
casualty program business.

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.  During 1998,  the Company's
worldwide catastrophe  retrocession program provided coverage of 75.0% of $112.5
million of losses in excess of a $25 million  attachment  point,  net of inuring
retrocessions,  incurred on a per catastrophe and aggregate basis. The worldwide
catastrophe retrocession program was cancelled by the retrocessionaire effective
December 31, 1998.

For the period from May 15, 1998 through May 15, 1999, the Company's catastrophe
retrocession  program  also  provides  coverage  of 70.0% of $20.0  million  per
occurrence in excess of $10.0 million in losses  incurred by the Company outside
of the United States. And for the period from May 23, 1998 through May 23, 1999,
the Company's  catastrophe  retrocession  program provides  coverage of 87.5% of
$20.0 million per  occurrence  in excess of $30.0 million in losses  incurred by
the Company outside of the United States.

The Company also purchases a corporate level retrocession covering the potential
accumulation  of all exposures.  During 1998, the Company  purchased an accident
year aggregate excess of loss retrocession agreement which provided up to $100.0
million of limit if Everest Re's  statutory  basis loss ratio exceeded 79.0% for
the 1998  accident  year.  For 1999,  the Company  purchased  an  accident  year
aggregate  excess of loss  protection  which  provides  up to $175.0  million of
coverage if Everest Re's  statutory  basis  accident  year loss ratio  exceeds a
certain  threshold  and  responds  on an  aggregate  basis with  respect to both
property and casualty losses,  including those arising from  catastrophies.  The
attachment point is net of inuring retrocessions and includes adjustable premium
provisions which  effectively  cause the Company to offset,  on a pre-tax income
basis,  up to 52.5% of such ceded  losses,  depending  upon the character of the
underlying losses,  through additional premiums.  The maximum recovery is $175.0
million before giving effect to a maximum adjustable premium of $86.3 million.

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
$170.0 million of gross losses and allocated loss adjustment  expenses  ("ALAE")
in 1999, 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 $93  million.  This  pre-tax net loss
estimate  assumes  that Everest  Re's  aggregate  losses and ALAE for 1999 would
exceed the threshold  loss ratio  requirement  in the  aggregate  excess of loss
cover by $170.0 million.

In addition,  Everest Re continues to have coverage under an aggregate stop loss
retrocession  agreement  (the "Stop Loss  Agreement")  purchased  from Gibraltar
Casualty  Company  ("Gibraltar"),  an affiliate of The Prudential,  in 1995. See
"Stop Loss Agreement".

As of December 31, 1998,  Everest Re had  retrocessional  arrangements  with 432
retrocessionaires,  and it carried  as an asset  $982.0  million in  reinsurance
receivables with respect to losses ceded to retrocessionaires, which, except for
$142.0  million  which is due from  Gibraltar in the first quarter of 1999 under
the  terms of the Stop  Loss  Agreement,  will  not be due to  Everest  Re until
Everest Re makes  payment  on the  underlying  claims.  Of this  amount,  $563.3
million,  or 57.4%, was receivable from Gibraltar,  including the $142.0 million
due under the Stop Loss Agreement  ($266.5  million,  net of collateral held and
liability  balances for which Everest Re has a contractual right of offset).  An
additional $150.0 million,  or 15.3%, was receivable from Continental  Insurance
Company ("Continental"). No other retrocessionaire accounted for more than $25.0
million of Everest Re's receivables.

None  of  the  reinsurance  receivables from  Gibraltar  was  in dispute or more
than  90  days  in  arrears,  with  the  exception  of  $63.0  million and $39.7
million  items,  which  Gibraltar  has  disputed.  The  $63.0  million  disputed
amount,  which  is  part  of  the  $142.0  million  due  from  Gibraltar  in the
first  quarter,  has   been  disputed   pursuant  to  the  Stop  Loss  Agreement

8
<PAGE>
and, in  accordance  with the terms of the Stop Loss  Agreement,  Gibraltar  has
secured the disputed amount.  Gibraltar paid the $79.0 million remaining balance
of the  $142.0  million  amount  to  Everest  Re in the first  quarter  of 1999.
Gibraltar has also disputed  Everest Re's level of reserves  previously ceded to
and paid by Gibraltar under the Stop Loss Agreement and claims a refund of $91.7
million. Should Everest Re and Gibraltar not resolve these disputes, pursuant to
the terms of the Stop Loss Agreement,  each will appoint an independent examiner
to review the  disputed  amounts  and to  determine  the  appropriate  amount of
cessions to Gibraltar,  and Everest Re will secure the $91.7 million amount.  If
the examination  process does not resolve the disputes,  the Stop Loss Agreement
provides  for  resolution  through  arbitration.  In the event the  cessions  to
Gibraltar were  determined to be excessive,  Everest Re would reduce the cession
to Gibraltar by such excess,  refund  previous  payments made by  Gibraltar,  if
applicable,  and the unused  portion  of the  limits of the Stop Loss  Agreement
would be restored.  Also,  Everest Re would consider the independent  examiners'
findings in its ongoing  determination of appropriate reserve levels,  which may
lead to a  corresponding  reduction  in  Everest  Re's gross  reserves,  and net
reserves to the extent of the coinsurance under the Stop Loss Agreement.  In the
event the  cessions  are not  determined  to be  excessive,  Gibraltar  would be
obligated to pay the disputed amount.  Accordingly, if the disputes are resolved
in Gibraltar's  favor, any adverse effect on the Company's  financial  condition
and results of  operations  would likely be limited to a reduction in cash flows
from operations with a corresponding impact on investment income.

The $39.7 million has been disputed  pursuant to the Direct Excess  Retrocession
(defined  below  - see  "Relationships  with  Gibraltar")  primarily  reflecting
reserve increases for asbestos losses ceded by the Company in 1998. Gibraltar is
disputing the level of reserves  established by the Company for such losses, but
Gibraltar is not  disputing  its  responsibility  to pay the ultimate  losses in
accordance with the terms of the Direct Excess Retrocession. Management does not
expect that this dispute will have a material  adverse  effect on the  Company's
future financial condition, results of operations or cash flows.

Everest  Re's  arrangement  with  Continental  is managed on a funds held basis,
which  means  that  Everest  Re  has  not  released   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, 1998, such funds had reduced Everest
Re's net exposure to Continental to $90.4 million.

No assurance can be given that the Company will be able to obtain retrocessional
coverage similar to that currently in place in the future.  Although  management
carefully selects its  retrocessionaires,  the Company 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
cessions to Everest Re, Everest Re became, and remains, a reinsurer of Gibraltar
with respect to the Gibraltar MUF cessions. As of December 31, 1998, Gibraltar's
reinsurance  receivables  from  Everest Re totaled  $169.6  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"):

o             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").

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

o             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.
                         
                                                                               9
<PAGE>                            
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 $165.2  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 7 of Notes to Consolidated Financial Statements.


STANDBY CAPITAL CONTRIBUTION AGREEMENT AND PRUCO INDEMNITY
On October 6, 1995, Holdings agreed,  pursuant to a Standby Capital Contribution
Agreement  (the  "Capital  Contribution  Agreement"),  to make  certain  capital
contributions  ("Capital  Contributions")  to  Everest Re in respect of all or a
portion of the $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.  And, on October 6, 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.

PRUDENTIAL GUARANTEES
On  October 6,  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  (i)  payment
obligations  with  respect  to 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, 1998, based on publicly available information, The Prudential
had GAAP basis total  assets of $279.4  billion  and GAAP based  equity of $20.4
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.  In most  instances,
primary  insurance  claims are handled by third party claims services  providers
who have  limited  authorities  and are subject to  oversight  by the  Company's
professional claims staff.

10
<PAGE>
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 net
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 historical loss reserves for Everest Re for
1988 and  subsequent  years.  The top line of each  table  shows  the  estimated
reserves for unpaid  losses and LAE recorded at each year end date.  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 all  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 1995 for $100,000 was first reserved in 1991 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 1991 through 1994 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.
                                 
                                                                              11
<PAGE>
<TABLE>
<CAPTION>
                           TEN YEAR STATUTORY LOSS DEVELOPMENT TABLE PRESENTED NET OF REINSURANCE
                                                WITH SUPPLEMENTAL GROSS DATA (1)
 
                                                            YEARS ENDED DECEMBER 31,
                       ------------------------------------------------------------------------------------------------------------
(Dollars in millions)      1988      1989      1990      1991      1992      1993      1994      1995      1996      1997      1998
                       ------------------------------------------------------------------------------------------------------------
<S>                    <C>       <C>       <C>       <C>       <C>       <C>       <C>       <C>       <C>       <C>       <C> 
                                                              
Reserves for unpaid
 loss and LAE          $1,775.8  $1,766.7  $1,891.9  $1,752.9  $1,854.7  $1,934.2  $2,104.2  $2,316.0  $2,551.6  $2,810.0  $2,953.5
Paid (cumulative)
 as of:
  One year later          299.1     321.9     597.1     333.3     461.5     403.5     359.5     270.4     331.2     450.8
  Two years later         522.3     829.5     785.9     550.4     740.1     627.7     638.0     502.8     619.2
  Three years later       984.3     966.3     933.1     758.3     897.0     820.5     828.0     682.0
  Four years later      1,096.1   1,078.2   1,096.9     868.1   1,036.0     953.0     983.6
  Five years later      1,189.5   1,209.0   1,176.9     970.0   1,141.0   1,071.5
  Six years later       1,308.9   1,276.3   1,257.3   1,052.9   1,232.7
  Seven years later     1,367.9   1,346.6   1,329.8   1,130.3
  Eight years later     1,430.7   1,407.9   1,395.6
  Nine years later      1,489.0   1,462.1
  Ten years later       1,539.1
Liability re-
 estimated as of:
  One year later        1,794.6   1,835.4   1,866.3   1,737.8   1,929.2   2,008.5   2,120.8   2,286.5   2,548.4   2,836.1
  Two years later       1,813.2   1,834.3   1,872.8   1,775.7   1,988.9   2,015.4   2,233.7   2,264.5   2,575.9
  Three years later     1,805.6   1,849.5   1,907.5   1,843.3   2,010.0   2,119.0   2,271.2   2,285.1
  Four years later      1,867.6   1,913.6   1,976.5   1,855.7   2,111.9   2,164.5   2,452.3
  Five years later      1,934.5   1,982.3   1,984.3   1,955.1   2,155.3   2,344.9
  Six years later       2,007.6   1,984.1   2,080.0   1,995.8   2,332.3
  Seven years later     2,008.0   2,089.4   2,123.2   2,178.0
  Eight years later     2,122.6   2,135.9   2,307.8
  Nine years later      2,167.6   2,310.8
  Ten years later       2,339.3

Cumulative 
 redundancy/
 (deficiency)          $ (563.5) $ (544.1) $ (415.9) $ (425.1) $ (477.6) $ (410.7) $ (348.1) $   30.9  $  (24.3) $  (26.1)
                       ==================================================================================================

Gross liability-
 end of year                                                                       $2,752.7  $3,016.9  $3,298.2  $3,498.7  $3,869.2
Reinsurance  
 receivable                                                                           648.5     700.9     746.6     688.7     915.7
                                                                                   ------------------------------------------------
Net liability-
 end of year                                                                        2,104.2   2,316.0   2,551.6   2,810.0   2,953.5
                                                                                   --------------------------------------  ========

Gross re-estimated
 liability at 
 December 31, 1998                                                                  3,412.5   3,553.0   3,702.8   3,811.2
Re-estimated 
 receivable at 
 December 31, 1998                                                                    960.2   1,267.9   1,126.9     975.1
                                                                                   --------------------------------------
Net re-estimated 
 liability at 
 December 31, 1998                                                                  2,452.3   2,285.1   2,575.9   2,836.1
                                                                                   --------------------------------------
Gross cumulative
 redundancy/
 (deficiency)                                                                      $ (659.8) $ (536.1) $ (404.6) $ (312.5)
                                                                                   ======================================

</TABLE>
----------

(1)  Includes Gibraltar data through September 30, 1991

12
<PAGE>
For years  prior to 1988,  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. Incurred losses with
respect to asbestos and  environmental  claims,  net of reinsurance,  were $15.4
million,  $3.5 million,  $0, $0 and $40.5 million in 1998,  1997, 1996, 1995 and
1994,  respectively.  Substantially  all of these  losses  related  to  pre-1986
exposures.  The absence of net incurred  losses in 1996 and 1995 is attributable
to coverage under the Company's Stop Loss Agreement.  The net incurred losses in
1998 and 1997 reflect coinsurance under the Stop Loss Agreement.

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" and Note 7 of Notes to Consolidated  Financial Statements.
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  1988-1990  "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
amount so treated as paid in 1991 was $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,
                       --------------------------------------------------------------------------------------------------
(Dollars in millions)      1988      1989      1990      1991      1992      1993      1994      1995      1996      1997
                       --------------------------------------------------------------------------------------------------
<S>                    <C>       <C>       <C>       <C>       <C>       <C>       <C>       <C>       <C>       <C>
                                                              
Everest Re excluding
  Gibraltar            $ (433.6) $ (446.0) $ (385.9) $ (425.1) $ (477.6) $ (410.7) $ (348.1) $   30.9  $  (24.3) $  (26.1)
Gibraltar                (129.9)    (98.1)    (30.0)      -         -        -         -         -         -         -
                       --------------------------------------------------------------------------------------------------
Consolidated           $ (563.5) $ (544.1) $ (415.9) $ (425.1) $ (477.6) $ (410.7) $ (348.1) $   30.9  $  (24.3) $  (26.1)
                       ==================================================================================================

</TABLE>                              
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, 1998.  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.

                                                                              13
<PAGE>
<TABLE>
<CAPTION>
                      EFFECT OF RESERVE REESTIMATES ON CALENDAR YEAR OPERATIONS
                                                                                                              
                                                                                                                        CUMULATIVE
                                              CALENDAR YEAR ENDED DECEMBER 31,                                    RE-ESTIMATES FOR 
(Dollars in     -------------------------------------------------------------------------------------------------    EACH ACCIDENT  
 millions)          1989      1990      1991      1992      1993      1994      1995      1996      1997     1998             YEAR
                ------------------------------------------------------------------------------------------------------------------
<S>             <C>       <C>       <C>       <C>       <C>       <C>       <C>       <C>       <C>      <C>       <C>              
Accident
Years
1988 & prior    $  (18.7) $  (18.6) $    7.6  $  (62.0) $  (66.9) $  (73.0) $   (0.4) $ (114.5) $ (45.1) $ (171.7) $       (563.3)
1989                         (50.1)     (6.5)     46.8       2.8       4.4      (1.4)      9.2     (1.5)     (3.2)            0.5
1990                                    24.5       8.7      29.4      (0.4)     (6.0)      9.7      3.3      (9.7)           59.5
1991                                              21.6      (3.2)      1.4      (4.6)     (3.8)     2.5       2.4            16.3
1992                                                       (36.6)      7.9      (8.7)     (2.5)    (2.7)      5.2           (37.4)
1993                                                                 (14.6)     14.2      (1.7)    (2.1)     (3.4)           (7.6)
1994                                                                            (9.8)     (9.2)     8.0      (0.7)          (11.7)
1995                                                                                     142.4     59.6     160.4           362.4
1996                                                                                              (18.8)     (6.8)          (25.6)
1997                                                                                                          1.4             1.4
Total calendar
year effect     $  (18.7) $  (68.7) $   25.6  $   15.1  $  (74.5) $  (74.3) $  (16.7) $   29.6    $ 3.2  $  (26.1) $       (205.5)

</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  1989  principally   reflecting  the  impact  of  asbestos  and
environmental  exposures discussed above. The significant  favorable development
experienced for the 1995 accident year is due to recoveries  under the Stop Loss
Agreement.  This contract,  because of the 1995 inception date, is attributed to
the 1995 accident year. Aggregate historical development excluding the impact of
these two unusual items is not material.

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)             1998           1997           1996
                             ---------------------------------------
<S>                          <C>            <C>            <C>
                                         
Reserves at beginning 
 of period                   $ 3,437.8      $ 3,246.9      $ 2,969.3
                             ---------------------------------------

Incurred related to:
  Current year                   752.3          768.6          745.6
  Prior years                     26.1           (3.2)         (29.6)
                             ---------------------------------------
    Total incurred 
     losses                      778.4          765.4          716.0
                             ---------------------------------------

Paid related to:
  Current year                   192.4          185.3          213.9
  Prior years                    450.8          331.2          270.4
                             ---------------------------------------
    Total paid losses            643.2          516.5          484.3
                             ---------------------------------------

Change in reinsurance 
 receivables on unpaid 
 losses and LAE                  227.0          (58.0)          45.9
                             ---------------------------------------

Reserves at end of 
 period                      $ 3,800.0      $ 3,437.8      $ 3,246.9
                             =======================================

</TABLE>
14
<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,
1998 is shown below:

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

                                        YEARS ENDED DECEMBER 31,
                              --------------------------------------------
(Dollars In Millions)                 1998            1997            1996
                              --------------------------------------------
<S>                           <C>             <C>             <C>                                          
Statutory reserves-net (1)    $    2,922.9    $    2,778.5    $    2,313.0
Statutory retroactive 
 reinsurance reserves                 29.8            31.4            15.4
Financing arrangement                 -               -              (10.3)
                              --------------------------------------------
Subtotal                           2,952.7         2,809.9         2,318.1

Foreign subsidiary 
 reserves (1)                          0.8             0.1           233.5
                              --------------------------------------------

   Subtotal-net reserves 
    as shown in loss 
    development schedule           2,953.5         2,810.0         2,551.6
Reinsurance receivable 
 on unpaid losses                    915.7           688.7           746.6
                              --------------------------------------------

   Subtotal-gross reserves 
    as shown in loss 
    development schedule           3,869.2         3,498.7         3,298.2

Foreign translation effect 
 of Canadian reserves (2)            (69.2)          (60.9)          (51.3)
                              --------------------------------------------
Reserves on a GAAP basis      $    3,800.0    $    3,437.8    $    3,246.9
                              ============================================
</TABLE>
--------------------
(1)  On  January  1, 1997 the  insurance  operations  of  Everest  Re Ltd.  were
     converted  to branches of Everest Re. For 1998 and 1997,  the net  reserves
     for the branches are included in statutory net  reserves,  and for 1996 the
     Everest Re Ltd. reserves are shown as foreign subsidiary reserves. For 1998
     and 1997, the foreign subsidiary reserve amounts represent the reserves for
     Everest Canada.

(2)  Pursuant to statutory accounting conventions,  reserves with respect to the
     Canadian Branch are reflected in Canadian dollars.
                                 
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 11 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, 1998, 1997 and 1996.

<TABLE>
<CAPTION>
                                          YEARS ENDED DECEMBER 31,
                                --------------------------------------------
(Dollars In Millions)                   1998            1997            1996
                                --------------------------------------------
<S>                             <C>             <C>             <C>                                            
Case reserves reported by 
 ceding companies               $      137.5    $      125.9    $      101.2
Additional reserves 
 established by Everest Re 
 (assumed reinsurance)                  67.9            52.0            50.1
Case reserves established 
 by Everest Re (Ceded 
 Direct Insurance)                      40.9            45.8            52.8
IBNR reserves                          414.5           222.4           219.2
                                --------------------------------------------

Gross reserves                         660.8           446.1           423.3
Reinsurance receivable                (397.3)         (233.7)         (223.7)
                                --------------------------------------------

Net reserves                    $      263.5    $      212.4    $      199.6
                                ============================================
</TABLE>                                
Everest Re's  asbestos and  environmental  claims are managed by an  experienced
staff consisting of eight 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.

                                                                              15
<PAGE>
Additional  losses,  the type or  magnitude  of which  cannot be foreseen by the
Company, or the reinsurance and insurance industry generally,  may emerge in the
future.   Such  future  emergence,   to  the  extent  not  covered  by  existing
retrocessional 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 18.6%, 18.8% and 16.9% of the Company's revenues for
the years ending December 31, 1998, 1997 and 1996,  respectively.  The Company's
cash and invested assets totalled $4,325.8 million at December 31, 1998 of which
93.7% were cash or investment grade fixed maturities.

Everest Re's current  investment  strategy  seeks to maximize  after-tax  income
through a high quality, diversified,  taxable bond and tax-exempt fixed maturity
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 current duration guideline of five
to six years.  The  duration of an  investment  is based on the  maturity of the
security but also reflects the payment of interest and the  possibility of early
prepayment of such security.  This investment  duration guideline is established
and periodically revised by management considering economic and business factors
including  Everest Re's  average  duration of potential  liabilities  which,  at
December 31, 1998, was  approximately  five years based on the estimated payouts
of underwriting liabilities using standard duration calculations.

Approximately 7.7% 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  comparable to the estimated  liabilities  which are  denominated in such
currency.

As of December 31, 1998,  96.5% of Everest Re's total  investments and cash were
comprised of fixed maturity  investments or cash and 97.0% of Everest Re's fixed
maturities  consisted of investment  grade  securities.  The average maturity of
fixed  maturities was 8.7 years at December 31, 1998, and their overall duration
was 5.7 years.  As of December  31,  1998,  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 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, 1998, the
Company had no investments in derivative products.

As of December 31, 1998, the common stock portfolio was $146.3 million at market
value,  comprising  3.4% of total  investments  and cash and is  managed  with a
growth and income  orientation  consisting  primarily of investments in dividend
paying mid and large capitalization companies.

16
<PAGE>
The following table reflects  investment  results for Everest Re for each of the
five years in the period ended December 31, 1998:

<TABLE>
<CAPTION>
                                                                                  PRE-TAX
                                                    PRE-TAX                  REALIZED NET
                                      AVERAGE    INVESTMENT     EFFECTIVE   CAPITAL GAINS
Years Ended December 31,       INVESTMENTS(1)     INCOME(2)         YIELD        (LOSSES)
(Dollars in millions)          ----------------------------------------------------------
<S>                            <C>              <C>            <C>          <C>                                                   
1998                           $      4,243.3   $     244.9          5.77%  $        (0.8)
1997                                  3,888.9         228.5          5.88            15.9
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)

</TABLE>
-----------------
(1)   Average of the beginning and ending  carrying  values of  investments  and
      cash,  less  net  funds  held and non-interest bearing cash. Bonds, common
      stock and redeemable and non-redeemable preferred stocks  are  carried  at
      market value.  

(2)   After investment expenses, excluding realized net capital gains (losses).
                                
The  following  table  summarizes  fixed  maturities as of December 31, 1998 and
1997:

<TABLE>
<CAPTION>


                                        AMORTIZED      UNREALIZED      UNREALIZED        MARKET
(Dollars In Millions)                        COST    APPRECIATION    DEPRECIATION         VALUE
                                        -------------------------------------------------------
<S>                                     <C>          <C>             <C>             <C>

December 31, 1998:
   U.S. Treasury securities and 
    obligations of U.S. government 
    agencies and corporations           $   152.0    $        7.6    $        -      $    159.6
   Obligations of states and 
    political subdivisions                1,982.5           134.4             0.5       2,116.4
   Corporate Securities                     839.9            46.5             5.7         880.7
   Mortgage-backed securities               388.8            20.2             0.1         408.9
   Foreign government securities            241.3            29.8             -           271.1
   Foreign corporate securities             246.6            17.5             0.2         263.9
                                        -------------------------------------------------------

       Total                            $ 3,851.1    $      256.0    $        6.5    $  4,100.6
                                        =======================================================

December 31, 1997:
   U.S. Treasury securities and 
    obligations of U.S. government 
    agencies and corporations           $   144.1    $        3.1    $        0.1    $    147.1
   Obligations of states and 
    political subdivisions                1,610.2           112.2             0.3       1,722.1
   Corporate Securities                     893.9            39.2             -           933.1
   Mortgage-backed securities               521.0            20.5             -           541.5
   Foreign government securities            232.8            20.6             0.1         253.3
   Foreign corporate securities             256.4            13.4             -           269.8
                                        -------------------------------------------------------

       Total                            $ 3,658.4    $      209.0    $        0.5    $  3,866.9
                                        =======================================================

</TABLE>

                                                                              17
<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, 1998:

<TABLE>
<CAPTION>

   NAIC                                                                            PERCENT OF
 RATING(1)      STANDARD AND POOR'S EQUIVALENT DESCRIPTION               AMOUNT         TOTAL
 ---------------------------------------------------------------------------------------------
 <S>            <C>                                                   <C>          <C>

     1          AAA/AA/A                                              $ 3,562.8          86.9%
     2          BBB                                                       415.6          10.1
     3          BB                                                        122.2           3.0
     4          B                                                         -              -
     5          CCC/CC/C                                                  -              -
     6          CI/D                                                      -              -
                                                                      ------------------------
                          Total                                       $ 4,100.6         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 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.
                               
The following table summarizes  fixed  maturities by contractual  maturity as of
December 31, 1998:

<TABLE>
<CAPTION>

                                                             PERCENT OF
                                                AMOUNT            TOTAL
                                           -----------------------------
<S>                                        <C>               <C>

Maturity category:
  Less than one year                       $      75.6              1.8%
  Due after 1-5 years                            477.7             11.7
  Due after 5-10 years                         1,534.3             37.4
  Due after 10 years                           1,604.0             39.1
                                           -----------------------------
    Subtotal                                   3,691.6             90.0
  Mortgage-backed securities (1)                 409.0             10.0
                                           -----------------------------
    Total (2)                              $   4,100.6            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.                        


YEAR 2000 ISSUES
Like many other companies,  the Company faces potential business  disruption and
costs and possible  claims under  reinsurance  contracts and insurance  policies
associated  with the possible  inability of many computer  systems to accurately
process  data  containing  information  about  the  year  2000 or  later.  For a
discussion of these issues, see Item 7, Management's  Discussion and Analysis of
Financial Condition and Results of Operations - Year 2000 Readiness Disclosures.

RATINGS
Everest  Re  currently  has a rating of "A+"  ("Superior")  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+" ("Superior")
rating is assigned to those companies  which, in its opinion,  have, on balance,
achieved superior financial strength,  operating  performance and market profile
when compared to the standards  established by A.M. Best and have demonstrated a
very strong ability to meet their ongoing obligations to policyholders. The "A+"
("Superior")  rating is the second 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.

18
<PAGE>
Everest Re currently has a  claims-paying  ability rating of "AA-" (Very Strong)
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 "AA-"
rating is assigned to those  companies  which, in its opinion,  offer  excellent
financial security and whose capacity to meet policyholder obligations is strong
under a variety of economic and underwriting conditions. The "AA-" rating is the
fourth highest of nineteen  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  which rating as of February 18, 1999 is under review for possible
upgrade.  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 worldwide property and casualty  reinsurance business is highly competitive,
characterized  by severe price  competition  and expanding  terms and conditions
over the last  several  years.  Similar  conditions  also  exist in the  primary
insurance market.  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 jurisdictions 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,  including  underwriting  syndicates in
Lloyd's of London.  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,  the demand for reinsurance by primary  insurers has been adversely
affected  by several  factors,  including  consolidation  of  primary  insurers,
increased primary insurer capital levels and continued access to capital markets
and  increases in primary  insurer's net  retention  levels.  These factors have
precluded  reinsurance  rate  improvement and resulted in generally low rates of
reinsurance premium growth, if any.

Other  factors  affecting  the  capacity  of  reinsurance   companies  to  offer
reinsurance and which factors  contributed to the increased  global  competition
since 1987,  include  consolidation  of reinsurance  companies,  new reinsurance
companies,  including  several  well-capitalized  Bermuda-based  companies which
operate  within a  tax-advantaged  jurisdiction  and generally  greater  capital
levels  maintained by  reinsurance  companies  resulting  from earnings  growth,
investment gains, mergers and other factors (including a relatively low level of
catastrophic  events).  In addition,  Lloyd's of London relaxed its  requirement
that syndicate  members have  unlimited  liability for losses and allows limited
liability  investors to join  syndicates,  thereby  increasing  the  reinsurance
capacity at Lloyd's. In 1996, Lloyd's implemented its reconstruction and renewal
plan in an attempt to  separate  1992 and prior  years  losses  from the current
market  participants and to provide a more secure market going forward,  thereby
enhancing its competitive  position.  And, the potential for  securitization  of
insurance  and  reinsurance   risks  through  the  capital  markets  provide  an
additional source of insurance and reinsurance capacity.

                                                                              19
<PAGE>
Management believes that the factors noted above which affect the demand for and
supply  of  reinsurance  have  resulted  in  increasingly   competitive   market
conditions  and  have  influenced  the  continuing  pressure  on  insurance  and
reinsurance  rates and the  expansion  of contract  terms in the current  market
place.  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.  The Company also believes that
the insurance and reinsurance  industries,  including  reinsurance brokers, will
continue  to  undergo  further  consolidation  and  that  reinsurers  will  need
significant  size,  financial  strength  and  service  capabilities  to  compete
effectively.

EMPLOYEES
As of March 2, 1999,  Everest Re employed 386  persons,  including 24 persons in
the WorkCare agency operations, which were acquired in 1998. 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  geographic  areas of operation set forth in
Note  13 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 and
Everest  Indemnity,  Arizona,  the domiciliary  state of Everest  National,  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  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.

20
<PAGE>
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 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 1999 without  triggering
the requirement for prior approval of regulatory  authorities in connection with
an extraordinary  dividend is $179.2 million.  As of December 31, 1998,  Everest
Re's  accumulated  statutory  surplus from  realized net  operating  profits and
realized gains was $686.5 million.

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,  Singapore 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 Canada,  Everest  Indemnity and Everest  National are subject to similar
regulation  and, in  addition,  Everest  National  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 and Wyoming. In
New Hampshire and Puerto Rico, Everest Re is licensed for reinsurance only.

                                                                              21
<PAGE>
Everest Re is licensed as a  property/casualty  reinsurer in Canada.  It is also
authorized to conduct reinsurance business in the United Kingdom,  Hong Kong and
Singapore and to maintain a representative office in Moscow. 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, El Salvador, Guatemala,
Mexico, Peru, Venezuela and the Philippines.  Everest National is licensed in 42
states and the District of Columbia.  Everest  Indemnity is licensed in Delaware
and is eligible to write insurance on a surplus lines basis in 37 states and the
District of Columbia.  Everest Canada is federally  licensed under the Insurance
Companies Act of Canada and licensed in all Canadian provinces and territories.

PERIODIC  EXAMINATIONS.  Everest Re, Everest National and Everest  Indemnity 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 Indemnity, and Everest
National, respectively, usually conduct examinations of domestic 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.  Everest  Indemnity's  last  examination  report  was
conducted  upon its  organization  in 1997.  This  report  did not  contain  any
material recommendations.  Delaware and Arizona are currently conducting routine
examinations  of  Everest  Re  and  Everest   Indemnity  and  Everest  National,
respectively.

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,  Everest National's and Everest  Indemnity's  financial
positions  at December  31,  1998,  Everest  Re,  Everest  National  and Everest
Indemnity  exceed the minimum  thresholds.  Various  proposals to change the RBC
formula  arise from time to time.  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,   modernization  of  financial  services  regulation,  product
liability  and  tort  reform,   state  and  federal   involvement   in  insuring
catastrophes, limitations on the ability of primary insurance carriers to effect
premium  rate   increases  or  to  cancel  or  not  renew   existing   policies,
modifications  to investment  limitations,  creation of interstate  compacts for
multi-state insurer receivership proceedings or multi-state insurance regulation
and the codification of Statutory Accounting  Principles.  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.

22
<PAGE>
ITEM 2.  PROPERTIES

Everest Re's corporate  offices are located in Liberty Corner,  New Jersey,  and
occupy  approximately  112,000 square feet of office space under a sublease with
The Prudential that expires on November 29, 2003. In January,  1999,  Everest Re
entered into an agreement to  sub-sublease,  for the  remaining  term of Everest
Re's  sub-lease,  approximately  27,000  square  feet of space in  Everest  Re's
corporate  headquarters.  Everest Re's other ten office locations occupy a total
of  approximately  56,600  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.


PART II

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

MARKET INFORMATION
Since  October 3, 1995,  the common stock of Holdings has been traded on the New
York Stock Exchange under the symbol "RE".  Quarterly high and low market prices
of Holdings' common stock in 1998 and 1997 were as follows:
<TABLE>

                                                   High              Low
                                                ------------------------
<S>                                             <C>              <C>
First Quarter 1998:                             41.6250          35.2500
Second Quarter 1998:                            45.2500          36.1250
Third Quarter 1998:                             43.5000          34.1875
Fourth Quarter 1998:                            38.9375          28.7500

First Quarter 1997:                             32.7500          26.0000
Second Quarter 1997:                            40.2500          26.7500
Third Quarter 1997:                             41.1250          34.5000
Fourth Quarter 1997:                            43.0000          33.0000
</TABLE>

NUMBER OF HOLDERS OF COMMON STOCK
The number of record  holders of common stock as of March 1, 1999 was 110.  That
number  excludes the beneficial  owners of shares held in "street" names or held
through participants in depositories, such as The Depository Trust Company.

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,
$0.04 per share for each quarter of 1997 and $0.05 per share for each quarter of
1998. On February 23, 1999, the Board of Directors raised the quarterly dividend
to $0.06 per share and declared a dividend,  payable on or before March 26, 1999
to shareholders of record on March 8, 1999.

                                                                              23
<PAGE>
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  10A of Notes to  Consolidated
Financial Statements.

RECENT  SALES OF  UNREGISTERED  SECURITIES  
Information  required by Item 701 of Regulation S-K:

         (a) On October 1,  1998,  1,080  common  shares of the  Company  and on
         January 1, 1999, 1,056 common shares of the Company (previously held as
         treasury shares) were distributed.

         (b) The securities were distributed to the Company's four  non-employee
         Directors.

         (c) The  securities  were issued as  compensation  to the  non-employee
         Directors  for  services  rendered to the Company  during the third and
         fourth quarters of 1998.

         (d) Exemption from registration was claimed pursuant to Section 4(2) of
         the  Securities  Act of 1933.  There  was no  public  offering  and the
         participants in the transactions  were the Company and its non-employee
         Directors.

         (e) Not applicable.


ITEM 6.  SELECTED FINANCIAL DATA

The following selected consolidated GAAP financial data of the Company as of and
for the years ended December 31, 1998,  1997,  1996,  1995 and 1994 were derived
from the consolidated financial statements of the Company, which were audited by
PricewaterhouseCoopers  LLP  (1998,  1997 and  1996)  and by  other  independent
auditors  (1995 - 1994).  The  statutory  data have been derived from  statutory
financial statements of Everest Re filed with the Delaware Insurance Department.
Such statutory  financial  statements are prepared in accordance  with Statutory
Accounting  Principals ("SAP"),  which differ from GAAP. The statutory financial
statements  are  unconsolidated  and  reflect  the net  assets of  Everest  Re's
subsidiaries,  Everest  Ltd.,  Everest  National,  Everest  Canada  and  Everest
Indemnity 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 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.

24
<PAGE>
<TABLE>
<CAPTION>

                                                  YEARS ENDED DECEMBER 31,
                                   ---------------------------------------------------------
(Dollars in millions, except            1998        1997        1996        1995        1994
 per share amounts)                ---------------------------------------------------------
<S>                                <C>         <C>         <C>         <C>         <C>                 
OPERATING DATA:
  Gross premiums written           $ 1,045.9   $ 1,075.0   $ 1,044.0   $   949.5   $   953.2
  Net premiums written               1,016.6     1,031.1     1,030.5       783.2       863.2
  Net premiums earned                1,068.0     1,049.8       973.6       753.3       853.3
  Net investment income                244.9       228.5       191.9       166.0       143.6
  Net realized capital 
   gains (losses)(1)                    (0.8)       15.9         5.7        33.8       (10.5)
  Total revenue                      1,315.2     1,299.2     1,169.3       948.9       982.8
  Losses and LAE incurred 
   (including catastrophes)            778.4       765.4       716.0       674.7       720.8
  Total catastrophe losses(2)           30.6         8.6         7.1        31.4        81.9
  Commission, brokerage, 
   taxes and fees                      274.6       274.8       254.6       227.4       197.9
  Other underwriting expenses           49.6        51.7        54.9        60.0        68.3
  Compensation related to 
   public offering                       -           -           -          13.3         -
  Restructuring and early 
   retirement costs                      -           -           -           -           7.8
  Total expenses(3)                  1,102.5     1,091.9     1,025.5       975.4       994.8
  Income (loss) before 
   taxes(3)                            212.7       207.3       143.8       (26.6)      (12.0)
  Income tax (benefit)                  47.5        52.3        31.8       (27.3)      (22.6)
  Net income (3)                   $   165.2   $   155.0   $   112.0   $     0.7   $    10.7
                                   =========================================================
  Net income per basic 
   share (4)                       $    3.28   $    3.07   $    2.22   $    0.01   $    0.21
                                   =========================================================
  Net income per diluted 
   share (5)                       $    3.26   $    3.05   $    2.21   $    0.01   $    0.21
                                   =========================================================
  Dividends paid per share         $    0.20   $    0.16   $    0.12   $    0.14   $    0.15
                                   =========================================================
CERTAIN GAAP FINANCIAL RATIOS:
  Loss and LAE ratio(6)                 72.9%       72.9%       73.5%       89.6%       84.5%
  Underwriting expense 
   ratio(7)                             30.3        31.1        31.8        39.9        31.2
                                   ---------------------------------------------------------
  Combined ratio                       103.2%      104.0%      105.3%      129.5%      115.7%
                                   =========================================================
CERTAIN SAP DATA(8):
  Ratio of net premiums 
   written to surplus(9)                 1.0x        1.4x        1.2x        1.0x        1.2x
  Statutory surplus                $ 1,059.4   $   908.8   $   772.7   $   686.9   $   600.7
  Loss and LAE ratio(10)                72.2%       75.7%       71.2%       92.2%       85.8%
  Underwriting expense 
   ratio(11)                            31.1        25.6        31.7        38.9        32.6
                                   ---------------------------------------------------------
  Combined ratio                       103.3%      101.3%      102.9%      131.1%      118.4%
                                   =========================================================


BALANCE SHEET DATA (AT 
 END OF PERIOD):
  Total investments and cash       $ 4,325.8   $ 4,163.3   $ 3,624.6   $ 3,238.3   $ 2,573.2
  Total assets                       5,996.7     5,538.0     5,047.8     4,647.8     4,040.6
  Loss and LAE reserves              3,800.0     3,437.8     3,246.9     2,969.3     2,706.4
  Total liabilities                  4,517.5     4,230.5     3,961.7     3,664.2     3,299.6
  Stockholders' equity(12)           1,479.2     1,307.5     1,086.0       983.6       741.0
  Book value per share(13)             29.59       25.90       21.51       19.36       14.82
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 basic and 
   diluted 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 $165.7 million (or $3.29 per basic share and $3.27
       per  diluted  share),  $144.6  million (or $2.86 per  basic and $2.85 per
       diluted  share),  $108.3  million (or $2.14 per basic and diluted share),
       ($21.2)  million  (or  ($0.42)  per  basic and  diluted  share) and $17.5
       million  (or  $0.35 per basic and  diluted  share)  for  the years  ended
       December 31, 1998, 1997, 1996, 1995 and  1994, respectively. Supplemental
       after-tax  operating  income,  before  net realized  gains and  excluding
       IPO-related  charges  was,  $78.4 million (or $1.56 per basic and diluted
       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)  Some amounts may not reconcile due to rounding.
  (4)  Based  on weighted average basic shares outstanding of 50.4 million, 50.5
       million,  50.6 million, 50.2 million  and  50.0  million  for 1998, 1997,
       1996, 1995 and 1994, respectively.
  (5)  Based  on  weighted  average  diluted shares outstanding of 50.7 million,
       50.8  million, 50.7 million, 50.2 million  and  50.0  million  for  1998,
       1997, 1996, 1995 and 1994, respectively.
  (6)  GAAP losses and LAE incurred as a percentage of GAAP net premiums earned.
  (7)  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%.
  (8)  Statutory  results  are on a Everest Re legal entity basis; consequently,
       investments  in  subsidiary  operations  are  accounted for on an  equity
       basis. Effective January 1, 1997, the reinsurance operations  of  Everest
       Re Ltd. were  transferred  to Everest Re on a portfolio basis.  Excluding
       the impact of the portfolio transaction,  the 1997  ratio of net  written
       premiums to  surplus,  the 1997 loss and LAE ratio, the 1997 underwriting
       expense ratio and the 1997  combined  ratio  were 1.1 x, 70.5%, 32.2% and
       102.7%, respectively.
  (9)  Statutory net premiums written as a percentage of period-end surplus.
 (10)  Statutory  losses and LAE  incurred as a  percentage  of SAP net premiums
       earned.  
 (11)  Statutory  underwriting  expenses  as a  percentage  of SAP  net premiums
       written.
 (12)  Excluding  net  unrealized  appreciation  (depreciation)  of investments,
       stockholders'  equity  was $1,281.6 million,  $1,147.1 million,  $1,008.3
       million,  $899.9  million  and  $799.1  million as of December  31, 1998,
       1997, 1996, 1995 and 1994, respectively.
 (13)  Based  on  50.0 million shares  outstanding  for December 31, 1998,  50.5
       million  shares  outstanding for December 31, 1997 and 1996, 50.8 million
       shares  outstanding  for  December 31,  1995,  and  50.0  million  shares
       outstanding for December 31, 1994.

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 the emergence of
significant  reinsurance  capacity  from the  Bermuda  and  rejuvenated  Lloyds'
markets,  higher retentions by primary insurance companies and consolidation and
increased  capital levels in the insurance  industry,  have caused  increasingly
competitive  global  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.

SEGMENT INFORMATION
The Company, through its subsidiaries,  operates as a single segment focusing on
the coverage of property and casualty risks using an approach  which  emphasizes
central control and coordination of critical business elements.

YEAR ENDED DECEMBER 31, 1998 COMPARED TO YEAR ENDED DECEMBER 31, 1997
The following discussion and analysis is focused on a comparison of 1998 results
of operations to 1997 results of operations.

PREMIUMS. Gross premiums written decreased 2.7% to $1,045.9 million in 1998 from
$1,075.0  million in 1997 as the Company  maintained a disciplined  underwriting
approach in the face of  increasingly  competitive  market  conditions.  Premium
growth areas  included a 10.8% ($35.2  million)  increase in U.S.  broker treaty
premiums,  largely  attributable  to growth in non-standard  auto,  accident and
health and workers  compensation  lines where the  Company's  relatively  recent
entry to  these  lines  has  provided  growth  opportunities  and a 6.8%  ($10.8
million) increase in U.S. direct treaty  reinsurance and insurance due mainly to
portfolio  reinsurance  transactions.  These  increases  were  offset by a 25.5%
($41.2  million)  decrease in marine,  aviation,  and surety  premiums,  a 13.2%
($10.9  million)  decrease in  facultative  premiums and a 6.6% ($23.0  million)
decrease in international  premiums reflecting highly competitive current market
conditions.  The Company  continued  to decline  business  that did not meet the
Company's objectives regarding underwriting profitability.

Ceded premiums decreased by 33.2% to $29.3 million in 1998 from $43.8 million in
1997, principally as a result of a $32.3 million return premium in 1998 relating
to a restructuring of the Company's catastrophe  retrocessional  protection. The
impact of this  transaction was partially  offset by increases in ceded premiums
in 1998 over 1997  attributable  to increased  utilization of contract  specific
retrocessions,  including common account protections, and reinstatement premiums
on corporate catastrophe reinsurance protections.

26
<PAGE>
Net premiums written decreased by 1.4% to $1,016.6 million in 1998 from $1,031.1
million in 1997, reflecting the decreases in international, marine, aviation and
surety and facultative  gross written  premiums,  partially  offset by growth in
U.S.  broker and U.S. direct treaty  reinsurance and insurance  premiums and the
decrease in ceded premiums.

REVENUES. Net premiums earned increased by 1.7% to $1,068.0 million in 1998 from
$1,049.8  million in 1997, with the increase  attributable  to premium  earnings
patterns coupled with the decrease in premiums written.

Pre-tax  investment  income increased 7.2% to $244.9 million in 1998 from $228.5
million  in 1997,  principally  reflecting  the effect of  investing  the $183.3
million of cash flow from operating  activities in 1998.  The Company's  pre-tax
yield on average cash and invested assets decreased to 5.8% in 1998 from 5.9% in
1997 reflecting an increase in tax preferenced  investments and a lower interest
rate environment.  After-tax  investment income increased 9.9% to $190.8 million
in 1998 from  $173.5  million in 1997  reflecting  growth in the  Company's  tax
preferenced  investment holdings.  The Company's after-tax yield on average cash
and invested assets was 4.5% in 1998, the same yield as in 1997.

Net  realized  capital  losses  were  $0.8  million  in 1998  reflecting  normal
portfolio  management  activity compared to a net realized capital gain of $15.9
million in 1997,  mainly  arising  from a $14.0  million gain on the sale of the
Company's  remaining  investment in the common stock of  Corporacion  MAPFRE,  a
publicly traded Spanish insurer.

EXPENSES. Incurred losses and loss adjustment expenses ("LAE") increased by 1.7%
to $778.4  million in 1998 from $765.4  million in 1997.  The Company's loss and
LAE ratio was 72.9% for 1998 and 1997.  Excluding the impact of catastrophes and
the one-time  return premium of $32.3 million,  the Company's loss and LAE ratio
increased  by 0.1  percentage  points to 72.2% in 1998 as  compared  to 72.1% in
1997.  Net  catastrophe  losses for 1998 were $30.6 million  mainly arising from
Hurricanes  Georges  and  Mitch,  Canadian  Ice Storm  losses  and a major  fire
impacting a facultative  coverage  partially offset by favorable  development on
prior period catastrophes compared to net catastrophe losses of $8.6 million for
1997.  Catastrophe  losses  include the impact of both current period events and
favorable  and  unfavorable  development  on prior period  events and are net of
reinsurance.  The underlying loss ratio increase was  attributable to changes to
the Company's  business mix consistent with its underwriting  strategy  together
with the impact of $17.1 million in incurred  losses relating to the coinsurance
provisions  of the Aggregate  Excess of Loss  Reinsurance  coverage  ("Stop Loss
Agreement") acquired from Gibraltar Casualty Company ("Gibraltar"), an affiliate
of the Prudential Insurance Company of America ("The Prudential"), the Company's
former parent,  at the time of the Company's  initial  public  offering in 1995.
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  LAE and  uncollectible
reinsurance at June 30, 1995 (December 31, 1994 for catastrophe losses).

Incurred  losses  and LAE for 1998  reflected  ceded  losses  and LAE of  $357.4
million.  Ceded losses and LAE included  $153.9 million net ceded under the Stop
Loss  Agreement,  $33.5 million net ceded to Gibraltar  pursuant to a 1986 quota
share reinsurance ("Direct Excess Retrocession") through which Gibraltar assumed
100% of the liabilities  related to Everest Re's former direct excess  insurance
operations which ceased writing business in 1985, and $102.4 million ceded under
the  Company's   management   underwriting   facility  ("MUF"),   a  reinsurance
arrangement  begun in 1977 pursuant to which  Everest Re ceded certain  business
written prior to 1992 to a number of insurance and reinsurance  companies which,
as the result of commutations, also includes Gibraltar.

Gibraltar has disputed $63.0 million ceded under the Stop Loss Agreement in 1998
and pursuant to the terms of the Stop Loss Agreement,  Gibraltar has secured the
disputed  amount.  Gibraltar  has also  disputed  Everest Re's level of reserves
previously  ceded to and paid by  Gibraltar  under the Stop Loss  Agreement  and
claims a refund of $91.7  million.  Should  Everest Re and Gibraltar not resolve
these  disputes,  pursuant  to the terms of the Stop Loss  Agreement,  each will
appoint an independent  examiner to review the disputed amounts and to determine
the appropriate amount of cessions to Gibraltar,  and Everest Re will secure the
$91.7 million amount. If the examination  process does not resolve the disputes,
the Stop Loss Agreement  provides for  resolution  through  arbitration.  In the
event the cessions to Gibraltar  were  determined  to be  excessive,  Everest Re
would reduce the cession to Gibraltar by such excess,  refund previous  payments
made by Gibraltar,  if  applicable,  and the unused portion of the limits of the
Stop Loss  Agreement  would be  restored.  Also,  Everest Re would  consider the
independent  examiners'  findings in its ongoing  determination  of  appropriate
reserve  levels,  which may lead to a  corresponding  reduction  in Everest Re's
gross reserves, and net reserves to the extent of the coinsurance under the Stop
Loss  Agreement.  In the event the cessions are not  determined to be excessive,
Gibraltar  would be obligated to pay the disputed  amount.  Accordingly,  if the
disputes are resolved in Gibraltar's  favor, any adverse effect on the Company's
financial  condition  and  results of  operations  would  likely be limited to a
reduction  in  cash  flows  from  operations  with  a  corresponding  impact  on
investment income.

                                                                              27
<PAGE>
Gibraltar has disputed $39.7 million ceded under the Direct Excess  Retrocession
primarily  reflecting reserve increases for asbestos losses ceded by the Company
in 1998. Gibraltar is disputing the level of reserves established by the Company
for such losses,  but Gibraltar is not disputing its  responsibility  to pay the
ultimate losses in accordance with the terms of the Direct Excess  Retrocession.
Management does not expect that this dispute will have a material adverse effect
on the  Company's  future  financial  condition,  results of  operations or cash
flows.

The ceded losses and LAE for 1998 principally  reflect a $214.9 million increase
in gross reserves with respect to asbestos exposures which the Company judged to
be necessary based on continuing reported and paid loss emergence,  particularly
with  respect to  secondary  defendants,  internal  and third party  statistical
analysis, and its assessment of potential ultimate liabilities, $25.7 million of
non-asbestos  related  losses  ceded  under  the Stop Loss  Agreement  and $23.1
million ceded under various catastrophe retrocessions. The 1998 ceded losses and
LAE compares to ceded losses and LAE of $109.6 million in 1997,  including $45.0
million ceded under the Stop Loss Agreement. See "Financial Condition" below for
a further discussion.

Underwriting  expenses  decreased by 0.7% to $324.1  million in 1998 from $326.5
million in 1997. Commission, brokerage, taxes and fees decreased by $0.2 million
attributable  to  decreases  in written  premium  and  changes in the  Company's
business mix.  Other  underwriting  expenses  decreased by $2.1 million,  as the
Company's  cost  reduction  initiatives  continued to provide  benefits over the
course of 1998 and 1997.  The benefits more than offset the impact of salary and
other  expense  increases  that  were  generally  in line  with  inflation.  The
Company's expense ratio decreased by 0.8 percentage points to 30.3% in 1998 from
31.1% in 1997 as a result of the increase in premiums earned and the decrease in
underwriting expenses.

The Company's  combined ratio  decreased by 0.8  percentage  points to 103.2% in
1998 from 104.0% in 1997  reflecting the lower expense ratio,  increased  earned
premium and loss ratio factors described above.

INCOME  TAXES.  The  Company  had  income tax  expense of $47.5  million in 1998
compared  to  $52.3  million  in  1997,  with the  decrease  resulting  from the
relationship of tax exempt income to pre-tax income as the Company increased the
tax preferenced element of investment income at a rate greater than the increase
in  pre-tax  income  as a result  of growth  in the  Company's  tax  preferenced
investment holdings.

NET INCOME.  Net income was $165.2 million in 1998 compared to $155.0 million in
1997. This improvement mainly reflects higher earned premium,  higher investment
income,  and lower  income taxes  partially  offset by a decrease in net capital
gains and an increase in net incurred losses.


YEAR ENDED DECEMBER 31, 1997 COMPARED TO YEAR ENDED DECEMBER 31, 1996
The following discussion and analysis is focused on a comparison of 1997 results
of operations to 1996 results of operations.

PREMIUMS. Gross premiums written increased 3.0% to $1,075.0 million in 1997 from
$1,044.0 million in 1996, as the Company  maintained a cautious  approach to the
increasingly  competitive  market  conditions.   Factors  contributing  to  this
increase  included  a 5.9%  ($18.2  million)  increase  in  U.S.  broker  treaty
premiums,  largely attributable to product line expansion, a 6.6% ($9.8 million)
increase in U.S.  direct treaty  reinsurance  and insurance due to the growth in
primary  insurance  written  through  Everest  National,  a 2.6% ($8.8  million)
increase  in  international  premiums,  and a 0.3% ($0.5  million)  increase  in
marine,  aviation, and surety premiums. These increases were partially offset by
a 7.2% ($6.4 million) decrease in facultative premiums.

Ceded  premiums  increased by 224.7% to $43.8 million in 1997 from $13.5 million
in 1996, principally as a result of a return premium in 1996 under the Company's
catastrophe  retrocessional  protection,  coupled with increased  retrocessional
protections  for  international  catastrophe  exposures  and  increases  in  the
Company's contract specific retrocessions in 1997.

Net premiums written increased by 0.1% to $1,031.1 million in 1997 from $1,030.5
million  in 1996,  reflecting  the growth in U.S.  broker,  U.S.  direct  treaty
reinsurance and insurance,  international and marine,  aviation and surety gross
written  premiums offset by the decrease in facultative  gross premiums  written
and the increase in ceded premiums.

REVENUES. Net premiums earned increased by 7.8% to $1,049.8 million in 1997 from
$973.6  million in 1996,  with the  increase  attributable  to premium  earnings
patterns coupled with a decrease in the rate of written premium growth.

Net  investment  income  increased  19.1% to $228.5  million in 1997 from $191.9
million in 1996,  reflecting  the effect of investing the $376.4 million of cash
flow from operating activities in 1997 and the increase in the Company's pre-tax
yield on average cash and invested assets to 5.9% in 1997 from 5.6% in 1996.

28
<PAGE>
Net realized  capital gains increased  179.5% to $15.9 million in 1997 from $5.7
million in 1996,  with the gains in both periods mainly arising from activity in
the  Company's  portfolio  of equity  securities,  including,  in 1997,  a $14.0
million gain on the sale of the  Company's  remaining  investment  in the common
stock of Corporacion MAPFRE, a publicly traded Spanish insurer.

EXPENSES. Incurred losses and loss adjustment expenses ("LAE") increased by 6.9%
to $765.4  million in 1997 from $716.0  million in 1996.  The Company's loss and
LAE ratio  decreased  by 0.6  percentage  points to 72.9% in 1997 from  73.5% in
1996. This improvement was attributable  principally to changes in the Company's
business mix consistent with the Company's  underwriting  strategy together with
modest and comparable  catastrophe losses in both years. Net incurred losses and
LAE for 1997 reflected ceded losses and LAE of $109.6  million,  including $45.0
million ceded under the Stop Loss Agreement, compared to ceded losses and LAE of
$206.0  million in 1996,  including  $116.5  million  ceded  under the Stop Loss
Agreement.

Underwriting  expenses  increased by 5.5% to $326.5  million in 1997 from $309.5
million  in 1996.  Commission,  brokerage,  taxes  and fees  increased  by $20.2
million  attributable  primarily to increases in written  premium and changes in
the  Company's  business  mix.  Other  underwriting  expenses  decreased by $3.2
million,  as the impact of the  continued  reductions in the number of employees
over the course of 1996 and 1997 together with 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 decreased by 0.7
points to 31.1% in 1997 from 31.8% in 1996 as the  increase of  premiums  earned
more than offset the increases in underwriting expenses.

The  Company's  combined  ratio  decreased  by 1.3 points to 104.0% in 1997 from
105.3% in 1996, reflecting the lower loss ratio and increased premiums.

INCOME  TAXES.  The  Company  had  income tax  expense of $52.3  million in 1997
compared  to  $31.8  million  in  1996,   with  the   difference   substantially
attributable to the improvement in pre-tax income to $207.3 million in 1997 from
$143.8 million in 1996.

NET INCOME.  Net income was $155.0 million in 1997 compared to $112.0 million in
1996. This improvement mainly reflects higher premiums earned, higher investment
income, higher capital gains and a lower combined ratio, offset by higher income
taxes.

FINANCIAL CONDITION
CASH  AND  INVESTED  ASSETS.  Aggregate  invested  assets,  including  cash  and
short-term  investments,  were $4,325.8  million at December 31, 1998,  $4,163.3
million at December  31, 1997 and $3,624.6  million at December  31,  1996.  The
change in invested  assets  resulted  primarily from cash flows from  operations
generated  during the period together with net realized and unrealized gains and
losses on investments.

LOSS AND LAE RESERVES
GENERAL.  Gross loss and LAE reserves  totaled  $3,800.0 million at December 31,
1998, $3,437.8 million at December 31, 1997 and $3,246.9 million at December 31,
1996.  The increases were mainly due to reserve  increases on pre-1986  accident
years for asbestos and environmental  exposures,  most of which were ceded under
various  retrocessional   arrangements  resulting  in  offsetting  increases  to
reinsurance receivables, together with continued growth in the Company's book of
business.  Reinsurance  receivables totaled $982.0 million at December 31, 1998,
$692.5  million at December 31, 1997 and $749.1 million at December 31, 1996. At
December  31, 1998,  $563.3  million or 57.4% of the total was  receivable  from
Gibraltar  including  $142.0  million  which is  contractually  due in the first
quarter of 1999,  subject to  resolution of the dispute noted above (See - "Year
Ended December 31, 1998 Compared to Year Ended December 31, 1997" above), $154.8
million  which is  collateralized  by funds held by the  Company  or  offsetting
liabilities  and $266.5  million which is subject to the terms and conditions of
The Prudential's  guarantee of Gibraltar's  payment  obligations to the Company.
Additionally,  $150.0 million or $15.3% is receivable from Continental Insurance
Company  which is secured by a funds held  arrangement  wherein  the Company has
retained the premium payments due the  retrocessionaire,  recognized a liability
for such  amounts  and  reduces  such  liability  as  payments  are due from the
retrocessionaire.  No  other  retrocessionaire  accounted  for more  than  $25.0
million of the Company's receivable.

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
actuarial  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

                                                                              29
<PAGE>
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.  Actual losses and LAE  ultimately  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  additional  uncertainties  in estimating the amount of Everest Re's
potential losses from asbestos and environmental claims. Among the complications
impacting  the  estimation  of such losses 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)  historical data concerning  asbestos
and environmental  losses, which is more limited than historical  information on
other types of casualty claims;  (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.  Although these complications have become less severe in
recent years, management believes that these factors continue to render reserves
for asbestos and environmental  losses significantly less subject to traditional
actuarial  methods  than are  reserves  on other  types of losses.  Given  these
uncertainties,  management  believes that no meaningful  range for such ultimate
losses can be established.  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,
                                        ---------------------------------
(Dollars in millions)                        1998        1997        1996
                                        ---------------------------------
<S>                                     <C>         <C>         <C>
                                                        
Gross Basis:
Beginning of period reserves            $   446.1   $   423.3   $   428.5
                                        ---------------------------------

Incurred losses and LAE:
Reported losses                              57.6        80.5        36.7
Change in IBNR                              192.0         3.2        (6.7)
                                        ---------------------------------
Total                                       249.6        83.7        30.0
Paid losses                                 (34.9)      (60.9)      (35.2)
                                        ---------------------------------

End of period reserves                  $   660.8   $   446.1   $   423.3
                                        =================================


Net Basis:
Beginning of period reserves            $   212.4   $   199.6   $   186.0
                                        ---------------------------------

Incurred losses and LAE:
Reported losses (1)                        (105.9)      (18.3)       (4.4)
Change in IBNR                              121.3        21.8         4.4
                                        ---------------------------------
Total                                        15.4         3.5         0.0
Paid losses (2)                              35.7         9.3        13.6
                                        ---------------------------------

End of period reserves                  $   263.5   $   212.4   $   199.6
                                        =================================
</TABLE>
----------
(1) Net of $138.5  million in 1998,  $41.2  million in 1997 and $24.2 million in
1996  ceded  under the  incurred  loss  reimbursement  feature  of the Stop Loss
Agreement.

(2) Net of $39.7  million in 1998,  $22.6  million in 1997 and $34.5  million in
1996 ceded as paid losses under the Stop Loss Agreement.

30
<PAGE>
The $397.3  million of  reinsurance  receivables  with  respect to asbestos  and
environmental  reserves as of December 31, 1998 was attributable  principally to
three  retrocessional  arrangements:  (i)  $168.6  million  was ceded to various
insurance and reinsurance  companies,  including  Gibraltar,  in connection with
their participation in MUF; (ii) $118.8 million was ceded to Gibraltar under the
Company's Stop Loss Agreement which is  contractually  due to the Company in the
first quarter of 1999,  subject to  resolution  of the dispute noted above;  and
(iii) $96.5 million  resulting from the Company's former direct excess insurance
operations,  which ceased writing business in 1985 and which has been 100% ceded
to  Gibraltar  since 1986,  a portion of which is subject to  resolution  of the
dispute noted above.  See - "Year Ended December 31, 1998 Compared to Year Ended
December 31, 1997" above.

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 make payment on account of such  Adverse  Development.  Through  December 31,
1998,  Adverse  Development  ceded under the Stop Loss Agreement have aggregated
$339.2  million  with  remaining  limits  available  of  $35.8  million  (net of
coinsurance)  as respects the next $39.8 million of Adverse  Development.  See -
"Year Ended December 31, 1998 Compared to Year Ended December 31, 1997" - above.

The Prudential has guaranteed all of Gibraltar's  payment  obligations under the
Stop Loss  Agreement and up to $400.0  million of  Gibraltar's  net  obligations
under all other reinsurance  agreements between Gibraltar and Everest Re, $128.3
million  of which  has been  discharged  by loss  payments  made to the  Company
subsequent to June 30, 1995. At December 31, 1998,  Gibraltar's  net obligations
under such other reinsurance agreements consisted of the following balances:
<TABLE>
<S>                                                                  <C>
Reinsurance receivables from Gibraltar                               $  421.3
Reserve for losses and loss adjustment expenses assumed
 from Gibraltar                                                        (164.2)
Losses in the course of payment assumed from Gibraltar                   (5.4)
Funds held by Everest Re under reinsurance treaties with 
 Gibraltar                                                             (127.2)
                                                                     --------
    Net obligations of Gibraltar                                     $  124.5
                                                                     ======== 
</TABLE>
STOCKHOLDERS'  EQUITY.  Holdings'  stockholders'  equity  increased  to $1,479.2
million as of December  31, 1998 from  $1,307.5  million as of December 31, 1997
principally  reflecting a $155.1 million  increase in retained  earnings for the
year and an increase of $37.2 million in unrealized appreciation of investments.
Stockholders'  equity as of December 31, 1997 increased to $1,307.5 million from
$1,086.0 million as of December 31, 1996  principally  reflecting an increase of
$146.9  million  in  retained  earnings  and an  increase  of $82.6  million  in
unrealized appreciation of investments. Dividends of $10.1 million, $8.1 million
and $6.1  million  were  declared  and paid by Holdings in 1998,  1997 and 1996,
respectively.

Holdings'  stockholders'  equity  of  $1,479.2  million  exceeded  Everest  Re's
statutory-basis  surplus of $1,059.4  million by $419.8  million at December 31,
1998. 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-term 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 $183.3
million,   $376.4  million  and  $414.0   million,   in  1998,  1997  and  1996,
respectively.  The  decreases  from 1997 and 1996 in cash  provided by operating
activities were principally a result of increases in net paid losses, reflecting
maturation  of the  Company's  loss  reserves,  combined with the changes in the
Company's mix of business and modest,  if any, growth in gross written  premium,
all of which  may  affect  growth in cash flow  from  operations  in  subsequent
periods, offset by improved  profitability.  Recoveries under the Company's Stop
Loss Agreement with Gibraltar contributed $31.9 million, $99.8 million and $53.4
million of such net cash flows in 1998, 1997 and 1996 respectively.

                                                                              31
<PAGE>
Proceeds and applications  from sales and acquisitions of investment assets were
$634.2 million and $755.3 million,  respectively, in 1998 principally reflecting
reduced portfolio turnover as the result of the tax implications of capital gain
realization, compared to $1,077.0 million and $1,482.8 million, respectively, in
1997 and $1,632.9 million and $2,014.9 million,  respectively,  in 1996. 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.

Everest Re employs various techniques,  including licensed software modeling, 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  $170.0
million in each such region based on its current  book of  business.  Similarly,
management estimates that the largest current PML exposure,  before reinsurance,
outside  the  United  States is  approximately  $86.0  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.

The Company maintains a corporate-level retrocessional protection program, above
and beyond retrocessions purchased with respect to specific assumed coverage, to
mitigate the potential impact of catastrophe  losses.  Prior to the December 31,
1998 cancellation of significant  elements of this program, the attachment point
of this program was $25.0 million per catastrophe in the United States and $10.0
million per catastrophe  outside the United States.  During 1998,  $23.1 million
was  ceded  under  the  corporate  level  retrocession  program  as a result  of
catastrophes occurring outside the United States.  Effective January 1, 1999 the
Company has purchased an accident year aggregate excess of loss protection which
provides  up to $175.0  million of  coverage  if Everest  Re's  statutory  basis
accident  year loss  ratio  exceeds  a  certain  threshold  and  responds  on an
aggregate  basis with respect to both  property and casualty  losses,  including
those  arising  from  catastrophes.  The  attachment  point  is net  of  inuring
retrocessions and includes adjustable premium provisions which effectively cause
the  Company to offset,  on a pre-tax  income  basis,  up to 52.5% of such ceded
losses,   depending  upon  the  character  of  the  underlying  losses,  through
additional premiums. The maximum recovery is $175.0 million before giving effect
to a maximum adjustable premium of $86.3 million.  Retrocessions  inuring to the
benefit of this program,  for the period from May 15, 1998 through May 15, 1999,
include a catastrophe  retrocession  which  provides  coverage of 70.0% of $20.0
million  per  occurrence  in excess of $10.0  million in losses  incurred by the
Company  outside of the United  States,  and for the  period  from May 23,  1998
through May 23, 1999, include a catastrophe retrocession which provides coverage
of 87.5% of $20.0  million per  occurrence  in excess of $30.0 million in losses
incurred  by the  Company  outside  of the  United  States.  All  aspects of the
retrocession  program have been structured to permit the program to be accounted
for as reinsurance under SFAS No. 113.

If a single  catastrophe  were to occur in the United  States  that  resulted in
$170.0 million of gross losses and allocated loss adjustment  expenses  ("ALAE")
in 1999 (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 $93.0  million.  This pre-tax net loss
estimate  assumes  that Everest  Re's  aggregate  losses and ALAE for 1999 would
exceed the threshold  loss ratio  requirement  in the  aggregate  excess of loss
cover by $170.0 million.

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.

In  May  1998,  the  Company  renewed  its  364  day  revolving  line  of credit
with  First  Union  National  Bank  originally  entered  into in June 1997. This
credit  facility,  which  will  be  used  for  liquidity  and general  corporate
purposes,  provides for the  borrowing of up to $50 million.  There have been no
borrowings  under this facility in 1998 or 1997.  The credit facility  agreement
continues to require  that  Everest Re maintains  statutory  surplus of not less
than  $575  million  and  that  the  Company  not  allow  its  ratio  of certain
debt  to  capital  to  be  greater  than  a  specified  amount.  The Company may

32
<PAGE>
choose an  interest  rate on  borrowings  equal to either  (i) the Base Rate (as
defined below),  (ii) an adjusted London InterBank Offered Rate ("LIBOR") plus a
margin (the "Margin") or (iii) a Money Market Rate, which is a daily uncommitted
advised rate. The Base Rate is the higher of the rate of interest established by
the bank from time to time as its reference  rate in making loans or the Federal
Funds rate plus 0.5% per annum.  The amount of the Margin and the commitment fee
payable to the bank for the credit facility  depend upon the insurance  strength
or claims paying ability ratings of Everest Re.

The payment of  dividends  to  Holdings by Everest Re is subject to  limitations
imposed by the  Delaware  Insurance  Code.  Based upon these  restrictions,  the
maximum  amount that will be  available  for payment of dividends to Holdings by
Everest Re in 1999  without the prior  approval  of  regulatory  authorities  is
$179.2  million.  Everest  Re's future cash flow  available  to Holdings  may be
influenced  by a variety  of  factors,  including  changes in the  property  and
casualty   reinsurance  market,   Everest  Re's  financial  results,   insurance
regulatory changes and changes in general 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 Insurance 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  1998,  1997 and 1996  Holdings  declared  and  paid  dividends  of $10.1
million, $8.1 million and $6.1 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.  During  1998,  the
first year in which purchases were made under this authorization, 516,900 shares
were repurchased at an average price of $33.68 per share.

In September  1998,  Holdings  adopted a shareholder  rights plan  ("Plan").  To
implement  the Plan,  the  Company  declared a dividend of one  preferred  share
purchase right ("Right") for each outstanding share of common stock. Pursuant to
the Plan,  the Rights can only be  exercised in certain  situations  involving a
potential  change in control of the Company.  For more  information  see Exhibit
4.1.

INCOME TAXES
On April 21, 1998,  the Supreme  Court  issued its  decision in Atlantic  Mutual
Insurance  Company v.  Commissioner,  upholding the Internal  Revenue  Service's
position  regarding the computation of the fresh start benefit  relating to 1986
reserve strengthening.  Pursuant to a separation agreement entered into with The
Prudential,  its  former  parent  at the time of the  Company's  initial  public
offering in 1995, the Company paid The Prudential $10.4 million representing tax
and interest in  resolution of the matter.  The Company had adequate  provisions
for this tax contingency and, as a result, this item has not materially impacted
the Company's financial position.

MARKET SENSITIVE INSTRUMENTS
The Securities and Exchange Commission  Financial Reporting Release #48 requires
registrants  to  clarify  and  expand  upon  the  existing  financial  statement
disclosure   requirements  for  derivative  financial  instruments,   derivative
commodity instruments,  and other financial instruments  (collectively,  "market
sensitive instruments").

Everest Re's current  investment  strategy does not provide for  investments  in
derivative  financial  instruments  or  derivative  commodity  instruments.  The
Company's current investment strategy seeks to maximize after-tax income through
a high quality,  diversified,  taxable and tax-exempt fixed maturity  portfolio,
while  maintaining an adequate  level of liquidity.  Everest Re's mix of taxable
and  tax-preferenced  investments  are adjusted  continuously,  consistent  with
Everest Re's current and projected operating results, market conditions, and tax
position.  The fixed  maturities  in the  investment  portfolio are comprised of
non-trading available for sale securities.  Additionally,  Everest Re invests in
marketable equity  securities,  which it believes will enhance the risk-adjusted
total return of the investment portfolio.

The overall  strategy  considers  the scope of present and  anticipated  Company
operations.  In  particular,  estimates of the financial  impact  resulting from
non-investment  asset and  liability  transactions,  together with the Company's
capital  structure  and  other  factors,  are used to  develop  a net  liability
analysis.  This analysis includes estimated payout characteristics for which the
investments of the Company provide liquidity. This analysis is considered in the
development of specific  investment  strategies for asset allocation,  duration,
and credit quality.

                                                                              33
<PAGE>
The $4.3 billion investment  portfolio is comprised of fixed maturity securities
that are  subject to  interest  rate risk and foreign  currency  rate risk,  and
equity  securities  that are subject to equity  price risk.  The impact of these
risks in the investment portfolio is generally mitigated by changes in the value
of  operating  assets  and  liabilities and their  associated  income  statement
impact.

Interest  rate  risk is the  potential  change  in value of the  fixed  maturity
portfolio  due  to  change  in  market  interest  rates.  Further,  it  includes
prepayment risk in a declining  interest rate  environment on the $408.9 million
of the $4.1 billion fixed maturity portfolio,  which consists of mortgage-backed
securities.  Prepayment risk results from  accelerated  principal  payments that
shorten the average life and thus, the expected yield of the security.

The table below displays the potential  impact of market value  fluctuations and
after-tax unrealized appreciation on the fixed maturity portfolio as of December
31, 1998 based on parallel 200 basis point shifts in interest  rates up and down
in 100 basis point  increments.  For legal entities with a US dollar  functional
currency, this modeling was performed on each security individually. To generate
appropriate price estimates on mortgage-backed securities, changes in prepayment
expectations  under different interest rate environments are taken into account.
For legal  entities  with a non-US  dollar  functional  currency,  the effective
duration of the  involved  portfolio of  securities  was used as a proxy for the
market value change under the various interest rate change scenarios.
All amounts are in millions of US$.
<TABLE>
<CAPTION>
                       Interest Rate Shift in Basis Points

                                          -200           -100              0           100           200
                                     -------------------------------------------------------------------
<S>                                  <C>           <C>            <C>           <C>           <C>
Total Market Value                   $ 4,638.4     $  4,381.9     $  4,135.4    $  3,892.0    $  3,653.8

Market Value Change from Base (%)
                                          12.2%           6.0%           0.0%         (5.9%)       (11.7%)

Change in Unrealized Appreciation
After-tax from Base ($)
                                     $   326.9     $    160.2     $        0    $   (158.2)   $   (313.0)

</TABLE>
Foreign  currency rate risk is the potential change in value,  income,  and cash
flow  arising from  adverse  changes in foreign  currency  exchange  rates.  The
Company's  foreign  operations  each  maintain  capital in the  currency  of the
country of its geographic  location  consistent with local regulatory  guidance.
Generally, the Company prefers to maintain the capital of its foreign operations
in  US  dollar  assets  although  this  varies  by  regulatory  jurisdiction  in
accordance with market needs. Each foreign operation may conduct business in its
local currency as well as the currency of other  countries in which it operates.
The primary  foreign  currency  exposures are the Canadian  Dollar,  the Belgian
Franc, the British Pound Sterling, the German Deutschmark,  and the French Franc
for these foreign operations. The Company mitigates foreign exchange exposure by
a  general  matching  of  the  currency  and  duration  of  its  assets  to  its
corresponding  operating  liabilities.  In  accordance  with FAS 52, the Company
translates  the  assets,  liabilities,  and income of non-US  dollar  functional
currency legal entities to the US dollar. This translation amount is reported as
a  component  of other  comprehensive  income.  The primary  functional  foreign
currency  exposures are the Canadian Dollar,  the British Pound Sterling and the
Belgian Franc for these foreign operations.

The table below  displays  the  potential  impact of a parallel 20% increase and
decrease in foreign  exchange rates on the valuation of invested  assets subject
to foreign  currency  exposure in 10%  increments as of December 31, 1998.  This
analysis  includes  the  after-tax  impact  of  translation  from  transactional
currency to functional  currency as well as the after-tax  impact of translation
from functional currency to the US dollar reporting currency. All amounts are in
millions of US$.
<TABLE>
<CAPTION>
                   Change in Foreign Exchange Rates in Percent

                                      -20%        -10%         0%        10%        20%
                                  -----------------------------------------------------
<S>                               <C>         <C>           <C>      <C>        <C>
 Total After-tax Foreign 
 Exchange Exposure                ($ 31.0)    ($ 17.5)      $   0    $  20.4    $  42.8
</TABLE>
Equity  risk is the  potential  change in market  value of the common  stock and
preferred  stock  portfolios  arising from changing  equity prices.  The Company
invests in  predominately  high  quality  preferred  and common  stocks that are
traded on the major  exchanges in the United  States.  The primary  objective in
managing the $146.3 million  equity  portfolio is to provide  long-term  capital
growth through market appreciation and income.

34
<PAGE>
The table below  displays  the impact on market value and  after-tax  unrealized
appreciation  of a 20% change in equity prices up and down in 10%  increments as
of December 31, 1998. All amounts are in millions of US$.
<TABLE>
<CAPTION>
                       Change in Equity Values in Percent

                                     -20%          -10%            0%           10%           20%
                                ----------------------------------------------------------------- 
<S>                             <C>           <C>           <C>           <C>           <C>
Market Value of the 
 Equity Portfolio               $   117.0     $   131.6     $   146.3     $   160.9     $   175.5
After-tax Change in 
 Unrealized Appreciation            (19.0)         (9.5)            0           9.5          19.0
</TABLE>

YEAR 2000 READINESS DISCLOSURES
Many  computers,  software  programs  and  microprocessors  embedded  in certain
equipment (collectively,  "systems") were designed to accommodate only two-digit
date fields to  represent  a given year  (e.g.,  "98"  represents  1998).  It is
possible  that  such  systems  will  not be  able  to  accurately  process  data
containing  information relating to dates before, during or after the year 2000.
It is also  possible  that such systems  could fail  entirely,  although in many
instances  the  consequences  of a system not being  "year 2000  compliant"  are
unknown.  The "year 2000 issue" has the potential to affect the Company  through
(i)  the  disruption  of  the  processing  of  business  and  general  corporate
transactions,  both at the Company  and  between the Company and other  business
entities with which it interacts, and (ii) claims which may be brought asserting
that  costs  associated  with  the  issue  may be  covered  under  insurance  or
reinsurance contracts in which the Company participates.

READINESS.  The Company has been  actively  engaged in a project to mitigate the
potential  effects of the year 2000  issue.  For each  segment  of its  internal
computer  processing  environment  (mainframe,  midrange and  personal  computer
equipment),   the  Company  has  a  multi-phase   plan  that  involves  (a)  the
identification  and  assessment  of year 2000  compliance,  (b) the  design  and
development of remedies  (including the replacement of non-compliant  systems if
needed),  (c) testing of year 2000 readiness and (d) the implementation of fully
integrated year 2000-compliant processing. The assessment phase is complete, and
many of the Company's  systems are already year  2000-compliant.  For those that
are not yet  compliant,  steps are being taken to upgrade or replace them.  With
the  exception of one  non-critical  application,  which will be replaced in the
third quarter of 1999, all processing/reporting systems are currently planned to
be  compliant  by June 30,  1999.  Testing  has  indicated  that  virtually  all
mission-critical  mainframe hardware and software is compliant, and that the few
software  applications  that are non-compliant can be made compliant by June 30,
1999;  additional  testing of remaining systems will continue as those remaining
systems are brought into compliance.

Although the Company has devoted  significant efforts to assessing and upgrading
its systems, most of the Company's  computerized systems have been developed and
maintained by  third-party  vendors,  and the Company is thus dependent in large
part on the efforts of those  vendors.  In many cases the involved  systems have
already been made compliant. In other cases the Company continues to communicate
with  the  vendors  regarding  their  plans  for  making  the  involved  systems
compliant. On the basis of those communications, the Company believes that those
vendors have a critical  business need to make their products  compliant and are
exercising their best efforts to make their products fully compliant.

In addition to addressing  hardware/software  information technology ("IT"), the
Company has also been  assessing year 2000 issues with respect to non-IT systems
such as  telephones  and various  building  services  which may rely on embedded
microprocessors.  Although  failure of non-IT systems such as telephone  service
could disrupt the Company's  business,  the Company's  inquiries of the relevant
vendors have not identified any material year 2000 problems.

The Company's  plan also  addresses  potential  year 2000 issues  related to the
processing  of  transactions  with its  external  business  contacts,  including
business partners (e.g., ceding companies) and service providers (e.g.,  banks).
The Company has actively surveyed its significant  business partners and service
providers  concerning their compliance status. The information  received to date
has not identified any  significant  barriers to year 2000  compliance,  and the
Company  believes that these  entities will be  sufficiently  compliant that the
year 2000 issue will not cause material disruption to the Company's business.

                                                                              35
<PAGE>
COSTS.  The Company's  historical and expected  future costs to make its systems
year 2000 compliant are not material.  The total expected out-of-pocket costs of
the year 2000 effort are approximately  $0.6 million,  of which  approximately $
0.3 million had been  incurred as of December 31, 1998.  These  figures  include
only expenses  specifically  related to Year 2000  compliance and do not include
the cost of  hardware  or  software  acquisitions  made in the normal  course of
business.

RISKS. The Company does not rely on computer-dependent  transactions to the same
extent  as many  other  businesses.  However,  in the event  that the  Company's
internal processing environment could not be made year 2000-compliant, or in the
event that significant  business partners or service providers or other business
entities  experienced  serious year 2000 problems,  the Company could experience
disruption in its  business.  Such  disruption  could  conceivably  take several
forms: (a) having to compile information and process transactions  manually, (b)
if compliance  problems  persisted,  impairing the Company's  ability to receive
premiums from and make claim payments to its ceding companies, (c) impairing the
Company's  ability to obtain  information about its investments or (d) impairing
the  value  of the  Company's  bond  and  equity  investments,  if the  entities
underlying  those  investments  themselves  have  substantial  year 2000  costs,
liabilities or disruptions.  Any or all of the types of possible  disruptions in
such a  "worst  case  scenario"  could  materially  increase  the  cost of doing
business, could impair the Company's ability to make required regulatory filings
and could materially  affect the Company's  results of operations,  liquidity or
financial condition.  However, based upon current information,  the Company does
not expect such  scenarios to occur and does not expect  material  disruption to
its business.

CONTINGENCY PLANS.  Although it has considered various scenarios  concerning the
possible  effects of the year 2000 issue,  the Company  does not yet have formal
contingency plans relating to either its internal processing  environment or its
external  business  contacts.  As it  completes  the  upgrading  and  testing of
non-compliant  systems  and  continues  to monitor  the status of its  important
external contacts throughout 1999, the Company will develop contingency plans as
necessary for mission-critical systems and relationships.

POTENTIAL  CLAIMS  EXPOSURE.  It appears  probable that  individuals or entities
which  experience  business  disruption,   increased  costs  or  other  problems
associated  with the year  2000  issue  may  assert  claims  against  their  own
insurance  carrier to recover such costs or against other  entities for damages,
which  entities  may in turn assert that such  potential  damages are covered by
insurance.  While it appears probable that some such claims will be made against
insurers,  it is not yet possible to determine  whether such claims will be held
to have  merit or  whether  any such  claims may be made  against  insurance  or
reinsurance  contracts  in which  the  Company  participates.  With  respect  to
prospective  business,  the Company  works with brokers and ceding  companies to
attempt to determine  whether  prospective or existing  business written carries
potential year 2000 exposures.  If the ceding company, in the Company's opinion,
is  adequately  underwriting  the  exposures,  the Company may not exclude  such
exposures from its contracts. If the ceding company is not adequately addressing
the  issue,  the  Company  will  attempt  to exclude  those  exposures  from its
contracts or non-renew those contracts. There can be no assurance, however, that
such business will be completely free of potential exposure to claims related to
the year 2000 issue.

EURO CONVERSION.
On  January 1, 1999 eleven of the fifteen member countries of the European Union
(the "participating countries") established fixed conversion rates between their
existing  sovereign  currencies  (the  "legacy  currencies")  and the Euro.  The
participating  countries  have  agreed to adopt the Euro as their  common  legal
currency,  to issue  sovereign debt  exclusively in the Euro and to redenominate
outstanding  sovereign  debt.  Between  January 1, 1999 and January 1, 2002 (the
"transition  period") the legacy currencies are scheduled to remain legal tender
in the participating countries. During the transition period, public and private
parties  may  pay  for  goods  and  services   using  either  the  Euro  or  the
participating country's legacy currency. European Union regulations, among other
matters,  specify how legacy currencies  convert to Euros.  Beginning January 1,
2002, new  Euro-denominated  bills and coins will be issued and by July 1, 2002,
the  participating  countries'  legacy currencies will no longer be legal tender
for any  transactions.  The  Company  has  operations  in Belgium and the United
Kingdom,  both members of the European  Union;  Belgium  became a  participating
country on January 1, 1999.

The nature of the Company's  reinsurance  business and its  investments  is such
that the  Company  does not  expect  the  impact  of the Euro  conversion  to be
material to the Company's business,  operations or financial condition. Although
systems  which  support the  Company's  United  Kingdom  and Belgian  operations
require  modifications to enable  conversion of legacy currency  historical data
and  accommodate  conversions in accordance  with European  Union  requirements,
which modifications the system vendor is investigating,  a failure of the vendor
to modify the system is not expected to be material to the  Company's  business,
operations or financial  condition.  The Company has not yet determined  when it
will convert the functional currency for its Belgian operation to the Euro.

36
<PAGE>
SAFE HARBOR DISCLOSURE
In  connection  with the "safe  harbor"  provisions  of the  Private  Securities
Litigation  Reform  Act of 1995  (the  "Act"),  the  Company  sets  forth  below
cautionary statements  identifying important factors, among others, that in some
cases have affected and that could cause its actual results to differ materially
from  those  which  might  be  projected,   forecasted,   or  estimated  in  its
forward-looking  statements,  as defined in the Act, made by or on behalf of the
Company  in press  releases,  written  statements  or  documents  filed with the
Securities and Exchange  Commission,  or in its  communications  and discussions
with investors and analysts in the normal course of business  through  meetings,
phone calls and conference calls. These cautionary  statements  supplement other
factors  contained in this report which could cause the Company's actual results
to  differ  materially  from  those  which  might be  projected,  forecasted  or
estimated in its forward-looking statements.

Such forward-looking statements may include, but are not limited to, projections
of premium revenue, investment income, other revenue, losses, expenses, earnings
(including earnings per share), cash flows, plans for future operations,  common
stockholders'  equity (including book value per share),  investments,  financing
needs, capital plans,  dividends,  plans relating to products or services of the
Company,  and estimates  concerning the effects of litigation or other disputes,
as well as assumptions for any of the foregoing and are generally expressed with
words  such  as  "believes,"  "estimates,"  "expects,"  "anticipates,"  "plans,"
"projects,"   "forecasts,"   "goals,"  "could  have,"  "may  have"  and  similar
expressions. Undue reliance on any forward-looking statements should be avoided.
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.

Forward-looking  statements  involve known and unknown risks,  uncertainties and
other factors which may cause the Company's  results to differ  materially  from
such  forward-looking  statements.  Such risks,  uncertainties and other factors
include, but are not limited to, the following:

    1)   Changes in the level of competition  in the domestic and  international
         reinsurance  or primary  insurance  markets that  adversely  affect the
         volume or  profitability  of the  Company's  reinsurance  or  insurance
         business.   These  changes  include,   but  are  not  limited  to,  the
         intensification of price and contract terms  competition,  the entry of
         new  competitors,   consolidation  in  the  reinsurance  and  insurance
         industry  and the  development  of new  products  by new  and  existing
         competitors;

    2)   Changes in the demand for  reinsurance  and  insurance  products of the
         type offered by the Company and its ceding insurer customers;

    3)   The ability of the Company to execute its strategies;

    4)   Catastrophe   losses   in   the  Company's  domestic  or  international
         reinsurance or insurance business;

    5)   Adverse  development on claim and claim expense  liabilities related to
         business  written  in  prior  years,  including,  but not  limited  to,
         evolving  case law and its  effect on  environmental  and other  latent
         injury  claims,  changing  government  regulations,   newly  identified
         toxins,  newly  reported  claims,  new  theories of  liability,  or new
         insurance and reinsurance contract interpretations,  to the extent that
         such adverse  development  exceeds the limits available under or is not
         covered by the Stop Loss Agreement;

    6)   Greater than expected loss ratios on  reinsurance or insurance  written
         by the Company;

    7)   Changes in inflation  that affect the  profitability  of the  Company's
         current  reinsurance  and  insurance  businesses or the adequacy of its
         claim and claim expense liabilities;

    8)   Changes in the Company's retrocessional arrangements;

    9)   Lower  than  estimated  retrocessional  or  reinsurance  recoveries  on
         losses,  including,  but not limited to, losses due to a decline in the
         creditworthiness of the Company's retrocessionaires or reinsurers;

   10)   Changes  in  the  reinsurance/retrocessional   market   impacting   the
         Company's  ability to cede risks above its desired level of retention.

   11)   Changes in interest rates,  increases in which cause a reduction in the
         market value of the Company's fixed income  investment  portfolio,  and
         its  common  stockholders'  equity,  and  decreases  in  which  cause a
         reduction of income earned on new cash flow from  operations as well as
         on the reinvestment of the proceeds from sales,  calls or maturities of
         existing investments;

   12)   Decline in the value of the Company's common equity investments;

                                                                              37
<PAGE>
   13)   Changes in the composition of the Company's investment portfolio;

   14)   Gains or losses related to changes in foreign currency exchange rates;

   15)   Changes in the role of reinsurance  brokers and the relationship of the
         Company with such brokers;

   16)   Impact of Year 2000  computer  hardware,  software and  microprocessors
         embedded in certain  equipment  issues on the Company's  operations and
         potential  for  Year  2000  claims  under   reinsurance  and  insurance
         contracts written by the Company;

   17)   Impact of the Euro on the Company's operations or financial condition;

   18)   Adverse results in litigation matters,  including,  but not limited to,
         litigation related to environmental,  asbestos and other potential mass
         tort claims;

   19)   Changes in the Company's capital needs;

   20)   Changes in the Company's ratings;

   21)   The impact of current and future  regulatory  environments,  generally,
         and on the  ability  of the  Company's  subsidiaries  to enter and exit
         reinsurance or insurance markets; and

   22)   Changes  in  the  commission  or  brokerage levels that competitors are
         willing to offer to ceding companies, brokers or agents.

In addition  to the  factors  outlined  above that are  directly  related to the
Company's  businesses,  the Company is also subject to general  business  risks,
including, but not limited to, adverse state, federal or foreign legislation and
regulation,  adverse  publicity or news  coverage,  changes in general  economic
factors, and the loss of key employees.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

See "Market Sensitive Instruments" in Item 7.

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.

None.

38
<PAGE>
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 1999 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, 1998 (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.


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 1998.


                                                                              39
<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 22, 1999.


                                            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           March 22, 1999
----------------------------          Executive Officer
     JOSEPH V. TARANTO                   and Director

/s/  STEPHEN L. LIMAURO              Vice President and           March 22, 1999
----------------------------         Comptroller (also
     STEPHEN L. LIMAURO         principal financial officer)                   
                                                       

/s/  MARTIN ABRAHAMS                      Director                March 22, 1999
----------------------------
     MARTIN ABRAHAMS

/s/  KENNETH J. DUFFY                     Director                March 22, 1999
----------------------------
     KENNETH J. DUFFY

/s/  JOHN R. DUNNE                        Director                March 22, 1999
----------------------------
     JOHN R. DUNNE

/s/  THOMAS J. GALLAGHER                  Director                March 22, 1999
----------------------------
     THOMAS J. GALLAGHER

/s/  WILLIAM F. GALTNEY, JR.              Director                March 22, 1999
----------------------------
     WILLIAM F. GALTNEY, JR.



40
<PAGE>                                    
INDEX TO FINANCIAL STATEMENTS AND SCHEDULES

                                                                           PAGES
                                                                           -----
EVEREST REINSURANCE HOLDINGS, INC.
         Report of Independent Accountants on Financial 
          Statements and Schedules......................................     F-2
         Consolidated Balance Sheets at December 31, 1998 and 1997......     F-3
         Consolidated Statements of Operations for the years
          ended December 31, 1998, 1997 and 1996........................     F-4
         Consolidated Statements of Changes in Stockholders' Equity 
          for the years ended December 31, 1998, 1997 and 1996..........     F-5
         Consolidated Statements of Cash Flows for the years ended 
          December 31, 1998, 1997 and 1996..............................     F-6
         Notes to Consolidated Financial Statements.....................     F-7


SCHEDULES
I        Summary of Investments Other Than Investments in Related 
          Parties at December 31, 1998..................................     S-1

II       Condensed Financial Information of Registrant:
            Balance Sheets as of December 31, 1998 and 1997.............     S-2
            Statements of Operations for the Years Ended 
             December 31, 1998, 1997 and 1996...........................     S-3
            Statements of Cash Flows for the Years Ended 
             December 31, 1998, 1997 and 1996...........................     S-4

III      Supplementary Insurance Information as of December 31, 1998 
          and 1997 and for the years ended December 31, 1998, 
          1997 and 1996.................................................     S-5

IV       Reinsurance for the years ended December 31, 1998, 1997 
          and 1996......................................................     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>
REPORT OF  INDEPENDENT  ACCOUNTANTS

To  the Board of Directors  and  Shareholders
of Everest Reinsurance Holdings, Inc.

In our opinion,  the consolidated  financial  statements  listed in the index on
page F-1 of this  Form  10-K  present  fairly,  in all  material  respects,  the
financial position of Everest Reinsurance Holdings, Inc. and its subsidiaries at
December 31, 1998 and 1997,  and the results of their  operations and their cash
flows for each of the three years in the period  ended  December  31,  1998,  in
conformity with generally accepted accounting  principles.  In addition,  in our
opinion,  the financial  statement  schedules listed in the index on page F-1 of
this Form 10-K present  fairly,  in all material  respects,  the information set
forth therein when read in conjunction with the related  consolidated  financial
statements. These financial statements and financial statement schedules are the
responsibility of the Company's management;  our responsibility is to express an
opinion on these financial statements and financial statement schedules based on
our audits.  We conducted  our audits of these  statements  in  accordance  with
generally accepted auditing standards which 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,
assessing the  accounting  principles  used and  significant  estimates  made by
management,  and evaluating the overall  financial  statement  presentation.  We
believe  that our audits  provide a reasonable  basis for the opinion  expressed
above.

PricewaterhouseCoopers LLP
New York, New York
February 17, 1999
Except for Note 14, as to which the date is
March 11, 1999


F-2
<PAGE>
<TABLE>
<CAPTION>
EVEREST REINSURANCE HOLDINGS, INC.
CONSOLIDATED BALANCE SHEETS
               

                                                      December 31,
                                          -----------------------------------
(Dollars in thousands, except 
 par value per share)                               1998                 1997
                                          -----------------------------------
<S>                                       <C>                   <C>
ASSETS:
Fixed maturities - available 
 for sale, at market value
 (amortized cost: 1998, 
 $3,851,051; 1997, $3,658,370)            $    4,100,575        $   3,866,860
Equity securities, at market
 value (cost: 1998, $91,787; 
 1997, $120,510)                                 146,274              158,784
Short-term investments                            34,846               75,244
Other invested assets                              4,736               10,848
Cash                                              39,326               51,578
                                          -----------------------------------
 Total investments and cash                    4,325,757            4,163,314

Accrued investment income                         64,220               60,424
Premiums receivable                              261,488              256,191
Reinsurance receivables                          981,959              692,473
Funds held by reinsureds                         200,302              186,454
Deferred acquisition costs                        70,753               82,332
Prepaid reinsurance premiums                       8,592                8,980
Deferred tax asset                                62,237               74,434
Other assets                                      21,420               13,418
                                          -----------------------------------
   TOTAL ASSETS                           $    5,996,728        $   5,538,020
                                          ===================================

LIABILITIES:
Reserve for losses and 
 adjustment expenses                      $    3,800,041        $   3,437,818
Unearned premium reserve                         284,640              337,383
Funds held under reinsurance
 treaties                                        195,169              190,639
Losses in the course of 
 payment                                          64,630               55,969
Contingent commissions                           111,344              100,027
Other net payable to 
 reinsurers                                       18,731               13,231
Current federal income taxes                        (581)              13,567
Other liabilities                                 43,550               81,903
                                          -----------------------------------
 Total liabilities                             4,517,524            4,230,537
                                          -----------------------------------

Commitments and contingencies
 (Note 11)

STOCKHOLDERS' EQUITY:
Preferred stock, par value:
 $0.01; 50 million shares 
 authorized; no shares issued
 and outstanding (Includes 0.2 
 million shares of Series A                          
 Junior Preferred Stock)                             -                    -
Common stock, par value: $0.01;
 200 million shares authorized; 
 50.9 million shares issued in 1998 
 and 50.8 million shares issued 
 in 1997                                             509                  508
Additional paid-in capital                       390,559              389,876
Unearned compensation                               (240)                (514)
Accumulated other comprehensive 
 income, net of deferred income 
 taxes ($99.8 million in 1998 and 
 $81.9 million in 1997)                          185,518              152,319
Retained earnings                                928,500              773,380
Treasury stock, at cost; 0.9 
 million shares in 1998 and 
 0.3 million shares in 1997                      (25,642)              (8,086)
                                          -----------------------------------
 Total stockholders' equity                    1,479,204            1,307,483
                                          -----------------------------------
   TOTAL LIABILITIES AND 
    STOCKHOLDERS' EQUITY                  $    5,996,728        $   5,538,020
                                          ===================================

</TABLE>

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

                                                                             F-3
<PAGE>
<TABLE>
<CAPTION>

EVEREST REINSURANCE HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
                


                                         Years Ended December 31,
                               -------------------------------------------
(Dollars in thousands,
 except per share amounts)            1998            1997            1996
                               -------------------------------------------
<S>                            <C>             <C>             <C>
REVENUES:

Premiums earned                $ 1,068,010     $ 1,049,847     $   973,611
Net investment income              244,909         228,546         191,901
Net realized capital 
 gain/(loss)                          (765)         15,916           5,695
Other income/(loss)                  3,046           4,880          (1,867)
                               -------------------------------------------
                                 1,315,200       1,299,189       1,169,340
                               -------------------------------------------

CLAIMS AND EXPENSES:
Incurred losses and 
 loss adjustment 
 expenses                          778,404         765,421         716,033
Commission, brokerage, 
 taxes and fees                    274,559         274,796         254,598
Other underwriting 
 expenses                           49,561          51,672          54,870
                               -------------------------------------------
                                 1,102,524       1,091,889       1,025,501
                               -------------------------------------------

INCOME BEFORE TAXES                212,676         207,300         143,839

Income tax                          47,479          52,345          31,812
                               -------------------------------------------

NET INCOME                     $   165,197     $   154,955     $   112,027
                               ===========================================


Other comprehensive 
 income, net of tax                 33,199          74,907           1,524
                               -------------------------------------------

COMPREHENSIVE INCOME           $   198,396     $   229,862     $   113,551
                               ===========================================

PER SHARE DATA:
  Average shares 
   outstanding (000's)              50,374          50,476          50,567
  Net income per 
   common share - basic        $      3.28     $      3.07     $      2.22
                               ===========================================


  Average diluted 
   shares outstanding 
   (000's)                          50,665          50,765          50,711
  Net income per 
   common share - 
   diluted                     $      3.26     $      3.05     $      2.21
                               ===========================================
</TABLE>

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

F-4
<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)               1998              1997              1996
                               ---------------------------------------------------
<S>                            <C>               <C>               <C>
COMMON STOCK (SHARES 
 OUTSTANDING):
Balance, beginning of 
 period                            50,479,271        50,490,273         50,792,869
Issued during the period               34,436            22,600              3,800
Treasury stock acquired 
 during period                       (529,040)          (37,287)          (306,396)
Treasury stock reissued 
 during period                          4,537             3,685                -
                               ---------------------------------------------------
Balance, end of period             49,989,204        50,479,271         50,490,273
                               ===================================================

COMMON STOCK (PAR VALUE):
Balance, beginning of 
 period                        $          508    $          508    $           508
Issued during the period                    1               -                  -
                               ---------------------------------------------------
Balance, end of period                    509               508                508
                               ---------------------------------------------------

ADDITIONAL PAID IN CAPITAL:
Balance, beginning of 
 period                               389,876           389,196            387,349
Contributions during the 
 period                                   -                 -                1,783
Common stock issued during 
 the period                               610               636                 64
Treasury stock reissued 
 during period                             73                44                -
                               ---------------------------------------------------
Balance, end of period                390,559           389,876            389,196
                               ---------------------------------------------------

UNEARNED COMPENSATION:
Balance, beginning of 
 period                                  (514)             (374)              (692)
Net increase (decrease) 
 during the period                        274              (140)               318
                               ---------------------------------------------------
Balance, end of period                   (240)             (514)              (374)
                               ---------------------------------------------------

ACCUMULATED OTHER 
 COMPREHENSIVE INCOME, NET
 OF DEFERRED INCOME TAXES:
Balance, beginning of 
 period                               152,319            77,412             75,888
Net increase during the 
 period                                33,199            74,907              1,524
                               ---------------------------------------------------
Balance, end of period                185,518           152,319             77,412
                               ---------------------------------------------------

RETAINED EARNINGS:
Balance, beginning of 
 period                               773,380           626,501            520,541
Net income                            165,197           154,955            112,027
Dividends declared ( $0.20 
 per share in 1998, $0.16 
 per share in 1997 and 
 $0.12 per share in 1996)             (10,077)           (8,076)            (6,067)
                               ---------------------------------------------------
Balance, end of period                928,500           773,380            626,501
                               ---------------------------------------------------

TREASURY STOCK AT COST:
Balance, beginning of 
 period                                (8,086)           (7,220)               -
Treasury stock acquired 
 during period                        (17,663)             (953)            (7,220)
Treasury stock reissued 
 during period                            107                87                -
                               ---------------------------------------------------
Balance, end of period                (25,642)           (8,086)            (7,220)
                               ---------------------------------------------------

TOTAL STOCKHOLDERS' 
 EQUITY, END OF PERIOD         $    1,479,204    $    1,307,483    $     1,086,023
                               ===================================================

</TABLE>

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

                                                                             F-5
<PAGE>
<TABLE>
<CAPTION>

EVEREST REINSURANCE HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
                             

                                            Years Ended December 31,
                                ------------------------------------------------
(Dollars in thousands)                  1998               1997             1996
                                ------------------------------------------------
<S>                             <C>                <C>               <C>
CASH FLOWS FROM OPERATING 
 ACTIVITIES:
Net income                      $    165,197       $   154,955       $   112,027
 Adjustments to reconcile 
  net income to net cash
  provided by operating 
  activities:
 (Increase) decrease in 
  premiums receivable                 (4,466)          (30,867)           38,285
 (Increase) in funds held 
  by reinsureds, net                  (7,766)           (1,065)          (21,606)
 (Increase) decrease in 
  reinsurance receivables           (289,908)           56,544           (37,084)
 (Increase) decrease in 
  deferred tax asset                  (2,532)           10,451           (13,065)
 Increase in reserve for 
  losses and loss adjustment 
  expenses                           359,178           202,191           281,590
 Increase (decrease) in 
  unearned premiums                  (52,757)          (16,970)           60,293
 (Increase) decrease in 
  other assets and liabilities        16,949            17,706            (1,064)
 Non cash compensation expense           274              (140)              318
 Accrual of bond discount/
  amortization of bond premium        (1,617)             (500)              (46)
 Realized capital (gains) 
  losses                                 765           (15,916)           (5,695)
                                ------------------------------------------------
Net cash provided by 
 operating activities                183,317           376,389           413,953
                                ------------------------------------------------

CASH FLOWS FROM INVESTING 
 ACTIVITIES :
Proceeds from fixed maturities
 matured/called - held to 
 maturity                                -               2,155            20,582
Proceeds from fixed maturities 
 matured/called - available 
 for sale                            162,514           132,231           143,114
Proceeds from fixed maturities
 sold - available for sale           373,327           880,189         1,281,882
Proceeds from equity securities 
 sold                                 50,508            59,494           160,429
Proceeds from other invested 
 assets sold                           7,605             1,368               -
Cost of fixed maturities 
 acquired - held to maturity             -                 -             (17,378)
Cost of fixed maturities 
 acquired - available for sale      (731,500)       (1,413,516)       (1,836,274)
Cost of equity securities 
 acquired                            (22,350)          (45,825)         (150,861)
Cost of other invested assets 
 acquired                               (935)              -              (7,184)
Net (purchases) sales of 
 short-term securities                40,273           (23,422)           26,890
Net increase (decrease) in 
 unsettled securities 
 transactions                           (499)            1,533            (3,166)
                                ------------------------------------------------
Net cash (used in) 
 investing activities               (121,057)         (405,793)         (381,966)
                                ------------------------------------------------

CASH FLOWS FROM FINANCING
 ACTIVITIES:
Acquisition of treasury 
 stock net of reissuances            (17,498)             (822)           (7,220)
Contributions during the 
 period                                  -                 -               1,783
Common stock issued during 
 the period                              625               636                64
Dividends paid to 
 stockholders                        (10,077)           (8,076)           (6,067)
Net increase (decrease) in 
 collateral for loaned 
 securities                          (47,119)           47,119           (19,897)
                                ------------------------------------------------
Net cash provided by 
 (used in) financing 
 activities                          (74,069)           38,857           (31,337)
                                ------------------------------------------------

EFFECT OF EXCHANGE RATE 
 CHANGES ON CASH                        (443)          (10,470)            1,033
                                ------------------------------------------------

Net increase (decrease) 
 in cash                             (12,252)           (1,017)            1,683
Cash, beginning of period             51,578            52,595            50,912
                                ------------------------------------------------
Cash, end of period             $     39,326       $    51,578       $    52,595
                                ================================================

SUPPLEMENTAL CASH FLOW 
 INFORMATION CASH 
 TRANSACTIONS:
Income taxes paid, net          $     65,659       $    53,645       $    38,055
NON-CASH FINANCING 
 TRANSACTION:
Issuance of common stock        $        274       $      (140)      $       318

</TABLE>

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

F-6
<PAGE>
EVEREST REINSURANCE HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
                                                    

For  purposes  of footnote  presentation,  all dollar  values,  except per share
amounts, 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
interests  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
Indemnity  Insurance Company ("Everest  Indemnity"),  Everest Re Holdings,  Ltd.
("Everest Ltd."), a Bermuda domiciled  successor company of Everest Re Ltd. (the
assets of which funded  Everest  Ltd.  and which was  formerly  known as Everest
Reinsurance Ltd. and 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.
They also include Mt.  McKinley  Managers,  L.L.C.  ("Mt.  McKinley")  which was
formed by Holdings  and Everest  National in 1997 as an  insurance  producer and
which  acquired in 1998 the assets of certain  agency  operations in Alabama and
Georgia which now operate as Workcare Southeast, Inc. ("Workcare Southeast") and
Workcare Southeast of Georgia, Inc. ("Workcare Georgia").  Everest National also
acquired an agency operation in Texas,  Workcare,  Inc. The acquisition price of
these three agency operations was $2,900 and the transaction occurred on July 1,
1998. These  acquisitions  have been accounted for by the purchase  method.  Had
these  acquisitions  occurred at the  beginning of 1996,  they would have had 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 1996  financial  statements to
conform to the 1997 and 1998 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  stockholders'
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  stockholders'  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.

                                                                             F-7
<PAGE>
C.  UNCOLLECTIBLE REINSURANCE BALANCES
The Company provides  reserves for uncollectible  reinsurance  balances based on
management's  assessment of the collectibility of the outstanding balances. Such
reserves  were  $25,102 and $14,399 at December  31, 1998 and December 31, 1997,
respectively (see also Note 7).

D.  DEFERRED ACQUISITION COSTS
Acquisition costs,  consisting principally of commissions and brokerage expenses
and  certain  premium  taxes  and fees  associated  with the  Company's  primary
insurance  business  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 $269,160,  $270,605 and $252,928 in
1998, 1997 and 1996, 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 (see
also  Note 11).  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.  Loss and loss adjustment  expense  reserves are
presented  gross  of  reinsurance  receivables  and  incurred  losses  and  loss
adjustment  expenses  are  presented  net of  ceded  reinsurance.  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
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. 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.

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
stockholders' equity.

I.  EARNINGS PER SHARE
SFAS No. 128 requires an enterprise  to present  basic and diluted  earnings per
share on the  income  statement.  Basic  earnings  per  share is  calculated  by
dividing net income by the weighted average number of common shares outstanding.
Diluted  earnings per share reflects the potential  dilution that could occur if
securities or other  contracts to issue common stock were exercised or converted
into common  stock or resulted in the  issuance of common stock that then shared
in the earnings of the entity.
                                               
F-8
<PAGE>
Net income per common share has been computed below in accordance  with SFAS No.
128, based upon weighted average common and dilutive shares outstanding.
<TABLE>

                                      1998            1997            1996
                                ------------------------------------------
<S>                             <C>             <C>             <C>

Net income (numerator)          $  165,197      $  154,955      $  112,027
                                ==========================================

Weighted average common 
 and effect of dilutive 
 shares used in the 
 computation of net 
 income per share:                   
   Average shares 
    outstanding - basic
    (denominator)                   50,374          50,476          50,567
   Effect of dilutive 
    shares                             291             289             144
                                ------------------------------------------
   Average shares 
    outstanding - diluted
    (denominator)                   50,665          50,765          50,711
                                ==========================================
Net income per common 
 share:
   Basic                        $     3.28      $     3.07      $     2.22
   Diluted                            3.26            3.05            2.21
</TABLE>
Options to purchase 738,600, 337,750 and 20,000 shares of common stock at prices
ranging from $37.41 to $39.16,  $39.16 and $26.63, per share were outstanding at
the end of 1998,  1997 and  1996,  respectively,  but were not  included  in the
computation of earnings per diluted share for the respective years,  because the
options'  exercise price was greater than the average market price of the common
shares at the end of such years. The options, which expire between September 26,
2007 and  September  25,  2008,  September  26,  2007  and  November  18,  2006,
respectively,  were still  outstanding  at the end of 1998 with the exception of
26,400 shares which were not included in the computation at the end of 1997.

J.   SEGMENTATION
In June 1997,  the  Financial  Accounting  Standards  Board issued  Statement of
Financial Accounting Standards ("SFAS") No. 131,  "Disclosures about Segments of
an Enterprise and Related Information". This statement establishes standards for
the way a public enterprise reports  information about its operating segments in
its financial statements.  The Company, through its subsidiaries,  operates as a
single  segment  focusing on the coverage of property  and casualty  risks which
emphasizes central control and coordination of critical business  elements.  The
Company's   product  is  distributed   globally  through  multiple  markets  and
distribution  channels  including  insurance  and  reinsurance,  originated on a
broker,  direct and program manager basis,  accepting primary,  proportional and
excess layers, treaty and facultative arrangements, covering virtually all lines
of  business.  The  management  approach  of  the  Company  is to  focus  on the
enterprise's overall  profitability as opposed to an analysis of the stand alone
profitability results of any unit.


K.  FUTURE APPLICATION OF ACCOUNTING STANDARDS
In June 1998,  the  Financial  Accounting  Standards  Board issued  Statement of
Financial  Accounting  Standards  ("SFAS") No. 133,  "Accounting  for Derivative
Instruments and Hedging Activities".  This statement requires all derivatives to
be  recognized  as either  assets or  liabilities  in the statement of financial
position and to be measured at fair value.  This  statement is effective for all
fiscal  quarters and fiscal  years  beginning  after June 15,  1999.  Management
believes  that the  statement  will not have a material  impact on the financial
position of the Company.

                                                                             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, 1998
Fixed maturities - available 
 for sale
 U.S. Treasury securities and 
  obligations of U.S. 
  government agencies and
  corporations                     $   151,976    $      7,644    $          4    $   159,616
 Obligations of states and 
  political subdivisions             1,982,490         134,411             470      2,116,431
 Corporate securities                  839,892          46,444           5,682        880,654
 Mortgage-backed securities            388,843          20,171              68        408,946
 Foreign government securities         241,310          29,744              -         271,054
 Foreign corporate securities          246,540          17,547             213        263,874
                                   ----------------------------------------------------------
TOTAL                              $ 3,851,051    $    255,961    $      6,437    $ 4,100,575
                                   ==========================================================

As of December 31, 1997
Fixed maturities - available 
 for sale
 U.S. Treasury securities and 
  obligations of U.S. 
  government agencies and
  corporations                     $   144,079    $      3,076    $         86    $   147,069
Obligations of states and 
  political subdivisions             1,610,190         112,211             293      1,722,108  
 Corporate securities                  893,885          39,189              16        933,058 
 Mortgage-backed securities            521,048          20,504               2        541,550
 Foreign government securities         232,815          20,540              57        253,298
 Foreign corporate securities          256,353          13,426               2        269,777
                                   ----------------------------------------------------------
TOTAL                              $ 3,658,370    $    208,946    $        456    $ 3,866,860 
                                   ==========================================================
</TABLE>
During 1997, the Company transferred all of the fixed maturity securities in its
held-to-maturity  classification  (with an amortized  cost of $78,974 and market
value  of  $85,508)  to  the   available-for-sale   classification   to  enhance
management's  flexibility with respect to future portfolio  management.  The net
financial  statement impact at the time of the transfer was a $4,247 increase in
net after-tax unrealized appreciation of investments.
                                                                            
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.  Mortgage-backed  securities generally
are more likely to be prepaid than other fixed maturites. As the stated maturity
of such  securities  may not be indicative of actual  maturities,  the total for
mortgage-backed securities is shown separately.
<TABLE>
                                                          December 31, 1998
                                                     ----------------------------
                                                       Amortized           Market
                                                            Cost            Value
                                                     ----------------------------
<S>                                                  <C>             <C>
Fixed maturities - available for sale
   Due in one year or less                           $    75,137     $     75,594
   Due after one year through five years                 452,953          477,709
   Due after five years through ten years              1,423,395        1,534,307
   Due after ten years                                 1,510,724        1,604,019
   Mortgage-backed securities                            388,842          408,946
                                                     ----------------------------
TOTAL                                                $ 3,851,051     $  4,100,575
                                                     ============================
</TABLE>
F-10
<PAGE>
Proceeds from sales of fixed  maturity  investments  during 1998,  1997 and 1996
were $373,327,  $880,189 and  $1,281,882,  respectively.  Gross gains of $6,328,
$6,766 and $9,146, and gross losses of $6,615,  $9,439 and $20,952 were realized
on those sales during 1998, 1997 and 1996, 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,
                                              ---------------------------
                                                    1998             1997
                                              ---------------------------
<S>                                           <C>              <C>
Cost                                          $   91,787       $  120,510
Unrealized appreciation                           54,748           39,162
Unrealized depreciation                             (261)            (888)
                                              ---------------------------
Market value                                  $  146,274       $  158,784                                                           
                                              ===========================
</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,
                                     ----------------------------------
                                         1998         1997         1996
                                     ----------------------------------
<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                   $ 16,212     $  6,361     $  5,897
 Fixed maturities                      41,034      120,764      (14,440)
 Other invested assets                     -            -            -
 Deferred taxes                       (20,036)     (44,494)       2,583
                                     ----------------------------------

Increase (decrease) in unrealized 
 appreciation, net of deferred 
 taxes, included in stockholders' 
 equity                                37,210       82,631       (5,960)
Increase (decrease) during the 
 period between the market value
 and cost of fixed maturities 
 carried at amortized cost                 -        (7,852)      (4,288)
                                     ----------------------------------        
TOTAL                                $ 37,210     $ 74,779     $(10,248)
                                     ==================================
</TABLE>
The components of net investment income are presented in the table below:
<TABLE>
                                            Years Ended December 31,
                                     -------------------------------------
                                          1998          1997          1996
                                     -------------------------------------
<S>                                  <C>           <C>           <C>
Fixed maturities                     $ 249,382     $ 232,779     $ 198,947
Equity securities                        4,601         4,473         2,835
Short-term securities                    2,849         3,435         5,357
Other interest income                    3,273         2,582         1,450
                                     -------------------------------------
Total gross investment income          260,105       243,269       208,589
                                     -------------------------------------
Interest on funds held                  11,983        11,173        12,294
Other investment expenses                3,213         3,550         4,394
                                     -------------------------------------
Total investment expenses               15,196        14,723        16,688
                                     ------------------------------------- 
Total net investment income          $ 244,909     $ 228,546     $ 191,901
                                     =====================================
</TABLE>
                                                                            F-11
<PAGE>
The  components of realized  capital  gains  (losses) are presented in the table
below:
<TABLE>
                                             Years Ended December 31,
                                      -------------------------------------
                                          1998          1997           1996
                                      -------------------------------------
<S>                                   <C>           <C>           <C>
Fixed maturities                      $   (287)     $ (2,673)     $ (11,805)
Equity securities                         (455)       18,572         17,443
Short-term investments                     (23)           17             57
                                      -------------------------------------
TOTAL                                 $   (765)     $ 15,916      $   5,695
                                      =====================================
</TABLE>
Securities with a carrying value amount of $280,245 at December 31, 1998 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, 1998, 1997 and 1996.

                                      
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,
                                      -------------------------------------------
                                             1998            1997            1996
                                      ------------------------------------------- 
<S>                                   <C>             <C>             <C>
Reserves at January 1                 $ 3,437,818     $ 3,246,858     $ 2,969,341
 Less reinsurance recoverables            688,694         746,640         700,877
                                      -------------------------------------------
 Net balance at January 1               2,749,124       2,500,218       2,268,464
                                      -------------------------------------------

Incurred related to:
 Current year                             752,349         768,597         745,594
 Prior years                               26,055          (3,176)        (29,561)
                                      -------------------------------------------
  Total incurred losses and 
   loss adjustment expenses               778,404         765,421         716,033
                                      -------------------------------------------
Paid related to:
 Current year                             192,404         185,310         213,832
 Prior years                              450,824         331,205         270,447
                                      -------------------------------------------
  Total paid losses and loss 
   adjustment expenses                    643,228         516,515         484,279 
                                      -------------------------------------------
Net balance at December 31              2,884,300       2,749,124       2,500,218
 Plus reinsurance recoverables            915,741         688,694         746,640
                                      -------------------------------------------
  Balance at December 31              $ 3,800,041     $ 3,437,818     $ 3,246,858
                                      ===========================================
</TABLE>

4.    CREDIT LINE

In May 1998, the Company renewed its 364 day revolving line of credit with First
Union National Bank originally  entered into in June 1997. This credit facility,
which will be used for liquidity and general  corporate  purposes,  provides for
the  borrowing of up to $50 million.  There have been no  borrowings  under this
facility in 1998 or 1997.  The credit  facility  agreement  continues to require
that  Everest Re maintains  statutory  surplus of not less than $575 million and
that the  Company  not allow its ratio of certain  debt to capital to be greater
than a specified  amount.  The Company may choose an interest rate on borrowings
equal to either (i) the Base Rate (as defined  below),  (ii) an adjusted  London
Interbank  Offered Rate  ("LIBOR") plus a margin (the "Margin") or (iii) a Money
Market Rate,  which is a daily  uncommitted  advised rate.  The Base Rate is the
higher of the rate of interest  established by the bank from time to time as its
reference  rate in making  loans or the Federal  Funds rate plus 0.5% per annum.
The  amount of the  Margin and the  commitment  fee  payable to the bank for the
credit  facility  depend upon the insurance  strength or claims  paying  ability
ratings of Everest Re.

F-12
<PAGE>                                               
5.      OPERATING LEASE AGREEMENTS

The future minimum rental commitments, exclusive of cost escalation clauses, for
all of the Company's  operating  leases with remaining  non-cancelable  terms in
excess of one year are as follows:
<TABLE>
(in thousands)
<S>                                             <C>

1999                                            $        3,892
2000                                                     4,093
2001                                                     4,076
2002                                                     3,664
2003                                                     3,046
Thereafter                                                 731
                                                --------------
Total payments                                          19,502
Sublease rental income                                   3,025
                                                --------------
Net Commitments                                 $       16,477
                                                ==============
</TABLE>
All of these leases,  the expiration terms of which range from 1999 to 2008, are
for the rental of office space.  Rental expense,  net of sublease rental income,
was $5,313, $4,903 and $5,334 for 1998, 1997 and 1996, respectively.


6.       INCOME TAXES

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

                                              Years Ended December 31,
                                        ----------------------------------
                                            1998         1997         1996
                                        ----------------------------------
<S>                                     <C>          <C>          <C>
Current tax:
   U.S.                                 $ 44,341     $ 18,892     $ 24,363
   Foreign                                 8,854       23,000       20,735
                                        ----------------------------------
   Total current tax                      53,195       41,892       45,098
Total deferred U.S. tax (benefit)         (5,716)      10,453      (13,286)
                                        ----------------------------------
   Total income tax                     $ 47,479     $ 52,345     $ 31,812
                                        ==================================
</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,
                                       -------------------------------------      
                                         1998            1997           1996
                                       -------------------------------------
<S>                                    <C>             <C>            <C>

Federal income tax rate                  35.0%           35.0%          35.0%
Increase (reduction) in 
 taxes resulting from:
   Tax exempt income                    (14.8)          (12.1)         (15.1)
   Other, net                             2.1             2.4            2.2
                                       -------------------------------------
   Effective tax rate                    22.3%           25.3%          22.1%
                                       =====================================
</TABLE>
                                                                            F-13
<PAGE>
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,
                                           --------------------------
                                                1998             1997
                                           -------------------------- 
<S>                                        <C>              <C>  
Deferred tax assets:
 Reserve for losses and 
  loss adjustment expenses                 $ 164,894        $ 155,666
 Unearned premium reserve                     19,323           22,988
 Foreign currency translation                  6,637            4,480
 Net operating loss 
  carryforward                                 1,401            1,222
 Other assets                                  6,505            8,866
                                           --------------------------
Total deferred tax assets                    198,760          193,222  

Deferred tax liabilities:
 Deferred acquisition costs                   24,764           28,816
 Net unrealized appreciation 
  of investments                             106,404           86,368
 Other liabilities                             5,355            3,604
                                           --------------------------
Total deferred tax liabilities               136,523          118,788
                                           --------------------------
Net deferred tax assets                    $  62,237        $  74,434
                                           ==========================
</TABLE>
Holdings  has total net  operating  loss  carryforwards  of $4,002  which expire
during years 2001-2014. Management believes that it is more likely than not that
the Company  will  realize  the  benefits  of its 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   subsidiaries
indefinitely.  If these  earnings  were  distributed,  foreign  tax  credits are
available  under  current law to reduce or eliminate  any  resulting  income tax
liability.

On April 21, 1998,  the Supreme  Court  issued its  decision in ATLANTIC  MUTUAL
INSURANCE  COMPANY V.  COMMISSIONER,  upholding the Internal  Revenue  Service's
position  regarding the computation of the fresh start benefit  relating to 1986
reserve strengthening.  Pursuant to a separation agreement entered into with The
Prudential,  its  former  parent  at the time of the  Company's  initial  public
offering in 1995, the Company paid The Prudential  $10,445  representing tax and
interest in resolution of the matter.  The Company had adequate  provisions  for
this tax contingency and, as a result, this item has not materially impacted the
Company's financial position.

                                      
7.       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  without  relieving  the  insurer of its
obligation to the policyholder. 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,
including  letters of credit,  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").  This
agreement,  for a premium of $140,000,  provides  protection against 100% of the
first $150,000 of adverse  development,  if any, and 90% of the next $250,000 of
adverse  development,  if any, of Everest Re's consolidated  reserves for losses
and  uncollectible  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.  Coverage  under the Stop Loss  Agreement  terminates on

F-14
<PAGE>
December 31, 2007,  or earlier if coverage is  exhausted.  Through  December 31,
1998 and 1997,  cessions under the Stop Loss Agreement have aggregated  $339,179
and $185,231,  respectively,  yielding remaining limits, net of coinsurance,  of
$35,821 and $189,769 at December 31, 1998 and 1997, respectively.

The  Prudential  has,  subject  to the terms and  conditions  of the  guarantee,
guaranteed all of Gibraltar's  payment obligations under the Stop Loss Agreement
and up to  $400,000  of  Gibraltar's  net  payment  obligations  under all other
reinsurance  agreements  between Gibraltar and Everest Re, $128,275 of which has
been  discharged  by loss  payments  made to the Company  subsequent to June 30,
1995.  At  December  31,  1998,  Gibraltar's  net  obligations  under such other
reinsurance agreements consisted of the following balances:
<TABLE>
<S>                                                             <C>
Reinsurance receivables from Gibraltar                          $ 421,278
Reserve for losses and loss adjustment 
 expenses assumed from Gibraltar                                 (164,204)
Losses in the course of payment assumed 
 from Gibraltar                                                    (5,382)
Funds held by Everest Re under reinsurance 
 treaties with Gibraltar                                         (127,183)
                                                                ---------
   Net obligations of Gibraltar                                 $ 124,509
                                                                =========
</TABLE>
Gibraltar  has  disputed  $63,000  ceded under the Stop Loss  Agreement  and, in
accordance   with  the  terms  of  the  Stop  Loss  Agreement,   Gibraltar   has
secured the disputed  amount.  Gibraltar  has also  disputed  Everest Re's level
of  reserves  previously  ceded  to  and paid by  Gibraltar  under the Stop Loss
Agreement and claims a refund of $91,700.  Should  Everest Re and  Gibraltar not
resolve  these  disputes, pursuant to the terms of the Stop Loss Agreement, each
will appoint an independent  examiner  to review  the  disputed  amounts  and to
determine  the  appropriate  amount of  cessions  to  Gibraltar,  and Everest Re
will secure the $91,700 amount.  If the examination process does not resolve the
disputes, the Stop Loss Agreement  provides for resolution through  arbitration.
In   the   event   the   cessions   to   Gibraltar   were   determined   to   be
excessive,  Everest Re would  reduce the cession to  Gibraltar  by such  excess,
refund  previous  payments  made by  Gibraltar,  if  applicable,  and the unused
portion  of the  limits  of the Stop Loss  Agreement  would be  restored.  Also,
Everest Re would  consider the  independent  examiners'  findings in its ongoing
determination of appropriate  reserve levels,  which may lead to a corresponding
reduction in Everest Re's gross reserves,  and net reserves to the extent of the
coinsurance  under the Stop Loss  Agreement.  In the event the  cessions are not
determined  to be  excessive,  Gibraltar  would be obligated to pay the disputed
amount.  Accordingly,  if the disputes are resolved in  Gibraltar's  favor,  any
adverse  effect on the Company's  financial  condition and results of operations
would  likely be limited to a  reduction  in cash flows from  operations  with a
corresponding impact on investment income.

Gibraltar  has  disputed  $39,714  ceded  under a 1986 quota  share  reinsurance
("Direct  Excess  Retrocession")  through  which  Gibraltar  assumed 100% of the
liabilities  related to Everest Re's former direct excess  insurance  operations
which ceased  writing  business in 1985.  Gibraltar  is  disputing  the level of
reserves  established by the Company primarily  reflecting reserves for asbestos
losses,  but Gibraltar is not disputing its  responsibility  to pay the ultimate
losses  in  accordance  with  the  terms  of  the  Direct  Excess  Retrocession.
Management does not expect that this dispute will have a material adverse effect
on the  Company's  future  financial  condition,  results of  operations or cash
flows.

Written and earned premiums are comprised of the following:
<TABLE>
                                          Years Ended December 31,
                                ---------------------------------------------
                                       1998             1997             1996
                                ---------------------------------------------
<S>                             <C>              <C>              <C>
Written premium:
   Direct                       $    78,976      $    75,653      $    59,691
   Assumed                          966,914          999,316          984,340
   Retroceded                       (29,291)         (43,827)         (13,497)
                                ---------------------------------------------
   Net written premium          $ 1,016,599      $ 1,031,142      $ 1,030,534
                                =============================================
Earned premium
   Direct                       $    75,017      $    77,784      $    37,963
   Assumed                        1,022,611        1,012,168          945,698
   Retroceded                       (29,618)         (40,105)         (10,050)
                                ---------------------------------------------
   Net earned premium           $ 1,068,010      $ 1,049,847      $   973,611
                                =============================================
</TABLE>
The  amounts  deducted  from  losses  and loss adjustment  expenses incurred for
retrocessional  recoveries were $357,366,  $109,574 and $206,032 for  the  years
ended December 31, 1998, 1997 and 1996, respectively.

                                                                            F-15
<PAGE>
8.       COMPREHENSIVE INCOME

The Company  adopted SFAS No. 130,  "Reporting  Comprehensive  Income",  in 1998
which requires an enterprise to present items of other comprehensive income in a
financial statement and to display  accumulated  balances of other comprehensive
income in the equity section of a financial statement.
                                      
The components of comprehensive income for the periods ending December 31, 1998,
1997 and 1996 are shown in the following table:
<TABLE>
                                         1998            1997            1996
                                    -----------------------------------------
<S>                                 <C>             <C>             <C>
Net Income                          $ 165,197       $ 154,955       $ 112,027
                                    -----------------------------------------

Other comprehensive income, 
 before tax:
 Foreign currency translation 
  adjustments                          (6,304)        (11,891)         11,287
 Unrealized gains on securites:
  Unrealized gains arising 
   during period                       58,012         111,209         (14,238)
  Less:  reclassification 
   adjustment for realized 
   (gains) losses included 
   in net income                          765         (15,916)         (5,695)
                                    -----------------------------------------
Other comprehensive income, 
 before tax                            50,943         115,234           2,744
                                    -----------------------------------------

Income tax expense (benefit) 
 related to items of other 
 comprehensive income:
 Tax expense (benefit) from 
  foreign currency translation         (2,292)         (4,167)          3,803
 Tax expense (benefit) from 
  holding gains arising during 
  period                               20,304          38,923          (4,576)
 Tax expense (benefit) from 
  gains included in net income           (268)          5,571           1,993
                                    -----------------------------------------
Income tax expense (benefit) 
 related to items of other 
 comprehensive income:                 17,744          40,327           1,220

Other comprehensive income, 
 net of tax                            33,199          74,907           1,524
                                    -----------------------------------------

Comprehensive Income                $ 198,396       $ 229,862       $ 113,551
                                    =========================================
</TABLE>                                     
The  following  table  shows  the components of the change in accumulated  other
comprehensive  income for the years ending  December 31, 1998 and 1997.
<TABLE>
                                                   1998                         1997
                                          ----------------------------------------------------
<S>                                       <C>           <C>            <C>           <C>
Beginning balance of accumulated 
 other comprehensive income                             $ 152,319                    $  77,412
                                                        ---------                    ---------

Beginning balance of foreign 
 currency translation adjustments         $ (8,078)                    $   (354)
Current period change in foreign 
 currency translation adjustmens            (4,012)        (4,012)       (7,724)        (7,724)
                                          ----------------------------------------------------
Ending balance of foreign currency
 translation adjustments                   (12,090)                      (8,078)
                                          --------                     --------

Beginning balance of unrealized 
 gains on securities                       160,397                       77,766
Current period change in unrealized 
 gains on securities                        37,211         37,211        82,631         82,631
                                          ----------------------------------------------------
Ending balance of unrealized gains 
 on securities                             197,608                      160,397
                                          --------                     --------

Current period change in accumulated 
 other comprehensive income                                33,199                       74,907
                                                        ---------                    ---------

Ending balance of accumulated other
 comprehensive income                                   $ 185,518                    $ 152,319
                                                        =========                    =========
</TABLE>
F-16
<PAGE>                                            
9.     EMPLOYEE BENEFIT PLANS

The Company  adopted SFAS No. 132,  "Employers'  Disclosures  about Pensions and
Other  Postretirement  Benefits," in 1998 which revises  employers'  disclosures
with  respect to pension and other  postretirement  benefit  plans.  The Company
maintains both a qualified and  non-qualified  defined  benefit pension plan for
its U.S.  employees.  Generally,  the Company  computes  the  benefits  based on
average  earnings over a period  prescribed by the plans and credited  length of
service.  The  Company  has  not  been  required  to fund  contributions  to its
qualified defined benefit pension plan for the years ended December 31, 1998 and
1997  because  the  Company's  qualified  plan was  subject to the full  funding
limitation  under  the  Internal  Revenue  Service  guidelines.   The  Company's
non-qualified  defined  benefit  pension  plan,  established  in 1998,  provides
compensating   pension  benefits  for  participants  whose  benefits  have  been
curtailed  under the qualified  plan due to Internal  Revenue Code  limitations.
Pension  expense for the Company's  plans for the years ended December 31, 1998,
1997 and 1996 were $1,565, $770 and $901, respectively.
                                      
The following table summarizes the status of these plans:
<TABLE>
                                                       Years Ended December 31,
                                                       ------------------------
                                                           1998            1997
                                                       ------------------------
<S>                                                    <C>             <C>
Change in projected benefit obligation:
 Benefit obligation at beginning of year               $ 17,115        $ 15,131
 Service cost                                             1,089           1,063
 Interest cost                                            1,178           1,030
 Change in accumulated benefit obligation                   954              - 
 Affect of future salary increases                        1,286              -
 Actuarial gain                                            (228)          (900)
 Change in discount rate                                    869            834
 Benefits paid                                             (168)           (43)
                                                       -----------------------
 Benefit obligation at end of year                       22,095         17,115
                                                       -----------------------

Change in plan assets:
 Fair value of plan assets at beginning 
  of year                                                17,389         14,610
 Actual return on plan assets                               911          2,822
 Benefits paid                                             (168)           (43)
                                                       -----------------------
 Fair value of plan assets at end of year                18,132         17,389
                                                       -----------------------

 Funded status                                           (3,963)           274
 Unrecognized prior service cost                          1,328             -
 Unrecognized net loss or (gain)                           (913)        (2,257)
                                                       -----------------------
 (Accrued) pension cost                                $ (3,548)       $(1,983)
                                                       =======================
</TABLE>
Plan  assets are  comprised  of shares in  investment  trusts with approximately
64% and 36% of the  underlying  assets consisting of equity securities and fixed
maturities, respectively.

Net periodic pension cost included the following components:
<TABLE>
                                        Years Ended December 31,
                                 --------------------------------------   
                                     1998           1997           1996
                                 --------------------------------------
<S>                              <C>            <C>            <C>
Service cost                     $  2,001       $  1,063       $  1,102
Interest cost                       1,178          1,031            948
Actual return on assets            (1,560)        (2,824)        (1,841)
Amortization of net gain 
 from earlier periods                 (54)           (10)            -
Net asset gain during  
 period deferred for 
 later recognition                     -           1,510            692
                                 --------------------------------------
Net periodic pension cost        $  1,565       $    770       $    901  
                                 ======================================
</TABLE>
The weighted  average  discount  rates used to determine the  actuarial  present
value of the projected  benefit  obligation  for 1998,  1997 and 1996 are 6.75%,
7.00%  and  7.25%,  respectively.  The  rate of  compensation  increase  used to
determine the actuarial  present value of the projected  benefit  obligation for
1998,  1997 and 1996 is 4.50%.  The  expected  long-term  rate of return on plan
assets for 1998, 1997 and 1996 is 9.0%.

                                                                            F-17
<PAGE>
The Company also maintains both qualified and non-qualified defined contribution
plans ("Savings Plan" and "Non-Qualified  Savings Plan",  respectively) covering
U.S.  employees.  Under the plans, the Company contributes up to a maximum 3% of
the  participants  compensation  based  on the  contribution  percentage  of the
employee.  The  Non-Qualified  Savings Plan provides  compensating  savings plan
benefits for  participants  whose benefits have been curtailed under the Savings
Plan due to Internal Revenue Code limitations.  The Company's  incurred expenses
related  to these  plans  are  $488,  $489 and $466  for  1998,  1997 and  1996,
respectively.

In addition,  the Company maintains several defined  contribution  pension plans
covering non-U.S.  employees.  Each branch office (Canada, London, Belgium, Hong
Kong and Singapore) maintains a separate plan for the non-U.S. employees working
in that location.  The Company contributes various amounts based on salary, age,
and/or years of service.  The  contributions  as a percentage  of salary for the
branch  offices range from 2% to 12%. The  contributions  are generally  used to
purchase pension benefits from local insurance providers. The Company's incurred
expenses related to these plans are $348, $650 and $414 for 1998, 1997 and 1996,
respectively.

During  1998,  the  Company  adopted  a  Senior  Executive   Change  of  Control
Plan and entered  into a change of control  agreement  with the Chief  Executive
Officer,  which will  provide  benefits  to certain  officers  in the event of a
change in control of the Company.


10.     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, 1998, Everest Re had $179,176 available for payment of
dividends in 1999 without prior regulatory approval.

B.  STATUTORY FINANCIAL INFORMATION
Everest Re prepares  its  statutory  financial  statements  in  accordance  with
accounting  practices  prescribed  or permitted 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
$1,059,429  and  $908,766  at  December  31,  1998 and 1997,  respectively.  The
statutory  net income of Everest Re was  $176,672,  $193,057 and $88,517 for the
years ended December 31, 1998, 1997 and 1996, respectively.

                                                   
11.      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)  historical data concerning  asbestos
and   environmental    losses,   which   is   more   limited   than   historical

F-18
<PAGE>
information  on other  types of casualty  claims;  (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.

Although these complications have become less severe in recent years, management
believes  that these  factors  continue  to render  reserves  for  asbestos  and
environmental losses significantly less subject to traditional actuarial methods
than  are  reserves  on  other  types  of  losses.  Given  these  uncertainties,
management  believes  that no meaningful  range for such ultimate  losses can be
established. 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 7).
                                      
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>
                                      1998            1997            1996
                                 -----------------------------------------
<S>                              <C>             <C>             <C>
Gross basis
Beginning of reserves            $ 446,132       $ 423,336       $ 428,495
Incurred losses                    249,597          83,724          30,028
Paid losses                        (34,936)        (60,928)        (35,187)
                                 -----------------------------------------
End of period reserves           $ 660,793       $ 446,132       $ 423,336
                                 =========================================

Net basis
Beginning of reserves            $ 212,376       $ 199,557       $ 185,981
Incurred losses  (1)                15,385           3,490              -
Paid losses  (2)                    35,781           9,329          13,576
                                 -----------------------------------------
End of period reserves           $ 263,542       $ 212,376       $ 199,557
                                 =========================================
</TABLE>
---------------------
(1) Net  of  $138,467,  $41,178  and  $24,196  ceded  in  1998,  1997  and 1996,
respectively,  under the incurred loss reimbursement feature of  the  Stop  Loss
Agreement.

(2) Net  of  $39,667,  $22,610  and  $34,451 ceded paid losses in 1998, 1997 and
1996,  respectively, under the Stop Loss Agreement.

At December 31, 1998, the gross reserves for asbestos and  environmental  losses
were  comprised  of  $137,560  representing  case  reserves  reported  by ceding
companies,  $67,863 representing additional case reserves established by Everest
Re on assumed reinsurance claims, $40,905 representing case reserves established
by Everest Re on direct excess insurance claims and $414,465  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 7). 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 payments.  The
estimated  cost  to  replace  all  such  annuities  for  which  Everest  Re  was
contingently  liable at December 31, 1998 and 1997 was  $143,204  and  $140,478,
respectively.

                                                                            F-19
<PAGE>                                                  
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, 1998 and 1997 was
$10,790 and $9,968, respectively.


12.      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, 1998, there
were 1,800,051 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, 1998, there were 38,145  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,
1998,  1997 and 1996 and  changes  during  the years  then  ended  is  presented
below:
<TABLE>
                                               1998                           1997                           1996
                               ---------------------------------------------------------------------------------------- 
                                                Weighted-                      Weighted-                      Weighted-
                                                  Average                        Average                        Average
                                  Shares   Exercise Price        Shares   Exercise Price        Shares   Exercise Price
                               ----------------------------------------------------------------------------------------
<S>                            <C>         <C>                <C>         <C>                <C>         <C>  
Outstanding,
 beginning of year               999,020   $        26.39       732,570   $        19.72       459,700   $        16.93
Granted                          429,750            37.57       339,250            39.13       286,270            24.10
Exercised                         34,436            17.74        11,100            16.75         3,800            16.75
Forfeited                         87,235            25.58        61,700            19.00         9,600            18.25
                               ---------                      ---------                      ---------                
Outstanding, end of
 year                          1,307,099   $        30.35       999,020   $        26.39                 $        19.72
                               =========                      =========                                             
Options exercisable at
 year-end                        365,189                        215,313                         91,496
                               =========                      =========                      =========
Weighted-average fair
 value of options
 granted during the
 year                                      $        17.21                 $        18.37                 $        11.55
                                           ==============                 ==============                 ==============
</TABLE>                                     
The following table summarizes  information  about stock options  outstanding at
December 31, 1998:
<TABLE>
                                                                                   Options
                               Options Outstanding                               Exercisable
                         --------------------------------------------------------------------------------------
                                                Weighted-
                              Number              Average          Weighted-          Number          Weighted-
Range of                 Outstanding            Remaining            Average     Exercisable            Average
Exercise Prices          at 12/31/98     Contractual Life     Exercise Price     at 12/31/98     Exercise Price
---------------------------------------------------------------------------------------------------------------
<S>                      <C>             <C>                  <C>                <C>             <C>
$16.75  to  $20.94           324,600         6.5              $        17.01         196,400     $        17.01
$22.56  to  $26.63           242,399         7.6                       24.13         104,939              24.07
$33.00  to  $39.16           740,100         9.3                       38.23          63,850              39.13
                         -----------                          -------------------------------------------------
                           1,307,099         8.3              $        30.35         365,189     $        22.90
                         ===========                          =================================================
</TABLE>
Since its 1995 initial  public  offering,  the Company has issued to certain key
employees of the Company  58,100  restricted  shares of stock.  Upon issuance of
restricted  shares,  unearned  compensation  is  charged to stockholders' 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  $99,  $203  and  $318  for  1998,
1997  and  1996,   respectively.   In   1998,  10,460  restricted   shares  were
forfeited, while  6,400  restricted  shares   were   forfeited   in   1997.  The

F-20
<PAGE>
Company acquired 1,680 shares and 30,887 shares of its common stock at a cost of
$58 and $846 in 1998 and 1997  respectively,  and, pursuant to the 1995 Employee
Plan, 306,396 shares of the common stock at a cost of $7,220 in 1996,  primarily
from the Chief Executive  Officer,  to fund required  withholding  taxes arising
from a prior period stock award.  Also, the Company  recorded  contributions  to
paid in capital  representing  the tax benefits  attributable  to the difference
between the amount of  compensation  expense  deductible  for tax purposes  with
respect  to the  stock  awards  and  the  amount  of such  compensation  expense
reflected in the Company's financial statements.
                                                   
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>
                                                           1998          1997          1996
                                                      -------------------------------------
<S>                               <C>                 <C>           <C>           <C>

Net Income                        As reported         $ 165,197     $ 154,955     $ 112,027
                                  Pro forma           $ 162,768     $ 153,492     $ 110,850
Earnings per share - basic        As reported         $    3.28     $    3.07     $    2.22
                                  Pro forma           $    3.23     $    3.04     $    2.19
Earnings per share - diluted      As reported         $    3.26     $    3.05     $    2.21
                                  Pro forma           $    3.21     $    3.02     $    2.19
</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
yields ranging from 0.5% to 0.7%, (ii) expected  volatility  ranging from 32.86%
to 34.79%,  (iii) risk-free interest rates ranging from a low of 4.71% to a high
of 7.01%, and (iv) expected life of 7.5 years.
                                      
In  addition  to the 1995  Employee  Plan and 1995  Director  Plan,  the Company
transferred  4,537 and 3,685 shares of treasury stock having an aggregate  value
of $179 and $131 to its non-employee directors as compensation for their service
as directors in 1998 and 1997, respectively.


13.     GEOGRAPHIC 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,
                               ---------------------------------------------
                                      1998             1997             1996
                               --------------------------------------------- 
<S>                            <C>              <C>              <C>
Premiums earned:
  Domestic                     $   737,384      $   696,645      $   655,097
  International                    330,626          353,202          318,514
                               ---------------------------------------------
Total premiums earned          $ 1,068,010      $ 1,049,847      $   973,611 
                               =============================================
Net income (loss):
  Domestic                     $   170,434      $   115,728      $    70,978
  International                     (5,237)          39,227           41,049
                               ---------------------------------------------
Total net income               $   165,197      $   154,955      $   112,027
                               =============================================

                                                      December 31,
                                                ----------------------------  
                                                       1998             1997
                                                ----------------------------
Total identifiable assets:
  Domestic                                      $ 5,173,103      $ 4,714,134
  International                                     823,625          823,886
                                                ----------------------------
Total identifiable assets                       $ 5,996,728      $ 5,538,020
                                                ============================
</TABLE>
The basis for  "International"  is the geographic area of the Company's internal
marketing units.

Approximately  17.0%,  19.3% and 15.9% of  the Company's gross premiums  written
in 1998, 1997 and 1996,  respectively,  were sourced through one intermediary.

                                                                            F-21
<PAGE>
14.     SUBSEQUENT EVENTS

On February 9, 1999 and March 11, 1999,  Gibraltar disputed $39,714 and $154,700
with respect to cessions under the Direct Excess  Retrocession and the Stop Loss
Agreement,  respectively.  Management is pursuing contractual dispute resolution
mechanisms with respect to these disputes. (See Note 7)

                                      
15.  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> 
1998 OPERATING DATA:
 Gross written premium                $ 253,011     $ 267,452     $ 272,408     $ 253,019
 Net written premium                    242,694       255,599       257,985       260,321
 Earned premium                         241,336       264,726       265,242       296,707
 Net investment income                   60,013        62,525        60,667        61,704
 Net realized capital gain (loss)           (17)        2,523           989        (4,260)
 Incurred losses and LAE                178,592       195,552       189,905       214,355
 Underwriting expenses                   72,261        77,861        83,830        90,168
 Underwriting loss                       (9,517)       (8,687)       (8,493)       (7,816)
 Net income (loss)                    $  39,801     $  43,544     $  42,125     $  39,728
                                      ===================================================

 Weighted average basic shares 
  outstanding (000's)                    50,481        50,480        50,465        50,075
 Net income per common 
  share - basic                       $    0.79     $    0.86     $    0.83     $    0.79
 Weighted average diluted shares 
  outstanding (000's)                    50,800        50,799        50,748        50,317
 Net income per common 
  share - diluted                     $    0.78     $    0.86     $    0.83     $    0.79
                                                                         

1997 OPERATING DATA:
 Gross written premium                $ 246,011     $ 253,233     $ 285,796     $ 289,928
 Net written premium                    233,811       246,072       275,915       275,344
 Earned premium                         230,443       247,515       271,520       300,368
 Net investment income                   54,042        57,368        57,917        59,219
 Net realized capital gain (loss)          (199)       13,410         2,722           (17)
 Incurred losses and LAE                166,841       180,191       204,234       214,155
 Underwriting expenses                   74,754        78,237        76,677        96,799
 Underwriting loss                      (11,152)      (10,913)       (9,391)      (10,586)
 Net income (loss)                    $  34,464     $  44,338     $  38,432     $  37,721
                                      ===================================================

 Weighted average basic shares 
  outstanding (000's)                    50,490        50,469        50,466        50,479
 Net income per common 
  share - basic                       $    0.68     $    0.88     $    0.76     $    0.75
 Weighted average diluted shares 
  outstanding (000's)                    50,725        50,738        50,791        50,807
 Net income per common 
  share - diluted                     $    0.68     $    0.87     $    0.76     $    0.74
</TABLE>
F-22
<PAGE>
<TABLE>
<CAPTION>
EVEREST REINSURANCE HOLDINGS, INC.

SCHEDULE I - SUMMARY OF INVESTMENTS -
OTHER THAN INVESTMENTS IN RELATED PARTIES
DECEMBER 31, 1998
                             
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-available for 
 sale Bonds:
  U.S. Government and government 
   agencies                         $    151,976    $    159,616    $    159,616
  State, municipalities and 
   political subdivisions              1,982,490       2,116,431       2,116,431
  Foreign government securities          241,310         271,054         271,054
  Foreign corporate securities           246,540         263,874         263,874
  Public Utilities                        63,120          67,490          67,490
  All other corporate bonds              766,800         802,739         802,739
  Mortgage pass-through 
   securities                            388,843         408,946         408,946
  Redeemable preferred stock               9,972          10,425          10,425
                                    --------------------------------------------
Total fixed maturities-available 
 for sale                              3,851,051       4,100,575       4,100,575
Equity securities                         91,787         146,274         146,274
Short-term investments                    34,846          34,846          34,846
Other invested assets                      4,736           4,736           4,736
Cash                                      39,326          39,326          39,326
                                    --------------------------------------------
Total investments and cash          $  4,021,746    $  4,325,757    $  4,325,757
                                    ============================================

</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)                                1998                 1997
                                        --------------------------------------
<S>                                     <C>                  <C>
ASSETS
 Cash                                                 -                    -
 Investment in subsidiaries, at 
  equity in the underlying net 
  assets                                $       1,460,084    $       1,301,913
 Receivable from affliate                          18,884                5,731
 Current tax receivable                               -                    -
 Deferred tax asset                                 1,904                1,688
                                        --------------------------------------
Total assets                            $       1,480,872    $       1,309,332
                                        ======================================

LIABILITIES
 Other liabilities                      $           1,668    $           1,849
                                        --------------------------------------

STOCKHOLDERS' EQUITY
 Preferred stock, par value:  
  $0.01;  50 million shares 
  authorized; no shares issued 
  and outstanding (Includes 0.2 
  million shares of Series A 
  Junior Preferred Stock)                             -                    -
 Common stock, par value:  
  $0.01;  200 million shares 
  authorized; 50.9 million 
  shares issued in 1998 and 
  50.8 million shares issued         
  in 1997                                             509                  508
 Paid-in capital                                  390,559              389,876
 Unearned compensation                               (240)                (514)
 Accumulated other comprehensive 
  income, net of deferred taxes
  ($99.8 million in 1998 and $81.9 
  million in 1997)                                185,518              152,319
 Treasury stock, at cost; 0.9 
  million shares in 1998 and              
  0.3 million shares in 1997                      (25,642)              (8,086)    
 Retained earnings                                928,500              773,380
                                        --------------------------------------
  Total stockholders' equity                    1,479,204            1,307,483
                                        --------------------------------------

   Total liabilities and 
    stockholders' equity                $       1,480,872    $       1,309,332
                                        ======================================
</TABLE>

See notes to consolidated financial statements.

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)                  1998              1997              1996
                               -------------------------------------------------
<S>                            <C>               <C>               <C>
REVENUES
Dividends received from 
 subsidiary                    $      43,125     $       9,270     $      17,924
Net Investment Income                    521               241                55
Equity in undistributed 
 net income of subsidiary            122,197           146,970            95,242
                               -------------------------------------------------

  Total revenues                     165,843           156,481           113,221
                               -------------------------------------------------

EXPENSES
 Other expenses                          862             1,184             1,807
                               -------------------------------------------------

Income before taxes                  164,981           155,297           111,414
Income tax (benefit)                    (216)              342              (613)
                               -------------------------------------------------
  Net income                   $     165,197     $     154,955     $     112,027
                               =================================================

</TABLE>
See notes to consolidated financial statements.

                                                                             S-3
<PAGE>
<TABLE>
<CAPTION>

EVEREST REINSURANCE HOLDINGS, INC.

SCHEDULE II - 
CONDENSED FINANCIAL INFORMATION OF THE REGISTRANT
CONDENSED STATEMENT OF CASH FLOWS
                             

                                      For Years Ended December 31,
                              ---------------------------------------------
(Dollars in thousands)                1998            1997             1996
                              ---------------------------------------------
<S>                           <C>             <C>             <C>          
CASH FLOWS FROM OPERATING
 ACTIVITIES
Net income                    $    165,197    $    154,955    $     112,027
 Adjustments to reconcile 
  net income to net cash 
  provided by operating 
  activities:
  Equity in undistributed 
   (earnings) loss of 
   subsidiaries                   (122,197)       (146,970)         (95,242)
  (Decrease) in other 
   liabilities                        (181)           (296)            (364)
  Decrease (increase) in 
   current tax receivable              -             2,918             (972)
  Decrease (increase) in 
   deferred tax asset                 (216)            -                -  
  (Increase) in receivable 
   from affliates                  (13,154)         (2,300)          (3,431)
  Non-cash compensation                273             203              407
                              ---------------------------------------------

NET CASH PROVIDED BY 
 OPERATING ACTIVITIES               29,722           8,510           12,425

CASH FLOWS FROM INVESTING 
 ACTIVITIES
  Additional investment in 
   subsidiaries                     (2,772)           (248)             -


CASH FLOWS FROM FINANCING 
 ACTIVITIES
Acquisition of treasury 
 stock net of reissuances          (17,498)           (822)          (7,220)
Common stock issued during 
 the period                            625             636              420
Dividends paid to 
 stockholders                      (10,077)         (8,076)          (6,067)
                              ---------------------------------------------
Net cash (used in) 
 financing activities              (26,950)         (8,262)         (12,867)

Net (decrease) in cash                 -               -               (442)
Cash, begining of period               -               -                442
                              ---------------------------------------------

Cash, end of period           $        -      $        -      $         -
                              =============================================


SUPPLEMENTAL CASH FLOW 
 INFORMATION 
NON-CASH OPERATING 
 TRANSACTION:
Dividends received from 
 subsidiary in the form 
 of forgiveness of 
 liabilities                  $        967    $      1,536    $       1,767


</TABLE>

See notes to consolidated financial statements.

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                                          INCURRED  AMORTIZATION
                     DEFERRED       LOSSES AND    UNEARNED                     NET LOSS AND LOSS   OF DEFERRED      OTHER
       GEOGRAPHIC ACQUISITION  LOSS ADJUSTMENT     PREMIUM      EARNED  INVESTMENT    ADJUSTMENT   ACQUISITION  OPERATING    WRITTEN
             AREA       COSTS         EXPENSES    RESERVES     PREMIUM      INCOME      EXPENSES         COSTS   EXPENSES    PREMIUM
------------------------------------------------------------------------------------------------------------------------------------
<S>               <C>          <C>               <C>         <C>         <C>          <C>         <C>           <C>       <C> 
December 31, 1998
Domestic          $    50,476       $3,242,579  $  217,982  $  737,384  $  194,607   $   497,113  $    182,918  $  38,287 $ 713,022
International          20,277          557,462      66,658     330,626      50,302       281,291        86,242     16,673   303,577
                  ------------------------------------------------------------------------------------------------------------------
     Total        $    70,753       $3,800,041  $  284,640  $1,068,010  $  244,909   $   778,404  $    269,160  $  54,960 $1,016,599
                  ==================================================================================================================

December 31, 1997
Domestic          $    56,747       $2,914,616  $  244,335   $ 696,645  $  175,053   $   514,021  $    185,885  $  38,267 $  695,211
International          25,585          523,202      93,048     353,202      53,493       251,400        84,720     17,596    335,931
                  ------------------------------------------------------------------------------------------------------------------
     Total        $    82,332       $3,437,818  $  337,383  $1,049,847  $  228,546   $   765,421  $    270,605  $  55,863 $1,031,142
                  ==================================================================================================================

December 31, 1996
Domestic                                                    $  655,097  $  143,301   $   508,247  $    175,241  $  43,738 $  694,053
International                                                  318,514      48,600       207,786        77,687     12,802    336,481
                                                            ------------------------------------------------------------------------
     Total                                                  $  973,611  $  191,901   $   716,033  $    252,928  $  56,540 $1,030,534
                                                            ========================================================================

</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
(Dollars in thousands)        AMOUNT    OTHER COMPANIES    OTHER COMPANIES          AMOUNT           NET
                        --------------------------------------------------------------------------------
<S>                     <C>             <C>                <C>                <C>             <C>
DECEMBER 31, 1998
Total property and 
 liability insurance 
 earned premium         $     75,017    $        29,618    $     1,022,611    $  1,068,010          95.7%
DECEMBER 31, 1997
Total property and 
 liability insurance 
 earned premium         $     77,784    $        40,105    $     1,012,168    $  1,049,847          96.4%
DECEMBER 31, 1996
Total property and 
 liability insurance 
 earned premium         $     37,963    $        10,050    $       945,698    $    973,611          97.1%

</TABLE>

S-6
<PAGE>
INDEX TO EXHIBITS

EXHIBIT NO.                                                                     
-----------                                                                     
     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 Annual
             Report on Form 10-K for the year ended December 31, 1997 (the "1997
             10-K")

     4.1     Rights Agreement, dated as of September 24,  1998, between  Everest
             Reinsurance  Holdings,  Inc. and First Chicago Trust Company of New
             York, as Rights Agent.  The Rights  Agreement  includes as exhibits
             thereto the form of Certificate of Designation specifying the terms
             of the Preferred Shares and the form of Right Certificate. Pursuant
             to the Rights Agreement, printed Right  Certificates  will  not  be
             mailed until as soon  as  practicable  after the earlier of (i) the
             tenth day  after  public  announcement  that  a person or group has
             acquired,  or obtained the right to acquire,  beneficial  ownership
             of 15% or more of the outstanding shares  of Common  Stock  or (ii)
             the  tenth  business  day   after  the  commencement  of,  or   the
             announcement of  an  intention  to  commence,  a tender or exchange
             offer the consummation of  which would  result  in  the  beneficial
             ownership by a person or group of 15% or  more  of the  outstanding
             shares  of  Common  Stock.  The  Rights  Agreement  is incorporated
             herein by  reference  to  Exhibit  4.1 to the  Form  8-K  filed  on
             September 28, 1998

   *10.1     Everest Reinsurance Holdings,  Inc. Annual Incentive Plan effective
             January 1, 1999, filed herewith

    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,
             incorporated herein by reference to Exhibit 10.5 to the 1996 10-K

   *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     Resolution   adopted  by  the  Compensation  Committee  of  Everest
             Reinsurance  Holdings,  Inc.  on  February  24,  1997  establishing
             a Chief Executive  Officer's  Bonus  Plan  incorporated  herein  by
             reference to Exhibit 10.8 to the 1997 10-K

    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)

                                                                             E-1
<PAGE>
   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

  *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

   10.19     Credit agreement between Everest  Reinsurance  Holdings,  Inc.  and
             First Union  National  Bank dated June 16, 1997 providing for a $50
             million revolving credit facility, incorporated herein by reference
             to Exhibit 10.19 to the Form 8-K filed on June 24, 1997

  *10.20     Deferred   Compensation  Plan,  as  amended,   for  certain  United
             States employees  of Everest  Reinsurance  Holdings,  Inc.  and its
             participating subsidiaries filed herewith.

  *10.21     Employment Agreement with Joseph V. Taranto  executed  on  July 15,
             1998, incorporated  herein  by  reference  to  Exhibit 10.21 to the
             Quarterly  Report on Form 10-Q for the quarter  ended June 30, 1998
             (the "second quarter 1998 10-Q")

  *10.22     Change  of  Control  Agreement  with  Joseph V.  Taranto  effective
             July 15, 1998, incorporated herein by reference to Exhibit 10.22 to
             the second quarter 1998 10-Q

   10.23     Credit  Line  Extension  dated   May  20,  1998   between   Everest
             Reinsurance   Holdings,   Inc.  and   First  Union  National  Bank,
             incorporated  herein  by  reference  to Exhibit 10.23 to the second
             quarter 1998 10-Q
 
  *10.24     Senior  Executive Change  of Control Plan,  incorporated  herein by
             reference to Exhibit 10.24 to the Quarterly Report on Form 10-Q for
             the quarter ended September 30, 1998

    11.1     Statement  regarding   computation  of  per  share  earnings  filed
             herewith

    21.1     Subsidiaries of the registrant filed herewith

    23.1     Consent of PricewaterhouseCoopers LLP filed herewith

    27.1     Financial Data Schedule filed herewith


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

E-2
<PAGE>