================================================================================
                       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, 1997       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. [  ]

     The  aggregate  market  value on March 3, 1998 of the voting  stock held by
non-affiliates of the registrant was $1,841 million.

     At March 3, 1998,  the  number of shares  outstanding  of the  registrant's
common stock was 50,482,326.

                       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 1998 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, 1997.

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<PAGE>

TABLE OF CONTENTS

Item                                                                    Page
----                                                                    ----

PART I

 1.  Business ....................................................         1
 2.  Properties ..................................................        21 
 3.  Legal Proceedings ...........................................        21
 4.  Submission of Matters to a Vote of Security 
      Holders ....................................................        21

PART II

 5.  Market for Registrant's Common Equity and Related
      Stockholder Matters ........................................        21
 6.  Selected Financial Data .....................................        22
 7.  Management's Discussion and Analysis of Financial 
      Condition and Results of Operation .........................        24

 7A. Quantitative and Qualitative Disclosures About 
      Market Risk ................................................        32
 8.  Financial Statements and Supplementary Data .................        32
 9.  Changes in and Disagreements with Accountants on 
      Accounting and Financial Disclosure ........................        33


PART III

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

PART IV

14.  Exhibits, Financial Statement Schedules, and 
      Reports on Form 8-K ........................................        33



<PAGE>
                                                       
PART I


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


ITEM 1.  BUSINESS

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

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. The Company had
gross premiums written in 1997 of $1,075.0 million and  stockholders'  equity at
December 31, 1997 of $1,307.5  million and Everest Re had  statutory  surplus at
December 31, 1997 of $908.8 million. Based on industry data at December 31, 1997
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  subsidiaries:  Everest Re Ltd.  ("Everest  Ltd.",  formerly
Everest  Reinsurance  Ltd. and Le Rocher  Reinsurance  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 United
Kingdom  company,  was authorized to engage in the  reinsurance  business in the
United Kingdom and, prior to January 1, 1997, it reinsured risks  worldwide.  In
1996, Everest Re obtained authorization to engage in the reinsurance business in
the United Kingdom,  and the operations of Everest Ltd. were converted to branch
operations  of Everest  Re,  effective  January 1, 1997.  Everest  National,  an
Arizona insurance company, is licensed in 39 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 primary insurance business in
the United  States.  Everest  Indemnity  is licensed  in Delaware  and is in the
process  of  obtaining  eligibility  to  write  business  in  all  states  on  a
non-admitted basis.

In 1997, Holdings formed Mt. McKinley Managers,  L.L.C. ("Mt. McKinley"),  a New
Jersey  limited  liability  corporation,  which  is  licensed  as  an  insurance
producer, including surplus lines authority, in New Jersey.


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 cost
and expense  control.  The  underwriting  strategies  seek to  capitalize on the
Company's staff resources and its flexibility to offer multiple products through
multiple production sources in a cost efficient manner.

The  Company's  products  include  the  full  range  of  property  and  casualty
coverages,  including marine,  aviation,  surety,  errors & omissions  liability
("E&O"),  directors' & officers' liability ("D&O"),  medical malpractice,  other
specialty lines, accident and health,  workers  compensation,  non-standard auto
and loss portfolios.  The Company's distribution sources 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,  will  facilitate  adjustments to its mix of business
geographically,  by line of  business  and by type of  coverage,  allowing it to
capitalize on those market opportunities that provide the greatest potential for
underwriting profitability.  The Company's primary insurance infrastructure will
facilitate  this  strategy by  allowing  the  Company to develop  business  that
requires the Company to issue primary insurance policies.  The Company will also
continue  to  carefully  monitor  its mix of  business  to  avoid  inappropriate
concentrations of geographic or other risk.

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.

Efforts to control  expenses  and to  operate  in a more  cost-efficient  manner
continue to be a focus of the Company.  These  efforts have  resulted in a 45.7%
reduction  in  employees  to 377 at December 31, 1997 from 694 at June 30, 1994,
the restructuring of the Company's facultative operations in 1995 and changes in
certain  vendor  relationships.   These  changes  were  implemented  to  improve
efficiency and eliminate redundant  positions.  Additionally,  the Company is in
the  process of  implementing  a plan to improve the cost  effectiveness  of its
information systems.


MARKETING
The  Company  writes  its  business  on a  worldwide  basis  for many  different
customers  and for many lines of property  and casualty  business.  Its products
provide a broad array of coverages.  The Company is not materially  dependent on
any single customer, small group of customers,  line of business or geographical
area. For the 1997  underwriting  year, no single  customer  generated more than
3.6% 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  64.8% and 35.2% of Everest Re's 1997 gross premiums  written were
written in the broker and direct market,  respectively.  Everest Re's ability to
write  reinsurance both through brokers and directly with ceding companies gives
it the  flexibility  to  pursue  business  regardless  of the  ceding  company's
preferred reinsurance purchasing method.

The  reinsurance  broker  market  consists of several  substantial  national and
international  brokers and a number of smaller specialized  brokers.  Brokers do
not  have  the  authority  to  bind  Everest  Re  with  respect  to  reinsurance
agreements,  nor does  Everest Re commit in advance to accept any portion of the
business  that  brokers  submit  to it.  Reinsurance  business  from any  ceding
company,  whether  new or  renewal,  is subject  to  acceptance  by Everest  Re.
Brokerage  fees  generally are paid by  reinsurers.  The  Company's  largest ten
brokers  accounted  for an aggregate of  approximately  51.3% of gross  premiums
written in 1997 with the two largest brokers accounting for approximately  19.3%
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 UNITS
The following  table  presents the  distribution  of Everest Re's gross premiums
written by its U.S. broker treaty, U.S. direct treaty reinsurance and insurance,
marine,  aviation and surety, U.S. facultative and international  operations for
the years  ended  December  31,  1997,  1996,  1995,  1994 and 1993,  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,
                      -----------------------------------------------------------------------------------------
                              1997              1996             1995              1994              1993
                      -----------------------------------------------------------------------------------------
(Dollars in millions)      $         %        $        %       $         %      $          %       $        %
                      -----------------------------------------------------------------------------------------
<S>                   <C>          <C>    <C>       <C>     <C>       <C>     <C>       <C>    <C>       <C>   
U.S. Broker Treaty
    Property
        Pro Rata(1)   $    62.8     5.8%  $   45.4    4.4%  $  51.7     5.4%  $ 59.7      6.3% $   80.3    8.7%
        Excess             53.3     5.0       60.4    5.8      59.0     6.2     53.9      5.7      88.8    9.7
    Casualty
        Pro Rata(1)        84.6     7.9       63.4    6.1      18.5     1.9     29.6      3.1      28.2    3.1
        Excess            124.3    11.6      137.5   13.2     122.6    12.9    113.5     11.9     103.7   11.3
                      -----------------------------------------------------------------------------------------
    Total(2)              325.0    30.2      306.8   29.4     251.8    26.5    256.6     26.9     301.0   32.8
                      -----------------------------------------------------------------------------------------
U.S. Direct Treaty
   Reinsurance and
   Insurance
    Property
        Pro Rata(1)        11.7     1.1       12.6    1.2       3.3     0.3      5.4      0.6      17.3    1.9
        Excess              4.4     0.4        8.9    0.9       9.1     1.0     12.5      1.3      10.9    1.2
    Casualty
        Pro Rata(1)       128.0    11.9      114.5   11.0      99.8    10.5     83.2      8.7      56.2    6.1
        Excess             14.3     1.3       12.5    1.2      10.0     1.1     38.6      4.0      46.3    5.0
                      -----------------------------------------------------------------------------------------
    Total(2)              158.4    14.7      148.6   14.2     122.2    12.9    139.7     14.7     130.7   14.2
                      -----------------------------------------------------------------------------------------
Marine, Aviation
   and Surety
    Property
        Pro Rata(1)        92.9     8.6       94.6    9.1      89.2     9.4     74.1      7.8      67.3    7.3
        Excess             16.9     1.6       17.8    1.7      18.7     2.0     16.8      1.8      16.3    1.8
    Casualty
        Pro Rata(1)        45.4     4.2       43.1    4.1      53.0     5.6     66.0      6.9      48.6    5.3
        Excess              6.4     0.6        5.6    0.5       6.0     0.6      4.8      0.5      10.5    1.1
                      -----------------------------------------------------------------------------------------
    Total(2)              161.6    15.0      161.1   15.4     166.9    17.6    161.7     17.0     142.7   15.5
                      -----------------------------------------------------------------------------------------
U.S. Facultative
    Property
        Pro Rata(1)          -       -          -      -         -       -        -        -         -      -
        Excess             29.0     2.7       26.9    2.6      22.3     2.3     27.4      2.9      20.9    2.3
    Casualty
        Pro Rata(1)          -       -          -      -         -       -        -        -         -      -
        Excess             53.4     5.0       61.8    5.9      46.6     4.9     39.3      4.1      35.0    3.8
                      -----------------------------------------------------------------------------------------
    Total(2)               82.4     7.7       88.7    8.5      68.8     7.2     66.7      7.0      55.9    6.1
                      -----------------------------------------------------------------------------------------
Total U.S.
    Property
        Pro Rata(1)       167.4    15.6      152.6   14.6     144.2    15.2    139.2     14.6     164.9   18.0
        Excess            103.6     9.6      114.0   10.9     109.1    11.5    110.6     11.6     136.9   14.9
    Casualty
        Pro Rata(1)       258.0    24.0      221.1   21.2     171.3    18.0    178.8     18.8     133.0   14.5
        Excess            198.4    18.5      217.6   20.8     185.2    19.5    196.1     20.6     195.5   21.3
                      -----------------------------------------------------------------------------------------
    Total(2)              727.4    67.7      705.2   67.5     609.7    64.2    624.7     65.5     630.3   68.7
                      -----------------------------------------------------------------------------------------
International
    Property
        Pro Rata(1)       144.2    13.4      124.2   11.9     136.2    14.3    147.0     15.4     122.1   13.3
        Excess             62.9     5.9       79.8    7.6      84.9     8.9     89.2      9.4      81.5    8.9
    Casualty
        Pro Rata(1)        99.2     9.2       90.5    8.7      66.4     7.0     49.6      5.2      44.4    4.8
        Excess             41.3     3.8       44.4    4.3      52.3     5.5     42.7      4.5      39.8    4.3
                      -----------------------------------------------------------------------------------------
    Total(2)              347.6    32.4      338.8   32.5     339.8    35.8    328.5     34.5     287.8   31.3
                      -----------------------------------------------------------------------------------------
Total Company
    Property
        Pro Rata(1)       311.6    29.0      276.7   26.5     280.4    29.5    286.2     30.0     287.0   31.3
        Excess            166.5    15.5      193.8   18.6     194.0    20.4    199.8     21.0     218.4   23.8
    Casualty
        Pro Rata(1)       357.2    33.2      311.6   29.8     237.6    25.0    228.4     24.0     177.4   19.3
        Excess            239.7    22.3      261.9   25.1     237.5    25.0    238.8     25.1     235.3   25.6
                      -----------------------------------------------------------------------------------------
    Total(2)          $ 1,075.0   100.0% $ 1,044.0  100.0%  $ 949.5   100.0% $ 953.2    100.0% $  918.1  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 1997,  $116.1 million of gross premiums written were attributable to domestic
property  business  (which in 1997 included  accident and health  business),  of
which  45.9% was  written on an excess of loss basis and 54.1% was  written on a
pro rata basis.  This unit  utilizes  sophisticated  underwriting  methods which
management  believes  are  necessary  to analyze  and price  property  business,
particularly that segment of the property market which has catastrophe exposure.

Domestic  casualty  business  accounted  for $208.9  million  of gross  premiums
written in 1997, of which 59.5% was written on an excess of loss basis and 40.5%
was  written  on a pro  rata  basis.  The  treaty  casualty  portfolio  consists
principally  of  professional  liability,   directors'  &  officers'  liability,
workers' compensation,  excess and surplus lines, and other liability coverages.
As a  result  of the  complex  technical  nature  of most of  these  risks,  the
Company's casualty  underwriters tend to specialize by line of business and work
closely with the Company's pricing actuaries.

DIRECT TREATY REINSURANCE AND INSURANCE OPERATIONS.  The Company's direct treaty
reinsurance  operation writes a full line of property and casualty business.  In
1997,  direct treaty  business  accounted  for $83.5  million of gross  premiums
written,  of which  22.4% was  written  on an excess of loss basis and 77.6% 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 1997, the Company's domestic insurance  operation  consisted of $74.9 million
of gross premiums written primarily through Everest National,  which is licensed
in 39 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 1997 totaled  $106.5
million,  substantially  all of which was written on a treaty basis and 69.1% of
which was sourced through reinsurance brokers. Marine treaties represented 51.4%
of marine and aviation gross premiums  written in 1997 and consisted of hull and
liability coverage. Approximately 85.6% of the marine unit premiums in 1997 were
written  on a pro rata  basis and 14.4% as  excess  of loss.  Aviation  premiums
accounted for 48.6% of marine and aviation  gross  premiums  written in 1997 and
included   reinsurance   for   airlines,   general   aviation  and   satellites.
Approximately  87.7% of the aviation  unit's  premiums in 1997 were written on a
pro rata basis and 12.3% as excess of loss.

In 1997,  gross  premiums  written by the surety  unit  totaled  $55.1  million.
Approximately  83.6% of the surety unit  premiums in 1997 were  written on a pro
rata  basis  and  16.4% 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 1997,  $26.5 million,  $29.0 million,  and $26.9 million of gross
premiums written were  attributable to property,  general casualty and specialty
lines of business, respectively.

INTERNATIONAL.   Everest  Re's  international   operations   are   designed   to
enable it to  capitalize  on  the  growth  opportunities  in  the  international
reinsurance   market.   The  Company  targets  several  international   markets,
including:   Europe  and  the  London  market,  which  are  serviced  by  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

                                                                               5
<PAGE>

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  59.6% of the gross premiums
written by the Company's international underwriters in 1997 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 81.1% of the Company's  international business was written through
brokers, with the remainder written directly with ceding companies.

In 1997,  Everest  Re's  gross  premiums  written  by its  London  and  Brussels
operations  totaled $159.1  million and consisted of pro rata property  (29.5%),
excess property (21.2%),  pro rata casualty (38.0%) and excess casualty (11.3%).
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 1997 from the Brussels and London
offices totaled $83.2 million and $75.9 million, respectively.

Gross premiums written by Everest Re's Canadian  operation totaled $57.7 million
in 1997 and consisted of pro rata property (5.2%),  excess property (11.0%), pro
rata multi-line  (46.6%),  excess casualty (33.7%) and primary insurance written
by Everest Canada (3.5%). Approximately 69.4% of the Canadian premiums consisted
of treaty  reinsurance  while  27.1% was  facultative  reinsurance  and 3.5% was
primary insurance.

Everest  Re's Hong Kong and  Singapore  offices  cover the Asian and  Australian
markets and accounted for $45.2 million of gross written  premiums in 1997. This
business  consisted of pro rata treaty property (87.9%),  excess treaty property
(11.1%) and excess facultative casualty (1.0%). No premiums were written in 1997
from the Singapore office, which opened in the fourth quarter of the year.

International  business written out of Everest Re's New Jersey and Miami offices
accounted  for $85.6  million of Everest  Re's 1997 gross  premiums  written and
consisted of pro rata treaty property (61.7%), pro rata treaty casualty (13.5%),
excess  treaty  property   (13.7%),   excess  treaty  casualty  (1.8%),   excess
facultative  property  (6.6%) and excess  facultative  casualty  (2.7%).  Of the
treaty business 54.5% was sourced from Latin America, 19.8% was sourced from the
Middle East,  6.7% was sourced from Europe,  5.4% was sourced from Africa,  1.3%
was sourced from Asia and 12.3% was "home-foreign" business.


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

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

6
<PAGE>

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  $200  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  $116 million.  There can be no assurance that Everest Re will not
experience losses from one or more catastrophic events that exceed, perhaps by a
substantial amount, its estimated PML.

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

Everest Re does not typically retrocede individual risks, but does, from time to
time, purchase  retrocessional  protections where the underwriter deems it to be
prudent to reinsure a portion of the specific risk being  assumed.  In addition,
Everest Re has purchased a three layer property facultative retrocession program
which  provides  $18  million of  coverage  in excess of $2 million of  retained
losses per facultative  certificate and purchases three retrocessional  workers'
compensation excess of loss treaties which collectively  provide $115 million of
coverage  in excess of $5 million of  retained  losses on  accidental  death and
dismemberment  claims  resulting  from a  catastrophe  loss.  The  Company  also
purchases  a  worker's  compensation  reinsurance  program  which  provides  for
statutory  limits coverage in excess of $250,000 per occurrence on the Company's
primary worker's compensation insurance 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.  Effective January 1, 1997, the
Company's  worldwide  catastrophe  retrocession  program  was amended to provide
coverage  in  each  of the  three  years,  1997  through  1999,  subject  to the
retrocessionaire's  right to cancel on November 1, 1998. The  attachment  point,
net of inuring retrocessions,  of the worldwide catastrophe retrocession program
is $25 million per catastrophe. In 1997, the Company could have retroceded 75.0%
of the next $75.0 million of losses in excess of the  attachment  point incurred
on a per  catastrophe  and aggregate  basis.  In 1998, the Company can retrocede
75.0% of the next  $112.5  million of losses in excess of the  attachment  point
incurred on a per catastrophe and aggregate  basis.  Fifty percent of the unused
portion of the 1998 year's coverage increases the limit of coverage for 1999 (up
to 75.0% of  $168.75  million).  The  maximum  recoverable  under the  worldwide
catastrophe retrocession program over the three-year period is $126.56 million.

For the period from May 1, 1997 through May 1, 1998,  the Company's  catastrophe
retrocession  program  also  provides  coverage  of 76.0% 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,  1997  through May 23,
1998, the Company's catastrophe  retrocession program provides coverage of 75.0%
of $25.0 million per occurrence in excess of $30.0 million in losses incurred by
the Company in the Caribbean,  Israel,  Canada and Colombia. In each of 1997 and
1998,   Everest  Re  purchased  an  accident  year  aggregate   excess  of  loss
retrocession  agreement  which provides up to $100.0 million of limit if Everest
Re's statutory loss ratio exceeds 79.0% for the respective accident years.

                                                                               7
<PAGE>

Although the catastrophe and aggregate excess of loss  retrocessions  have terms
which provide for additional premiums to be paid to the  retrocessionaire in the
event that losses are ceded, all aspects of the Company's retrocessional program
have  been  structured  to  permit  these  agreements  to be  accounted  for  as
reinsurance under Statement of Financial  Accounting Standards ("SFAS") No. 113.
If a single  catastrophe  were to occur in the United  States  that  resulted in
$200.0 million of gross losses and allocated loss adjustment  expenses  ("ALAE")
in 1998 (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 $108.2  million.  This pre-tax net loss
estimate  assumes  that Everest  Re's  aggregate  losses and ALAE for 1998 would
exceed the 79.0% loss ratio requirement in the aggregate excess of loss cover by
at least $100.0 million.

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

As of December 31, 1997,  Everest Re had  retrocessional  arrangements  with 418
retrocessionaires,  and it carried  as an asset  $692.5  million in  reinsurance
receivables with respect to losses ceded to retrocessionaires, substantially all
of which  will not be due to Everest  Re until  Everest Re makes  payment on the
underlying claims. Of this amount, $324.9 million, or 46.9%, was receivable from
Gibraltar  ($88.9  million,  net of collateral  held and liability  balances for
which  Everest Re has a  contractual  right of  offset).  An  additional  $150.0
million,   or  21.7%,   was  receivable  from  Continental   Insurance   Company
("Continental").   None  of  the  reinsurance   receivables  from  Gibraltar  or
Continental  was in  dispute  or more  than 90 days  in  arrears.  Everest  Re's
arrangement with Continental is managed on a funds held basis,  which means that
Everest Re did not release premium payments to the  retrocessionaire  but rather
retains such payments to secure  obligations  of the  retrocessionaire,  records
them as a liability and reduces the liability account as payments become due. As
of December  31,  1997,  such funds had  reduced  Everest  Re's net  exposure to
Continental to $95.3 million. No other retrocessionaire  accounted for more than
$20.5 million of Everest Re's receivables.

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, 1997, Gibraltar's
reinsurance  receivables  from  Everest Re totaled  $132.4  million.  MUF became
inactive with respect to new business in 1991.

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

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

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

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

8
<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 $94.1  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.  Also see
Note 8F of Notes to the Consolidated Financial Statements.


STANDBY CAPITAL CONTRIBUTION AGREEMENT AND PRUCO INDEMNITY
On October 5, 1995, Holdings agreed,  pursuant to a Standby Capital Contribution
Agreement  (the  "Capital  Contribution  Agreement"),  to make  certain  capital
contributions ("Capital  Contributions") to Everest Re. And, on October 5, 1995,
PRUCO agreed to make payments ("Indemnity Payments") to Holdings, pursuant to an
Indemnity Agreement (the "PRUCO  Indemnity"),  in an amount equal to the Capital
Contributions.  For a description of the Capital Contribution  Agreement and the
PRUCO Indemnity, see Note 8A of Notes to the Consolidated Financial Statements.


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

As of December 31, 1997, based on publicly available information, The Prudential
had statutory  basis total assets of $194.0 billion,  statutory  surplus of $9.2
billion and total equity on a GAAP basis of $19.7 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.

                                                                               9
<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
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
1987 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 1990 for $100,000 was first reserved in 1987 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 1987 through 1989 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.

10
<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)     1987      1988      1989      1990      1991      1992      1993      1994      1995      1996      1997
                     -------------------------------------------------------------------------------------------------------------
<S>                  <C>       <C>       <C>       <C>       <C>       <C>       <C>       <C>       <C>       <C>       <C>    
Reserves for unpaid
   loss and LAE      $ 1,676.7 $ 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
Paid (cumulative)
   as of:
   One year later        345.7     299.1     321.9     597.1     333.3     461.5     403.5     359.5     270.4     331.2
   Two years later       582.3     522.3     829.5     785.9     550.4     740.1     627.7     638.0     502.8
   Three years later     757.0     984.3     966.3     933.1     758.3     897.0     820.5     828.0
   Four years later    1,189.1   1,096.1   1,078.2   1,096.9     868.1   1,036.0     953.0
   Five years later    1,278.7   1,189.5   1,209.0   1,176.9     970.0   1,141.0
   Six years later     1,358.6   1,308.9   1,276.3   1,257.3   1,052.9
   Seven years later   1,478.7   1,367.9   1,346.6   1,329.8
   Eight years later   1,532.0   1,430.7   1,407.9
   Nine years later    1,591.1   1,489.0
   Ten years later     1,646.7
Liability re-
 estimated as of:
   One year later      1,768.0   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
   Two years later     1,841.5   1,813.2   1,834.3   1,872.8   1,775.7   1,988.9   2,015.4   2,233.7   2,264.5
   Three years later   1,839.6   1,805.6   1,849.5   1,907.5   1,843.3   2,010.0   2,119.0   2,271.2
   Four years later    1,879.1   1,867.6   1,913.6   1,976.5   1,855.7   2,111.9   2,164.5
   Five years later    1,942.2   1,934.5   1,982.3   1,984.3   1,955.1   2,155.3
   Six years later     2,029.1   2,007.6   1,984.1   2,080.0   1,995.8
   Seven years later   2,118.0   2,008.0   2,089.4   2,123.2
   Eight years later   2,125.2   2,122.6   2,135.9
   Nine years later    2,243.1   2,167.6
   Ten years later     2,287.5
Cumulative 
 redundancy/
 (deficiency)         $ (610.8) $ (391.8) $ (369.2) $ (231.3) $ (242.9) $ (300.6) $ (230.3) $ (167.0) $   51.5  $    3.2
                      ============================================================================================================
Gross liability - 
 end of year                                                                      $2,576.0  $2,752.7  $3,016.9  $3,298.2  $3,498.7
Reinsurance 
 receivable                                                                          641.8     648.5     700.9     746.6     688.7
                                                                                  ------------------------------------------------
Net liability-end
 of year                                                                           1,934.2   2,104.2   2,316.0   2,551.6   2,810.0
                                                                                  --------------------------------------- ========
Gross re-estimated
 liability at 
 December 31, 1997                                                                 3,056.9   3,096.2   3,228.7   3,380.0
Re-estimated
 receivable at
 December 31, 1997                                                                   892.4     825.0     964.2     831.6
                                                                                  ---------------------------------------
Net re-estimated
 liability at 
 December 31, 1997                                                                 2,164.5   2,271.2   2,264.5   2,548.4
                                                                                  ---------------------------------------
Gross cumulative
  redundancy/
  (deficiency)                                                                    $ (480.9) $ (343.5) $ (211.8) $  (81.8)
                                                                                  =======================================
</TABLE>

----------
(1)  Includes Gibraltar data through September 30, 1991

                                                                              11
<PAGE>

For years  prior to 1987,  management  believes  that two  factors  had the most
significant impact on loss development.  First, through the mid-1980's, a number
of industry  and external  factors,  such as the  propensity  of courts to award
large damage awards in liability cases,  combined to increase loss frequency and
severity to unexpectedly  high levels.  Second,  contracts written prior to 1986
contained coverage terms which, for Everest Re and the industry in general, have
been  interpreted by courts to provide  coverage for asbestos and  environmental
exposures not contemplated by either the pricing or the initial reserving of the
contracts.  Legal  developments  during the mid-1980's  necessitated  additional
reserving for such exposures on both a case and IBNR basis. Incurred losses with
respect to asbestos and  environmental  claims,  net of  reinsurance,  were $3.5
million, -0-, -0-, $40.5 million and $70.6 million in 1997, 1996, 1995, 1994 and
1993,  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
1997 reflected 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".  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  1987-1990  "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 $285.6 million for the year ended 1987 and
$288.5 for each of the years 1988 through 1990. The following  table  identifies
the  cumulative  reserve  redundancy/(deficiency)  relating to  Gibraltar  only,
Everest Re excluding Gibraltar and the consolidated group.

<TABLE>
<CAPTION>


                           CUMULATIVE RESERVE REDUNDANCY/(DEFICIENCY) ATTRIBUTABLE TO GIBRALTAR

                                                            Years Ended December 31,
                       ----------------------------------------------------------------------------------------------------
(Dollars in millions)       1987      1988       1989      1990      1991      1992      1993      1994      1995      1996
                       ----------------------------------------------------------------------------------------------------
<S>                    <C>        <C>       <C>       <C>       <C>        <C>       <C>       <C>       <C>       <C>              
Everest Re excluding
 Gibraltar             $  (434.2) $ (261.9) $ (271.1) $ (201.3) $  (242.9) $ (300.6) $ (230.3) $ (167.0) $   51.5  $    3.2
Gibraltar                 (176.6)   (129.9)    (98.1)    (30.0)       -         -         -         -         -         -
                       ----------------------------------------------------------------------------------------------------
Consolidated           $  (610.8) $ (391.8) $ (369.2) $ (231.3) $  (242.9) $ (300.6) $ (230.3) $ (167.0) $   51.5  $    3.2
                       ====================================================================================================

</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, 1997.  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.

12
<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)              1988     1989      1990     1991      1992     1993      1994      1995      1996      1997             Year
                    ---------------------------------------------------------------------------------------------------------------
<S>                 <C>      <C>      <C>       <C>      <C>       <C>      <C>       <C>       <C>        <C>        <C>           
Accident
Years
1987 & prior        $ (91.4) $ (73.5) $    2.0  $ (39.5) $  (63.1) $ (86.9) $  (88.9) $   (7.2) $ (117.9)  $ (44.4)   $     (610.8)
1988                            54.8     (20.6)    47.1       1.1     20.0      15.8       6.8       3.4      (0.7)          127.7
1989                                     (50.1)    (6.5)     46.8      2.8       4.4      (1.4)      9.2      (1.5)            3.7
1990                                               24.5       8.7     29.4      (0.4)     (6.0)      9.7       3.3            69.2
1991                                                         21.6     (3.2)      1.4      (4.6)     (3.8)      2.5            13.9
1992                                                                 (36.6)      7.9      (8.7)     (2.5)     (2.7)          (42.6)
1993                                                                           (14.5)     14.2      (1.7)     (2.1)           (4.1)
1994                                                                                      (9.8)     (9.2)      8.0           (11.0)
1995                                                                                               142.4      59.6           202.0
1996                                                                                                         (18.8)          (18.8)
Total calendar    
  year effect       $ (91.4) $ (18.7) $  (68.7) $  25.6  $   15.1  $ (74.5) $  (74.3) $  (16.7) $   29.6   $   3.2    $     (270.8)

</TABLE>
              
      
As illustrated by this table, the factors which caused the deficiencies shown in
the Ten Year Statutory Loss Development Table relate almost entirely to accident
years  prior to 1987.  With the  exception  of the  1992  accident  year,  which
included Hurricane Andrew,  the original reserves  established for each accident
year since 1987 have  developed  either  positively  or in a manner  that is not
materially adverse. Adverse development relating to accident years prior to July
1, 1995  (prior to  January 1, 1995 for  catastrophe  losses)  is  mitigated  by
recoveries under the Stop Loss Agreement. As the Stop Loss Agreement was entered
into in 1995,  recoveries  thereunder  are  reflected in the 1995  accident year
rather  than  in  the  accident  year  which  included  the  underlying  adverse
development.

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

<TABLE>
<CAPTION>


                  RECONCILIATION OF RESERVES FOR LOSSES AND LAE

                                               Years Ended December 31,
                                      ------------------------------------------
(Dollars in millions)                        1997           1996            1995
                                      ------------------------------------------
<S>                                   <C>             <C>            <C>                                                  
Reserves at beginning of period       $   3,246.9     $  2,969.3     $   2,706.4
                                      ------------------------------------------
Incurred related to:
  Current year                              768.6          745.6           658.0
  Prior years                                (3.2)         (29.6)           16.7
                                      ------------------------------------------
       Total incurred losses                765.4          716.0           674.7
                                      ------------------------------------------
Paid related to:
  Current year                              185.3          213.9           104.6
  Prior years                               331.2          270.4           359.5
                                      ------------------------------------------
       Total paid losses                    516.5          484.3           464.1
                                      ------------------------------------------
Change in reinsurance receivables
  on unpaid losses and LAE                  (58.0)          45.9            52.3
                                      ------------------------------------------
Reserves at end of period             $   3,437.8     $  3,246.9    $    2,969.3
                                      ==========================================
                               
</TABLE>

                                                                              13
<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,
1997 is shown below:

<TABLE>
<CAPTION>


                  RECONCILIATION OF RESERVES FOR LOSSES AND LAE
                       FROM STATUTORY BASIS TO GAAP BASIS

                                              Years Ended December 31,
                                    --------------------------------------------
(Dollars in millions)                      1997            1996            1995
                                    --------------------------------------------
<S>                                 <C>             <C>             <C>                                                
Statutory reserves-net (1)          $   2,778.6     $   2,313.0     $   2,108.3
Statutory retroactive 
  reinsurance reserves                     31.4            15.4             5.4
Financing arrangement                       -             (10.3)          (10.3)
                                    --------------------------------------------
Subtotal                                2,810.0         2,318.1         2,103.4
Foreign subsidiary reserves (1)             -             233.5           212.6
                                    --------------------------------------------
     Subtotal-net reserves as 
       shown in loss development
       schedule                         2,810.0         2,551.6         2,316.0
Reinsurance receivable on unpaid
  losses                                  688.7           746.6           700.9
                                    --------------------------------------------
     Subtotal-gross reserves as 
       shown in loss development
       schedule                         3,498.7         3,298.2         3,016.9
Foreign translation effect of 
  Canadian reserves (2)                   (60.9)          (51.3)          (47.6)
                                    --------------------------------------------
Reserves on a GAAP basis            $   3,437.8     $   3,246.9     $   2,969.3
                                    ============================================
</TABLE>

-----------
(1) On  January  1, 1997  the  insurance  operations  of  Everest  Re  Ltd. were
    converted to branches of  Everest  Re.  For  1997, the  net reserves for the
    branches are included in statutory net reserves, and for 1996 and  1995, the
    Everest Re Ltd. reserves are shown as foreign subsidiary reserves.
(2) Pursuant to statutory  accounting  conventions, reserves with respect to the
    Canadian Branch are reflected in Canadian dollars.
                                 
Statutory reserves are  presented  net of reinsurance receivables on unpaid loss
and LAE for years ended December 31, 1997, 1996 and 1995.  The amounts  shown as
financing arrangement in 1996 and 1995 relate  to  a single treaty which did not
qualify for reinsurance accounting under GAAP.


RESERVES FOR ASBESTOS AND ENVIRONMENTAL LOSSES AND LOSS ADJUSTMENT EXPENSES
Everest Re's reserves include an estimate of Everest Re's ultimate liability for
asbestos and  environmental  claims for which ultimate value cannot be estimated
using traditional reserving techniques.  There are significant  uncertainties in
estimating  the  amount of Everest  Re's  potential  losses  from  asbestos  and
environmental  claims.  See Item 7,  "Management's  Discussion  and  Analysis of
Financial  Condition  and Results of  Operations  -- Asbestos and  Environmental
Exposures" and Note 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, 1997, 1996 and 1995.

<TABLE>

                                            Years Ended December 31,
                                 --------------------------------------------
(Dollars in millions)                   1997            1996            1995
                                 --------------------------------------------
<S>                              <C>             <C>             <C>   
Case reserves reported
 by ceding companies             $     125.9     $     101.2     $     108.5
Additional reserves 
 established by Everest Re
 (assumed reinsurance)                  52.0            50.1            43.8
Case reserves established 
 by Everest Re (Ceded 
 Direct Insurance)                      45.8            52.8            50.3
IBNR reserves                          222.4           219.2           225.9
                                 --------------------------------------------
Gross reserves                         446.1           423.3           428.5
Reinsurance receivable                (233.7)         (223.7)         (242.5)
                                 --------------------------------------------
Net reserves                     $     212.4     $     199.6     $     186.0
                                 ============================================
</TABLE>
                               
Everest Re's  asbestos and  environmental  claims are managed by an  experienced
staff consisting of seven people. This claims unit works closely with members of
Everest Re's in-house  legal staff on legal  developments.  The claims unit also
meets with the  management of primary  insurance  companies to understand  their
asbestos and environmental exposures and reserving practices.

14
<PAGE>

Additional  losses,  the type or  magnitude  of which  cannot be foreseen by the
Company, or the reinsurance  industry generally,  may emerge in the future. Such
future  emergence,   to  the  extent  not  covered  by  existing  retrocessional
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 18.8%, 16.9% and 21.1% of the Company's revenues for
the years ending December 31, 1997, 1996 and 1995,  respectively.  The Company's
cash and invested assets totalled $4,163.3 million at December 31, 1997 of which
95.2% were cash or investment grade fixed maturities.

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

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

Everest Re's investment  guidelines  include a duration guideline of five to six
years.  The duration of an  investment  is based on the maturity of the security
but also reflects the possibility of early prepayment of such security without a
prepayment  penalty.  This investment duration guideline is sensitive to Everest
Re's average duration of potential  liabilities which, at December 31, 1997, was
approximately  five  years.  Liability  duration  is  determined  based  on  the
estimated   payouts  of  underwriting   liabilities   using  standard   duration
calculations.

Approximately  12.6% of the Company's  consolidated  reserves for losses and LAE
and  unearned   premiums   represents   estimated  amounts  payable  in  foreign
currencies.  For each currency in which the Company has established  substantial
reserves,  the Company seeks to maintain  invested  assets  denominated  in such
currency in an amount approximately equal to the estimated liabilities which are
denominated in such currency.

As of December 31, 1997,  99.3% of Everest  Re's fixed  maturities  consisted of
investment  grade  securities.  The average maturity of fixed maturities was 8.7
years at December  31, 1997,  and their  overall  duration was 5.6 years.  As of
December 31, 1997,  Everest Re did not have any material holdings of issuers who
management  believes are experiencing cash flow difficulty to an extent that the
ability of the obligor to meet debt service payments is threatened. Everest Re's
current  investment  strategy  does not  contemplate  additional  investment  in
non-investment  grade securities or any investments in commercial real estate or
direct commercial  mortgages.  Also,  investments in derivative  products (i.e.,
products which include features such as futures,  forwards,  swaps,  options and
other  investments  with  similar  characteristics)  are  generally  prohibited,
without the prior approval of Everest Re's Investment Committee. At December 31,
1997, the Company had no investments in derivative products.

As of December 31, 1997, the common stock portfolio was $158.8 million at market
value, is managed with a growth and income  orientation and consisted  primarily
of investments in dividend paying mid and large capitalization companies.

                                                                              15
<PAGE>

The following table reflects  investment  results for Everest Re for each of the
five years in the period ended December 31, 1997:

<TABLE>

                                                                                       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>      
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)
1993                                    2,532.2           141.1         5.57              78.8

</TABLE>

------------
(1)  Average of the  beginning and ending  carrying  values of  investments  and
     cash, less net funds held and non-interest  bearing cash. Common stocks and
     nonredeemable  preferred stocks are carried at fair market value. Bonds and
     redeemable  preferred  stocks are carried at fair market  value  except for
     1993 where such investments are shown at amortized cost.
(2)  After investment expenses, excluding realized net capital gains (losses).
 
                                
The  following  table  summarizes  fixed  maturities as of December 31, 1997 and
1996:

<TABLE>

                                       Amortized       Unrealized       Unrealized         Market
(Dollars in millions)                       Cost     Appreciation     Depreciation          Value
                                      -----------------------------------------------------------
<S>                                   <C>            <C>              <C>             <C>                                           
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 debt securities (1)              489.2             34.0              0.1          523.1
                                      -----------------------------------------------------------
         Total                        $  3,658.4     $      209.0     $        0.5    $   3,866.9
                                      ===========================================================
December 31, 1996:
  U.S. Treasury securities and 
    obligations of U.S. government  
    agencies and corporations         $    192.6     $        1.2     $        1.4    $     192.4
  Obligations of states and 
    political subdivisions               1,309.9             56.1              1.0        1,365.0
  Corporate securities                     740.0             11.4              0.3          751.1
  Mortgage-backed securities               487.1              7.7              2.0          492.8
  Foreign debt securities (1)              545.2             24.7              0.9          569.0
                                      -----------------------------------------------------------
         Total                        $  3,274.8     $      101.1     $        5.6    $   3,370.3
                                      ===========================================================

</TABLE>

-------------
(1)  At December  31,  1997,  foreign  debt  securities  at  amortized  cost are
     comprised  of $232.8  million  and $256.4  million  in  foreign  government
     securities and foreign  corporate bonds,  respectively,  compared to $299.3
     million and $245.9 million, respectively, at December 31, 1996. At December
     31, 1997,  foreign debt  securities at market value are comprised of $253.3
     million and $269.8  million in foreign  government  securities  and foreign
     corporate  bonds,  respectively,  compared  to $315.0  million  and  $254.0
     million, respectively, at December 31, 1996.

16
<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, 1997:

<TABLE>


(Dollars in millions)
NAIC                                                                  Percent of
Rating(1)   Standard and Poor's Equivalent Description        Amount       Total
--------------------------------------------------------------------------------
<S>           <C>                                         <C>             <C>
1             AAA/AA/A                                    $  3,355.9       86.8%
2             BBB                                              481.9       12.5
3             BB                                                27.5        0.7
4             B                                                  0.2        0.0
5             CCC/CC/C                                           -          -
6             CI/D                                               1.4        0.0
                                                          ----------------------
                   Total                                  $  3,866.9      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, 1997:

<TABLE>

                                                           Percent of
(Dollars in millions)                        Amount             Total
                                       ------------------------------
<S>                                    <C>                    <C>    
Maturity category:
    Less than one year                 $       56.4              1.5%
    Due after 1-5 years                       482.0             12.5
    Due after 5-10 years                    1,294.2             33.5
    Due after 10 years                      1,492.6             38.6
                                       ------------------------------
       Subtotal                             3,325.2             86.0
    Mortgage-backed securities (1)            541.6             14.0
                                       ------------------------------
       Total (2)                       $    3,866.8            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  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 Management's Discussion and Analysis, Item 7.


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.

Everest Re  currently  has a  claims-paying  ability  rating of "A+" (Good) from
Standard & Poor's, an independent  rating  organization which rates an insurance
company's  financial  capacity to meet the obligations of its insurance policies
in accordance with their terms. Standard & Poor's states that the "A+" rating is
assigned  to those  companies  which,  in its  opinion,  have  secure  financial
capacity to meet policyholder obligations.  The "A+" rating is the fifth highest
of  eighteen  ratings  assigned  by  Standard & Poor's,  which  range from "AAA"
(Superior) to "R" (Regulatory  Action).  Ratings from AA to B may be modified by
the use of a plus or minus sign to show relative  standing of the insurer within
those rating categories.

                                                                              17
<PAGE>

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

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


COMPETITION
The worldwide property and casualty  reinsurance business is highly competitive.
Competition  with  respect to the types of  reinsurance  in which  Everest Re is
engaged is based on many  factors,  including the  perceived  overall  financial
strength of the reinsurer,  A.M.  Best's and/or  Standard & Poor's rating of the
reinsurer,  underwriting  expertise,  the  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.  Some of these competitors have greater
financial resources than Everest Re, have been operating for longer than Everest
Re,  and  have  established  long-term  and  continuing  business  relationships
throughout  the  industry,  which can be a  significant  competitive  advantage.
Although most U.S.  reinsurance  companies operate in the broker market, most of
Everest Re's largest competitors work directly with ceding companies,  competing
with brokers.  Management believes that Everest Re's major competitors are large
U.S. and foreign reinsurance companies.

Since 1987, the industry has experienced  increased global  competition.  During
this period,  primary  insurers  have  retained an  increasing  portion of their
business,  which, together with rate pressure at the primary insurance level and
ample reinsurance capacity,  precluded reinsurance rate improvement and resulted
in generally low rates of premium  growth,  if any. In the early 1990s,  several
well-capitalized new Bermuda-based  companies entered the reinsurance  industry,
and added  significant  capacity,  particularly in the  catastrophe  reinsurance
market, and rendered future rate improvement uncertain. In addition,  Lloyd's of
London 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  past losses from the
current market participants and to provide a more secure market going forward.

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

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


EMPLOYEES
As of March 2, 1998, Everest Re employed 369 persons.  Management  believes that
its employee  relations are good.  None of Everest Re's employees are subject to
collective  bargaining  agreements,  and the Company is not aware of any current
efforts to implement such agreements at Everest Re.

18
<PAGE>

INFORMATION RELATING TO DOMESTIC AND FOREIGN OPERATIONS
Financial  information  relating to geographic  segments 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.

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 1998 without  triggering
the requirement for prior approval of regulatory  authorities in connection with
an extraordinary  dividend is $177.6 million.  As of December 31, 1997,  Everest
Re's  accumulated  statutory  surplus from  realized net  operating  profits and
realized gains was $535.8 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.

                                                                              19
<PAGE>

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,  North
Carolina,  West Virginia and Wyoming.  In New Hampshire and Puerto Rico, Everest
Re is licensed for reinsurance only.

Everest Re is licensed as a  property/casualty  reinsurer in Canada.  It is also
authorized to conduct reinsurance business in the United Kingdom,  Hong Kong and
Singapore.  Everest Re can also write  reinsurance  in other foreign  countries.
Because  some  jurisdictions  require a reinsurer  to register in order to be an
acceptable  market for local  insurers,  Everest Re is  registered  as a foreign
insurer and/or reinsurer in the following countries:  Argentina, Bolivia, Chile,
Colombia,  Ecuador,  Guatemala,  Mexico,  Peru,  Venezuela and the  Philippines.
Everest National is licensed in 39 states and the District of Columbia.  Everest
Indemnity  is  licensed in Delaware  and is  eligible  to write  insurance  on a
surplus lines basis in 11 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.

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.

20
<PAGE>

Based upon Everest Re's,  Everest National's and Everest  Indemnity's  financial
positions  at December  31,  1997,  Everest  Re,  Everest  National  and Everest
Indemnity  exceed the minimum  thresholds.  Various  proposals to change the RBC
formula have been  proposed.  The Company is unable to predict  whether any such
proposal will be adopted,  the form in which any such proposals would be adopted
or the effect,  if any, the  adoption of any such  proposal or change in the RBC
calculations would have on the Company.

LEGISLATIVE AND REGULATORY PROPOSALS. Various regulatory and legislative changes
have from time to time been proposed that could affect  reinsurers and insurers.
Among  the  proposals  that  have  in the  past  been  or are at  present  being
considered are the possible  introduction of federal  regulation in addition to,
or in lieu of, the current  system of state  regulation  of insurers,  Superfund
re-authorization,   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.


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  Insurance  Company of America that expires on November 29, 2003.
Everest Re's other ten office locations  occupy a total of approximately  62,600
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 1997 and 1996 were as follows:

<TABLE>

                                                      High            Low
                                                      ---------------------- 
<S>                                                   <C>            <C>
First Quarter 1997:                                   32.75           26.00
Second Quarter 1997:                                  40.25           26.75
Third Quarter 1997:                                   41.125          34.50
Fourth Quarter 1997:                                  43.00           33.00
First Quarter 1996:                                   25.125          20.125
Second Quarter 1996:                                  26.50           21.375
Third Quarter 1996:                                   26.50           22.50
Fourth Quarter 1996:                                  29.50           23.875

</TABLE>


NUMBER OF HOLDERS OF COMMON STOCK
The number of record  holders of common stock as of March 2, 1998 was 108.  That
number  excludes the beneficial  owners of shares held in "street" names or held
through participants in depositories, such as The Depository Trust Company.

                                                                              21
<PAGE>

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.
The Company  declared and paid its regular  quarterly cash dividend of $0.04 per
share for each quarter of 1997.  On February  26,  1998,  the Board of Directors
raised  the  quarterly  dividend  to $0.05 per share and  declared  a  dividend,
payable on or before March 27, 1998 to shareholders of record on March 9, 1998.

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.


(B) RECENT SALES OF UNREGISTERED  SECURITIES

Information required by Item 701 of Regulation S-K:

     (a)  On October 1, 1997,  1,085  common  shares of the Company  (previously
          held as treasury shares) were distributed.

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

     (c)  The  securities  were  issued  as  compensation  to  the  non-employee
          Directors  for  services  rendered  to the  Company  during  the third
          quarter of 1997.

     (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, 1997,  1996,  1995,  1994 and 1993 were derived
from the consolidated financial statements of the Company, which were audited by
Coopers and Lybrand  L.L.P.  (1997 and 1996) and Deloitte and Touche LLP (1993 -
1995), independent auditors. 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 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.

22
<PAGE>

<TABLE>


                                                      Years Ended December 31,
                                   ----------------------------------------------------------------
(Dollars in millions, except            1997          1996         1995         1994          1993
 per share amounts)                ----------------------------------------------------------------
<S>                                <C>           <C>           <C>          <C>          <C>                                        
Operating data:
 Gross premiums written            $ 1,075.0     $ 1,044.0     $  949.5     $  953.2     $   918.1 
 Net premiums written                1,031.1       1,030.5        783.2        863.2         892.3
 Net premiums earned                 1,049.8         973.6        753.3        853.3         883.2
 Net investment income                 228.5         191.9        166.0        143.6         141.1
 Net realized capital gains 
  (losses)(1)                           15.9           5.7         33.8        (10.5)         78.8
 Total revenue                       1,299.2       1,169.3        948.9        982.8       1,098.3
 Losses and LAE incurred 
  (including catastrophes)             765.4         716.0        674.7        720.8         687.4
  Catastrophe losses(2):
   Hurricane Andrew                      -             -            0.5          3.9          30.4
   Northridge earthquake                 -             -            -           70.9           -
   Other(3)                              8.6           7.1         30.9          7.1          (7.8)
  Total catastrophe 
   losses(4)                             8.6           7.1         31.4         81.9          22.7
 Commission, brokerage, taxes
  and fees                             274.8         254.6        227.4        197.9         189.6
 Other underwriting expenses            51.7          54.9         60.0         68.3          64.7
 Compensation related to public
  offering                               -             -           13.3          -             -
 Restructuring and early 
  retirement costs                       -             -            -            7.8           -
 Total expenses(4)                   1,091.9       1,025.5        975.4        994.8         941.7
 Income (loss) before taxes(4)         207.3         143.8        (26.6)       (12.0)        156.5
 Income tax (benefit)                   52.3          31.8        (27.3)       (22.6)         30.2
 Net income (4)                    $   155.0     $   112.0     $    0.7     $   10.7     $   126.4
                                   ================================================================
 Net income per basic 
  share (5)                        $    3.07     $    2.22     $   0.01     $   0.21     $    2.53
                                   ================================================================
 Net income per diluted
  share (6)                        $    3.05     $    2.21     $   0.01     $   0.21     $    2.53
                                   ================================================================
 Dividends paid per share          $    0.16     $    0.12     $   0.14     $   0.15     $    -
                                   ================================================================
Certain GAAP financial ratios:
 Loss and LAE ratio(7)                  72.9%         73.5%        89.6%        84.5%         77.8%
 Underwriting expense ratio(8)          31.1          31.8         39.9         31.2          28.8
                                   ----------------------------------------------------------------
 Combined ratio                        104.0%        105.3%       129.5%       115.7%        106.6%
                                   ================================================================
Certain SAP data(9):
 Ratio of net premiums written
  to surplus(10)                         1.4x          1.2x         1.0x         1.2x          1.3x
 Statutory surplus                 $   908.8     $   772.7     $  686.9     $  600.7     $   607.7
 Loss and LAE ratio(11)                 75.7%         71.2%        92.2%        85.8%         81.0%
 Underwriting expense ratio(12)         25.6          31.7         38.9         32.6          29.1
                                   ----------------------------------------------------------------
 Combined ratio                        101.3%        102.9%       131.1%       118.4%        110.1%
                                   ================================================================
Balance sheet data (at end 
 of period):
 Total investments and cash        $ 4,163.3     $ 3,624.6     $3,238.3     $2,573.2     $ 2,610.8
 Total assets                        5,538.0       5,047.8      4,647.8      4,040.6       3,920.6
 Loss and LAE reserves               3,437.8       3,246.9      2,969.3      2,706.4       2,540.1
 Total liabilities                   4,230.5       3,961.7      3,664.2      3,299.6       3,045.2
 Stockholders' equity(13)            1,307.5       1,086.0        983.6        741.0         875.4
 Book value per share(14)              25.90         21.51        19.36        14.82         17.51
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>

                                                                              23
<PAGE>

-----------
 (1) After-tax operating  income (loss),  before after-tax  net realized capital
     gains or losses, was $144.6 million (or $2.86 per basic share 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), $17.5 million (or
     $0.35  per  basic and diluted  share) and $75.2 million (or $1.50 per basic
     and diluted share) for the years  ended December 31, 1997, 1996, 1995, 1994
     and 1993, 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) Other catastrophe losses  include  adverse (favorable) development  on loss
     reserves for other catastrophes occurring on or after January 1, 1988.
 (4) Some amounts may not reconcile due to rounding.
 (5) Based on  weighted  average  basic shares outstanding of 50.5 million, 50.6
     million, 50.2 million, 50.0 million and 50.0  million for 1997, 1996, 1995,
     1994 and 1993, respectively.
 (6) Based on weighted  average diluted shares outstanding of 50.8 million, 50.7
     million, 50.2 million, 50.0 million  and 50.0 million for 1997, 1996, 1995,
     1994 and 1993, respectively.
 (7) GAAP losses and LAE incurred as a percentage of GAAP net premiums earned.
 (8) GAAP underwriting  expenses  as  a  percentage of GAAP net premiums earned.
     Including restructuring and early retirement  costs, incurred in the fourth
     quarter of 1994, the Company's GAAP underwriting expense ratio in 1994  was
     32.1%.
 (9) Statutory  results  are  on a  Everest Re legal entity basis; consequently,
     investments in subsidiary operations are accounted  for on an equity basis.
     Effective  January 1, 1997, the reinsurance operations of Everest 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 1.1x, 70.5%, 32.2% and 102.7%, respectively.
(10) Statutory net premiums written as a percentage of period-end surplus.
(11) Statutory  losses  and  LAE  incurred  as  a percentage of SAP net premiums
     earned.
(12) Statutory  underwriting  expenses  as  a  percentage  of  SAP  net premiums
     written.
(13) Excluding  net  unrealized  appreciation  (depreciation)  of   investments,
     stockholder's  equity  was  $1,147.1   million,  $1,008.3  million,  $899.9
     million,  $799.1 million  and $794.6 million as of December 31, 1997, 1996,
     1995, 1994 and 1993, respectively.
(14) Based on  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 and 1993, respectively.


ITEM 7.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
         OF OPERATIONS


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

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

24
<PAGE>

<TABLE>

                                                         IPO
                                                     related
(Dollars in thousands)            As reported        charges      As adjusted
                                  -------------------------------------------  
<S>                               <C>              <C>            <C>   
Revenues:
Net earned premiums               $  753,321       $ 140,000      $   893,321
Net investment income                166,023               0          166,023
Other income (loss)                   (4,315)              0           (4,315)
Net realized capital gains            33,835               0           33,835
                                  -------------------------------------------
                                     948,864         140,000        1,088,864
                                  -------------------------------------------
Claims and expenses:
Incurred losses and loss 
 adjustment expenses                 674,696               0          674,696
Commission, brokerage, taxes
 and fees                            227,376               0          227,376
Other underwriting expenses           60,017               0           60,017
Compensation related to public 
 offering                             13,343         (13,343)               0
                                  -------------------------------------------
                                     975,432         (13,343)         962,089
                                  -------------------------------------------
INCOME (LOSS) BEFORE TAXES           (26,568)        153,343          126,775
Income tax (benefit)                 (27,315)         53,670           26,355
                                  -------------------------------------------
NET INCOME                        $      747       $  99,673      $   100,420
                                  ===========================================
</TABLE>
                                                            

YEAR ENDED DECEMBER 31, 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 normal  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.

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.

                                                                              25
<PAGE>

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.

YEAR ENDED DECEMBER 31, 1996 COMPARED TO YEAR ENDED DECEMBER 31, 1995

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

PREMIUMS.  Gross premiums  written  increased 10.0% to $1,044.0  million in 1996
from $949.5 million in 1995.  Factors  contributing to this increase  included a
21.8% ($55.0 million) increase in U.S. broker treaty premiums,  principally from
increased writings in specialty casualty,  workers' compensation and substandard
automobile  lines,  a 21.6%  ($26.4  million)  increase  in U.S.  direct  treaty
reinsurance and insurance due to the growth in primary insurance written through
Everest  National  and a 28.9%  ($19.9  million)  increase  in U.S.  facultative
premiums,  reflecting  growth in casualty and specialty  casualty  lines, as the
unit  completed  its first  full year  after  its major  restructuring  and took
advantage  of  significant  dislocation  in the  market.  These  increases  were
partially  offset by a 3.5% ($5.8  million)  decrease  in marine,  aviation  and
surety premiums and a 0.3% ($0.9 million) decrease in international premiums.

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

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

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

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

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

EXPENSES.   Incurred  losses  and  LAE  increased  by  6.1%  to  $716.0  million
in  1996  from  $674.7  million  in  1995.   Catastrophe  losses  on events with
ultimate  gross  losses  estimated  at  $5.0  million  or greater  ("catastrophe
losses")  in  1996  were  $7.1  million, which  included $10.0 million estimated
for  Hurricane  Fran  and  $2.9  million  of net favorable  development on prior
year  occurrences,  compared   with  $31.4  million  in  1995,  which   included
$30.9  million  estimated  for  the  Kobe,  Japan   earthquake  and   Hurricanes
Marilyn  and  Opal  and  $0.5  million of net adverse  development on prior year
occurrences. The Company's loss and LAE ratio,  as  adjusted,  decreased  by 2.0
percentage  points  to  73.5% in 1996 from  75.5% in 1995. This  improvement was
attributable  principally  to  the  lower  catastrophe  losses  and  changes  in

26
<PAGE>

the  Company's  business  mix in line with the new  underwriting  strategy.  Net
incurred  losses  and LAE for 1996  reflected  ceded  losses  and LAE of  $206.0
million, including $116.5 million ceded under the Stop Loss Agreement,  compared
to ceded losses and LAE of $119.1 million in 1995, including $23.7 million ceded
under the Stop Loss Agreement.

Underwriting expenses, as adjusted,  increased by 7.7% to $309.5 million in 1996
from $287.4 million in 1995. Commission,  brokerage, taxes and fees increased by
$27.2 million attributable primarily to increases in written premium and changes
in the Company's  business mix. Other  underwriting  expenses  decreased by $5.1
million, as the impact of the significant reduction in employees over the course
of 1995 and 1996 and other  cost  reduction  initiatives  more than  offset  the
impact of salary and other expense  increases  that were  generally in line with
inflation. The Company's expense ratio, as adjusted,  decreased by 0.4 points to
31.8% in 1996 from 32.2% in 1995 as the  increase of  premiums  earned more than
offset the increases in underwriting expenses.

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

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

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


FINANCIAL CONDITION
CASH  AND  INVESTED  ASSETS.  Aggregate  invested  assets,  including  cash  and
short-term  investments,  were $4,163.3  million at December 31, 1997,  $3,624.6
million at December  31, 1996 and $3,238.3  million at December  31,  1995.  The
change in invested  assets  resulted  primarily from cash flows from  operations
generated  during the period  together  with net realized and  unrealized  gains
(losses) on investments.


LOSS AND LAE  RESERVES
GENERAL.  Gross loss and LAE reserves  totaled  $3,437.8 million at December 31,
1997, $3,246.9 million at December 31, 1996 and $2,969.3 million at December 31,
1995. These increases were consistent with the continued growth in the Company's
book of business.

Everest Re maintains  reserves to cover its  estimated  ultimate  liability  for
losses and LAE with respect to reported and unreported claims.  Because reserves
are estimates of ultimate losses and LAE,  management  monitors reserve adequacy
over  time,  evaluating  new  information  as it  becomes  known  and  adjusting
reserves, as necessary. Management considers many factors when setting reserves,
including:  (i) current legal  interpretations  of coverage and liability;  (ii)
economic  conditions;  (iii) internal  methodologies  which analyze Everest Re's
experience with similar cases,  information from ceding companies and historical
trends,  such as reserving  patterns,  loss  payments,  pending levels of unpaid
claims and product mix; and (iv) the  uncertainties  discussed  below  regarding
reserve  requirements  for asbestos  and  environmental  claims.  Based on these
considerations,  management  believes that adequate  provision has been made for
Everest Re's loss and LAE reserves.  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  uncertainties  in estimating  the amount of Everest Re's  potential
losses  from  asbestos  and  environmental   claims.   Among  the  complications
are: (i) potentially  long waiting periods  between  exposure and  manifestation
of  any  bodily  injury  or  property  damage;  (ii)  difficulty in  identifying
sources  of  asbestos  or  environmental  contamination;   (iii)  difficulty  in
properly    allocating    responsibility   and/or  liability   for  asbestos  or
environmental damage;(iv) changes in underlying laws and judicial interpretation
of  those  laws; (v)  potential  for  an  asbestos  or  environmental  claim  to
involve many insurance providers over many policy  periods;  (vi) long reporting
delays,  both from  insureds to  insurance  companies  and ceding  companies  to
reinsurers; (vii) limited historical data concerning  asbestos and environmental
losses;  (viii) questions concerning interpretation and application of insurance
and  reinsurance  coverage;  and  (ix)  uncertainty  regarding  the  number  and
identity  of  insureds  with  potential  asbestos  or  environmental   exposure.

                                                                              27
<PAGE>

Management  believes that these issues are not likely to be resolved in the near
future.  Everest Re establishes  reserves to the extent that, in the judgment of
management,  the facts and  prevailing law reflect an exposure for Everest Re or
its ceding  company.  Due to the  uncertainties  discussed  above,  the ultimate
losses may vary materially from current loss reserves and, if coverage under the
Stop Loss Agreement 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)                          1997        1996        1995
                                            --------------------------------
<S>                                         <C>         <C>         <C>
Gross Basis:
Beginning of period reserves                $ 423.3     $ 428.5     $ 445.5
                                            --------------------------------
Incurred losses and LAE:
Reported losses                                80.5        36.7        31.9
Change in IBNR                                  3.2        (6.7)      (14.6)
                                            --------------------------------
Total                                          83.7        30.0        17.3
Paid losses                                   (60.9)      (35.2)      (34.3)
                                            --------------------------------
End of period reserves                      $ 446.1     $ 423.3     $ 428.5
                                            ================================
Net Basis:
Beginning of period reserves                $ 199.6     $ 186.0     $ 203.7
                                            --------------------------------
Incurred losses and LAE:
Reported losses                               (18.3)       (4.4)        5.5
Change in IBNR                                 21.8         4.4        (5.5)
                                            --------------------------------
Total (1)                                       3.5         0.0         0.0
Paid losses (2)                                 9.3        13.6       (17.7)
                                            --------------------------------
End of period reserves                      $ 212.4     $ 199.6     $ 186.0
                                            ================================
</TABLE>
----------
(1)  Net of $41.2  million in 1997,  $24.2  million in 1996 and $16.7 million in
     1995 ceded under the incurred loss  reimbursement  feature of the Stop Loss
     Agreement.
(2)  Net of $22.6  million in 1997,  $34.5  million in 1996 and $5.0  million in
     1995 ceded as paid losses under the Stop Loss Agreement.


The $233.7  million of  reinsurance  receivables  as of  December  31,  1997 was
attributable principally to two retrocessional arrangements:  (i) $135.4 million
was due from various insurance and reinsurance  companies,  including Gibraltar,
in connection with their  participation in Everest Re's management  underwriting
facility  ("MUF"),  a  reinsurance  arrangement  begun in 1977 pursuant to which
Everest Re ceded certain reinsurance and direct excess insurance  business;  and
(ii) $91.5  million was due as a result of the  Company's  former  direct excess
insurance  operations,  which ceased writing business in 1985 and which has been
100% ceded to Gibraltar since 1986.

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,
1997, cessions under the Stop Loss Agreement have aggregated $185.2 million with
remaining limits available of $189.8 million as respects the next $210.9 million
of Adverse Development.

STOCKHOLDERS'    EQUITY.    Holdings'   stockholders'   equity   increased    to
$1,307.5   million   as  of   December  31,  1997   from  $1,086.0   million  as
of  December  31,  1996  principally   reflecting  $146.9  million  in  retained
earnings  for  the  year  and  an  increase  of  $82.6  million  in   unrealized
appreciation  of   investments.  Stockholders'  equity as  of  December 31, 1996

28
<PAGE>

increased  to  $1,086.0  million  from $983.6  million as of  December  31, 1995
principally  reflecting  an  increase of $106.0  million in  retained  earnings.
Dividends of $8.1 million,  $6.1 million and $7.0 million were declared and paid
by Holdings in 1997, 1996 and 1995, respectively.

Holdings'  stockholders' equity exceeded Everest Re's statutory-basis surplus by
$398.7  million at December 31, 1997. The primary  differences  between GAAP and
SAP as they relate to the Company  are: (i) the  deferral of  acquisition  costs
under GAAP,  which are  immediately  expensed  under SAP; (ii) the provision for
deferred taxes on temporary tax differences under GAAP, which are excluded under
SAP; and (iii) the carrying at market value of fixed  maturities  available  for
sale under GAAP, as compared to at amortized cost under SAP.


LIQUIDITY AND CAPITAL RESOURCES
EVEREST RE.  Everest Re's  liquidity  requirements  are met on both a short- and
long-term basis by funds provided by premiums  collected,  investment income and
collected reinsurance  receivables  balances,  and from the sale and maturity of
investments.  The Company's net cash flows from operating activities were $376.4
million, $414.0 million and $397.9 million, as adjusted, in 1997, 1996 and 1995,
respectively.  The decreases from 1996 in cash provided by operating  activities
were  principally  a result of increases  in net paid losses  offset by improved
profitability. Recoveries under the Company's Stop Loss Agreement with Gibraltar
contributed  $99.8  million,  $53.4  million and $12.0  million of such net cash
flows in 1997, 1996 and 1995 respectively.

Proceeds and applications  from sales and acquisitions of investment assets were
$1,077.0  million  and  $1,482.8  million,  respectively,  in 1997,  compared to
$1,632.9  million  and  $2,014.9  million,  respectively,  in 1996 and  $1,101.0
million and  $1,494.7  million,  respectively,  in 1995.  Everest  Re's  current
investment  strategy seeks to maximize  after-tax income through a high quality,
diversified,  duration  sensitive,  taxable bond and  tax-exempt  municipal bond
portfolio, while maintaining an adequate level of liquidity.

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

The Company maintains a corporate-level retrocessional protection program, above
and beyond  retrocessions  purchased with respect to specific assumed coverages,
to mitigate the potential  impact of catastrophe  losses.  At December 31, 1997,
the  attachment  point of this program was $25.0 million per  catastrophe in the
U.S.  and $10.0  million per  catastrophe  outside the U.S. No losses were ceded
under the corporate-level  retrocession program during 1997 or 1996. All aspects
of the  retrocession  program have been  structured  to permit the program to be
accounted for as reinsurance under SFAS No. 113.

HOLDINGS. Holdings is a holding company whose only material asset is the capital
stock of Everest Re. Holdings' cash flow will consist primarily of dividends and
other permissible  payments from Everest Re. Holdings depends upon such payments
for funds for general corporate purposes and for the payment of any dividends on
its common stock.

On June 16, 1997, the Company  finalized a 364 day revolving line of credit with
First  Union  National  Bank.  This  credit  facility,  which  will be used  for
liquidity and general  corporate  purposes,  provides for the borrowing of up to
$50 million with  interest at a rate selected by the Company 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
credit facility agreement requires that Everest Re maintain 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 payment of  dividends  to  Holdings by Everest Re is subject to  limitations
imposed  by  the  Delaware  Code.  Based  upon these  restrictions,  the maximum
amount  that  will  be  available  for  payment  of  dividends  to  Holdings  by
Everest Re  in  1998  without  the  prior  approval  of  regulatory  authorities
is $177.6  million.  Everest  Re's future cash flow  available  to Holdings  may
be  influenced  by a  variety  of  factors,  including  cyclical  changes in the
property  and  casualty  reinsurance  market,  Everest  Re's  financial results,
insurance  regulatory  changes  and  changes  in  general  economic  conditions.

                                                                              29
<PAGE>

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

During 1997, 1996 and 1995 Holdings declared and paid dividends of $8.1 million,
$6.1 million and $7.0 million, respectively.

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


TAX CONSOLIDATION WITH THE PRUDENTIAL
The Internal  Revenue  Service  ("IRS") has  completed its  examinations  of The
Prudential's  tax  returns for all years  through  1992.  As those  examinations
relate to Everest  Re, the IRS has  disallowed  that  portion of the fresh start
benefit which relates to 1986 reserve  strengthening as defined by the IRS. As a
result of conflicting decisions by two U.S. Circuit Courts, the Supreme Court of
the United States will consider the issue in reviewing ATLANTIC MUTUAL INSURANCE
CO. V.  COMMISSIONER to determine  whether the Treasury  regulation that defines
the term  "reserve  strengthening"  is a valid  interpretation  of the law.  The
Supreme  Court's  decision  in this case is  expected  to bring  about a uniform
resolution of this question. The Company agrees with the petitioner in this case
in that the term "reserve strengthening" as used in the statute involves changes
in assumptions or methodologies.  The Company believes that,  because there were
no changes in reserving  assumptions or methodologies between 1985 and 1986, all
increases  to  reserves  in 1986 for which a fresh  start  benefit was taken are
normal  reserve   additions  and,   therefore,   does  not  constitute   reserve
strengthening  that is not  eligible  for the fresh  start  benefit.  If the IRS
position  prevails,  the Company will be required to reimburse  The  Prudential,
thereby incurring an additional charge of approximately $9.4 million,  including
the after-tax cost of interest through December 31, 1997.


YEAR 2000  ISSUES
Many computers and software programs were designed to accommodate only two-digit
date fields to  represent  a given year  (E.G.,  "97"  represents  1997).  It is
possible  that  such  systems  will  not be  able  to  accurately  process  data
containing  information  about the year 2000 or later. 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 businesses 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.

The  Company  depends,  in varying  degrees,  on many  computerized  information
systems, both within the Company and at others with whom it does business, which
may be affected by the year 2000 issue. In the absence of a response to the year
2000  issue,   the  Company  could  have   difficulty   efficiently   processing
transactions,  and the  costs of doing  its  business  could  increase,  perhaps
materially.  To  address  the  issue,  the  Company  has  initiated  a year 2000
initiative  to address  potential  concerns  relating to both the  Company's own
processing environment and companies with which it does business.

Within  the  Company's  own  processing  environment,  a  review  has  been made
of  all  the  computer  hardware  and software  the  Company  uses  and  whether
such  hardware  and  software is year 2000  compliant.  With respect to computer
hardware,  the  Company  is  upgrading  or  replacing   hardware  as  necessary.
Nearly all of the critical computerized business systems used by the Company are
based  on  software  products  licensed  from  third parties that  specialize in
software  development.  For  licensed  software  which  is  not  yet  compliant,
the  Company  has  been  in  contact  with  the  vendors  of  such  software  to
determine   whether  such  products  will   be  made  compliant.  Virtually  all
vendors  contacted  by the Company have  indicated  that their  products will be
made  compliant on a timely  basis.  The  Company  believes  that  each of those
vendors has a critical business need to make  its  products  compliant and  will
therefore exercise its best efforts to make its  products  compliant on a timely
basis.  With respect to those few products which  will  not  be  made year  2000
compliant, the Company is planning  to  license  replacement products which  are
compliant. The Company has, and expects to use beyond the  year  2000, a  number
of  application  programs  that it has  developed  internally; the  Company  has
assessed which of those programs are critical to its business and its  implemen-
tation  plan anticipates the modification  of those programs.  While the Company
believes  that its  computer  hardware, software licensed from third parties and
internally developed software critical to its business will be made compliant on
a timely  basis, there can  be  no  assurance that every such  product  will  be
compliant  on  a  timely  basis  and  there  can be no assurance that there will

30
<PAGE>

be no material  disruption  to the  Company's  business if such products are not
compliant.  The Company believes that the actual expenses involved in making its
internal  processing  environment and software  licensed from third parties year
2000 compliant will not be material.

Because the Company's  business relies upon data received from and given to many
business partners (E.G., ceding companies) and service providers (E.G.,  banks),
the Company's  business  could be disrupted if those  entities are not year 2000
compliant.  The Company has actively surveyed its significant  business partners
and service  providers to determine  their  compliance  status.  With respect to
entities with which the Company has direct electronic interfaces,  meetings have
been held to address the compliance issue. The information received to date from
business  partners and service  providers  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 in the Company's  business.  However,  there can be no assurance that
there will not be material  disruptions to the Company's business or an increase
in the cost of the Company's doing business.

It  is  possible  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.  It is not yet possible to
determine  whether any such claims will be made against  insurers,  whether such
claims will be held to have merit or whether  such claims  might be made against
insurance or reinsurance contracts in which the Company participates.


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.

Such  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;

                                                                              31
<PAGE>
 
 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;

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  and  software  issues on the
         Company's   operations   and  potential  for  Year  2000  claims  under
         reinsurance and insurance contracts written by the Company;

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

18)      Changes in the Company's capital needs;

19)      Changes in the Company's ratings;

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

21)      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

Not applicable.


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.

32
<PAGE>

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

During the 1994 and 1995  fiscal  years and the interim  period  January 1, 1996
through August 6, 1996, there were no  disagreements  with Deloitte & Touche LLP
on any  matter  of  accounting  principles  or  practices,  financial  statement
disclosure or auditing scope or procedure, which disagreements,  if not resolved
to the  satisfaction  of Deloitte & Touche  LLP,  would have caused them to make
reference to the subject  matter of the  disagreement  in their  reports.  Also,
there were no reportable  events of the nature  described in Regulation S-K Item
304(a)(1)(v)  during the  Company's  1994 and 1995 fiscal  years and the interim
period January 1, 1996 through August 6, 1996.


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 1998 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, 1997 (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 1997.

                                                                              33
<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 18, 1998.


                       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 18, 1998
------------------------------    Executive Officer and   
      Joseph V. Taranto                  Director

 /s/  ROBERT P. JACOBSON         Chief Financial Officer         March 18, 1998
------------------------------         and Director  
      Robert P. Jacobson               

 /s/  STEPHEN L. LIMAURO                Comptroller              March 18, 1998 
------------------------------          
      Stephen L. Limauro

 /s/  MARTIN ABRAHAMS                     Director               March 18, 1998
------------------------------            
      Martin Abrahams

 /s/  KENNETH J. DUFFY                    Director               March 18, 1998 
------------------------------             
      Kenneth J. Duffy

 /s/  JOHN R. DUNNE                       Director               March 18, 1998 
------------------------------             
      John R. Dunne

 /s/  THOMAS J. GALLAGHER                 Director               March 18, 1998 
------------------------------            
      Thomas J. Gallagher

 /s/  WILLIAM F. GALTNEY, JR.             Director               March 18, 1998 
------------------------------              
      William F. Galtney, Jr.

 /s/  ROBERT A. MULDERIG                  Director               March 18, 1998 
------------------------------            
      Robert A. Mulderig



34
<PAGE>

                                     
INDEX TO FINANCIAL STATEMENTS AND SCHEDULES


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

     Reports of Independent Auditors on Financial 
      Statements and Schedules..............................................F-2

     Consolidated Balance Sheets at December 31, 
      1997 and 1996.........................................................F-4

     Consolidated Statements of Operations for the 
      years ended December 31, 1997, 1996 and 1995..........................F-5

     Consolidated Statements of Changes in Stockholders'
      Equity for the years ended December 31, 1997, 1996
      and 1995..............................................................F-6

     Consolidated Statements of Cash Flows for the 
      years ended December 31, 1997, 1996 and 1995..........................F-7

     Notes to Consolidated Financial Statements.............................F-8


SCHEDULES

I    Summary of Investments Other Than Investments in 
      Related Parties at December 31, 1997..................................S-1

II   Condensed Financial Information of Registrant:
      Balance Sheets as of December 31, 1997 and 1996.......................S-2
      Statements of Operations for the Years Ended 
       December 31, 1997, 1996 and 1995.....................................S-3
      Statements of Cash Flows for the Years Ended 
       December 31, 1997, 1996 and 1995.....................................S-4

III  Supplementary Insurance Information as of 
      December 31, 1997 and 1996 and for the years 
      ended December 31, 1997, 1996 and 1995................................S-5

IV   Reinsurance for the years ended December 31,
      1997, 1996 and 1995...................................................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

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

We  have  audited  the  consolidated  financial  statements  and  the  financial
statement schedules of Everest Reinsurance Holdings, Inc. and Subsidiaries ("the
Company")  as of December  31, 1997 and 1996,  and for the years then ended,  as
listed in the index on page F-1 of this Form 10-K. These consolidated  financial
statements  and  financial  statement  schedules are the  responsibility  of the
Company's  management.  Our  responsibility  is to  express  an opinion on these
consolidated  financial  statements and financial statement schedules based upon
our audits.

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

In our opinion,  the financial  statements  referred to above present fairly, in
all  material   respects,   the  consolidated   financial  position  of  Everest
Reinsurance  Holdings,  Inc. and  Subsidiaries as of December 31, 1997 and 1996,
and the  consolidated  results of their operations and their cash flows for each
of the two years in the period  ended  December  31, 1997,  in  conformity  with
generally  accepted  accounting  principles.  In addition,  in our opinion,  the
financial  statement schedules referred to above, when considered in relation to
the basic financial statements taken as a whole, present fairly, in all material
respects, the information required to be included therein.



COOPERS & LYBRAND L.L.P.
New York, New York
February 17, 1998







F-2

<PAGE>
INDEPENDENT AUDITORS' REPORT

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

We  have   audited  the   accompanying   consolidated   statements   of  income,
stockholders' equity, and cash flows of Everest Reinsurance  Holdings,  Inc. and
subsidiaries  for the year ended  December 31, 1995. Our audit also included the
financial  statement schedules listed in the Index on page F-1 of this Form 10-K
for the year then ended.  These  financial  statements  and financial  statement
schedules are the responsibility of the Company's management. Our responsibility
is to express an opinion on the financial  statements  and  financial  statement
schedules based on our audit.

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

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

As discussed in Note 1I, the  accompanying  1995 financial  statements have been
restated for the adoption of Statement of Financial  Accounting  Standard Number
128, "Earnings per Share".



DELOITTE & TOUCHE LLP
Parsippany, New Jersey
February 23, 1996 (February 27, 1998 as to Note 1I)


  
                                                                            F-3
<PAGE>

<TABLE>
<CAPTION>

EVEREST REINSURANCE HOLDINGS, INC.

CONSOLIDATED BALANCE SHEETS
                   

                                                        As of December 31,
                                               -------------------------------------
(Dollars in thousands, except                            1997                   1996
 par value per share)                          -------------------------------------
<S>                                            <C>                    <C>
ASSETS:
Fixed maturities - held to 
 maturity, at amortized cost
 (market value: 1997, $0; 
 1996, $88,374)                                $          -           $       80,522
Fixed maturities - available
 for sale, at market value
 (amortized cost: 1997, 
 $3,658,370 ; 1996, $3,194,246)                     3,866,860              3,281,972
Equity securities, at market 
 value (cost: 1997, $120,510;
 1996, $115,367)                                      158,784                147,280
Short-term investments                                 75,244                 49,486
Other invested assets                                  10,848                 12,750
Cash                                                   51,578                 52,595
                                               -------------------------------------
     Total investments and cash                     4,163,314              3,624,605

Accrued investment income                              60,424                 50,211
Premiums receivable                                   256,191                226,502
Reinsurance receivables                               692,473                749,062
Funds held by reinsureds                              186,454                173,386
Deferred acquisition costs                             82,332                 84,123
Prepaid reinsurance premiums                            8,980                  5,265
Deferred tax asset                                     74,434                124,664
Other assets                                           13,418                  9,949
                                               -------------------------------------
TOTAL ASSETS                                   $    5,538,020         $    5,047,767
                                               =====================================

LIABILITIES:
Reserve for losses and 
 adjustment expenses                           $    3,437,818         $    3,246,858
Unearned premium reserve                              337,383                355,908
Funds held under reinsurance
 treaties                                             190,639                177,921
Losses in the course of payment                        55,969                 33,386
Contingent commissions                                100,027                 83,279
Other net payable to reinsurers                        13,231                  8,779
Current federal income taxes                           13,567                 25,879
Other liabilities                                      81,903                 29,734
                                               -------------------------------------
    Total liabilities                               4,230,537              3,961,744
                                               -------------------------------------
Commitments and contingencies 
 (Note 11)

STOCKHOLDERS' EQUITY:
Preferred stock, par value: 
 $0.01; 50 million shares 
 authorized; no shares issued
 and outstanding                                          -                      -
Common stock, par value: 
 $0.01; 200 million shares
 authorized; 50.8 million 
 shares issued                                            508                    508
Additional paid-in capital                            389,876                389,196
Unearned compensation                                    (514)                  (374)
Net unrealized appreciation 
 of investments, net of
 deferred income taxes                                160,397                 77,766
Cumulative foreign currency 
 translation adjustment, net 
 of deferred income taxes                              (8,078)                  (354)
Retained earnings                                     773,380                626,501
Treasury stock, at cost; 
 0.3 million shares                                    (8,086)                (7,220)
                                               -------------------------------------
    Total stockholders' equity                      1,307,483              1,086,023
                                               -------------------------------------
TOTAL LIABILITIES AND 
 STOCKHOLDERS' EQUITY                          $    5,538,020        $     5,047,767
                                               =====================================



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


F-4
<PAGE>

<TABLE>
<CAPTION>

EVEREST REINSURANCE HOLDINGS, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS



                                               Years Ended December 31,
                                 ---------------------------------------------------
(Dollars in thousands,                    1997               1996               1995
 except per share amounts)       ---------------------------------------------------
<S>                              <C>                <C>                <C>
REVENUES:
Premiums earned:
  Before stop loss premium       $   1,049,847      $     973,611      $     893,321
  Stop loss premium                        -                  -              140,000
                                 ---------------------------------------------------
  Net premiums earned                1,049,847            973,611            753,321
Net investment income                  228,546            191,901            166,023
Net realized capital gain               15,916              5,695             33,835
Other income/(loss)                      4,880             (1,867)            (4,315)
                                 ---------------------------------------------------
                                     1,299,189          1,169,340            948,864
                                 ---------------------------------------------------

CLAIMS AND EXPENSES:
Incurred losses and loss
 adjustment expenses                   765,421            716,033            674,696
Commission, brokerage, 
 taxes and fees                        274,796            254,598            227,376
Other underwriting expenses             51,672             54,870             60,017
Compensation related to 
 public offering                           -                  -               13,343
                                 ---------------------------------------------------
                                     1,091,889          1,025,501            975,432
                                 ---------------------------------------------------

INCOME (LOSS) BEFORE TAXES             207,300            143,839            (26,568)
Income tax (benefit)                    52,345             31,812            (27,315)
                                 ---------------------------------------------------
NET INCOME                       $     154,955      $     112,027      $         747
                                 ===================================================

PER SHARE DATA:
Average shares 
 outstanding (000's)                    50,476             50,567             50,189
Net income per common
 share - basic                   $        3.07      $        2.22      $        0.01
                                 ===================================================


Average diluted shares
 outstanding (000's)                    50,765             50,711             50,209
Net income per common
 share - diluted                 $        3.05      $        2.21      $        0.01
                                 ===================================================
 





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


                                                                             F-5
<PAGE>

<TABLE>
<CAPTION>

EVEREST REINSURANCE HOLDINGS, INC.

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY



                                                  Years Ended December 31,
                                     ---------------------------------------------------
(Dollars in thousands,                        1997               1996               1995
 except per share amounts)           ---------------------------------------------------
<S>                                  <C>                <C>                <C>
COMMON STOCK (shares 
 outstanding):
Balance, beginning of
 period                                 50,490,273         50,792,869         50,000,000
Issued during the period                    22,600              3,800            792,869
Treasury stock acquired
 during period                             (37,287)          (306,396)               -
Treasury stock reissued  
 during period                               3,685                -                  -
                                     ---------------------------------------------------
Balance, end of period                  50,479,271         50,490,273         50,792,869
                                     ===================================================
COMMON STOCK (par value):
Balance, beginning of period         $         508      $         508      $         500
Issued during the period                       -                  -                    8
                                     ---------------------------------------------------
Balance, end of period                         508                508                508
                                     ---------------------------------------------------
ADDITIONAL PAID IN CAPITAL:
Balance, beginning of period               389,196            387,349            283,076
Contributions during the
 period                                        -                1,783             91,000
Common stock issued during
 the period                                    636                 64             13,273
Treasury stock reissued 
 during period                                  44                -                  -
                                     ---------------------------------------------------
Balance, end of period                     389,876            389,196            387,349
                                     ---------------------------------------------------
UNEARNED COMPENSATION:
Balance, beginning of period                  (374)              (692)               -
Net increase (decrease) 
 during the period                            (140)               318               (692)
                                     ---------------------------------------------------
Balance, end of period                        (514)              (374)              (692)
                                     ---------------------------------------------------
NET UNREALIZED APPRECIATION
 (DEPRECIATION) OF INVESTMENTS,
 NET OF DEFERRED INCOME TAXES:
Balance, beginning of period                77,766             83,726            (58,172)
Net increase (decrease) during
 the period                                 82,631             (5,960)           141,898
                                     ---------------------------------------------------
Balance, end of period                     160,397             77,766             83,726
                                     ---------------------------------------------------
CUMULATIVE TRANSLATION 
 ADJUSTMENTS, NET OF DEFERRED 
 INCOME TAXES:
Balance, beginning of period                  (354)            (7,838)           (11,255)
Net increase (decrease) during
 the period                                 (7,724)             7,484              3,417
                                     ---------------------------------------------------
Balance, end of period                      (8,078)              (354)            (7,838)
                                     ---------------------------------------------------
RETAINED EARNINGS:
Balance, beginning of period               626,501            520,541            526,818
Net income                                 154,955            112,027                747
Dividends declared ($0.16 per
 share in 1997, $0.12 per
 share in 1996 and $0.14 per 
 share in 1995)                             (8,076)            (6,067)            (7,024)
                                     ---------------------------------------------------
Balance, end of period                     773,380            626,501            520,541
                                     ---------------------------------------------------
TREASURY STOCK AT COST:
Balance, beginning of period                (7,220)               -                  -
Treasury stock acquired 
 during period                                (953)            (7,220)               -
Treasury stock reissued 
 during period                                  87                -                  -
                                     ---------------------------------------------------
Balance, end of period                      (8,086)            (7,220)               -
                                     ---------------------------------------------------
TOTAL STOCKHOLDERS' EQUITY,
 END OF PERIOD                       $   1,307,483      $   1,086,023      $     983,594
                                     ===================================================


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


F-6
<PAGE>

<TABLE>
<CAPTION>

EVEREST REINSURANCE HOLDINGS, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS


                                                           Years Ended December 31,
                                              ------------------------------------------------
(Dollars in thousands)                                1997              1996              1995
                                              ------------------------------------------------
<S>                                           <C>               <C>               <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income                                    $    154,955      $    112,027      $        747
  Adjustments to reconcile net income
    to net cash provided by operating
    activities:
    (Increase) decrease in premiums 
     receivable                                    (30,867)           38,285            24,986
    (Increase) decrease in funds held
     by reinsureds, net                             (1,065)          (21,606)           31,511
    (Increase) decrease in reinsurance
     receivables                                    56,544           (37,084)          (20,656)
    (Increase) decrease in deferred 
     tax asset                                      10,451           (13,065)           (8,143)
    Increase in reserve for losses 
     and loss adjustment expenses                  202,191           281,590           248,789
    Increase (decrease) in unearned
     premiums                                      (16,970)           60,293            30,268
    (Increase) decrease in other 
     assets and liabilities                         17,706            (1,064)           16,343
    Non cash compensation expense                     (140)              318            12,589
    Accrual of bond discount/
     amortization of bond premium                     (500)              (46)            4,264
    Realized capital (gains)                       (15,916)           (5,695)          (33,835)
                                              ------------------------------------------------
Net cash provided by operating 
 activities                                        376,389           413,953           306,863
                                              ------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from fixed maturities 
 matured/called - held to maturity                   2,155            20,582            30,961
Proceeds from fixed maturities matured/
 called - available for sale                       132,231           143,114           145,543
Proceeds from fixed maturities sold -
 available for sale                                880,189         1,281,882           699,869
Proceeds from equity securities sold                59,494           160,429           164,723
Proceeds from other invested assets 
 sold                                                1,368               -                 -
Cost of fixed maturities acquired -
 held to maturity                                      -             (17,378)              (10)
Cost of fixed maturities acquired - 
 available for sale                             (1,413,516)       (1,836,274)       (1,370,981)
Cost of equity securities acquired                 (45,825)         (150,861)         (121,569)
Cost of other invested assets acquired                 -              (7,184)           (2,133)
Net (purchases) sales of short-term 
 securities                                        (23,422)           26,890            58,408
Net increase (decrease) in unsettled 
 securities transactions                             1,533            (3,166)            1,526
                                              ------------------------------------------------
Net cash (used in) investing activities           (405,793)         (381,966)         (393,663)
                                              ------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Purchase of treasury stock                            (822)           (7,220)              -
Contributions during the period                        -               1,783            91,000
Common stock issued during the period                  636                64               -
Dividends paid to stockholders                      (8,076)           (6,067)           (7,024)
Net increase (decrease) in collateral 
 for loaned securities                              47,119           (19,897)           12,372
                                              ------------------------------------------------
Net cash provided by (used in)
 financing activities                               38,857           (31,337)           96,348
                                              ------------------------------------------------
EFFECT OF EXCHANGE RATE CHANGES 
 ON CASH                                           (10,470)            1,033            (3,044)
                                              ------------------------------------------------
Net increase (decrease) in cash                     (1,017)            1,683             6,504
Cash, beginning of period                           52,595            50,912            44,408
                                              ------------------------------------------------
Cash, end of period                           $     51,578      $     52,595      $     50,912
                                              ================================================
SUPPLEMENTAL CASH FLOW INFORMATION
Cash transactions:
Income taxes paid (received), net             $     53,645      $     38,055      $    (50,944)
Non-cash financing transaction:
Issuance of common stock in 
 connection with public offering              $       (140)     $        318      $     12,589


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

 
                                                                             F-7
<PAGE>
EVEREST REINSURANCE HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 

Years Ended December 31, 1997, 1996 and 1995

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 Ltd.  ("Everest
Ltd.")  (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.  The  acquisition  of Everest  Canada has been
accounted  for by the  purchase  method.  Had this  acquisition  occurred at the
beginning  of either 1995 or 1996,  there would have been no material  effect on
the Company's  results of  operations.  All material  intercompany  balances and
transactions have been eliminated in consolidation.

Certain  reclassifications  have  been  made  to the  1995  and  1996  financial
statements to conform to the 1997 presentation.

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

C.  UNCOLLECTIBLE REINSURANCE RECOVERABLE BALANCES
The Company provides  reserves for uncollectible  reinsurance  balances based on
management's  assessment of the collectibility of the outstanding balances. Such
reserves  were  $14,399 and $14,267 at December  31, 1997 and December 31, 1996,
respectively (see also Note 7).

F-8
<PAGE>

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 $270,605,  $252,928 and $226,819 in
1997, 1996 and 1995, 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
stockholder's equity.

I.  EARNINGS PER SHARE
The Company adopted SFAS No. 128,  "Earnings Per Share",  in 1997 which requires
retroactive  application for all prior periods presented.  SFAS No. 128 requires
an  enterprise  to present  basic and diluted  earnings  per share on the income
statement.  Basic earnings per share, which is calculated by dividing net income
by the weighted  average number of common shares  outstanding,  replaces primary
earnings per share from the prior standard.  For all periods previously reported
by the Company,  basic  earnings  per share is the same as primary  earnings per
share,  since the impact of the  Company's  common stock  equivalents  for those
periods  did  not  reach  the  significance   threshold  prescribed  to  require
adjustment  under the prior  standard.  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. Diluted
earnings  per share is computed  similarly to fully  diluted  earnings per share
from the prior standard.

Net income per common share has been computed below in accordance  with SFAS No.
128, based upon weighted average common and dilutive shares outstanding.

                                                                             F-9
<PAGE>

<TABLE>

                                            1997            1996            1995
                                       -----------------------------------------
<S>                                    <C>             <C>             <C>
Net income (numerator)                 $ 154,955       $ 112,027       $     747
                                       =========================================
Weighted average common and
 effect of dilutive shares 
 used in the computation of
 net income per share:
  Average shares outstanding -
   basic (denominator)                    50,476          50,567          50,189
  Effect of dilutive shares                  289             144              20
                                       -----------------------------------------
  Average shares outstanding -
   diluted (denominator)                  50,765          50,711          50,209
                                       =========================================
Net income per common share:
     Basic                             $    3.07       $    2.22       $    0.01
     Diluted                                3.05            2.21            0.01

</TABLE>


Options to purchase 337,750, 20,000 and 20,000 shares of common stock at $39.16,
$26.63 and $20.94 per share were  outstanding at the end of 1997, 1996 and 1995,
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 for such years.  The options,
which  expire on September  26,  2007,  November 18, 2006 and November 20, 2005,
respectively, were still outstanding at the end of 1997.

J.  FUTURE APPLICATION OF ACCOUNTING STANDARDS
In June 1997,  the  Financial  Accounting  Standards  Board issued  Statement of
Financial  Accounting  Standards  ("SFAS")  No.  130,  "Reporting  Comprehensive
Income".

SFAS No. 130  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.  SFAS No.
130 is effective  for fiscal years  beginning  after  December 15, 1997.  As the
components of other  comprehensive  income consist of items already reflected as
direct charges or credits to the Company's stockholder's equity, the only impact
of adopting this standard will be to reflect an additional presentation of these
items. When adopted,  the additional required  presentation will be provided for
earlier periods.

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, 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 debt securities              489,168          33,966               59         523,075
                                  ------------------------------------------------------------ 
TOTAL                             $ 3,658,370    $    208,946     $        456     $ 3,866,860
                                  ============================================================
As of December 31, 1996
Fixed maturities - held 
 to maturity
 U.S. Treasury securities
  and obligations of U.S.
  government agencies and
  corporations                    $    30,182    $        307     $         54     $    30,435
 Obligations of states and
  political subdivisions               50,340           7,824              225          57,939
                                  ------------------------------------------------------------
TOTAL                             $    80,522    $      8,131     $        279     $    88,374
                                  ============================================================  
Fixed maturities - available
 for sale
 U.S. Treasury securities 
  and obligations of U.S.
  government agencies and
  corporations                    $   162,406    $        909     $      1,361     $   161,954
 Obligations of states and 
  political subdivisions            1,259,544          48,277              733       1,307,088
 Corporate securities                 739,997          11,440              315         751,122
 Mortgage-backed securities           487,145           7,692            2,007         492,830
 Foreign debt securities              545,154          24,660              836         568,978
                                  ------------------------------------------------------------
TOTAL                             $ 3,194,246    $     92,978     $      5,252     $ 3,281,972
                                  ============================================================

</TABLE>


F-10
<PAGE>

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.

<TABLE>

                                                              December 31, 1997
                                                        -----------------------------
                                                          Amortized            Market
                                                               Cost             Value
                                                        ----------------------------- 
<S>                                                     <C>               <C>
Fixed maturities - available for sale
   Due in one year or less                              $    55,757       $    56,437
   Due after one year through five years                    469,121           482,049
   Due after five years through ten years                 1,214,417         1,294,212
   Due after ten years                                    1,398,027         1,492,612
   Mortgage-backed securities                               521,048           541,550
                                                        -----------------------------
TOTAL                                                   $ 3,658,370       $ 3,866,860
                                                        =============================
</TABLE>


Proceeds from sales of fixed  maturity  investments  during 1997,  1996 and 1995
were  $880,189,  $1,281,882 and $699,869,  respectively.  Gross gains of $6,766,
$9,146 and $7,058, and gross losses of $9,439, $20,952 and $12,058 were realized
on those sales during 1997, 1996 and 1995, 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,
                                                          -------------------------- 
                                                               1997             1996
                                                          --------------------------
<S>                                                       <C>              <C>

Cost                                                      $ 120,510        $ 115,367
Unrealized appreciation                                      39,162           33,015
Unrealized depreciation                                         888            1,102
                                                          --------------------------
Market value                                              $ 158,784        $ 147,280
                                                          ==========================

</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,
                                            ---------------------------------------
                                                  1997           1996          1995
                                            ---------------------------------------
<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                         $    6,361    $     5,897    $   (8,153)
  Fixed maturities                             120,764        (14,440)      226,459
  Other invested assets                             -              -             -
  Deferred taxes                               (44,494)         2,583       (76,408)
                                            ---------------------------------------
Increase (decrease) in unrealized 
 appreciation, net of deferred 
 taxes, included in stockholder's
 equity                                         82,631         (5,960)      141,898
Increase (decrease) during the 
 period between the market value
 and cost of fixed maturities 
 carried at amortized cost                      (7,852)        (4,288)        3,294
                                            ---------------------------------------
TOTAL                                       $   74,779    $   (10,248)   $  145,192
                                            =======================================
</TABLE>


                                                                            F-11
<PAGE>

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

<TABLE>

                                                 Years Ended December 31,
                                        -----------------------------------------
                                               1997           1996           1995
                                        -----------------------------------------
<S>                                     <C>            <C>            <C>
Fixed maturities                        $   232,779    $   198,947    $   168,268
Equity securities                             4,473          2,835          2,017
Short-term securities                         3,435          5,357          9,005
Other interest income                         2,582          1,450            860
                                        -----------------------------------------
Total gross investment income               243,269        208,589        180,150
                                        -----------------------------------------   
Interest on funds held                       11,173         12,294          9,451
Other investment expenses                     3,550          4,394          4,676
                                        -----------------------------------------
Total investment expenses                    14,723         16,688         14,127
                                        -----------------------------------------
Total net investment income             $   228,546    $   191,901    $   166,023
                                        =========================================

</TABLE>


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

<TABLE>

                                            Years Ended December 31,
                                     ------------------------------------------
                                            1997            1996           1995
                                     ------------------------------------------ 
<S>                                  <C>            <C>             <C>  
Fixed maturities                     $    (2,673)   $    (11,805)   $    (5,000)
Equity securities                         18,572          17,443         38,833
Short-term investments                        17              57              2
                                     ------------------------------------------
TOTAL                                $    15,916    $      5,695    $    33,835
                                     ==========================================

</TABLE>


Securities with a carrying value amount of $288,433 at December 31, 1997 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, 1997, 1996 and 1995.

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,
                                        -------------------------------------------------   
                                                  1997              1996             1995
                                        -------------------------------------------------
<S>                                     <C>               <C>               <C>
Reserves at January 1                   $    3,246,858    $    2,969,341    $   2,706,429
 Less reinsurance recoverables                 746,640           700,877          648,550
                                        -------------------------------------------------
 Net balance at January 1                    2,500,218         2,268,464        2,057,879
                                        -------------------------------------------------
Incurred related to:
 Current year                                  768,597           745,594          658,039
 Prior years                                    (3,176)          (29,561)          16,657
                                        -------------------------------------------------
  Total incurred losses and
   loss adjustment expenses                    765,421           716,033          674,696
                                        -------------------------------------------------
Paid related to:
 Current year                                  185,310           213,832          104,636
 Prior years                                   331,205           270,447          359,475
                                        -------------------------------------------------
  Total paid losses and loss
   adjustment expenses                         516,515           484,279          464,111
                                        ------------------------------------------------- 
Net balance at December 31                   2,749,124         2,500,218        2,268,464
 Plus reinsurance recoverables                 688,694           746,640          700,877
                                        -------------------------------------------------
  Balance at December 31                $    3,437,818    $    3,246,858    $   2,969,341
                                        =================================================
</TABLE>



F-12
<PAGE>

4.  CREDIT LINE

On June 16, 1997, the Company  finalized a 364 day revolving line of credit with
First  Union  National  Bank.  This  credit  facility,  which  will be used  for
liquidity and general  corporate  purposes,  provides for the borrowing of up to
$50 million with  interest at a rate selected by the Company 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
credit facility agreement requires that Everest Re maintain 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.

5.  OPERATING LEASE AGREEMENTS

The future minimum rental commitments,  exclusive of cost escalation clauses, as
of December 31, 1997 for all of the Company's  operating  leases with  remaining
noncancelable terms in excess of one year are as follows:

<TABLE>

(in thousands)
<S>                                                        <C>
1998                                                       $    4,124
1999                                                            3,821
2000                                                            3,705
2001                                                            3,689
2002                                                            3,302
Thereafter                                                      2,845
                                                           ----------
Total payments                                                 21,486                                                               
Sublease rental income                                            589
                                                           ----------
Net Commitments                                            $   20,897
                                                           ==========
</TABLE>


All of these leases,  the expiration terms of which range from 1999 to 2004, are
for the rental of office space.  Rental expense,  net of sublease rental income,
was $4,903, $5,334 and $7,337 for 1997, 1996 and 1995, respectively.

6.  INCOME TAXES

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

<TABLE>

                                                      Years Ended December 31,
                                             ---------------------------------------
                                                   1997          1996           1995
                                             ---------------------------------------
<S>                                          <C>           <C>           <C>
Current tax (benefit):
 U.S.                                        $   18,892    $   24,363    $   (35,435)
 Foreign                                         23,000        20,735         18,351
                                             ---------------------------------------
 Total current tax (benefit)                     41,892        45,098        (17,084)
Total deferred U.S. tax (benefit)                10,453       (13,286)       (10,231)
                                             ---------------------------------------
 Total income tax (benefit)                  $   52,345    $   31,812    $   (27,315)
                                             =======================================
</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,
                                               -----------------------------------
                                                    1997         1996         1995
                                               ----------------------------------- 
<S>                                             <C>          <C>           <C>
Federal income tax rate                             35.0%        35.0%       (35.0)%
Increase (reduction) in 
  taxes resulting from:
  Tax exempt income                                (12.1)       (15.1)       (73.4)
  Other, net                                         2.4          2.2          5.6
                                               -----------------------------------
  Effective tax rate                                25.3%        22.1%      (102.8)%
                                               ===================================

</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,
                                                    ----------------------------
                                                           1997             1996
                                                    ----------------------------
<S>                                                 <C>             <C>
Deferred tax assets:
 Reserve for losses and loss
  adjustment expenses                               $   155,666     $    164,477
 Unearned premium reserve                                22,988           24,545
 Foreign currency translation                             4,480              232
 Net operating loss carryforward                          1,222            1,579
 Other assets                                             8,866            6,569
                                                    ----------------------------
Total deferred tax assets                               193,222          197,402
                                                    ----------------------------
Deferred tax liabilities:
 Deferred acquisition costs                              28,816           29,443
 Net unrealized appreciation  
  of investments                                         86,368           41,874
 Other liabilities                                        3,604            1,421
                                                    ----------------------------
Total deferred tax liabilities                          118,788           72,738
                                                    ----------------------------
Net deferred tax assets                             $    74,434      $   124,664
                                                    ============================
</TABLE>


Pursuant to the terms of a separation agreement, The Prudential retained the net
operating loss carryforwards  attributable to the Company at the date of the IPO
and paid the Company for the tax  benefits  thereof in 1996.  Holdings has total
net operating loss carryforwards of $3,491, of which $343 expire in 2011, $2,408
expire in 2012 and $740  expire  in 2013.  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.

The Internal  Revenue  Service  ("IRS") has  completed its  examinations  of The
Prudential's  tax  returns for all years  through  1992.  As those  examinations
relate to Everest  Re, the IRS has  disallowed  that  portion of the fresh start
benefit which relates to 1986 reserve  strengthening as defined by the IRS. As a
result of conflicting decisions by two U.S. Circuit Courts, the Supreme Court of
the United States will consider the issue in reviewing ATLANTIC MUTUAL INSURANCE
CO. V.  COMMISSIONER to determine  whether the Treasury  regulation that defines
the term  "reserve  strengthening"  is a valid  interpretation  of the law.  The
Supreme  Court's  decision  in this case is  expected  to bring  about a uniform
resolution of this question. The Company agrees with the petitioner in this case
in that the term "reserve strengthening" as used in the statute involves changes
in assumptions or methodologies.  The Company believes that,  because there were
no changes in reserving  assumptions or methodologies between 1985 and 1986, all
increases  to  reserves  in 1986 for which a fresh  start  benefit was taken are
normal  reserve   additions  and,   therefore,   does  not  constitute   reserve
strengthening  that is not  eligible  for the fresh  start  benefit.  If the IRS
position  prevails,  the Company will be required to reimburse  The  Prudential,
thereby  incurring an additional charge of approximately  $9,445,  including the
after-tax cost of interest through December 31, 1997.

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 under
these  agreements  and has  never  suffered  a  significant  loss  because  of a
retrocessionaire's default. (see Note 1(C) and the following paragraph).

F-14
<PAGE>

Effective  October 5, 1995,  Everest Re entered into a stop loss  agreement (the
"Stop Loss Agreement") with Gibraltar  Casualty Company  ("Gibraltar") (see Note
8). 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  uncollectable  reinsurance  as of  June  30,  1995,  including
allocated loss adjustment expense and incurred but not reported losses, provided
that adverse development,  if any, relating to catastrophes will be covered only
to the extent that the catastrophe  event occurred prior to January 1, 1995. All
such  adverse  development  is  referred  to  herein as  "Adverse  Development".
Payments  will be made to  Everest Re under the Stop Loss  Agreement  as Adverse
Development  is incurred by Everest Re. The $375,000  aggregate  limit under the
Stop  Loss  Agreement  will  be  reduced  by an  amount  equal  to  the  Adverse
Development  which is not ceded,  in accordance  with the terms of the Stop Loss
Agreement,  to Gibraltar  (see Note 8A).  Coverage under the Stop Loss Agreement
terminates on December 31, 2007,  or earlier if coverage is  exhausted.  Through
December  31,  1997 and  1996,  cessions  under  the Stop  Loss  Agreement  have
aggregated $185,231 and $140,231, respectively.

Written and earned premiums are comprised of the following:

<TABLE>

                                                   Years Ended December 31,
                                         --------------------------------------------
                                                 1997            1996            1995
                                         --------------------------------------------
<S>                                      <C>             <C>             <C>
Written premium:
   Direct                                $     75,653    $     59,691    $     16,064
   Assumed                                    999,316         984,340         933,436
   Retroceded                                 (43,827)        (13,497)       (166,309)
                                         --------------------------------------------
   Net written premium                   $  1,031,142    $  1,030,534    $    783,191
                                         ============================================
Earned premium
   Direct                                $     77,784    $     37,963    $     10,784
   Assumed                                  1,012,168         945,698         907,995
   Retroceded                                 (40,105)        (10,050)       (165,458)
                                         --------------------------------------------
   Net earned premium                    $  1,049,847    $    973,611    $    753,321
                                         ============================================

</TABLE>


The amounts  deducted  from losses and loss  adjustment  expenses  incurred  for
retrocessional  recoveries  were  $109,574,  $206,032 and $119,115 for the years
ended December 31, 1997, 1996 and 1995, respectively.

8.  TRANSACTIONS WITH FORMER AFFILIATES

A.  INDEMNITY AGREEMENT
On October 5, 1995, Holdings agreed,  pursuant to a Standby Capital Contribution
Agreement (the "Capital Contribution Agreement"),  to make capital contributions
("Capital  Contributions")  to Everest Re in  respect of the first  $375,000  of
Adverse  Development  experienced by Everest Re that is not ceded, in accordance
with  the  terms  of  the  Stop  Loss  Agreement,  to  Gibraltar.  Each  Capital
Contribution,  if any,  will  equal  the  amount  of such  Adverse  Development,
adjusted to reflect an assumed tax rate of 36%,  although the  Company's  actual
tax rate may be  greater  than or less than 36%.  Holdings'  obligation  to make
Capital  Contributions  shall be  limited  to an  aggregate  maximum  amount  of
$240,000,  which  amount  shall  be  reduced  by 64% of the  amount  of  Adverse
Development ceded to Gibraltar under the Stop Loss Agreement.

Also on October 5, 1995, PRUCO agreed to make payments ("Indemnity Payments") to
Holdings,  pursuant to an Indemnity  Agreement  (the "PRUCO  Indemnity"),  in an
amount  equal  to the  Capital  Contributions  at such  times  as  such  Capital
Contributions,  if any,  are  required to be paid by Holdings to Everest Re. The
Capital Contribution  Agreement and the PRUCO Indemnity are intended to mitigate
the impact of up to the first  $375,000 of Adverse  Development on the Company's
earnings not otherwise covered by the Stop Loss Agreement.

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

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

                                                                            F-15
<PAGE>

<TABLE>

                                                                January 1
                                                                  Through
                                                               October 5,
                                                                     1995    
                                                               ----------
<S>                                                            <C>
Income statement:
Premiums earned - assumed
 Gibraltar                                                     $       -
 Other                                                             24,298
Premiums earned - retroceded
 Gibraltar                                                        140,000
Incurred losses and loss 
 adjustment expenses - assumed
 Gibraltar                                                         37,877
 Other                                                             13,587
Incurred losses and loss 
 adjustment expenses- retroceded
 Gibraltar                                                         27,640
 Other                                                                 16

</TABLE>

                                                             
The Prudential has guaranteed all of Gibraltar's obligations under the Stop Loss
Agreement,  all of  PRUCO's  obligations  under  the PRUCO  Indemnity  and up to
$400,000  of  Gibraltar's  net  obligations  that became due after June 30, 1995
under all other  reinsurance  agreements  between  Gibraltar  and Everest Re. At
December 31, 1997,  Gibraltar's  net  obligations  under such other  reinsurance
agreements consisted of the following balances:
<TABLE>

<S>                                                               <C>
Reinsurance receivables from Gibraltar                            $ 304,939
Reserve for losses and loss adjustment
 expenses assumed from Gibraltar                                   (131,305)
Losses in the course of payment assumed 
 from Gibraltar                                                      (1,073)
Funds held by Everest Re under reinsurance
 treaties with Gibraltar                                           (103,627)
                                                                  ---------                                                       
   Net obligations of Gibraltar                                   $  68,934
                                                                  =========
</TABLE>


In addition,  since June 30, 1995,  Gibraltar  has paid $75,931 to Everest Re in
respect of such other reinsurance agreements.

C.  EXPENSES
Everest Re has service and lease  agreements  with The  Prudential.  Under these
agreements,  The  Prudential has furnished  services of its employees,  provided
supplies,  use of equipment and office space,  and made payment to third parties
for general expenses on behalf of Everest Re. The agreements obligate Everest Re
to reimburse The Prudential for disbursements made on Everest Re's behalf and to
pay for  providing  these  services.  The cost of such  services  for the period
January 1 through  October  5, 1995 was  $10,789.  Everest Re also has a service
agreement  with  Gibraltar  pursuant  to which  Gibraltar manages the run-off of
Everest Re's former direct excess insurance operations.

D.  EMPLOYEE RETIREMENT PLAN
The  Prudential   sponsored  a  defined   benefit  pension  plan  which  covered
substantially  all of the employees of Everest Re through  October 6, 1995.  The
benefits are generally based on average earnings over a period prescribed by the
plan and credited length of service. In connection with the IPO, the Company has
established its own employee  retirement plan which is substantially the same as
The  Prudential's  plan (see also Note 9). In  September  1996,  The  Prudential
completed a  plan-to-plan  asset transfer of $13,270 to fully fund the Company's
projected  benefit  obligations  as of the IPO date,  plus interest from the IPO
date.  No pension  expense for  contributions  to the  Prudential  plan has been
charged  to  Everest  Re for the  year  ended  December  31,  1995  because  the
Prudential  plan  was  subject  to the full  funding  limitation  under  the IRS
guidelines.

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

F-16
<PAGE>

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

9.  PENSION PLAN

The  Company  has an  employee  retirement  plan under  which the  benefits  are
generally  based on average  earnings  over a period  prescribed by the plan and
credited  length  of  service.  The  Company  has  not  been  required  to  fund
contributions to the pension plan for the years ended December 31, 1997 and 1996
because the Company's plan was subject to the full funding  limitation under the
IRS  guidelines.  Pension  expense  for the  Company's  plan for the years ended
December 31, 1997,  1996 and for the period of October 6, 1995 through  December
31, 1995 was $770, $901 and $312, respectively.

The following table summarizes the plan's funded status:

<TABLE>
 
                                                 Years Ended December 31,
                                              ------------------------------
                                                      1997              1996
                                              ------------------------------
<S>                                           <C>              <C>
Accumulated benefit obligation
 Vested                                       $      8,513     $       7,985
 Non-vested                                          1,681                -
                                              ------------------------------
 Total                                              10,194             7,985
 Additional benefits based on 
  estimated future salary levels                     6,921             7,146
                                              ------------------------------
 Projected benefit obligation                       17,115            15,131
Fair value of plan assets                           17,389            14,610
                                              ------------------------------
Unfunded projected benefit 
 obligation                                            274              (521)
Unrecognized net loss or (gain)                     (2,257)             (692)
                                              ------------------------------
Unfunded (accrued) or prepaid 
 pension cost in the financial
 statements                                   $     (1,983)    $      (1,213)
                                              ==============================                                        
</TABLE>


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

Net periodic pension cost included the following components:

<TABLE>

                                                                            October 6
                                                                              Through
                                            Years Ended December 31,     December 31,
                                           ------------------------------------------ 
                                                1997            1996             1995
                                           ------------------------------------------
<S>                                        <C>           <C>             <C>
Service cost                               $   1,063     $     1,102     $        382
Interest cost                                  1,031             948              328
Actual return on assets                       (2,824)         (1,841)            (638)
Net asset gain during period
 deferred for later recognition                1,510             692              240
Amortization of net gain from
 earlier periods                                 (10)             -                -  
                                           ------------------------------------------
Net periodic pension cost                  $     770     $       901     $        312
                                           ==========================================

</TABLE>


The weighted  average  discount rate and rate of  compensation  increase used to
determine the actuarial  present value of the projected  benefit  obligation are
7.0% and  4.5%,  respectively.  The  expected  long-term  rate of return on plan
assets is 9.0%.


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

                                                                            F-17
<PAGE>
prior year's statutory annual statement. In addition, no dividend may be paid in
excess of  unassigned  earned  surplus.  At December  31,  1997,  Everest Re had
$177,567  available  for payment of dividends in 1998 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
$908,766 and $772,691 at December 31, 1997 and 1996, respectively. The statutory
net income (loss) of Everest Re was  $193,057,  $88,517 and $(736) for the years
ended December 31, 1997, 1996 and 1995, 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) limited  historical  data concerning
asbestos and environmental  losses;  (viii) questions concerning  interpretation
and  application of insurance and  reinsurance  coverage;  and (ix)  uncertainty
regarding  the number and  identity  of  insureds  with  potential  asbestos  or
environmental exposure.

Management  believes that these issues are not likely to be resolved in the near
future. 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>

                                            1997              1996              1995
                                    ------------------------------------------------
<S>                                 <C>              <C>               <C>
Gross basis
Beginning of reserves               $    423,336     $     428,495     $     445,537
Incurred losses                           83,724            30,028            17,269
Paid losses                              (60,928)          (35,187)          (34,311)
                                    ------------------------------------------------
End of period reserves              $    446,132     $     423,336     $     428,495
                                    ================================================
Net basis
Beginning of reserves               $    199,557     $     185,981     $     203,676
Incurred losses  (1)                       3,490                -                 -
Paid losses  (2)                           9,329            13,576           (17,695)
                                    ------------------------------------------------
End of period reserves              $    212,376     $     199,557     $     185,981
                                    ================================================
</TABLE>

--------------
(1)  Net of  $41,178,  $24,196  and  $16,687  ceded  in  1997,  1996  and  1995,
     respectively,  under the incurred  loss  reimbursement  feature of the Stop
     Loss Agreement.
(2)  Net of  $22,610,  $34,451 and $5,000  ceded paid  losses in 1997,  1996 and
     1995, respectively, under the Stop Loss Agreement.

F-18
<PAGE>
At December 31, 1997, the gross reserves for asbestos and  environmental  losses
were  comprised  of  $125,937  representing  case  reserves  reported  by ceding
companies,  $51,960 representing additional case reserves established by Everest
Re on assumed reinsurance claims, $45,776 representing case reserves established
by Everest Re on direct excess insurance claims and $222,459  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, 1997 and 1996 was  $140,478  and  $136,234,
respectively.

Everest Re has purchased  annuities from an unaffiliated  life insurance company
to settle  certain claim  liabilities  of Everest Re. Should the life  insurance
company become unable to make the annuity payments,  Everest Re would be liable.
The estimated  cost to replace such  annuities at December 31, 1997 and 1996 was
$9,968 and $9,208, 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, 1997, there
were 2,143,581 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, 1997, there were 37,130  remaining  shares available to be granted.  Options
granted  under the 1995  Employee  Plan vest at 20% per year over five years and
options  granted  under  the 1995  Director  Plan  vest at 50% per year over two
years. All options are exercisable at fair market value of the stock at the date
of grant and expire ten years after the date of grant.  Restricted stock granted
under the 1995 Employee Plan vests,  beginning one year after the date of grant,
in equal annual installments over five years.

                                                                            F-19
<PAGE>
A summary of the status of the Company's  stock options as of December 31, 1997,
1996 and 1995 and changes during the years then ended is presented below:

<TABLE>
 
                                                    1997                          1996                             1995
                             ------------------------------------------------------------------------------------------
                                               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                           732,570     $      19.72       459,700     $     16.93             -      $          xx
Granted                         339,250            39.13       286,270           24.10        459,700             16.93
Exercised                        11,100            16.75         3,800           16.75             -                 xx
Forfeited                        61,700            19.00         9,600           18.25             -                 xx
                             ----------                     ----------                     ----------
Outstanding, end of 
 year                           999,020     $      26.39       732,570     $     19.72        459,700     $       16.93
                             ==========                     ==========                     ==========
Options exercisable at
 year-end                       215,313                         91,496                             -
                             ==========                     ==========                     ==========
Weighted-average fair
 value of options
 granted during the
 year                                       $      18.37                   $     11.55                    $        7.92
                                            ============                   ===========                    =============
   
</TABLE>

The following table summarizes  information  about stock options  outstanding at
December 31, 1997:

<TABLE>

                                                                                       Options
                                Options Outstanding                                Exercisable
                          ---------------------------------------------------------------------------------------
                                                   Weighted-
                               Number                Average        Weighted-           Number          Weighted-
Range of                  Outstanding              Remaining          Average      Exercisable            Average
Exercise Prices           at 12/31/97       Contractual Life   Exercise Price      at 12/31/97     Exercise Price
-----------------------------------------------------------------------------------------------------------------
<S>                       <C>                      <C>         <C>                 <C>             <C>
$16.75 to $20.94              394,800              7.8 years   $        16.96          157,380     $        16.96
 22.56 to  26.63              264,970              8.7                  24.11           57,933              24.04
$33.00 to $39.16              339,250              9.7                  39.13               -                 -
                          -----------                                              -----------                    
                              999,020              8.7         $        26.39          215,313     $        18.87
                          ===========                                              ===========
</TABLE>


In  conjunction  with its 1995 initial  public  offering,  the Company issued to
certain  key  employees  of the  Company  746,269  shares  of stock  and  46,600
restricted  shares  of  stock,  respectively.  In  1997,  an  additional  11,500
restricted  shares of stock were issued to certain key employees of the Company,
while 6,400  restricted  shares were  forfeited.  In 1995, the Company  expensed
$12,500 in  recognition  of the  unrestricted  stock  awards.  Upon  issuance of
restricted shares,  unearned compensation is charged to stockholder's equity for
the cost of the restricted  stock and is amortized over the vesting period.  The
amount of earned  compensation  recognized as expense with respect to restricted
stock awards was $203, $318 and $89 for 1997, 1996 and 1995,  respectively.  The
Company  acquired  30,887  shares of its common  stock at a cost of $846 in 1997
and, pursuant to the 1995 Employee Plan, 306,396 shares of its common stock at a
cost of $7,220 in 1996, primarily from the Company's Chief Executive Officer, to
fund required  withholding  taxes.  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 stock awards and the amount of such compensation expense reflected in
the Company's financial statements.

F-20
<PAGE>
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>

                                                                 1997           1996           1995
                                                            ---------------------------------------
<S>                                <C>                      <C>            <C>            <C>
Net Income                         As reported              $ 154,955      $ 112,027      $     747
                                   Pro forma                $ 153,492      $ 110,850      $     514
Earnings per share - basic         As reported              $    3.07      $    2.22      $    0.01
                                   Pro forma                $    3.04      $    2.19      $    0.01
Earnings per share - diluted       As reported              $    3.05      $    2.21      $    0.01
                                   Pro forma                $    3.02      $    2.19      $    0.01

</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 34.33%,  (iii) risk-free interest rates ranging from a low of 5.90% to a high
of 7.01%, and (iv) expected life of 7.5 years.

In  addition  to the 1995  Employee  Plan and 1995  Director  Plan,  the Company
transferred  during  1997 a total of 3,685  shares of treasury  stock  having an
aggregate value of $131 to its non-employee  directors as compensation for their
service as directors.

13.  SEGMENT INFORMATION

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

<TABLE>

                                               Years Ended December 31,
                                    --------------------------------------------
                                            1997            1996            1995
                                    --------------------------------------------
<S>                                 <C>             <C>              <C>
Premiums earned:
 Domestic                           $    696,645    $    655,097     $   565,540
 Canada                                   59,420          63,615          57,133
 Other international                     293,782         254,899         270,648
 Premium for Stop Loss 
  Agreement                                   -               -         (140,000)
                                    --------------------------------------------
                                                
Total premiums earned               $  1,049,847    $    973,611     $   753,321
                                    ============================================
Net income (loss):
 Domestic                           $    115,728    $     70,978     $    37,305
 Canada                                   15,223           8,548          17,774
 Other international                      24,004          32,501          45,341
 After-tax cost of Stop Loss 
  Agreement and compensation
  related to public offering                  -               -          (99,673)
                                    --------------------------------------------
Total net income                    $    154,955    $    112,027     $       747
                                    ============================================

                                                             December 31,
                                                    ----------------------------
                                                            1997            1996
                                                    ----------------------------
Total identifiable assets:
 Domestic                                           $  4,714,134     $ 4,204,570
 Canada                                                  303,162         303,369
 Other international                                     520,724         539,828
                                                    ----------------------------
Total identifiable assets                           $  5,538,020     $ 5,047,767
                                                    ============================
</TABLE>


Approximately  19.3%,  15.9% and 6.3% of the Company's gross premiums written in
1997, 1996 and 1995,  respectively,  were sourced through one intermediary.  The
increase is principally  attributable to acquisitions  made by this intermediary
during the three year period.

                                                                            F-21
<PAGE>
14.  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>
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


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

 Weighted average basic shares 
  outstanding (000's)                              50,793       50,497       50,487       50,488
 Net income per common share - basic            $    0.55    $    0.57    $    0.46    $    0.64
 Weighted average diluted shares 
  outstanding (000's)                              50,909       50,627       50,630       50,676
 Net income per common share - diluted          $    0.55    $    0.57    $    0.46    $    0.64

</TABLE>


F-22
<PAGE>

<TABLE>
<CAPTION>

EVEREST REINSURANCE HOLDINGS, INC.

SCHEDULE I - SUMMARY OF INVESTMENTS -
OTHER THAN INVESTMENTS IN RELATED PARTIES
DECEMBER 31, 1997
  

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               $  144,079    $  147,069      $  147,069
  State, municipalities
   and political 
   subdivisions                       1,610,190     1,722,108       1,722,108
  Foreign debt 
   securities (1)                       489,168       523,075         523,075
  Public utilities                       48,479        50,727          50,727
  All other corporate bonds             835,434       871,943         871,943
 Mortgage pass-through 
  securities                            521,048       541,550         541,550
 Redeemable preferred stock               9,972        10,388          10,388
                                     ----------------------------------------
Total fixed maturities-
 available for sale                   3,658,370     3,866,860       3,866,860
Equity securities                       120,510       158,784         158,784
Short-term investments                   75,244        75,244          75,244
Other invested assets                    10,848        10,848          10,848
Cash                                     51,578        51,578          51,578
                                     ----------------------------------------
Total investments and cash           $3,916,550    $4,163,314      $4,163,314
                                     ========================================
</TABLE>

---------------
(1)  At December  31,  1997,  foreign  debt  securities  at  amortized  cost are
     comprised  of  $232,815  and  $256,353 in foreign government securities and
     foreign  corporate bonds, respectively.  At December 31, 1997, foreign debt
     securities  at  market  value  are  comprised  of  $253,298 and $269,777 in
     foreign government securities and foreign corporate bonds, respectively.
 

                                                                             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,                                    1997                   1996
 except par value per share)                 ----------------------------------------
<S>                                          <C>                    <C>
ASSETS
 Cash                                                      -                      -
 Investment in subsidiaries, at
  equity in the underlying net
  assets                                     $       1,301,913      $       1,080,131
 Receivable from affiliate                               5,731                  3,431
 Current tax receivable                                    -                    2,918
 Deferred tax asset                                      1,688                  1,688
                                             ----------------------------------------
  Total assets                               $       1,309,332      $       1,088,168
                                             ========================================
LIABILITIES
 Other liabilities                           $           1,849      $           2,145
                                             ----------------------------------------

STOCKHOLDERS' EQUITY
 Preferred stock, par value:
  $0.01;  50 million shares authorized;
  no shares issued and outstanding                         -                      -
 Common stock, par value:  $0.01;  
  200 million shares authorized;
  50.8 shares issued                                       508                    508
 Paid-in capital                                       389,876                389,196
 Unearned compensation                                    (514)                  (374)
 Net unrealized appreciation of
  investments, net of deferred 
  income taxes                                         160,397                 77,766
 Cumulative foreign currency 
  translation adjustment, net of
  deferred income taxes                                 (8,078)                  (354)
 Treasury stock, at cost; 0.3 million 
  shares                                                (8,086)                (7,220)
 Retained earnings                                     773,380                626,501
                                             ----------------------------------------
  Total stockholders' equity                         1,307,483              1,086,023
                                             ----------------------------------------
     Total liabilities and stockholders'
      equity                                 $       1,309,332      $       1,088,168
                                             ========================================


See notes to consolidated financial statements.
</TABLE>


S-2
<PAGE>

<TABLE>
<CAPTION>

EVEREST REINSURANCE HOLDINGS, INC.

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

                                          For Years Ended December 31,
                                --------------------------------------------------
(Dollars in thousands)                    1997              1996              1995
                                --------------------------------------------------
<S>                             <C>                <C>               <C>
REVENUES
Dividends received 
 from subsidiary                $        9,270     $      17,924     $      13,722
Equity in undistributed
 net income (loss) of 
 subsidiary                            146,970            95,242            (9,956)
                                --------------------------------------------------
       Total revenues                  156,240           113,166             3,766
                                --------------------------------------------------

EXPENSES
 Other expenses                            943             1,752             4,612
                                --------------------------------------------------
Income (loss) before 
 taxes                                 155,297           111,414              (846)
Income tax (benefit)                       342              (613)           (1,593)
                                --------------------------------------------------
       Net income               $      154,955     $     112,027     $         747
                                ==================================================
                                                                                   
See notes to consolidated financial statements.
</TABLE>



                                                                             S-3
<PAGE>

<TABLE>
<CAPTION>

EVEREST REINSURANCE HOLDINGS, INC.

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

                                                    For Years Ended December 31,
                                         -------------------------------------------------
(Dollars in thousands)                             1997              1996             1995
                                         -------------------------------------------------
<S>                                      <C>                <C>              <C>
CASH FLOWS FROM OPERATING
 ACTIVITIES
Net income                               $      154,955     $     112,027    $         747
  Adjustments to reconcile
    net income to net cash
    provided by operating 
    activities:
   Equity in undistributed 
    (earnings) loss of 
    subsidiaries                               (146,970)          (95,242)           9,956
   (Decrease) in other 
    liabilities                                    (296)             (364)          (4,586)
   Decrease (increase) in     
    current tax receivable                        2,918              (972)          (1,151)
   (Increase) in receivable
    from affiliates                              (2,300)           (3,431)              -
   Non-cash compensation                            203               407            2,500
                                         -------------------------------------------------
Net cash provided by 
 operating activities                             8,510            12,425            7,466

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

CASH FLOWS FROM FINANCING
 ACTIVITIES
Purchase of treasury stock                         (822)           (7,220)              -
Common stock issued during 
 the period                                         636               420               -
Dividends paid to stockholders                   (8,076)           (6,067)          (7,024)
                                         -------------------------------------------------
Net cash used in financing
 activities                                      (8,262)          (12,867)          (7,024)

Net increase in cash                                 -               (442)             442
Cash, beginning of period                            -                442               -
                                         -------------------------------------------------
Cash, end of period                      $           -      $          -     $         442
                                         =================================================
                                                                                 
SUPPLEMENTAL CASH FLOW
 INFORMATION
Cash transaction:
Income tax received                                  -                 -     $         442
Non-cash operating 
 transactions:
Dividends received from 
 subsidiary in the form of
 forgiveness of liabilities              $        1,536     $       1,767            6,698
Non-cash financing transaction:
Issuance of common stock in 
 connection with public offering.                    -                 -     $      12,500


See notes to consolidated financial statements.
</TABLE>


S-4
<PAGE>

<TABLE>
<CAPTION>

EVEREST REINSURANCE HOLDINGS, INC.

SCHEDULE III - 
SUPPLEMENTARY INSURANCE INFORMATION


(Dollars in thousands)
       Column A        Column B      Column C   Column D    Column F   Column G      Column H      Column I   Column J    Column K
----------------------------------------------------------------------------------------------------------------------------------  
                                      Reserve
                                   for Losses                                        Incurred  Amortization
                       Deferred      and Loss   Unearned                    Net Loss and Loss   of Deferred      Other
                    Acquisition    Adjustment    Premium      Earned Investment    Adjustment   Acquisition  Operating     Written
       SEGMENT            Costs      Expenses   Reserves     Premium     Income      Expenses         Costs   Expenses     Premium
----------------------------------------------------------------------------------------------------------------------------------
<S>                    <C>         <C>         <C>        <C>         <C>          <C>         <C>           <C>        <C>       
December 31, 1997
Domestic               $ 56,747    $2,914,616  $ 244,335  $  696,645  $ 175,053    $  514,021  $    185,885  $  38,267  $  695,211
Canada                    7,030       144,070     22,422      59,420     20,889        38,145        16,129      4,124      56,392
Other international      18,555       379,132     70,626     293,782     32,604       213,255        68,591     13,472     279,539
                       -----------------------------------------------------------------------------------------------------------
  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               $ 56,676    $2,751,282  $ 242,654  $  655,097  $ 143,301    $  508,247  $    175,241  $  43,738  $  694,053
Canada                    7,640       142,346     25,835      63,615     17,489        37,896        15,731      2,299      65,030
Other international      19,807       353,230     87,419     254,899     31,111       169,890        61,956     10,503     271,451
                       ----------------------------------------------------------------------------------------------------------- 
  Total                $ 84,123    $3,246,858  $ 355,908  $  973,611  $ 191,901    $  716,033  $    252,928  $  56,540  $1,030,534
                       ===========================================================================================================

December 31, 1995
Domestic               $ 55,743     $2,504,947  $ 200,886  $  565,540  $ 125,676   $  474,864  $    151,187  $  60,673  $  590,717
Canada                    7,716        133,559     24,456      57,133     16,112       35,571        11,650      2,515      64,064
Other international      16,560        330,835     68,949     270,648     24,235      164,261        63,982     10,729     268,410
Premium for Stop Loss 
 Agreement                  -              -          -      (140,000)       -            -             -          -      (140,000) 
                       -----------------------------------------------------------------------------------------------------------
  Total                $ 80,019     $2,969,341  $ 294,291  $  753,321  $ 166,023   $  674,696  $    226,819  $  73,917  $  783,191  
                       ===========================================================================================================

</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, 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%
December 31, 1995
Total property and
 liability insurance
 earned premium             $     10,784    $       165,458    $       907,995    $    753,321          120.5%



</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., filed herewith

     10.1     Sublease, effective as of January 1, 1994, between The  Prudential
              Insurance Company of  America  and  Everest  Reinsurance  Company,
              incorporated  herein  by   reference  to   Exhibit  10.3  to   the
              Registration  Statement  on Form S-1 (No. 33-71652)

     10.2     Stop Loss  Agreement  entered  into  between  Everest  Reinsurance
              Company and  Gibraltar  Casualty  Company, incorporated  herein by
              reference to  Exhibit 10.6 to  the Registration Statement on  Form
              S-1 (No. 33-71652)

     10.3     Everest Reinsurance Holdings, Inc. Amended  1995  Stock  Incentive
              Plan, incorporated  herein  by  reference  to  Exhibit 10.3 to the
              Annual Report on Form 10-K for the  year ended  December  31, 1995
              (the "1995 10-K")

     10.4     Everest Reinsurance  Holdings, Inc. Amended Annual Incentive Plan,
              incorporated herein by reference to Exhibit 10.4 to the 1995 10-K

     10.5     Sublease, effective as of February 1, 1997 between The  Prudential
              Insurance  Company  of  America  and Everest Reinsurance  Company,
              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 filed herewith

     10.9     Standby Capital Contribution Agreement between Everest Reinsurance
              Holdings,  Inc.  and  Everest  Reinsurance  Company,  incorporated
              herein by reference to Exhibit 10.69 to the Registration Statement
              on Form S-1 (No. 33-71652)

     10.10    Indemnification   Agreement   between   PRUCO,  Inc.  and  Everest
              Reinsurance Holdings,  Inc.,  incorporated  herein by reference to
              Exhibit  10.70  to  the  Registration  Statement  on Form S-1 (No.
              33-71652)

     10.11    Guarantee made by The Prudential Insurance Company of  America  in
              favor  of  Everest  Reinsurance  Company, incorporated  herein  by
              reference to  Exhibit 10.71  to the Registration Statement on Form
              S-1 (No. 33-71652)

     10.12    Guarantee made by The Prudential Insurance  Company  of America in
              favor of Everest Reinsurance Holdings, Inc.,  incorporated  herein
              by  reference  to  Exhibit 10.72 to  the Registration Statement on
              Form S-1 (No. 33-71652)

     10.13    1995  Service Contract  between  Everest Reinsurance  Company  and
              Gibraltar Casualty  Company,  incorporated  herein by reference to
              Exhibit 10.73  to  the  Registration  Statement  on  Form S-1 (No.
              33-71652)

     10.14    Separation  Agreement  among  The  Prudential Insurance Company of
              America, Gibraltar Casualty Company, Everest  Reinsurance Company,
              PRUCO, Inc., and Everest Reinsurance Holdings, Inc.,  incorporated
              herein by reference to Exhibit 10.2 to the Registration  Statement
              on Form S-1 (No. 33-71652)

    *10.15    Form of Non-Qualified Stock Option Award  Agreement  to be entered
              into between Everest Reinsurance Holdings,  Inc. and  participants
              in the 1995 Stock Incentive Plan, incorporated herein by reference
              to Exhibit 10.15 to the 1995 10-K

                                                                             E-1
<PAGE>

    *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 for certain United States  employees of
              Everest  Reinsurance   Holdings,   Inc.  and   its   participating
              subsidiaries  filed herewith.

     11.1     Statement regarding computation of per share earnings

     16.1     Letter  from  Deloitte  &  Touche  LLP,  dated  August  8,   1996,
              incorporated herein by reference to  Exhibit  16 to  the  Form 8-K
              filed on August 9, 1996

     21.1     Subsidiaries of the registrant filed herewith

     23.1     Consent of Deloitte & Touche LLP filed herewith

     23.2     Consent of Coopers & Lybrand L.L.P. filed herewith

     27.1     Financial Data Schedule filed herein



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

E-2
<PAGE>