.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS END DECEMBER 31, 2001 AND 2000

1. NATURE OF BUSINESS

Nuclear Electric Insurance Limited (the "Company") is incorporated under the laws of Bermuda, has its place of business in Delaware, and is a registered insurer under the Bermuda Insurance Act of 1978 and the Captive Insurance Companies Act of Delaware.

The Company insures nuclear plants and their generating units, owned by electric utilities, primarily in the United States, for: 1) the costs associated with certain long-term interruptions of electric generation, under the primary and accidental outage programs due to accidental physical damage to insured sites; 2) decontamination expenses incurred at such sites arising from nuclear contamination; and 3) other risks of direct physical loss at such sites, including certain premature decommissioning costs under the primary and excess programs.

In 2000, the Company began providing certain non-nuclear coverages to existing members. This coverage is provided on a quota share basis, in conformity with the conventional property programs, following the terms and conditions underwritten by the Member’s lead underwriter. This business is written directly and as assumed reinsurance.

The accidental outage program would pay a maximum weekly indemnity limit of $3.5 million resulting from an accidental outage at any one unit. The Company’s loss exposure on any single incident at a unit is limited to 100% of the weekly indemnity for 52 weeks and 80% for the subsequent 110 weeks, following a 12-week deductible period. Under the primary program for certain policyholders, the Company’s loss exposure on any single incident at a unit is limited to six weeks, following a seventeen-week deductible period.

The primary property program provides property insurance coverage of $500 million per occurrence. The excess program provides property insurance coverage of $2.25 billion in excess of $500 million per occurrence. The excess program features an optional blanket limit structure that allows for multiple nuclear sites to share limits at reduced rates. Effective in 2000, the Company discontinued the high-excess program that provided property coverage of $250 million in excess of $2.75 billion per occurrence on a non-membership basis.


2. SIGNIFICANT ACCOUNTING POLICIES

The consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America.

Principles of Consolidation
The consolidated financial statements include the Company and its wholly owned subsidiaries, Nuclear Service Organization, Inc., Delaware Risk Management, Inc., Nuclear Electric (Cayman) Limited, Overseas NEIL Limited, and several real estate limited partnerships. All material intercompany transactions have been eliminated in consolidation.

Premiums Written/Unearned Premiums
Premiums written and reinsurance premiums ceded are reflected in earnings on a pro-rata basis over the term of each policy. Unearned premiums represent the portion of premiums written that are applicable to the unexpired terms of policies in force.

Investments
The Company has categorized its investment portfolio as "available for sale" and has reported the portfolio at fair value with unrealized gains and losses, which include unrealized gains or losses due to foreign currency translation, net of tax, as accumulated other comprehensive earnings, a separate component of Policyholders’ Surplus. Amortization of premiums and discounts on marketable securities is included in investment income. Realized investment gains and losses, computed using the specific identification cost method, are included in the determination of income.

Other investments consist of investments in real estate that represent equity investments in Real Estate Investment Trusts, which are carried at cost, as well as several limited partnership interests, which are carried on the equity method. Investments in real estate were $209,799,000 and $268,894,000 at December 31, 2001 and 2000, respectively. The fair value of the underlying real estate in these investments approximated $259,029,000 and $292,732,000 at December 31, 2001 and 2000, respectively.

In 2000, the Company sold its equity interest in a U.K. holding company that owns, directly or through subsidiaries, companies that are dedicated to underwriting insurance risks through Lloyd’s of London. The sale of this investment resulted in a realized loss of $3,979,000.

Unpaid Losses and Loss Expenses
Provision is made for the estimated cost of incurred losses. The provision for unpaid losses and loss expenses is determined on the basis of management estimates, based, where appropriate, on information from claims adjustors, independent consultants and other evaluations. The methods of making such estimates and establishing resulting liabilities are continually reviewed and updated, and any adjustments resulting therefrom are reflected in operations currently.

Commitments
The Company leases office space under an operating lease that expires in April 2007. Future minimum rental commitments under the lease aggregate approximately $2.7 million.

Income Taxes
Deferred federal income taxes are provided for as a result of changes in the net deferred tax asset or liability for the reporting period. The tax consequences of temporary differences and operating loss and tax credit carryforwards are recognized as either tax liabilities for future taxable amounts or tax assets for future deductible amounts.

The provision for income taxes includes federal income taxes currently payable and those deferred because of temporary differences between the financial statement and tax bases of assets and liabilities.

Deferred federal income taxes are also recognized for the tax consequences of unrealized gains on investments.

Statements of Cash Flows
Cash includes deposits with banks and amounts that are generally considered part of the Company’s cash management activities rather than the Company’s investing activities.

Recent Accounting Standards
In June 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 133 ("FAS 133"), Accounting for Derivative Instruments and Hedging Activities. This Statement establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts (collectively referred to as derivatives), and for hedging activities. It requires that an entity recognize all derivatives as either assets or liabilities in the balance sheet and measure those instruments at fair value. The accounting for changes in the fair value of a derivative (that is, gains and losses) depends on the intended use of the derivative and the resulting designation. The adoption of FAS 133, effective January 1, 2001, did not have a material effect on the financial condition, operations or cash flows of the Company. At December 31, 2001 and 2000, the Company held no such derivative instruments.

Reclassifications
Certain prior year amounts have been reclassified to conform to the current year’s presentation.


3. INVESTMENTS

The amortized cost and estimated fair value of available-for-sale investments at December 31, 2001 and 2000, are as follows:



December 31, 2001 (In thousands of U.S. Dollars)

Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value

U.S. Government obligations $ 108,685 $ 2,049 $ (632)
$ 110,102
Foreign government obligations 48,415 3,809 (1,679)
50,545
Corporate debt securities 823,755 18,384 (29,675) 812,464
Mortgage-backed securities 497,700 8,343 (1,913) 504,130
Other debt securities 76,198 51 (26) 76,223

1,554,753 32,636 (33,925) 1,553,464
Equity securities 1,206,784 1,141,292 (177,125) 2,170,951

$2,761,537 $1,173,928 $(211,050) $3,724,415

.
.
December 31, 2000 (In thousands of U.S. Dollars)

Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value

U.S. Government obligations $ 148,590 $ 3,579 $ (823) $ 151,346
Foreign government obligations 53,674 4,452 (3,083) 55,043
Corporate debt securities 664,176 13,113 (27,384) 649,905
Mortgage-backed securities 525,925 11,042 (3,138) 533,829
Other debt securities 100,164 7,228 (2,074) 105,318

1,492,529 39,414 (36,502) 1,495,441
Equity securities 1,363,378 1,770,244 (173,680) 2,959,942

$2,855,907 $1,809,658 $(210,182) $4,455,383



The amortized cost and estimated fair value of fixed maturities by maturity date at December 31, 2001, are as follows:

(In thousands of U.S. Dollars)
Available-for-Sale

Amortized Cost Estimated Fair Value

Due in one year or less $ 123,746 $ 123,990
Due after one year through five years 393,664 396,763
Due after five years through ten years 332,600 323,863
Due after ten years 704,743 708,848

Total fixed maturities $1,554,753 $1,553,464


Mortgage-backed securities are amortized using their original maturity dates.

Gross realized gains and losses from sales of investments are as follows:


(In thousands of U.S. Dollars)

2001 2000

Realized gains $348,805 $283,001
Realized losses (137,793) (84,463)

$211,012 $198,538


Net unrealized appreciation (depreciation) pertaining to investments for the years ended December 31, 2001 and 2000, is as follows:


(In thousands of U.S. Dollars)

2001 2000

Fixed maturities $ (4,201) $ 27,677
Equity securities (632,397) (537,410)
Deferred income taxes 222,809 178,407

$(413,789) $(331,326)

The Company may invest in equity index futures contracts to accommodate additional contributions or withdrawals of cash, to reinvest cash arising from dividends and tender offers, and to rebalance the portfolios. Futures are not used to leverage portfolios or for any speculative purpose. During the years ended December 31, 2001 and 2000, the Company had no such index futures.


The Company participates in a securities lending program with its investment custodian. The Company receives a fee from the investment custodian for the lending of these securities, which is shown in the Investment Income component of the Statement of Operations and Comprehensive Loss. As a requirement of the lending program, the borrower of securities must pledge collateral in excess of 100% of the value of the loaned securities to the investment custodian. At December 31, 2001 and 2000, the Company had securities with a market value of $445,223,000 and $333,260,000, respectively, on loan with its investment custodian.

4. RESERVE FUND AND ESCROW DEPOSIT
Under its incorporating act, the Company must, at all times, maintain a reserve fund. At December 31, 2001 and 2000, the reserve fund was $250,000. In addition, the Company is required to maintain a $750,000 escrow deposit (restricted cash) in connection with being licensed in the state of Delaware. The escrow deposit is included in the Cash component of the Balance Sheets. Distributions to policyholders may not be declared out of either of these funds.

5. RETROSPECTIVE PREMIUM ADJUSTMENT
Upon the sole discretion of the Board of Directors, the Company can call upon the Members for payment of proportionate retrospective premium adjustments, in whole or in part, to cover losses and the related costs incurred by the Company with respect to a policy year to which they have subscribed.

Each insured is contingently liable to the Company for retrospective premium adjustments based on losses occurring in each year. Under the primary, accidental outage, and excess programs, the maximum adjustment is equal to ten times and five times annualized policy premiums at December 31, 2001 and 2000, respectively.

The liability of the Members for the retrospective premium adjustment for any policy year ceases six years after the end of that policy year unless prior demand has been made. The maximum potential retrospective premiums that could be demanded by the Company as of December 31, from the Members of each program, with respect to the current policy year comprise:

(In thousands of U.S. Dollars)

2001 2000

Primary Program $ 620,244 $300,477
Accidental Outage Program 368,582 169,777
Excess Program 688,545 360,401

$1,677,371 $830,655


Management believes that it is unlikely that any retrospective premium adjustments will be required for policies whose terms have expired.


6. REINSURANCE CEDED
In the normal course of business, the Company seeks to reduce its exposure to losses that may arise by reinsuring certain levels of risk with other insurance enterprises or reinsurers. Such reinsurance policies do not relieve the Company from its obligations to policyholders.

With respect to the accidental outage and primary programs, the Company has no reinsurance coverage. Under the excess program, coverage was obtained as single layer, $1 billion in excess of $1 billion per site. Ceded premiums in connection with this agreement in 2001 and 2000 were $32,075,000 and $32,572,000, respectively.

With respect to the non-nuclear coverage for 2001, the Company has placed a reinsurance layer of $40 million in excess of $10 million. Since the Company participates on a quota share basis on the non-nuclear policies, management believes this provides adequate protection. Ceded premiums in connection with this agreement in 2001 were $1,562,000.

In 2001, the Company placed facultative reinsurance on certain non-nuclear policies of its Member insureds. This reinsurance was placed to control the Company's exposure to loss. Ceded premiums in connection with this agreement in 2001 were $968,000.


7. REINSURANCE ASSUMED
The Company assumed reinsurance from non-affiliated entities for approximately $200 million per occurrence at December 31, 2001 and 2000. The risks are primarily property and liability for facilities involved in the nuclear industry as well as risks that are similar to the Company's direct business. Premiums written in connection with this agreement in 2001 and 2000 were $10,194,000 and $11,330,000, respectively. Premiums earned in connection with this agreement were $11,402,000 in 2001 and $13,343,000 in 2000.

The Company assumed reinsurance from the lead underwriters for the conventional property programs of its Member insureds. Such assumed reinsurance was written on a quota share basis, and the maximum limit was approximately $200 million per occurrence. Premiums written in connection with this agreement in 2001 and 2000 were $14,619,000 and $7,397,000, respectively. Premiums earned in connection with this agreement were $6,159,000 in 2001 and $4,487,000 in 2000.


8. UNPAID LOSSES AND LOSS EXPENSES


(In thousands of U.S. Dollars)

2001 2000

Balance at January 1
$16,771
$10,600

Incurred related to:
Current year 88,634 15,670
Prior years 2,313 1,507

Total - incurred 90,947 17,177

Paid related to:
Current year (56,390) (199)
Prior years (8,644) (10,807)

Total - paid (65,034) (11,006)

Balance at December 31 $42,684 $16,771

The losses and loss expenses for prior years increased by $2,313,000 and $1,507,000 in 2001 and 2000, respectively. This was due to revisions made to prior year claims after receiving additional information.


9. INCOME TAXES
Bermuda presently imposes no income, withholding or capital gains taxes, and the Company is exempted until March 2016 from any such taxes pursuant to the Bermuda Exempted Undertakings Tax Protection Act 1966, Amendment Act 1973.

The benefit for U.S. federal income taxes is comprised of the following:

(In thousands of U.S. Dollars)

2001 2000

Current $ 31 $ (1,803)
Deferred (8,010) (87,495)

$(7,979) $(89,298)

The major components of deferred income tax benefit are the differences between the tax basis of unpaid losses and loss expenses and unearned premium reserves, and their reported amounts on the consolidated financial statements, and the tax effect of net operating loss carryovers of $14,370,000 and $265,190,000 that were generated in 2001 and 2000, respectively. For tax purposes, unpaid losses and loss expenses are discounted to calculate the deductible portion of incurred losses, and 20% of the change in unearned premium reserves is not deductible in the current year.

Income taxes refunded in 2001 and 2000 totaled ($5,599,000) and ($37,184,000), respectively.

The effective tax rates were lower than the statutory tax rates of 35% primarily due to dividends received deductions.

At December 31, 2001 and 2000, the Company had deferred tax assets of $107,828,000 and $100,646,000, respectively. Deferred tax liabilities at December 31, 2001 and 2000, were $338,121,000 and $561,758,000, respectively, which net to deferred tax liabilities of $230,293,000 and $461,112,000, respectively. The deferred tax assets primarily relate to future deductible unearned premium reserves, the discounting of loss reserves, and a net operating loss carryover, while deferred tax liabilities primarily relate to net unrealized gains on investments. There was no valuation allowance recorded against the deferred tax assets at December 31, 2001 and 2000.


10. STATUTORY ACCOUNTING INFORMATION

Policyholders' Surplus, calculated in accordance with statutory accounting practices prescribed or permitted by the Insurance Department of the state of Delaware, differs from that shown on the Consolidated Balance Sheets at December 31, 2001 and 2000, as follows:

(In thousands of U.S. Dollars)

2001 2000

Statutory Policyholders' Surplus $3,194,937 $4,068,085
Valuation of fixed maturities 12,797 11,655
Deferred income taxes (0) (461,112)
Provision for reinsurance 719 219
Non-Admitted assets 8,043 6,626
Miscellaneous 2,705 2,289

Total Policyholders' Surplus $3,219,201 $3,627,762

In March 1998, the National Association of Insurance Commissioners adopted the Codification of Statutory Accounting Principles (the "Codification"). The Codification, which is intended to standardize regulatory accounting and reporting to state insurance departments, is effective January 1, 2001. However, statutory accounting principles will continue to be established by individual state laws and permitted practices. The state of Delaware will require adoption of the Codification for the preparation of statutory financial statements effective January 1, 2001. The adoption of the Codification reduced Statutory Policyholders' Surplus as of January 1, 2001, by approximately $461,042,000 due to the recognition of deferred income taxes, net.