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.

The Company also provides 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 $4.5 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, up to a maximum of $490 million for any one occurrence. In 2002, optional deductibles of 8, 12, 20, or 26 weeks were available as part of this program. Under the primary program for certain policyholders, the Company’s loss exposure on any single incident at a unit is limited to $3.5 million for 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.

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. Declines in the fair value of debt and equity securities held by the Company that have been determined by management to be “other than temporary” as defined by Statement of Financial Accounting Standards No. 115, Accounting for Certain Investments in Debt and Equity Securities, have been recorded as realized losses of $65,162,000 in 2002. 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 $196,073,000 and $209,799,000 at December 31, 2002 and 2001, respectively. The fair value of the underlying real estate in these investments approximated $243,900,000 and $259,029,000 at December 31, 2002 and 2001, respectively.

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 $2.2 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. Investments in fixed maturities in the Consolidated Balance Sheets include derivative securities known as deferred settlement mortgage-backed securities with a fair value at December 31, 2002 and 2001, of $92,189,000 and $49,465,000, respectively.

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, 2002 and 2001, are as follows:

December 31, 2002 (In thousands of U.S. Dollars)

Amortized
Cost
Gross
Unrealized
Gains
Gross
Unrealized
Losses
Estimated
Fair
Value

U.S. government obligations $ 430 $ 9 $ 0
$ 439
State and local government obligations 75,639 45 0 75,684
Foreign government obligations 19,714 591 0
20,305
Corporate debt securities 814,344 24,259 (9,794) 828,809
Mortgage-backed securities* 472,237 8,908 (84) 481,061
Other debt securities 110,409 0 0 110,409

1,492,773 33,812 (9,878) 1,516,707
Equity securities 1,121,446 751,389 (180,538) 1,692,297

$2,614,219 $785,201 $(190,416) $3,209,004


*Mortgage-backed securities include deferred settlement mortgage-backed securities with an amortized cost of $91,722,000 and an estimated fair value of $92,189,000.

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

Amortized
Cost
Gross
Unrealized
Gains
Gross
Unrealized
Losses
Estimated
Fair
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


*Mortgage-backed securities include deferred settlement mortgage-backed securities with an amortized cost of $49,346,000 and an estimated fair value of $49,465,000.


The amortized cost and estimated fair value of fixed maturities by maturity date at December 31, 2002, are as follows:

(In thousands of U.S. Dollars)

Available-for-Sale

Amortized Cost Estimated Fair Value

Due in one year or less $ 203,530 $ 204,579
Due after one year through five years 355,494 360,291
Due after five years through ten years 364,885 372,167
Due after ten years 568,864 579,670

Total fixed maturities $1,492,773 $1,516,707


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

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

(In thousands of U.S. Dollars)

2002 2001

Realized gains $132,731 $348,805
Realized losses (179,221) (137,793)

$ 46,490 $211,012

Net unrealized appreciation (depreciation) pertaining to investments for the years ended December 31, 2002 and 2001, is as follows:

(In thousands of U.S. Dollars)

2002
2001

Fixed maturities $ 25,223 $ (4,201)
Equity securities (393,316) (632,397)
Deferred income taxes 128,832 222,809

$(239,261) $(413,789)

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, 2002 and 2001, the Company had no such index futures.

The Company uses deferred settlement mortgages as a cost-efficient way to invest in mortgage-backed securities. In this approach, the investor accepts delayed settlement on the purchase of mortgage-backed securities in return for a modest reduction in the price paid for those mortgage-backed securities. The price differential is directly related to the fact that the investor does not enjoy the higher yield typically offered by mortgage-backed securities relative to the interest rate earned on cash equivalents held for the period between normal settlement and the agreed-upon deferred settlement.

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 Statements 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, 2002 and 2001, the Company had securities with a market value of $245,241,000 and $445,223,000, respectively, on loan with its investment custodian.

4. LINE OF CREDIT
During 2002, the Company negotiated an uncommitted $100 million line of credit with its investment custodian. Under the arrangement, the investment custodian has agreed to review the Company’s financial statements on a regular basis so that the Company may borrow funds for general corporate purposes or place letters of credit without the normal lengthy credit review process. The uncommitted nature of the line provides the investment custodian the flexibility to deny use of this line if it is so inclined. At December 31, 2002, the available line was reduced by $18,822,000 due to the issuance of a letter of credit supporting underwriting operations.

5. RESERVE FUND AND ESCROW DEPOSIT
Under its incorporating act, the Company must, at all times, maintain a reserve fund. At December 31, 2002 and 2001, 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. In lieu of the escrow deposit in 2002, a $750,000 letter of credit was established to comply with the State of Delaware licensing requirement. As a result, the escrow deposit was refunded in October 2002. At December 31, 2001, the escrow deposit was included in the Cash component of the Balance Sheet. Distributions to policyholders may not be declared out of either of these funds.

6. 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 annualized policy premiums.

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)

2002 2001

Primary Program $ 621,248 $ 620,244
Accidental Outage Program 428,858 368,582
Excess Program 652,659 688,545

$1,702,765 $1,677,371


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

7. 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 2002 and 2001 were $32,112,000 and $32,075,000, respectively.

With respect to the non-nuclear coverage for 2001, the Company had 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 believed this provided adequate protection. Ceded premiums in connection with this agreement in 2001 were $1,562,000. In 2002, the Company did not continue this reinsurance placement because of a significant increase in price.

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. The Company did not place any facultative reinsurance during 2002.

8. REINSURANCE ASSUMED
The Company assumed reinsurance from non-affiliated entities for approximately $200 million per occurrence at December 31, 2002 and 2001. 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 2002 and 2001 were $25,049,000 and $10,194,000, respectively. Premiums earned in connection with this agreement were $24,041,000 in 2002 and $11,402,000 in 2001.

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 2002 and 2001 were $40,103,000 and $14,619,000, respectively. Premiums earned in connection with this agreement were $30,026,000 in 2002 and $6,159,000 in 2001.

9. UNPAID LOSSES AND LOSS EXPENSES
(In thousands of U.S. Dollars)

2002 2001

Balance at January 1
$ 42,684
$16,771

Incurred related to:
Current year 54,784 88,634
Prior years 23,002 2,313

Total - incurred 77,786 90,947

Paid related to:
Current year (20) (56,390)
Prior years (20,225) (8,644)

Total - paid (20,245) (65,034)

Balance at December 31 $100,225 $42,684

The losses and loss expenses for prior years increased by $23,002,000 and $2,313,000 in 2002 and 2001, respectively. This was due to revisions made to prior year claims after receiving additional information.

10. 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)

2002 2001

Current $ (2,086) $ 31
Deferred (23,073) (8,010)

..................................................... $(25,159) $ (7,979)


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 $24,293,000 and $265,190,000 that were generated in 2002 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 2002 and 2001 totaled $2,610,000 and $5,599,000, respectively.

The effective tax rates differed from the statutory tax rates of 35% primarily due to dividends received deductions.

At December 31, 2002 and 2001, the Company had deferred tax assets of $140,339,000 and $107,828,000, respectively. Deferred tax liabilities at December 31, 2002 and 2001 were $218,727,000 and $338,121,000, respectively, which net to deferred tax liabilities of $78,388,000 and $230,293,000, respectively. The deferred tax assets primarily relate to future deductible unearned premium reserves, the discounting of loss reserves, and net operating loss carryovers, 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, 2002 and 2001.

11. 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, 2002 and 2001, as follows:

(In thousands of U.S. Dollars)

2002 2001

Statutory Policyholders' Surplus $2,888,013 $3,194,937
Valuation of fixed maturities 29,053 12,797
Provision for reinsurance 268 719
Non-admitted assets 8,525 8,043
Miscellaneous 4,992 2,705

Total Policyholders' Surplus $2,930,851 $3,219,201


Net Loss, 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 Statements of Operations and Comprehensive Loss for the years ended December 31, 2002 and 2001, as follows:

(In thousands of U.S. Dollars)

2002 2001

Statutory Net Loss $(85,336) $(4,639)
Deferred income taxes 23,073 8,010
Investment income 13,888 2,320
Miscellaneous (714) (463)

Net (Loss) Income $(49,089) $5,228


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, was effective January 1, 2001. However, statutory accounting principles will continue to be established by individual state laws and permitted practices. The state of Delaware required 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 $461,042,000 due to the recognition of deferred income taxes, net.