10-K 1 holdings10k.htm HOLDINGS 2006 10K

UNITED STATES

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, 2006

Commission file number 1-14527

EVEREST REINSURANCE HOLDINGS, INC.

(Exact name of registrant as specified in its charter)

Delaware

(State or other jurisdiction

of incorporation or organization)

22-3263609

(I.R.S Employer

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:

Title of Each Class

Name of Each Exchange

on Which Registered

8.75% Senior Notes Due 2010

NYSE

5.40% Senior Notes Due 2014

NYSE

7.85% Trust Preferred Securities of Everest Re

Capital Trust guaranteed by Everest Reinsurance
Holdings, Inc.

NYSE

6.20% Trust Preferred Securities of Everest Re

Capital Trust II guaranteed by Everest Reinsurance

Holdings, Inc.

NYSE

Securities registered pursuant to Section 12(g) of the Act: None

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the

Securities Act.

Yes

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.

Yes

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

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 the 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. [ ]

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act.)

Yes

The aggregate market value on June 30, 2006 (the last business day of the registrant’s most recently completed second quarter) of the voting stock held by non-affiliates was zero.

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act.

Large accelerated filer

Accelerated filer

Non-accelerated filer

At March 15, 2007, the number of common shares of the registrant outstanding shares was 1,000, all of which are owned by Everest Re Group, Ltd.

The Registrant meets the conditions set forth in General Instruction I(1)(a) and (b) of Form 10-K and is therefore filing this form with the reduced disclosure format permitted by General Instruction I of Form 10-K.

TABLE OF CONTENTS

Item		Page

PART I

1.	Business	1
1A.	Risk Factors	7
1B.	Unresolved Staff Comments	14
2.	Properties	14
3.	Legal Proceedings	14
4.	Submission of Matters to a Vote of Security Holders	15


PART II

5.	Market for Registrant’s Common Equity, Related Shareholder Matters and Issuer Purchases of Equity Securities	15
6.	Selected Financial Data	15
7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	16
7A.	Quantitative and Qualitative Disclosures About Market Risk	35
8.	Financial Statements and Supplementary Data	37
9.	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure	37
9A.	Controls and Procedures	37
9B.	Other Information	38

PART III

10.	Directors and Executive Officers of the Registrant	38
11.	Executive Compensation	38
12.	Security Ownership of Certain Beneficial Owners and Management and Related Shareholder Matters	38
13.	Certain Relationships and Related Transactions	38
14.	Principal Accountant Fees and Services	38


PART IV

15.	Exhibits and Financial Statement Schedules	39

PART I

Unless otherwise indicated, all financial data in this document have been prepared using accounting principles generally accepted in the United States of America (“GAAP”). As used in this document, “Holdings” means Everest Reinsurance Holdings, Inc.; “Group” means Everest Re Group, Ltd. “Everest Re” means Everest Reinsurance Company and its subsidiaries (unless the context otherwise requires) and the “Company” means Holdings and its subsidiaries (unless the context otherwise requires).

ITEM 1. Business

The Company
Holdings, a Delaware corporation, is a wholly-owned subsidiary of Group, which is a Bermuda holding company whose common shares are publicly traded in the U.S. on the New York Stock Exchange under the symbol “RE”. Group files an annual report on Form 10-K with the Securities and Exchange Commission (the “SEC”) with respect to its consolidated operations, including Holdings. Holdings became a wholly-owned subsidiary of Group on February 24, 2000 in a corporate restructuring pursuant to which holders of shares of common stock of Holdings automatically became holders of the same number of common shares of Group.

The Company’s principal business, conducted through its operating subsidiaries, is the underwriting of reinsurance and insurance in the U.S. and international markets. The Company had gross written premiums in 2006 of $3.2 billion, with approximately 72% representing reinsurance and 28% representing insurance, and stockholders’ equity at December 31, 2006 of $2.2 billion. The Company underwrites reinsurance both through brokers and directly with ceding companies, giving it the flexibility to pursue business based on of the ceding company’s preferred reinsurance purchasing method. The Company underwrites insurance principally through general agent relationships and surplus lines brokers. Holdings’ active operating subsidiaries, excluding Mt. McKinley Insurance Company (“Mt. McKinley”), which is in runoff, are each rated A+ (“Superior”) by A.M. Best Company (“A.M. Best”), a leading provider of insurer ratings that assigns financial strength ratings to insurance companies based on their ability to meet their obligations to policyholders.

Following is a summary of the Company’s operating subsidiaries:

•

Everest Re, a Delaware insurance company and a direct subsidiary of Holdings, is a licensed property and casualty insurer and/or reinsurer in all states (except Nevada and Wyoming), the District of Columbia and Puerto Rico and is authorized to conduct reinsurance business in Canada and Singapore. Everest Re underwrites property and casualty reinsurance for insurance and reinsurance companies in the U.S. and international markets. Everest Re had statutory surplus at December 31, 2006 of $2.7 billion.

•

Everest National Insurance Company (“Everest National”), a Delaware insurance company and a direct subsidiary of Everest Re, is licensed in 47 states and the District of Columbia and is authorized to write property and casualty insurance on an admitted basis in the jurisdictions in which it is licensed. The majority of Everest National’s business is reinsured by its parent, Everest Re.

•

Everest Indemnity Insurance Company (“Everest Indemnity”), a Delaware insurance company and a direct subsidiary of Everest Re, writes excess and surplus lines insurance business in the U.S. on a non-admitted basis. Excess and surplus lines insurance is specialty property and liability coverage that an insurer not licensed to write insurance in a particular jurisdiction is permitted to provide to insureds when the specific specialty coverage is unavailable from admitted insurers. Everest Indemnity is licensed in Delaware and is eligible to write business on a non-admitted basis in 49 states, the District of Columbia and Puerto Rico. The majority of Everest Indemnity’s business is reinsured by its parent, Everest Re.

•

Everest Security Insurance Company (“Everest Security”), formerly Southeastern Security Insurance Company, a Georgia insurance company and a direct subsidiary of Everest Re, was acquired in January 2000 and writes property and casualty insurance on an admitted basis in Georgia and Alabama. The majority of Everest Security’s business is reinsured by its parent, Everest Re.

•

Mt. McKinley, a Delaware insurance company and a direct subsidiary of Holdings, was acquired by Holdings in September 2000 from The Prudential Insurance Company of America (“The Prudential”). Mt. McKinley was formed by Everest Re in 1978 to write excess and surplus lines insurance business in the U.S. In 1985, Mt. McKinley ceased writing new and renewal insurance and commenced a run-off operation to service claims arising from previously written business. In 1991, Mt. McKinley was distributed to its ultimate parent, The Prudential. Effective September 19, 2000, Mt. McKinley and Everest Reinsurance (Bermuda), Ltd. (“Bermuda Re”) entered into a loss portfolio transfer reinsurance agreement, whereby Mt. McKinley transferred, for arm’s length consideration, all of its net insurance exposures and reserves to Bermuda Re.

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 or classes of 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.

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 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. 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 either for amounts in excess of the dollar limits of their reinsurance treaties or for unusual risks.

Both treaty and facultative reinsurance can be written on either a pro rata basis or an excess of loss basis. Under pro rata reinsurance, the ceding company and the reinsurer share the premiums as well as the losses and expenses in an agreed proportion. Under excess of loss reinsurance, 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.

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). Premiums paid 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. There is usually no ceding commission on excess of loss reinsurance.

Reinsurers may 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 insurers to purchase reinsurance: to reduce net liability on individual or classes of risks, protect against catastrophic losses, stabilize financial ratios and obtain additional underwriting capacity.

Reinsurance can be written through intermediaries, generally professional reinsurance brokers, or directly with ceding companies. From a ceding company’s perspective, both the broker and the direct distribution channels have advantages and disadvantages. A ceding company’s decision to select one distribution channel 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 strategy is to sustain its leadership position within its target reinsurance and insurance markets, provide effective management throughout the property and casualty underwriting cycle and achieve an attractive return for its stockholder. The Company’s underwriting strategies seek to capitalize on its i) financial strength and capacity; ii) stable and experienced management team; iii) diversified product and distribution offering; iv) underwriting expertise and disciplined approach; v) efficient and low-cost operating structure and vi) prudent risk management approach to catastrophe exposures and retrocessional costs.

The Company offers treaty and facultative reinsurance and admitted and non-admitted insurance. The Company’s products include the full range of property and casualty reinsurance and insurance coverages, including marine, aviation, surety, errors and omissions liability (“E&O”), directors’ and officers’ liability (“D&O”), medical malpractice, other specialty lines, accident and health (“A&H”) and workers’ compensation. The Company distributes its products through direct and broker reinsurance channels in U.S. and international markets.

The Company’s underwriting strategy emphasizes underwriting profitability over premium volume. Key elements of this strategy include careful risk selection, appropriate pricing through strict underwriting discipline and adjustment of the Company’s business mix to respond to changing market conditions. The Company focuses 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 its objectives.

The Company’s underwriting strategy emphasizes flexibility and responsiveness to changing market conditions, such as increased demand or favorable pricing trends. The Company believes that its existing strengths, including its broad underwriting expertise, U.S. and international presence, strong financial ratings and substantial capital, facilitate adjustments to its mix of business geographically, by line of business and by type of coverage, allowing it to capitalize on those market opportunities that provide the greatest potential for underwriting profitability. The Company’s insurance operations complement these strategies by providing access to business that is not available on a reinsurance basis. The Company carefully monitors its mix of business across all operations to avoid unacceptable geographic or other risk concentrations.

Capital Transactions
The Company’s business operations are in part dependent on the Company’s financial strength, and the market’s perception thereof, as measured by stockholders’ equity, which was $2,218.4 million and $1,790.7 million at December 31, 2006 and 2005, respectively. The Company has flexibility with respect to capitalization as a result of its perceived financial strength, including its financial strength ratings as assigned by independent rating

agencies, and its access to the debt and through its parent, equity markets. The Company continuously monitors its capital and financial position, as well as investment and security market conditions and responds accordingly.

On December 1, 2005, Group and Holdings filed a shelf registration statement on Form S-3 with the SEC, as a Well Known Seasoned Issuer under the new registration and offering revisions to the Securities Act of 1933. Generally, under this shelf registration statement, Group is authorized to issue common shares, preferred shares, debt securities, warrants and hybrid securities, Holdings is authorized to issue debt securities and Everest Re Capital Trust III (“Capital Trust III”) is authorized to issue trust preferred securities.

•

On December 1, 2005, Group issued 2,298,000 of its common shares at a price of $102.89 per share, which resulted in $236.4 million of proceeds before expenses and Holdings sold Group shares it acquired in 2002 at a price of $102.89 per share, which resulted in $46.5 million of proceeds before expenses. Expenses incurred for this transaction were approximately $0.3 million.

On June 27, 2003, Group and Holdings filed a shelf registration statement on Form S-3 with the SEC, providing for the issuance of up to $975.0 million of securities. Generally, under this shelf registration statement, Group was authorized to issue common shares, preferred shares, debt securities, warrants and hybrid securities, Holdings was authorized to issue debt securities and Everest Re Capital Trust II (“Capital Trust II”) and Capital Trust III were authorized to issue trust preferred securities. This shelf registration statement became effective on December 22, 2003 and was exhausted with the October 6, 2005 transaction described below. The following securities were issued pursuant to that registration statement.

•

On March 29, 2004, Capital Trust II, an unconsolidated affiliate, issued trust preferred securities resulting in a takedown from the shelf registration statement of $320.0 million. In conjunction with the issuance of Capital Trust II’s trust preferred securities, Holdings issued $329.9 million of 6.20% junior subordinated debt securities due March 29, 2034 to Capital Trust II. Part of the proceeds from the issuance of the junior subordinated debt securities was used for capital contributions to Holdings’ operating subsidiaries.

•

On October 12, 2004, Holdings completed a public offering of $250.0 million principal amount of 5.40% senior notes due October 15, 2014. The net proceeds were used to retire existing debt of the Company, which was due and retired on March 15, 2005.

•

On October 6, 2005, Group expanded the size of the remaining shelf registration to $486.0 million by filing under Rule 462(b) of the Securities Act of 1933, as amended, and General Instruction IV of Form S-3 promulgated there under. On the same date, Group entered into an agreement to issue 5,200,000 of its common shares at a price of $91.50 per share, which resulted in $475.8 million in proceeds received on October 12, 2005, before expenses of approximately $0.3 million. This transaction effectively exhausted the December 22, 2003 shelf registration.

On March 14, 2000, the Company completed a public offering of $200.0 million principal amount of 8.75% senior notes due March 15, 2010 and $250.0 million principal amount of 8.50% senior notes due and retired March 15, 2005. During 2000, the net proceeds of these offerings and additional funds were distributed by the Company to Group.

Financial Strength Ratings
The following table shows the current financial strength ratings of the Company’s operating subsidiaries as reported by A.M. Best, Standard & Poor’s Rating Services (“Standard & Poor’s”) and Moody’s Investors Service, Inc. (“Moody’s”). These 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 a direct or indirect equity investment in an insurance or reinsurance company.

All of the below-mentioned ratings are continually monitored and revised, if necessary, by each of the rating agencies.

The Company believes that its ratings, in general, have become increasingly important to its operations because they provide the Company’s customers and investors with an independent assessment of the Company’s underlying financial strength using a scale that provides for relative comparisons. Strong financial ratings are particularly important for reinsurance companies. Ceding companies must rely on their reinsurers to pay covered losses well into the future. As a result, a highly rated reinsurer is generally preferred.

Operating Subsidiary	A.M. Best	Standard & Poor's	Moody's
Everest Re	A+ (Superior)	AA- (Very Strong)	Aa3 (Excellent)
Everest National	A+ (Superior)	AA- (Very Strong)	Not Rated
Everest Indemnity	A+ (Superior)	Not Rated	Not Rated
Everest Security	A+ (Superior)	Not Rated	Not Rated
Mt. McKinley	Not Rated	Not Rated	Not Rated

A.M. Best states that the “A+” (“Superior”) rating is assigned to those companies which, in its opinion, have a superior ability to meet their ongoing obligations to policyholders based on A.M. Best’s comprehensive quantitative and qualitative evaluation of a company’s balance sheet strength, operating performance and business profile. Standard & Poor’s states that the “AA-” rating is assigned to those insurance companies which, in its opinion, have very strong financial security characteristics with respect to their ability to pay under its insurance policies and contracts in accordance with their terms. Moody’s states that insurance companies rated “Aa” offer excellent financial security. Together with the Aaa rated companies, Aa rated companies constitute what are generally known as high-grade companies, with Aa rated companies generally having somewhat larger long-term risks.

Subsidiaries other than Everest Re may not be rated by some or any rating agencies because such ratings are not considered essential by the individual subsidiary’s customers or because of the limited nature of the subsidiary’s operations. In particular, Mt. McKinley is not rated because it is in run-off status.

Debt Ratings
The following table shows the debt ratings by A.M. Best, Standard & Poor’s and Moody’s of the Company’s senior notes due March 15, 2010 and October 15, 2014 and Everest Re Capital Trust (“Capital Trust”) and Capital Trust II’s trust preferred securities due November 15, 2032 and March 29, 2034, respectively, all of which are considered investment grade. Debt ratings are a current assessment of the credit worthiness of an obligor with respect to a specific obligation.

			A.M. Best						Standard & Poor's						Moody's
Senior Notes			a	(Strong ability)					A-	(Strong security)					A3	(Good security)
Trust Preferred Securities			a-	(Strong ability)					BBB	(Good security)					Baa1	(Adequate security)

A debt rating of “a” or “a-” is assigned by A.M. Best where the issuer, in A.M. Best’s opinion, has a strong ability to meet the terms of the obligation. A debt rating of “A-” is assigned by Standard & Poor’s where the obligor has a strong capacity to meet its financial commitment on the obligation, although it is somewhat more susceptible to the adverse effects of changes in circumstances and economic conditions than obligations in

higher rated categories. Standard & Poor’s assigns a debt rating of “BBB” to issues that exhibit adequate protection parameters although adverse economic conditions or changing circumstances are more likely to lead to a weakened capacity of the obligor to meet its financial commitment on the obligation. According to Moody’s, a debt rating of “A3” is assigned to issues that are considered upper-medium-grade obligations and subject to low credit risk. Obligations rated “Baa1” are subject to moderate credit risk and are considered medium-grade and as such may possess certain speculative characteristics.

Competition
The worldwide reinsurance and insurance businesses are highly competitive; as well as cyclical by product and market. Competition in the types of reinsurance and insurance business that the Company underwrites is based on many factors, including the perceived overall financial strength of the reinsurer or insurer, ratings of the reinsurer or insurer by A.M. Best and/or Standard & Poor’s, underwriting expertise, the jurisdictions where the reinsurer or insurer is licensed or otherwise authorized, capacity and coverages offered, premiums charged, other terms and conditions of the reinsurance and insurance business offered, services offered, speed of claims payment and reputation and experience in lines written. These factors operate at the individual market participant level to varying degrees, as applicable to the specific participant’s circumstances. They also operate in aggregate across the reinsurance industry more generally, contributing, in combination with economic conditions and variations in the reinsurance buying practices of insurance companies (by participant and in the aggregate), to cyclical movements in reinsurance rates, terms and conditions and ultimately reinsurance industry aggregate financial results.

The Company competes in the U.S. and international reinsurance and insurance markets with numerous global competitors. The Company’s competitors include independent reinsurance and insurance companies, subsidiaries or affiliates of established worldwide insurance companies, reinsurance departments of certain insurance companies and domestic and international underwriting operations, including underwriting syndicates at Lloyd’s. Some of these competitors have greater financial resources than the Company and have established long-term and continuing business relationships, which can be a significant competitive advantage. In addition, the lack of strong barriers to entry into the reinsurance business and the potential for securitization of reinsurance and insurance risks through capital markets provide additional sources of potential reinsurance and insurance capacity and competition.

In 2006, the Company observed strong price increases, and more restricted limits, in those property lines and regions that were most affected by the catastrophe events of 2005, principally Hurricanes Katrina, Rita and Wilma. Reinsurance capacity in these areas was constrained, particularly for catastrophe reinsurance, which includes southeastern U.S. exposures and in the retrocession and energy lines. The record catastrophe losses of 2005 have also generally led to modest strengthening for U.S. property lines that have little or no substantive catastrophe exposure and price stabilization in most casualty insurance and reinsurance markets. However, certain of the Company’s U.S. casualty lines continue to exhibit weaker market conditions led by the medical stop loss and D&O reinsurance classes, as well as the California workers’ compensation insurance line. The Company believes that U.S. casualty reinsurance generally remains adequately priced; however, increased price competition at the insurance company level and cedants’ increased appetite for retaining more profitable business net following several years of hard-market conditions, may result in modestly softer reinsurance pricing. The Company’s U.S. insurance operation is less affected by these standard casualty insurance market conditions given its specialty insurance program orientation. Finally, the Company continues to observe generally stable property reinsurance market conditions in most countries outside of the U.S., except for hardening property market conditions in Mexico following Hurricane Wilma, while casualty rates are softening.

changes and even more restrictive coverage terms than earlier in 2006. As a result, many reinsurance buyers were not able to fully place their reinsurance program and have been forced to raise retention levels and/or reduce catastrophe limit purchases. In turn, insurance companies continue to adjust limits and coverages and increase the premium rates they charge their customers. Together, these trends have generally resulted in insurance companies retaining more property risk exposure and being more prone to potential future earnings volatility than in past years. This trend reflects an imbalance between reinsurance supply and demand. As a result of this imbalance and higher rates, additional competition is entering the market in the form of new companies and alternative risk transfer mechanisms. In January 2007, the Florida legislature enacted insurance reform that increases insurer’s access to the Florida Hurricane Catastrophe Fund, thus potentially reducing the amount of reinsurance purchased from the private reinsurance market. The Company is unable to predict the impact on future market conditions from the increased competition and legislative reform. In addition to these market forces, reinsurers continue to reassess their risk appetites and rebalance their property portfolios to reflect improved price to exposure metrics against the backdrop of: (i) recent revisions to the industry’s catastrophe loss projection models, which are indicating significantly higher loss potentials and consequently higher pricing requirements and (ii) elevated rating agency scrutiny and capital requirements for many catastrophe exposed companies.

In light of its 2005 catastrophe experience, the Company reexamined its risk management practices, concluded that its control framework operated generally as intended and made appropriate portfolio adjustments to its property reinsurance operations during the first nine months of 2006. This portfolio repositioning, particularly within peak catastrophe zones, including Southeast U.S., Mexico and Gulf of Mexico, has enabled the Company to benefit from these dislocated markets by carefully shifting the mix of its writings toward the most profitable classes, lines, customers and territories and enhancing portfolio balance and diversification.

Overall, the Company believes that current marketplace conditions offer solid opportunities for the Company given its strong ratings, distribution system, reputation and expertise. The Company continues to employ its opportunistic strategy of targeting those segments offering the greatest profit potential, while maintaining balance and diversification in its overall portfolio.

Employees
As of February 1, 2007, the Company employed 461 persons. Management believes that employee relations are good. None of the Company’s employees are subject to collective bargaining agreements, and the Company is not aware of any current efforts to implement such agreements.

Available Information
The Company’s Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and amendments to those reports are available free of charge through the Company’s internet website at http://www.everestre.com as soon as reasonably practicable after such reports are electronically filed with the SEC.

ITEM 1A. Risk Factors
In addition to the other information provided in this report, the following risk factors should be considered when evaluating the Company. If the circumstances contemplated by the individual risk factors materialize, our business, financial condition and results of operations could be materially and adversely affected and the trading price of Group’s common shares could decline significantly.

RISKS RELATING TO OUR BUSINESS

Our results could be adversely affected by catastrophic events.

We are exposed to unpredictable catastrophic events, including weather-related and other natural catastrophes, as well as acts of terrorism. Any material reduction in our operating results caused by the occurrence of one or more catastrophes could inhibit our ability to pay dividends or to meet our interest and principal payment obligations. We define a catastrophe as an event that causes a pre-tax loss on property exposures before reinsurance of at least $5.0 million, before corporate level reinsurance and taxes. Effective for the third quarter 2005, industrial risk losses have been excluded from catastrophe losses, with prior periods adjusted for comparison purposes. By way of illustration, during the past five calendar years, pre-tax catastrophe losses, net of contract specific reinsurance but before cessions under corporate reinsurance programs, were as follows:

Calendar year	Pre-tax catastrophe losses
2006	$	209.6 million
2005	$	833.0 million
2004	$	256.3 million
2003	$	20.1 million
2002	$	20.0 million

Our losses from future catastrophic events could exceed our projections.

We use projections of possible losses from future catastrophic events of varying types and magnitudes as a strategic underwriting tool. We use these loss projections to estimate our potential catastrophe losses in certain geographic areas and decide on the purchase of retrocessional coverage or other actions to limit the extent of potential losses in a given geographic area. These loss projections are approximations reliant on a mix of quantitative and qualitative processes and actual losses may exceed the projections by material amount.

We focus on potential losses that can be generated by any single event as part of our evaluation and monitoring of our aggregate exposure to catastrophic events. Accordingly, we employ various techniques to estimate the amount of loss we could sustain from any single catastrophic event in various geographical areas. These techniques range from non-modeled deterministic approaches – such as tracking aggregate limits exposed in catastrophe-prone zones and applying historic damage factors – to modeled approaches that scientifically measure catastrophe risks using sophisticated Monte Carlo simulation techniques that provide insights into the frequency and severity of expected losses on a probabilistic basis.

If our loss reserves are inadequate to meet our actual losses, net income would be reduced or we could incur a loss.

We are required to maintain reserves to cover our estimated ultimate liability of losses and loss adjustment expenses for both reported and unreported claims incurred. These reserves are only estimates of what we believe the settlement and administration of claims will cost based on facts and circumstances known to us. In setting reserves for our reinsurance liabilities, we rely on claim data supplied by our ceding companies and brokers and we employ actuarial and statistical projections. The information received from our ceding companies is not always timely or accurate, which can contribute to inaccuracies in our loss projections. Because of the uncertainties that surround our estimates of loss and LAE reserves, we cannot be certain that ultimate loss and LAE payments will not exceed our estimates. If our reserves are deficient, we would be required to increase loss reserves in the period in which such deficiencies are identified which would cause a charge to our earnings and a reduction of capital. By way of illustration, during the past five calendar years, the reserve re-estimation process resulted in a decrease to our pre-tax net income in four of the years:

Calendar year	Effect on pre-tax net income
2006	$	67.4	million decrease
2005	$	67.3	million increase
2004	$	174.2	million decrease
2003	$	168.3	million decrease
2002	$	99.6	million decrease

The difficulty in estimating our reserves is significantly more challenging as it relates to reserving for potential asbestos and environmental (“A&E”) liabilities. At year-end 2006, approximately 9% of our gross reserves were comprised of A&E reserves. A&E liabilities are especially hard to estimate for many reasons, including the long delays between exposure and manifestation of any bodily injury or property damage, difficulty in identifying the source of the asbestos or environmental contamination, long reporting delays and difficulty in properly allocating liability for the asbestos or environmental damage. Legal tactics and judicial and legislative developments affecting the scope of insurers’ liability, which can be difficult to predict, also contribute to uncertainties in estimating reserves for A&E liabilities.

The failure to accurately assess underwriting risk and establish adequate premium rates could reduce our net income or result in net loss.

Our success depends on our ability to accurately assess the risks associated with the businesses on which the risk is retained. If we fail to accurately assess the risks we retain, we may fail to establish adequate premium rates to cover our losses and LAE. This could reduce our net income and even result in a net loss.

In addition, losses may arise from events or exposures that are not anticipated when the coverage is priced. An example of an unanticipated event is the terrorist attacks on September 11, 2001. Neither the magnitude of loss on a single line of business nor the combined impact on several lines of business from an act of terrorism on such a large scale was contemplated when we priced our coverages. In addition to unanticipated events, we also face the unanticipated expansion of our exposures, particularly in long-tail liability lines. An example of this is the expansion over time of the scope of insurers’ legal liability within the mass tort arena, particularly for A&E exposures discussed above.

Decreases in pricing for property and casualty reinsurance and insurance could reduce our net income.

The worldwide reinsurance and insurance businesses are highly competitive, as well as cyclical by product and market. These cycles, as well as other factors that influence aggregate supply and demand for property and casualty insurance and reinsurance products, are outside of our control. The supply of (re)insurance is driven by prevailing prices and levels of capacity that may fluctuate in response to a number of factors including large catastrophic losses and investment returns being realized in the insurance industry. Demand for (re)insurance is influenced by underwriting results of insurers and insureds, including catastrophe losses, and prevailing general economic conditions. If any of these factors were to result in a decline in the demand for (re)insurance or an overall increase in (re)insurance capacity, our net income could decrease.

If rating agencies downgrade the ratings of our insurance subsidiaries, future prospects for growth and profitability could be significantly and adversely affected.

Our active insurance company subsidiaries currently hold financial strength ratings assigned by third-party rating agencies which assess and rate the claims paying ability and financial strength of insurers and reinsurers. Our active subsidiaries carry an “A+ (“Superior”)” rating from A.M. Best. Everest Re and Everest National hold an “AA– (“Very Strong”)” rating from Standard & Poor’s. Everest Re holds an “Aa3 (“Excellent”)” rating from

Moody’s. Financial strength ratings are used by client companies and agents and brokers that place the business as an important means of assessing the financial strength and quality of reinsurers. A downgrade or withdrawal of any of these ratings might adversely affect our ability to market our insurance products and could have a material and adverse effect on future prospects for growth and profitability.

During the last five years, no active subsidiary of ours has experienced a financial strength rating downgrade. However, we cannot assure that a downgrade will not occur in the future if we do not continue to meet the evolving criteria expected of our current rating. In that regard, several of the rating agencies are in the process of modifying their approaches to evaluating catastrophic risk relative to their capital and risk management requirements. Therefore, we cannot predict the outcome of this reassessment or its potential impact upon our ratings.

Consistent with market practice, much of our treaty reinsurance business allows the ceding company to terminate the contract or seek collateralization of our obligations in the event of a rating downgrade below a certain threshold. The termination provision would generally be triggered only if a rating fell below A.M. Best’s A- rating level, which is three levels below Everest Re’s current rating of A+. To a lesser extent, Everest Re also has modest exposure to reinsurance contracts that contain provisions for obligatory funding of outstanding liabilities in the event of a rating agency downgrade. That provision would also generally be triggered only if Everest Re’s rating fell below A.M. Best’s A- rating level.

The failure of our insureds, intermediaries and reinsurers to satisfy their obligations to us could reduce our net income.

In accordance with industry practice, we have uncollateralized receivables from insureds, agent and brokers and/or rely on agents and brokers to process our payments. We may not be able to collect amounts due from insureds, agents and brokers, resulting in a reduction to net income.

We are also subject to the credit risk of reinsurers in connection with retrocessional arrangements because the transfer of risk to a reinsurer does not relieve us of our liability to the insured. In addition, reinsurers may be unwilling to pay us even though they are able to do so. The failure of one or more of our reinsurers to honor their obligations to us in a timely fashion would impact our cash flow and reduce our net income and could cause us to incur a significant loss.

If we are unable or choose not to purchase reinsurance and transfer risk to reinsurers, our net income could be reduced or we could incur a net loss in the event of an unusual loss experience.

We are generally less reliant on the purchase of reinsurance than many of our competitors, in part because of our strategic emphasis on underwriting discipline and management of the cycles inherent in our business. We try to separate our risk taking process from our risk mitigation process in order to avoid developing too great a reliance on reinsurance. Thus, we generally evaluate, underwrite, select and price our products prior to consideration of reinsurance. However, our underwriters generally consider purchasing reinsurance with respect to specific insurance contracts or programs, and our senior management generally considers purchasing reinsurance with respect to potential accumulations of exposures across some or all of our operations, where reinsurance is deemed prudent from a risk mitigation perspective or is expected to have a positive cost/benefit relationship. Because we generally purchase reinsurance only when we expect a net benefit, the percentage of business that we reinsure, as indicated below, may vary considerably from year to year, depending on our view of the relationship between cost and expected benefit for the contract period.

We have entered into affiliated whole account quota share reinsurance agreements for 2002 through 2006 and renewed the quota share agreement for 2007 with Bermuda Re and Everest International Reinsurance, Ltd.

(“Everest International”). We believe that the terms, conditions and pricing of the quota share agreements reflect arm’s length market conditions. These affiliated reinsurance arrangements allow us to effectively leverage our expertise, distribution platform and market presence to a greater degree than our stand-a-lone capital position would otherwise allow.

Percentage of ceded written premiums to gross written premiums			2006			2005			2004			2003			2002
Unaffiliated				3.9	%		4.0	%		4.6	%		5.2	%		6.7	%
Affiliated				24.2	%		24.2	%		18.7	%		22.9	%		13.8	%

Changes in the availability and cost of unaffiliated reinsurance, which are subject to market conditions that are outside of our control, have thus reduced to some extent our ability to use reinsurance to tailor the risks we assume on a contract or program basis or to mitigate or balance exposures across our reinsurance operations. Because we have reduced our level of reinsurance purchases in recent years, our net income could be reduced following a large unreinsured event or adverse overall claims experience.

Our affiliated quota share agreements also reflect general reinsurance market terms and conditions and are negotiated on an arms’ length basis. As a result, there can be no assurance that these arrangements will continue beyond 2007. If the quota shares are not renewed, we may have to reduce our premium volume and we may be more exposed to reductions in net income from large losses.

Our industry is highly competitive and we may not be able to compete successfully in the future.

Our industry is highly competitive and subject to pricing cycles that can be pronounced. We compete globally in the U.S. and international reinsurance and insurance markets with numerous competitors. Our competitors include independent reinsurance and insurance companies, subsidiaries or affiliates of established worldwide insurance companies, reinsurance departments of certain insurance companies and domestic and international underwriting operations, including underwriting syndicates at Lloyd’s.

According to Standard & Poor’s, Group and its subsidiaries rank among the top ten global reinsurance groups, in which 80% of the market share is concentrated. The top twenty groups in our industry represent 95% of the market’s revenues. The leaders in this market are Munich Re, Swiss Re (including Employers Re), Berkshire Hathaway, Hannover Re, and syndicates at Lloyd’s. Some of these competitors have greater financial resources than we do and have established long-term and continuing business relationships throughout the industry, which can be a significant competitive advantage. In addition, the lack of strong barriers to entry into the reinsurance business and the potential for securitization of reinsurance and insurance risks through capital markets provide additional sources of potential reinsurance and insurance capacity and competition. We may not be able to compete successfully in the future should there be a significant change to the competitive landscape of our market.

We are dependent on our key personnel.

Our success has been, and will continue to be, dependent on the ability to retain the services of existing key executive officers and to attract and retain additional qualified personnel in the future. The loss of the services of any key executive officer or the inability to hire and retain other highly qualified personnel in the future could adversely affect our ability to conduct business. Generally, we consider key executive officers to be those individuals who have the greatest influence in setting overall policy and controlling operations: Chairman and Chief Executive Officer, Joseph V. Taranto (age 58), President and Chief Operating Officer, Thomas J. Gallagher (age 58), and Executive Vice President and Chief Financial Officer, Craig Eisenacher (age 59). Of those three officers, we have employment contracts with Mr. Taranto and Mr. Eisenacher. Mr. Taranto’s contract has been previously filed with the SEC and was most recently amended on August 31, 2005 to extend

Mr. Taranto’s term of employment from March 31, 2006 until March 31, 2008. Mr. Eisenacher’s contact has been previously filed with SEC on December 5, 2006 for a term of employment from December 18, 2006 until December 19, 2008. We are not aware that any of the above three officers are planning to leave Group or retire in the near future. We do not maintain any key employee insurance on any of our employees.

Our investment values and investment income could decline because they are exposed to interest rate, credit, and market risks.

A significant portion of our investment portfolio consists of fixed income securities and smaller portions consist of equity securities and other investments. Both the fair market value of our invested assets and associated investment income fluctuate depending on general economic and market conditions. For example, the fair market value of our predominant fixed income portfolio generally increases or decreases inversely to fluctuations in interest rates. The fair market value of our fixed income securities could also decrease as a result of downturn in the business cycle that causes the credit quality of such securities to deteriorate. The net investment income that we realize from future investments in fixed income securities will generally increase or decrease with interest rates.

Interest rate fluctuations also can cause net investment income from fixed income investments that carry prepayment risk, such as mortgage-backed and other asset-backed securities, to differ from the income anticipated from those securities at the time of purchase. In addition, if issuers of individual investments are unable to meet their obligations, investment income will be reduced and realized capital losses may arise.

Because all of our fixed income securities are classified as available for sale, temporary changes in the market value of these investments as well as equities are reflected as changes to our stockholders’ equity. As a result, a decline in the value of the securities in our portfolio reduces our capital or could cause us to incur a loss.

We have invested a growing portion of our investment portfolio in common stock or equity-related securities. The value of these assets fluctuate with equity markets. In times of economic weakness, the market value and liquidity of these assets may decline, and may negatively impact net income and capital. We also invest in non-traditional investments which have different risk characteristics than traditional fixed income and equity securities. These alternative investments are comprised primarily of private equity limited partnerships. The changes in value and investment income/(loss) for these partnerships are more volatile than over-the-counter securities.

The following table quantifies the portion of our investment portfolio that consists of fixed income securities, equity securities and investments that carry prepayment risk.

(Dollars in thousands) Type of Security
Fixed income:
Mortgage-backed securities	$	466,499	5.5	%
Other asset-backed		164,155	1.9	%

Total asset-backed		630,654	7.4	%
Other fixed income		5,506,756	65.2	%

Total fixed income		6,137,410	72.6	%
Equity securities		1,189,341	14.1	%
Other invested assets		330,875	3.9	%
Cash and short-term investments		794,209	9.4	%

Total investments and cash	$	8,451,835	100.0	%

We may experience foreign currency exchange losses that reduce our net income and capital levels.

Through our international operations, we conduct business in a variety of foreign (non-U.S.) currencies, principally the Euro, the British pound, the Canadian dollar and the Singapore dollar. Assets, liabilities, revenues and expenses denominated in foreign currencies are exposed to changes in currency exchange rates. Our functional currency is the U.S. dollar, and exchange rate fluctuations relative to the U.S. dollar may materially impact our results and financial position. In 2006, we wrote approximately 18.5% of our reinsurance coverages in non-U.S. currencies; as of December 31, 2006, we maintained approximately 8% of our investment portfolio in investments denominated in non-U.S. currencies. During 2006, 2005 and 2004, the impact on our quarterly pre-tax net income from exchange rate fluctuations ranged from a loss of $6.9 million to a gain of $4.6 million.

In addition to net income impacts, changes in foreign exchange rates resulted in pre-tax translation adjustments through other comprehensive income of $13.6 million and $2.7 million for the years ended December 31, 2006 and 2005, respectively. On a cumulative, after-tax basis, translation has increased equity by $29.2 million and $20.4 million at December 31, 2006 and 2005, respectively.

RISKS RELATING TO REGULATION

Insurance laws and regulations restrict our ability to operate and any failure to comply with those laws and regulations could have a material adverse effect on our business.

We are subject to extensive and increasing regulation under U.S., state and foreign insurance laws. These laws limit the amount of dividends that can be paid to us by our operating subsidiaries, impose restrictions on the amount and type of investments that we can hold, prescribe solvency, accounting and internal control standards that must be met and maintained and require us to maintain reserves. These laws also require disclosure of material inter-affiliate transactions and require prior approval of “extraordinary” transactions. Such “extraordinary” transactions include declaring dividends from operating subsidiaries that exceed statutory thresholds. These laws also generally require approval of changes of control of insurance companies. The application of these laws could affect our liquidity and ability to pay dividends, interest and other payments on securities, as applicable, and could restrict our ability to expand business operations through acquisitions of new insurance subsidiaries. We may not have or maintain all required licenses and approvals or fully comply with the wide variety of applicable laws and regulations or the relevant authority’s interpretation of the laws and regulations. If we do not have the requisite licenses and approvals or do not comply with applicable regulatory requirements, the insurance regulatory authorities could preclude or temporarily suspend us from carrying on some or all activities or monetarily penalize us. These types of actions could have a material adverse effect on our business. To date, no material fine, penalty or restriction has been imposed on us for failure to comply with any insurance law or regulation.

Current legal and regulatory activities related to the insurance industry, including investigations into contingent commission arrangements and certain finite risk or non-traditional products could affect our business and the industry.

The insurance industry has experienced uncertainty and negative publicity as a result of current litigation, investigations and regulatory activity by various insurance, governmental and enforcement authorities, including the SEC, with regard to certain practices within the insurance industry. These practices include the payment of contingent commissions by insurance companies to insurance brokers and agents, the solicitation and provision of fictitious or inflated quotes and the accounting treatment for finite reinsurance or other non-traditional, loss mitigation insurance and reinsurance products.

At this time, it appears the effects of these investigations will have more of an impact on specific companies being investigated rather than the industry as a whole, with greater transparency and financial reporting disclosures being required for the entire industry in these areas. In May 2005, the Company received and responded to a subpoena from the SEC seeking information for certain loss mitigation products. The Company has cooperated with the SEC on this matter. The future impact, if any, on our operation, net income or financial condition can not be determined at this time.

RISK RELATING TO OUR SECURITIES

Because of our holding company structure, our ability to pay dividends, interest and principal is dependent on our receipt of dividends, loan payments and other funds from our subsidiaries.

We are a holding company, whose most significant assets consist of the stock of our operating subsidiaries. As a result, our ability to pay dividends, interest or other payments on our securities in the future will depend on the earnings and cash flows of the operating subsidiaries and the ability of the subsidiaries to pay dividends or to advance or repay funds to us. This ability is subject to general economic, financial, competitive, regulatory and other factors beyond our control. Payment of dividends and advances and repayments from some of the operating subsidiaries are regulated by U.S., state and foreign insurance laws and regulatory restrictions, including minimum solvency and liquidity thresholds. Accordingly, the operating subsidiaries may not be able to pay dividends or advance or repay funds to us in the future, which could prevent us from paying dividends, interest or other payments on our securities.

ITEM 1B. Unresolved Staff Comments

None.

ITEM 2. Properties

Everest Re’s corporate offices are located in approximately 129,700 square feet of leased office space in Liberty Corner, New Jersey. The Company’s other eleven locations occupy a total of approximately 70,800 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

In the ordinary course of business, the Company is involved in lawsuits, arbitrations and other formal and informal dispute resolution procedures, the outcomes of which will determine the Company’s rights and obligations under insurance, reinsurance and other contractual agreements. In some disputes, the Company seeks to enforce its rights under an agreement or to collect funds owing to it. In other matters, the Company is resisting attempts by others to collect funds or enforce alleged rights. These disputes arise from time to time and as they arise are addressed and ultimately resolved, through both informal and formal means, including negotiated resolution, arbitration and litigation. In all such matters, the Company believes that its positions are legally and commercially reasonable. While the final outcome of these matters cannot be predicted with certainty, the Company does not believe that any of these matters, when finally resolved, will have a material adverse effect on the Company’s financial position or liquidity. However, an adverse resolution of one or more of these items in any one quarter or fiscal year could have a material adverse effect on the Company’s results of operations in that period.

In May 2005, the Company received and responded to a subpoena from the SEC seeking information regarding certain loss mitigation insurance products. Group, the Company’s parent, has stated that the Company will fully cooperate with this and any future inquiries and the Company provided the requested information. The Company does not believe that it has engaged in any improper business practices with respect to loss mitigation insurance products.

The Company’s insurance subsidiaries have also received and have responded to broadly distributed information requests by state regulators including among others, from Delaware and Georgia.

ITEM 4. Submission of Matters to a Vote of Security Holders

Information for Item 4 is not required pursuant to General Instruction I(2) of Form 10-K.

PART II

ITEM 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

Market Information and Holder of Common Stock
As of December 31, 2006, all of the Company’s common stock was owned by Group and was not publicly traded.

Dividend History and Restrictions
The Company did not pay any dividends in 2006 and 2005. In conjunction with the sale of the UK branch of Everest Re to an affiliate, the Company paid a dividend in 2004 of $26.3 million. 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, business needs and growth objectives, capital and surplus requirements of its operating subsidiaries, regulatory restrictions, rating agency considerations and other factors. As an insurance holding company, the Company is dependent on dividends and other permitted payments from its subsidiaries to pay cash dividends to its stockholder. The payment of dividends to Holdings by Everest Re is subject to limitations imposed by Delaware law. Generally, Everest Re may only pay dividends out of its statutory earned surplus, which was $1.8 billion at December 31, 2006, and only after it has given 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. Further, the maximum amount of dividends that may be paid without the prior approval of the Delaware Insurance Commissioner in any twelve month period is the greater of (1) 10% of an insurer’s statutory surplus as of the end of the prior calendar year or (2) 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 2007 without triggering the requirement for prior approval of regulatory authorities in connection with a dividend is $270.4 million.

Recent Sales of Unregistered Securities

None.

ITEM 6. Selected Financial Data

Information for Item 6 is not required pursuant to General Instruction I(2) of Form 10-K.

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

The following is a discussion of the results of operations and financial condition of the Company. This discussion and analysis should be read in conjunction with the Consolidated Financial Statements and accompanying notes thereto presented under ITEM 8, “Financial Statements and Supplementary Data”.

INDUSTRY CONDITIONS
The worldwide reinsurance and insurance businesses are highly competitive, as well as cyclical by product and market. Competition in the types of reinsurance and insurance business that the Company underwrites is based on many factors, including the perceived overall financial strength of the reinsurer or insurer, ratings of the reinsurer or insurer by A.M. Best and/or Standard & Poor’s, underwriting expertise, the jurisdictions where the reinsurer or insurer is licensed or otherwise authorized, capacity and coverages offered, premiums charged, other terms and conditions of the reinsurance and insurance business offered, services offered, speed of claims payment and reputation and experience in lines written. These factors operate at the individual market participant level to varying degrees, as applicable to the specific participant’s circumstances. They also operate in aggregate across the reinsurance industry more generally, contributing, in combination with economic conditions and variations in the reinsurance buying practices of insurance companies (by participant and in the aggregate), to cyclical movements in reinsurance rates, terms and conditions and ultimately reinsurance industry aggregate financial results.

U.S. property reinsurance market conditions tightened, particularly within peak catastrophe zones, during 2006. This market hardening was particularly pronounced in third quarter renewals with incrementally higher rate changes and even more restrictive coverage terms than earlier in 2006. As a result, many reinsurance buyers

were not able to fully place their reinsurance program and have been forced to raise retention levels and/or reduce catastrophe limit purchases. In turn, insurance companies continue to adjust limits and coverages and increase the premium rates they charge their customers. Together, these trends have generally resulted in insurance companies retaining more property risk exposure and being more prone to potential future earnings volatility than in past years. This trend reflects an imbalance between reinsurance supply and demand. As a result of this imbalance and higher rates, additional competition is entering the market in the form of new companies and alternative risk transfer mechanisms. In January 2007, the Florida legislature enacted insurance reform that increases insurer’s access to the Florida Hurricane Catastrophe Fund, thus potentially reducing the amount of reinsurance purchased from the private reinsurance market. The Company is unable to predict the impact on future market conditions from the increased competition and legislative reform. In addition to these market forces, reinsurers continue to reassess their risk appetites and rebalance their property portfolios to reflect improved price to exposure metrics against the backdrop of: (i) recent revisions to the industry’s catastrophe loss projection models, which are indicating significantly higher loss potentials and consequently higher pricing requirements and (ii) elevated rating agency scrutiny and capital requirements for many catastrophe exposed companies.

FINANCIAL SUMMARY
The Company’s management monitors and evaluates overall Company performance based upon financial results. The following table displays a summary of the consolidated net income, ratios and stockholder’s equity for the years indicated:

	Years Ended December 31,									Percentage Increase/(Decrease)
(Dollars in thousands)	2006			2005			2004			2006/2005			2005/2004
Gross written premiums	$	3,185,975		$	3,339,853		$	3,820,695			-4.6	%		-12.6	%
Net written premiums		2,290,261			2,395,650			2,932,718			-4.4	%		-18.3	%
REVENUES:
Premiums earned	$	2,247,200		$	2,426,076		$	2,829,151			-7.4	%		-14.2	%
Net investment income		372,352			325,217			329,184			14.5	%		-1.2	%
Net realized capital gains		34,957			64,568			56,710			-45.9	%		13.9	%
Other (expense) income		(40,542	)		10,344			(67,881	)		N	M		N	M

Total revenues		2,613,967			2,826,205			3,147,164			-7.5	%		-10.2	%

CLAIMS AND EXPENSES:
Incurred losses and loss adjustment expenses		1,557,079			2,202,820			2,172,371			-29.3	%		1.4	%
Commission, brokerage, taxes and fees		438,505			513,394			577,499			-14.6	%		-11.1	%
Other underwriting expenses		98,729			101,324			89,074			-2.6	%		13.8	%
Interest, fee and bond issue cost amortization expense		69,696			74,197			76,610			-6.1	%		-3.1	%

Total claims and expenses		2,164,009			2,891,735			2,915,554			-25.2	%		-0.8	%

INCOME (LOSS) BEFORE TAXES		449,958			(65,530	)		231,610			786.6	%		-128.3	%
Income tax expense (benefit)		117,052			(70,236	)		56,137			266.7	%		-225.1	%

NET INCOME	$	332,906		$	4,706		$	175,473			N	M		-97.3	%

RATIOS:											Point Change			Point Change

Loss ratio		69.3	%		90.8	%		76.8	%		(21.5	)		14.0
Commission and brokerage ratio		19.5	%		21.2	%		20.4	%		(1.7	)		0.8
Other underwriting expense ratio		4.4	%		4.1	%		3.1	%		0.3			1.0

Combined ratio		93.2	%		116.1	%		100.3	%		(22.9	)		15.8

	December 31,
(Dollars in millions)	2006			2005			2004
Stockholder's equity	$	2,218.4		$	1,790.7		$	1,743.8			23.9	%		2.7	%

(NM, not meaningful)

The Company’s 2006 results were very strong with net income of $332.9 million compared to net income of $4.7 million for 2005. This significant earnings improvement reflects the favorable effect of a benign U.S. hurricane season relative to unprecedented Company and industry hurricane losses experienced in 2005, as well as favorable underlying underwriting fundamentals.

Gross written premiums declined for 2006 compared to 2005 as the Company continued its disciplined underwriting and risk management practices. In particular, the Company repositioned its U.S. property reinsurance portfolio resulting in improved pricing, but lower premium volume. The premium volume decline

also reflects much lower premiums due to the run-off insurance credit program business and a cut back in treaty casualty writings in response to market softening in many U.S. casualty reinsurance classes.

Investment income increased from the growth of the invested asset base and greater income from limited partnership investments.

The Company’s stockholder’s equity increased by $0.4 billion to $2.2 billion in 2006, principally attributable to the net income generated during the year. This compares to an increase of $46.9 million to $1.8 billion in 2005.

Revenues. Gross and net written premiums declined 4.6% and 4.4%, respectively, for 2006 compared to 2005, while net premiums earned declined 7.4% in 2006 compared to 2005. The decrease in full year net premiums earned was primarily due to a decline in the U.S. insurance segment of 9.8%, reflective of: i) a reduction in credit business from an auto loan insurance program which is in run-off and ii) continued reductions in the California workers’ compensation writings due to competitive market conditions. In addition, net premiums earned for the worldwide reinsurance segments in the aggregate decreased by 6.5% for 2006, reflecting multiple segment level factors, including a significant return premium for a Florida property quota share contract cancelled in 2006, the absence of sizable reinstatement premiums triggered in 2005 from severe catastrophic events, as well as the exercise of continued underwriting disciplines which emphasizes potential profitability over volume.

Net investment income increased 14.5% for 2006 compared to 2005, reflecting continued year-over-year growth in invested assets from positive cash flow from operations and a $31.1 million increase in income from limited partnership investments. The average investment portfolio yields for 2006 were 4.6% pre-tax and 3.7% after-tax, slightly higher compared to the prior year.

Net realized capital gains were modest in relation to the Company’s invested asset base, mainly reflecting normal portfolio management activities in response to changes in interest rates and credit spreads.

Expenses. The Company’s incurred losses and loss adjustment expenses (“LAE”) decreased 29.3% in 2006 compared to 2005, primarily due to the relative absence of current year catastrophe losses.

The Company’s loss ratio improvement of 22 points for 2006 compared to 2005 resulted from a 25 point improvement in the catastrophe loss ratio.

Commission, brokerage, and tax expenses decreased by 14.6% in 2006 from 2005. The 7.4% decline in earned premiums in 2006 compared to 2005 was the principal driver of the decrease in this directly variable expense. Other underwriting expenses for 2006 decreased by 2.6% compared to 2005, primarily due to a decrease in corporate non-allocated expenses.

The Company’s effective income tax rate for 2006 was 26.0% compared with the effective tax rate for 2005 of 107.2%, which was impacted by the large catastrophe losses.

UK Branch Sale. Effective January 1, 2004, Everest Re sold its UK branch to Bermuda Re (“UK Branch Sale”) and in conjunction with the sale, Everest Re provided a reserve indemnity agreement for adverse development on loss and loss adjustment expenses (“LAE”) reserve balances as of December 31, 2002, as well as made sale related adjustments for the 2003 and 2002 quota share cessions. For the year ended December 31, 2004, gross written premiums, net written premiums, premiums earned, incurred losses and LAE, commission, brokerage, taxes and fees and other underwriting expense related to the UK Branch Sale were $0.0 million, $139.8 million, $118.8 million, $118.6 million, $30.9 million and $0.0 million, respectively.

The following table reflects the reconciliation from reported to proforma for the year indicated:

	Year Ended December 31, 2004
(Dollars in thousands)	As Reported			UK branch Adjustment			Proforma
Gross written premiums	$	3,820,695		$	-		$	3,820,695
Net written premiums		2,932,718			(139,751	)		2,792,967
REVENUES:
Premiums earned	$	2,829,151		$	(118,815	)	$	2,710,336
Net investment income		329,184			-			329,184
Net realized capital gains		56,710			-			56,710
Other expense		(67,881	)		-			(67,881	)

Total revenues		3,147,164			(118,815	)		3,028,349

CLAIMS AND EXPENSES:
Incurred losses and loss adjustment expenses		2,172,371			(118,567	)		2,053,804
Commission, brokerage, taxes and fees		577,499			(30,962	)		546,537
Other underwriting expense		89,074			-			89,074
Interest, fee and bond issue cost amortization expense		76,610			-			76,610

Total claims and expenses		2,915,554			(149,529	)		2,766,025

INCOME BEFORE TAXES	$	231,610		$	30,714		$	262,324

In the remainder of this Financial Summary section and the following Segment Information section, all analyses relate to the comparable proforma information, except where indicated.

SEGMENT INFORMATION
The Company, through its subsidiaries, operates in four segments: U.S. Reinsurance, U.S. Insurance, Specialty Underwriting and International. The U.S. Reinsurance operation writes property and casualty, treaty and facultative reinsurance, through reinsurance brokers, as well as directly with ceding companies within the U.S. The U.S. Insurance operation writes property and casualty insurance primarily through general agents and surplus lines brokers within the U.S. The Specialty Underwriting operation writes A&H, marine, aviation and surety business within the U.S. and worldwide through brokers and directly with ceding companies. The International operation writes property and casualty reinsurance through Everest Re’s branches in Canada and Singapore, in addition to foreign business written through Everest Re’s Miami and New Jersey offices.

These segments are managed in a carefully coordinated fashion with strong elements of central control, with respect to pricing, risk management, control of aggregate exposures to catastrophic events, capital, investments and support operations. Management monitors and evaluates the financial performance of these operating segments based upon their underwriting results. Underwriting results include earned premium less losses and LAE incurred, commission and brokerage expenses and other underwriting expenses and are analyzed using ratios, in particular loss, commission and brokerage and other underwriting expense ratios, which, respectively, divide incurred losses, commissions and brokerage and other underwriting expenses by earned premium. For selected financial information regarding these segments, see Note 16 of Notes to Consolidated Financial Statements.

The following tables represent the relevant operating results for the operating segments for the three years ended December 31, 2006, 2005 and 2004:

U.S. Reinsurance
(Dollars in thousands)	2006		2005			2004
Gross written premiums	$	1,336,728	$	1,386,170		$	1,478,159
Net written premiums		992,819		1,055,815			1,148,522
Premiums earned	$	978,072	$	1,080,453		$	1,155,317
Incurred losses and loss adjustment expenses		721,157		1,152,427			947,467
Commission and brokerage		202,809		259,751			274,370
Other underwriting expenses		24,947		23,980			23,390

Underwriting gain (loss)	$	29,159	$	(355,705	)	$	(89,910	)

U.S. Insurance
(Dollars in thousands)	2006		2005		2004
Gross written premiums	$	866,294	$	932,469	$	1,167,808
Net written premiums		591,177		618,752		788,457
Premiums earned	$	573,965	$	636,663	$	726,344
Incurred losses and loss adjustment expenses		432,232		415,379		540,734
Commission and brokerage		72,723		93,621		70,881
Other underwriting expenses		48,918		51,726		49,286

Underwriting gain	$	20,092	$	75,937	$	65,443

Specialty Underwriting
(Dollars in thousands)	2006			2005			2004
Gross written premiums	$	251,209		$	314,630		$	487,072
Net written premiums		174,431			222,526			364,256
Premiums earned	$	176,326		$	224,555		$	356,705
Incurred losses and loss adjustment expenses		125,160			225,740			249,086
Commission and brokerage		44,851			55,564			94,680
Other underwriting expenses		6,559			6,756			7,069

Underwriting (loss) gain	$	(244	)	$	(63,505	)	$	5,870

International
(Dollars in thousands)	2006		2005			2004
Gross written premiums	$	731,745	$	706,584		$	687,657
Net written premiums		531,834		498,557			491,732
Premiums earned	$	518,837	$	484,405		$	471,970
Incurred losses and loss adjustment expenses		278,530		409,274			316,517
Commission and brokerage		118,122		104,458			106,606
Other underwriting expenses		13,830		12,621			11,298

Underwriting gain (loss)	$	108,355	$	(41,948	)	$	37,549

The following table reconciles the underwriting results for the operating segments to income (loss) before tax as reported in the consolidated statements of operations and comprehensive income (loss) for the years ended December 31:

(Dollars in thousands)	2006			2005			2004
Underwriting gain (loss)	$	157,362		$	(385,221	)	$	18,952
UK Branch Sale and related transactions		-			-			(30,714	)

Underwriting gain (loss)	$	157,362			(385,221	)	$	(11,762	)
Net investment income		372,352			325,217			329,184
Net Realized capital gain		34,957			64,568			56,710
Corporate (expense) income		(4,475	)		(6,241	)		1,969
Interest, fee and bond issue cost amortization expense		(69,696	)		(74,197	)		(76,610	)
Other (expense) income		(40,542	)		10,344			(67,881	)

Income (loss) before taxes	$	449,958		$	(65,530	)	$	231,610

All the comparative analysis in this Segment Information section relates to the proforma information in the above table except where indicated otherwise.

CONSOLIDATED RESULTS OF OPERATIONS

YEAR ENDED DECEMBER 31, 2006 COMPARED TO YEAR ENDED DECEMBER 31, 2005
Premiums Written. Gross written premiums decreased 4.6% to $3,186.0 million in 2006 from $3,339.9 million in 2005. The Specialty Underwriting operation decreased 20.2% ($63.4 million), driven by a $53.2 million reduction in A&H premiums, as pricing for this business continues to be difficult and a $23.6 million decrease in marine and aviation premiums, partially offset by a $13.4 million increase in surety premiums. The U.S. Insurance operation decreased 7.1% ($66.2 million), mainly reflecting continued reductions in the California workers’ compensation business and run-off of the credit business. The U.S. Reinsurance operation decreased 3.6% ($49.4 million), principally reflecting a $72.7 million decrease in treaty casualty business, partially offset by a $16.4 million increase in treaty property business and by an $11.6 million increase in facultative business. Partially offsetting these declines was a 3.6% ($25.2 million) increase in the International operation, primarily due to a $47.1 million increase in international business written through the Miami and New Jersey offices, representing primarily Latin American business and by a $22.8 million increase in Canadian business, offset by a $44.1 million decrease in Asian business. The Company endeavors to write only business that meets its profit criteria; generally, increases and decreases in a line of business or region are the result of changes in management’s perceptions of the profit opportunities in the various markets.

Ceded premiums decreased to $895.7 million in 2006 from $944.2 million in 2005, primarily due to the decline in gross written premiums. Ceded premiums relate primarily to quota share reinsurance agreements between Everest Re and Bermuda Re and Everest International.

Net written premiums decreased by 4% to $2,290.3 million in 2006 from $2,395.7 million in 2005, reflecting the $153.9 million decrease in gross written premiums and the $48.5 million decrease in ceded premiums.

Premium Revenues. Net premiums earned decreased by 7.4% to $2,247.2 million in 2006 from $2,426.1 million in 2005. Contributing to this decrease was a 21.5% ($48.2 million) decrease in the Specialty Underwriting operation, a 9.8% ($62.7 million) decrease in the U.S. Insurance operation and a 9.5% ($102.4 million) decrease in the U.S. Reinsurance operation, partially offset by a 7.1% ($34.4 million) increase in the International operation. Additional premiums related to catastrophe business, included in net earned premiums,

were $5.1 million and $52.5 million for 2006 and 2005, respectively. These changes reflect period to period changes in net written premiums and business mix, together with normal variability in earnings patterns. Business mix changes occur not only as the Company shifts emphasis between products, lines of business, distribution channels and markets, but also as individual contracts renew or non-renew, almost always with changes in coverage, structure, prices and/or terms and as new contracts are accepted. As premium reporting, earnings, loss and commission characteristics derive from the provisions of individual contracts, the continuous turnover of individual contracts, arising from both strategic shifts and daily underwriting decisions, results in appreciable variability in various underwriting line items. Changes in estimates of the reporting patterns of ceding companies also affect premiums earned.

Expenses
Incurred Losses and LAE. The Company’s loss and LAE reserves reflect estimates of ultimate claim liability. Such estimates are regularly re-evaluated including re-estimates of prior period reserves, taking into consideration all available information and in particular, recently reported loss and claim experience related to prior periods. The effect of such re-evaluations is recorded in incurred losses in the period in which the adjustment was made.

The following table shows the components of the Company’s incurred losses and LAE for 2006 and 2005:

	December 31, 2006									December 31, 2005
(Dollars in millions)	Current Year			Prior Years			Total Incurred			Current Year			Prior Years			Total Incurred
All Segments
Attritional (a)	$	1,477	.2	$	(157	.1)	$	1,320	.1	$	1,514	.7	$	(156	.3)	$	1,358	.4
Catastrophes		12	.4		197	.2		209	.6		755	.4		77	.6		833	.0
A&E		-			27	.4		27	.4		-			11	.5		11	.5

Total All segments	$	1,489	.7	$	67	.4	$	1,557	.1	$	2,270	.1	$	(67	.3)	$	2,202	.8

Loss Ratio		66.3	%		3.0	%		69.3	%		93.6	%		-2.8	%		90.8	%
(a) Attritional losses exclude catastrophe and A&E losses
(Some amounts may not reconcile due to rounding.)

The Company’s incurred losses and LAE decreased by 29.3% to $1,557.1 million in 2006 from $2,202.8 million in 2005, due to significantly reduced current year catastrophe losses and a reduction in current year attritional losses, partially offset by increased prior years reserve development on catastrophe and A&E loss reserves. Incurred losses and LAE in 2006 reflected ceded losses and LAE of $546.4 million compared to ceded losses and LAE in 2005 of $852.4 million reflecting the decline in gross losses.

The Company’s loss ratio, which is calculated by dividing incurred losses and LAE by current year net premiums earned, improved by 21.5 points to 69.3% over the comparable 2005 period, principally due to a 30.5 point improvement on current year catastrophe losses, partially offset by 5.8 points of increased prior years reserve strengthening.

The following table shows the U.S. Reinsurance segment components of incurred losses and LAE for 2006 and 2005:

	December 31, 2006									December 31, 2005
(Dollars in millions)	Current Year			Prior Years			Total Incurred			Current Year			Prior Years			Total Incurred
Attritional	$	597	.3	$	(46	.9)	$	550	.4	$	651	.8	$	(41	.0)	$	610	.8
Catastrophes		7	.1		136	.3		143	.3		475	.9		54	.3		530	.2
A&E		-			27	.4		27	.4		-			11	.5		11	.5

Total segment	$	604	.4	$	116	.8	$	721	.2	$	1,127	.7	$	24	.7	$	1,152	.4

Loss Ratio		61.8	%		11.9	%		73.7	%		104.4	%		2.3	%		106.7	%
(Some amounts may not reconcile due to rounding.)

The U.S. Reinsurance segment’s incurred losses and LAE decreased 37.4%, or $431.3 million, for 2006 compared to 2005, primarily due to significantly reduced current year catastrophe losses, principally within the treaty property unit, and decreased earned premiums. The segment’s loss ratio improvement of 33.0 points from 2005 was primarily due to the 34.4 point decrease in catastrophe losses.

The following table shows the U.S. Insurance segment components of incurred losses and LAE for 2006 and 2005:

	December 31, 2006									December 31, 2005
(Dollars in millions)	Current Year			Prior Years			Total Incurred			Current Year			Prior Years			Total Incurred
Attritional	$	480	.4	$	(48	.5)	$	431	.9	$	433	.8	$	(19	.5)	$	414	.3
Catastrophes		-			0	.3		0	.3		1	.0		-			1	.0

Total segment	$	480	.4	$	(48	.2)	$	432	.2	$	434	.8	$	(19	.5)	$	415	.4

Loss Ratio		83.7	%		-8.4	%		75.3	%		68.3	%		-3.1	%		65.2	%
(Some amounts may not reconcile due to rounding.)

The U.S. Insurance segment’s incurred losses and LAE increased 4.0%, or $16.8 million, for 2006 compared to 2005; primarily due to higher current year attritional losses resulting from losses on the run-off credit program, partially offset by decreased losses due to reduced earned premiums, and an increase in favorable prior years reserve development.

The following table shows the Specialty Underwriting segment components of incurred losses and LAE for 2006 and 2005:

	December 31, 2006									December 31, 2005
(Dollars in millions)	Current Year			Prior Years			Total Incurred			Current Year			Prior Years			Total Incurred
Attritional	$	109	.4	$	(30	.1)	$	79	.4	$	140	.4	$	(38	.6)	$	101	.8
Catastrophes		-			45	.8		45	.8		110	.7		13	.2		123	.9

Total segment	$	109	.4	$	15	.7	$	125	.2	$	251	.1	$	(25	.4)	$	225	.7

Loss Ratio		62.1	%		8.9	%		71.0	%		111.8	%		-11.3	%		100.5	%
(Some amounts may not reconcile due to rounding.)

The Specialty Underwriting segment’s incurred losses and LAE decreased 44.6%, or $100.6 million, for 2006 as compared to 2005, primarily due to a decrease in current year catastrophe losses and a reduction in earned premiums across all classes of business. Correspondingly, the segment’s loss ratio improved by 29.5 points over 2005.

The following table shows the International segment components of incurred losses and LAE for 2006 and 2005:

	December 31, 2006									December 31, 2005
(Dollars in millions)	Current Year			Prior Years			Total Incurred			Current Year			Prior Years			Total Incurred
Attritional	$	290	.0	$	(31	.6)	$	258	.4	$	288	.7	$	(57	.3)	$	231	.4
Catastrophes		5	.4		14	.8		20	.2		167	.7		10	.1		177	.8

Total segment	$	295	.4	$	(16	.8)	$	278	.5	$	456	.4	$	(47	.2)	$	409	.3

Loss Ratio		56.9	%		-3.2	%		53.7	%		94.2	%		-9.7	%		84.5	%
(Some amounts may not reconcile due to rounding.)

The International segment’s incurred losses and LAE decreased 31.9%, or $130.7 million, for 2006 as compared to 2005 reflecting lower catastrophe losses. The segment’s loss ratio improved by 30.8 points from 2005, primarily due to reduced current year catastrophe losses incurred in Canada, Asia and international.

Underwriting Expenses. The Company’s expense ratio, which is calculated by dividing underwriting expenses by net premiums earned, was 23.9% in 2006 compared to 25.3% in 2005.

The following table shows the expense ratios for each of the Company’s operating segments for 2006 and 2005.

Segment Expense Ratios
Segment	2006			2005
U.S. Reinsurance		23.3	%		26.2	%
U.S. Insurance		21.2	%		22.9	%
Specialty Underwriting		29.1	%		27.8	%
International		25.4	%		24.2	%

Segment underwriting expenses decreased by 12.4% to $532.8 million for 2006 from $608.5 million in 2005. Commission, brokerage, taxes and fees decreased by $74.9 million, principally due to decreases in premium volume and changes in the mix of business. Segment other underwriting expenses were $0.1 million for both 2006 and 2005. Contributing to the segment underwriting expense decreases were a 19.7% ($56.0 million) decrease in the U.S. Reinsurance operation, a 17.5% ($10.9 million) decrease in the Specialty Underwriting operation and a 16.3% ($23.7 million) decrease in the U.S. Insurance operation, partially offset by a 12.7% ($14.9 million) increase in the International operation. The changes for each operation’s expenses principally resulted from changes in commission expenses due to changes in premium volume and business mix by class and type and, in some cases, changes in the use of specific reinsurance.

The Company’s combined ratio, which is the sum of the loss and expense ratios, improved by 22.9 percentage points to 93.2% in 2006 as compared to 116.1% in 2005, primarily as a result of lower catastrophe and attritional losses.

The following table shows the combined ratios for each of the Company’s operating segments in 2006 and 2005. The segment combined ratios were impacted by the loss and expense ratio variations noted above.

Segment Combined Ratios
Segment	2006			2005
U.S. Reinsurance		97.0	%		132.9	%
U.S. Insurance		96.5	%		88.1	%
Specialty Underwriting		100.1	%		128.3	%
International		79.1	%		108.7	%

Investment Results. Net investment income increased 14.5% to $372.4 million in 2006 from $325.2 million in 2005, primarily reflecting the growth in invested assets to $8.5 billion in 2006 from $7.9 billion in 2005 and a $31.1 million increase in investment income from limited partnership investments. Investment income from equity investments in limited partnerships fluctuates from year to year depending on the performance of the individual investments made by the partnerships as well as the movement in the equity markets. Period to period changes in investment income are also impacted by changes in the level and mix of invested assets, prevailing interest rates and price movements in the equity markets.

The following table shows the components of net investment income for the years ended as indicated:

(Dollars in thousands)	2006			2005
Fixed maturities	$	299,570		$	308,254
Equity securities		19,713			16,356
Short-term investments		26,828			12,325
Other investment income		41,934			9,019

Total gross investment income		388,045			345,954
Interest credited and other expense		(15,693	)		(20,737	)

Total net investment income	$	372,352		$	325,217

The following table shows a comparison of various investment yields for the years indicated:


Imbedded pre-tax yield of cash and invested assets at December 31	4.6	%	4.5	%
Imbedded after-tax yield of cash and invested assets at December 31	3.7	%	3.6	%
Annualized pre-tax yield on average cash and invested assets	4.8	%	4.4	%
Annualized after-tax yield on average cash and invested assets	3.8	%	3.6	%

Net realized capital gains of $35.0 million in 2006 emanated from realized capital gains on the Company’s investments of $39.6 million, resulting principally from gains on equity securities of $31.2 million and fixed maturities of $8.4 million, partially offset by $4.6 million of realized losses on equity securities. Net realized capital gains were $64.6 million in 2005, reflecting realized capital gains on the Company’s investments of $75.9 million, resulting principally from gains on fixed maturities of $34.5 million and equity securities of $16.1 million, coupled with $25.3 million of gains from the sale of the Company’s interest only strips of mortgage-backed securities (“interest only strips”) portfolio, partially offset by $11.3 million of realized capital losses, which included $4.1 million related to the write-downs in the value of interest only strips deemed to be impaired on an other than temporary basis in accordance with Emerging Issues Task Force Issue No. 99-20, “Recognition of Interest Income and Impairment of Purchased and Retained Beneficial Interests in Securitized Financial Assets” (“EITF 99-20”).

Corporate, Non-allocated Expenses. Corporate underwriting expenses not allocated to segments were $4.5 million for 2006 and $6.2 million for 2005, which included approximately $1.5 million of non-recurring expenses.

Interest, fees and bond issue cost amortization expense in 2006 and 2005 were $69.7 million and $74.2 million, respectively. Interest, fees and bond issue cost amortization expense in 2006 included $31.1 million related to the senior notes, $37.4 million related to the junior subordinated debt securities, $0.9 million related to the bond issue cost amortization and $0.2 million related to the credit line under the Company’s revolving credit facility. Interest, fees and bond issue cost amortization expense in 2005 included $35.5 million related to senior notes, $37.4 million related to the junior subordinated debt securities, $1.0 million related to the bond issue cost amortization and $0.2 million related to the credit line under the Company’s revolving credit facility. Interest expense on senior notes decreased due to the retirement on March 15, 2005 of the 8.5% senior notes issued on March 14, 2000.

Other expense in 2006 was $40.5 million as compared to other income in 2005 of $10.3 million. The change was primarily due to increased deferrals on retroactive reinsurance agreements with affiliates.

Income Taxes. The Company’s income tax expense is primarily a function of the U.S. statutory tax rates coupled with the impact from tax-preferenced investment income. The Company recorded income tax expense of $117.1 million in 2006 compared to a tax benefit of $70.2 million in 2005. The increased tax expense was primarily due to the significant change in pre-tax income in 2006 compared to the pre-tax loss in 2005.

Net Income. Net income was $332.9 million in 2006 compared to net income of $4.7 million in 2005, primarily caused by much larger catastrophe losses in 2005 than in 2006.

YEAR ENDED DECEMBER 31, 2005 COMPARED TO YEAR ENDED DECEMBER 31, 2004
Premiums Written. Gross written premiums decreased 12.6% to $3,339.9 million in 2005 from $3,820.7 million in 2004, reflecting a disciplined underwriting response to modest reinsurance market softening that affected all segments, resulting in an overall premium decline. Premiums declined 35.4% ($172.4 million) in the

Specialty Underwriting operation, primarily due to a $145.4 million decrease in A&H business and a $47.9 million decrease in surety business, partially offset by a $20.9 million increase in marine and aviation business. The U.S. Insurance operation decreased 20.2% ($235.3 million), principally as a result of a $242.6 million decrease in workers’ compensation, resulting primarily from changes in the California workers’ compensation market. The U.S. Reinsurance operation decreased 6.2% ($92.0 million), principally related to a $173.1 million decrease in treaty casualty business and a $29.3 million decrease in facultative business, partially offset by a $118.9 million increase in treaty property business. The International operation increased 2.8% ($18.9 million), resulting primarily from a $75.0 million increase in Asian business, partially offset by a $43.6 million decrease in international business written through the Miami and New Jersey offices, representing primarily Latin American business and an $11.3 million decrease in Canadian business.

Ceded premiums decreased to $944.2 million in 2005 from $1,027.7 million in 2004, principally resulting from the decrease in gross written premiums in the U.S. Insurance operation. Ceded premiums relate primarily to quota share reinsurance agreements between Everest Re and Bermuda Re and Everest International.

Net written premiums decreased by 14.2% to $2,395.7 million in 2005 from $2,793.0 million in 2004, reflecting the $480.8 million decrease in gross written premiums and the $83.5 million decrease in ceded premiums.

Premium Revenues. Net premiums earned decreased by 10.5% to $2,426.1 million in 2005 from $2,710.3 million in 2004. Contributing to this decrease was a 37.0% ($132.1 million) decrease in the Specialty Underwriting operation, a 12.3% ($89.9 million) decrease in the U.S. Insurance operation and a 6.5% ($74.9 million) decrease in the U.S. Reinsurance operation, partially offset by a 2.6% ($12.4 million) increase in the International operation. Additional premiums, related to catastrophe business included in net earned premiums, were $52.5 million for 2005 of which $40.5 million were due to Hurricanes Katrina and Wilma. Generally, catastrophe reinsurance provides coverage for one event; however, when limits are exhausted some contractual arrangements provide for the availability of additional coverage upon the payment of additional premium. There were no such additional premiums for 2004. All of there changes reflect period to period changes in net written premiums and business mix, together with normal variability in earnings patterns. Business mix changes occur not only as the Company shifts emphasis between products, lines of business, distribution channels and markets, but also as individual contracts renew or non-renew, almost always with changes in coverage, structure, prices and/or terms, and as new contracts are accepted with coverages, structures, prices and/or terms different from those of expiring contracts. As premium reporting, earnings, loss and commission characteristics derive from the provisions of individual contracts, the continuous turnover of individual contracts, arising from both strategic shifts and day to day underwriting, results in appreciable background variability in various underwriting line items. Changes in estimates related to the reporting patterns of ceding companies also affect premiums earned.

Expenses
Incurred Losses and LAE. The Company’s losses and LAE reserves reflect estimates of ultimate claim liability. Such estimates are regularly re-evaluated including re-estimates of prior period reserves, taking into consideration all available information and in particular, newly reported loss and claim experience. The effect of such re-evaluations impacts incurred losses for the period in which the adjustment was made.

The following table shows the components of the Company’s incurred losses and LAE for 2005 and 2004:

	December 31, 2005									December 31, 2004
(Dollars in millions)	Current Year			Prior Years			Total Incurred			Current Year			Prior Years			Total Incurred
All Segments
Attritional (a)	$	1,514	.7	$	(156	.3)	$	1,358	.4	$	1,588	.7	$	198	.5	$	1,787	.2
Catastrophes		755	.4		77	.6		833	.0		290	.9		(34	.6)		256	.3
A&E		-			11	.5		11	.5		-			10	.3		10	.3

Total All segments	$	2,270	.1	$	(67	.3)	$	2,202	.8	$	1,879	.6	$	174	.2	$	2,053	.8

Loss Ratio		93.6	%		-2.8	%		90.8	%		69.4	%		6.4	%		75.8	%
(a) Attritional losses exclude catastrophe and A&E losses
(Some amounts may not reconcile due to rounding.)

The Company’s incurred losses and LAE increased by 7.3% to $2,202.8 million in 2005 from $2,053.8 million in 2004. The increase in incurred losses and LAE was principally attributable to the increase in estimated losses due to property catastrophes, partially offset by favorable attritional prior years reserve development and the impact of reduced earned premiums. Incurred losses and LAE in 2005 reflected ceded losses and LAE of $852.4 million compared to ceded losses and LAE in 2004 of $789.6 million.

The Company’s loss ratio, which is calculated by dividing incurred losses and LAE by current year net premiums earned, increased by 15.0 points to 90.8% in 2005 from 75.8% in 2004. This 15.0 point year over year loss ratio deterioration was primarily the result of 25.6 point increase due to catastrophe losses, partially offset by 13.7 point improvement in attritional prior years reserve development.

Incurred losses and LAE include catastrophe losses, which include the impact of both current period events and favorable and unfavorable development on prior years events and are net of reinsurance. Individual catastrophe losses are reported net of specific reinsurance, but before recoveries under corporate level reinsurance and potential incurred but not reported (“IBNR”) loss reserve offsets. The Company defines a catastrophe as a property event with expected reported losses of at least $5.0 million before corporate level reinsurance and taxes. Effective for the third quarter 2005, industrial risk losses have been excluded from catastrophe losses with prior periods adjusted for comparison purposes. Catastrophe losses, net of contract specific cessions, were $833.0 million in 2005, related principally to aggregate estimated losses driven by Hurricanes Katrina, Rita and Wilma with catastrophe losses of $406.7 million, $74.4 million and $236.0 million, respectively, but also reflected catastrophe losses related to Hurricanes Emily ($14.9 million) and Dennis ($5.3 million), floods in India ($9.9 million) and Calgary ($3.6 million) and storms in Ontario ($4.9 million). The 2005 results also reflect net unfavorable reserve development on 2004 and prior catastrophes of $77.6 million. Catastrophe losses, net of contract specific cessions, were $256.3 million in 2004, related principally to aggregate estimated losses of $290.9 million from Hurricanes Charley, Frances, Ivan and Jeanne, Pacific typhoons, Edmonton hailstorms and the Asian tsunami, which were partially offset by $32.7 million of reserve reductions related to the 2001 World Trade Center losses.

Net favorable prior years reserve adjustments for the year ended December 31, 2005 were $67.3 million compared to net unfavorable prior years reserve adjustments of $174.2 million in 2004. For the year ended December 31, 2005, the favorable reserve adjustments included net favorable attritional reserve adjustments of $156.3 million related primarily to property business classes, partially offset by net unfavorable prior years catastrophe adjustments of $77.6 million related primarily to the 2004 hurricanes and net unfavorable A&E

adjustments of $11.5 million. For the year ended December 31, 2004, the unfavorable prior years reserve adjustments included net unfavorable attritional adjustments of $198.5 million related primarily to casualty reinsurance and net unfavorable A&E adjustments of $10.3 million. Partially offsetting the 2004 unfavorable development was $34.6 million of favorable catastrophe development, principally related to the reduction of reserves for the 2001 World Trade Center losses and other catastrophe events. It is important to note that non-A&E accident year reserve development arises from the re-evaluation of accident year results and that such re-evaluations may also impact premiums and commissions attributed by accident year, generally mitigating, in part, the impact of loss development and that such impacts are recorded as part of the overall reserve evaluation process.

Aggregate reserve development related to A&E exposures was $11.5 million and $10.3 million for the years ended December 31, 2005 and 2004, respectively. The Company has A&E exposure related to contracts written by the Company prior to 1986 and to claim obligations acquired as part of the Mt. McKinley acquisition in September 2000. The reserve strengthening on business written by the Company, net of reinsurance, was $ 11.5 million. Substantially all of the Company’s A&E exposures relate to insurance and reinsurance contacts with coverage periods prior to 1986. Given the uncertainties surrounding the settlement of A&E losses, management is unable to establish a meaningful range for these obligations.

The following table shows the U.S. Reinsurance segment components of incurred losses and LAE for 2005 and 2004:

	December 31, 2005									December 31, 2004
(Dollars in millions)	Current Year			Prior Years			Total Incurred			Current Year			Prior Years			Total Incurred
Attritional	$	651	.8	$	(41	.0)	$	610	.8	$	630	.0	$	127	.9	$	757	.9
Catastrophes		475	.9		54	.3		530	.2		214	.1		(34	.8)		179	.2
A&E		-			11	.5		11	.5		-			10	.3		10	.3

Total segment	$	1,127	.7	$	24	.7	$	1,152	.4	$	844	.1	$	103	.4	$	947	.5

Loss Ratio		104.4	%		2.3	%		106.7	%		73.1	%		8.9	%		82.0	%
(Some amounts may not reconcile due to rounding.)

The U.S. Reinsurance segment’s incurred losses and LAE increased 21.6%, or $205.0 million, for 2005 compared to 2004. The segment’s loss ratio increased 24.7 points over 2004 period due to current year catastrophe losses and unfavorable prior years catastrophe reserve development, partially offset by favorable attritional prior years loss development.

The prior years unfavorable loss development for the year ended December 31, 2004 was primarily attributable to a proliferation of claims related to bankruptcies and other financial management improprieties during the late 1990‘s and early 2000. This increased number of claims, combined with larger claims, had significantly increased incurred losses on the professional liability policies. In the general casualty area, the Company continued to experience losses greater than historical trends for accident years 1998 through 2001.

The following table shows the U.S. Insurance segment components of incurred losses and LAE for 2005 and 2004:

	December 31, 2005									December 31, 2004
(Dollars in millions)	Current Year			Prior Years			Total Incurred			Current Year			Prior Years			Total Incurred
Attritional	$	433	.8	$	(19	.5)	$	414	.3	$	486	.0	$	54	.0	$	539	.9
Catastrophes		1	.0		-			1	.0		0	.8		-			0	.8

Total segment	$	434	.8	$	(19	.5)	$	415	.4	$	486	.8	$	54	.0	$	540	.7

Loss Ratio		68.3	%		-3.1	%		65.2	%		67.0	%		7.4	%		74.4	%
(Some amounts may not reconcile due to rounding.)

The U.S. Insurance segment’s incurred losses and LAE decreased 23.2%, or $125.4 million, for 2005 as compared to 2004. The segment’s loss ratio improved by 9.2 points from 2004 primarily due to favorable prior years adjustments in 2005 principally on the California workers’ compensation for the 2004 accident year as the results of the benefit reform have become clearer, whereas the unfavorable prior years reserve adjustments in 2004 related principally to the casualty classes for accident years 2000 through 2002, where the Company strengthened its reserves for California workers’ compensation insurance. While management believes the cumulative results through 2005 remain quite positive, there was some deterioration in claim frequency and severity related to accident years 2001 and 2002.

The following table shows the Specialty Underwriting segment components of incurred losses and LAE for 2005 and 2004:

	December 31, 2005									December 31, 2004
(Dollars in millions)	Current Year			Prior Years			Total Incurred			Current Year			Prior Years			Total Incurred
Attritional	$	140	.4	$	(38	.6)	$	101	.8	$	218	.6	$	16	.0	$	234	.6
Catastrophes		110	.7		13	.2		123	.9		13	.0		1	.5		14	.5

Total segment	$	251	.1	$	(25	.4)	$	225	.7	$	231	.6	$	17	.5	$	249	.1

Loss Ratio		111.8	%		-11.3	%		100.5	%		64.9	%		4.9	%		69.8	%
(Some amounts may not reconcile due to rounding.)

The Specialty Underwriting segment’s incurred losses and LAE decreased 9.4%, or $23.3 million, for 2005 as compared to 2004, due to the decrease in attritional losses from reduced earned premiums and favorable prior years reserve development, partially offset by an increase in current year catastrophe losses in 2005 and development of catastrophes from prior years. The segment’s loss ratio increased by 30.7 points over 2004.

The following table shows the International segment components of incurred losses and LAE for 2005 and 2004:

	December 31, 2005									December 31, 2004
(Dollars in millions)	Current Year			Prior Years			Total Incurred			Current Year			Prior Years			Total Incurred
Attritional	$	288	.7	$	(57	.3)	$	231	.4	$	254	.2	$	0	.6	$	254	.7
Catastrophes		167	.7		10	.1		177	.8		63	.1		(1	.3)		61	.8

Total segment	$	456	.4	$	(47	.2)	$	409	.3	$	317	.2	$	(0	.7)	$	316	.5

Loss Ratio		94.2	%		-9.7	%		84.5	%		67.2	%		-0.1	%		67.1	%
(Some amounts may not reconcile due to rounding.)

The International segment’s incurred losses and LAE increased 29.3%, or $92.8 million, for 2005 as compared to 2004. The segment’s loss ratio increased by 17.4 points over 2004 period, primarily reflective of the significant property catastrophe losses in 2005 and development on prior years’ catastrophes, partially offset by an improvement in attritional prior years reserves on the Canadian, Asian and international business.

Underwriting Expenses. The Company’s expense ratio, which is calculated by dividing underwriting expenses by net premiums earned, was 25.3% in 2005 compared to 23.5% in 2004.

The following table shows the expense ratios for each of the Company’s operating segments for 2005 and 2004.

Segment Expense Ratios
Segment	2005			2004
U.S. Reinsurance		26.2	%		25.8	%
U.S. Insurance		22.9	%		16.6	%
Specialty Underwriting		27.8	%		28.6	%
International		24.2	%		24.9	%

Segment underwriting expenses decreased by 4.6% to $608.5 million in 2005 from $637.6 million in 2004. Commission, brokerage, taxes and fees decreased by $33.1 million, principally reflecting decreases in premium volume and changes in the mix and distribution channel of business. Segment other underwriting expenses increased by $4.0 million as the Company continued to expand operations. Contributing to the segment underwriting expense decreases were a 38.8% ($39.4 million) decrease in the Specialty Underwriting operation, a 4.7% ($14.0 million) decrease in the U.S. Reinsurance operation and a 0.7% ($0.8 million) decrease in the International operation, partially offset by a 21.0% ($25.2 million) increase in the U.S. Insurance operation. The changes for each operation’s expenses principally resulted from changes in commission expenses related to changes in premium volume and business mix by class and type and in some cases, changes in the use of specific reinsurance, as well as the underwriting performance of the underlying business.

The Company’s combined ratio, which is the sum of the loss and expense ratios, increased by 15.8 points to 116.1% in 2005 as compared to 100.3% in 2004, with the increase principally resulting from elevated catastrophe losses, partially offset by improved prior years development.

The following table shows the combined ratios for each of the Company’s operating segments in 2005 and 2004. The segment combined ratios were impacted by the loss and expense ratio variability noted above.

Segment Combined Ratios
Segment	2005			2004
U.S. Reinsurance		132.9	%		107.8	%
U.S. Insurance		88.1	%		91.0	%
Specialty Underwriting		128.3	%		98.4	%
International		108.7	%		92.0	%

Investment Results. Net investment income decreased 1.2% to $325.2 million in 2005 from $329.2 million in 2004, primarily reflecting lower returns from equity investments in limited partnerships. Investable assets increased by $0.4 billion to $7.9 billion in 2005, principally reflecting the effects of investing cash flow from operations during the year, partially offset by the repayment of $250.0 million of senior debt. Investment income for the limited partnerships for the years ended December 31, 2005 and 2004 was $7.5 million and $36.3 million, respectively.

The following table shows the components of net investment income for the years ended as indicated:

(Dollars in thousands)	2005			2004
Fixed maturities	$	308,254		$	306,892
Equity securities		16,356			8,453
Short-term investments		12,325			5,314
Other investment income		9,019			37,076

Total gross investment income		345,954			357,735
Interest credited and other expense		(20,737	)		(28,551	)

Total net investment income	$	325,217		$	329,184

The following table shows a comparison of various investment yields for the years indicated:


Imbedded pre-tax yield of cash and invested assets at December 31	4.5	%	4.5	%
Imbedded after-tax yield of cash and invested assets at December 31	3.6	%	3.6	%
Annualized pre-tax yield on average cash and invested assets	4.4	%	5.0	%
Annualized after-tax yield on average cash and invested assets	3.6	%	3.9	%

The Company’s net realized capital gains were $64.6 million in 2005, which reflected realized capital gains on the Company’s investments of $75.9 million, including $25.3 million on the sale of interest only strips investments, partially offset by $11.3 million of realized capital losses, which included $4.1 million related to the write-downs in the value of interest only strips deemed to be impaired on an other than temporary basis in accordance with EITF 99-20. Net realized capital gains were $56.7 million in 2004, which reflected realized capital gains on the Company’s investments of $107.4 million, including $77.6 million on the sale of interest only strips investments, partially offset by $50.7 million of realized capital losses, which included $43.9 million related to the write-downs in the value of interest only strips deemed to be impaired on an other than temporary basis in accordance with EITF 99-20.

Corporate, Non-allocated Expenses. Corporate underwriting expenses not allocated to segments were $6.2 million for 2005 as compared to corporate income of $2.0 million for 2004, as the Company expanded its infrastructure to support operations and incurred a one time expense of $1.5 million related to the transfer of the UK branch to Bermuda Re.

Interest, fees and bond issue cost amortization expense for 2005 was $74.2 million compared to $76.6 million in 2004. Interest, fees and bond issue cost amortization expense in 2005 included $35.5 million related to the senior notes, $37.4 million related to the junior subordinated debt securities, $1.0 million related to the bond issue cost amortization and $0.2 million related to the credit line under the Company’s revolving credit facility. Interest expense and fees in 2004 included $42.0 million related to senior notes, $32.4 million related to the junior subordinated debt securities, $1.1 million related to the bond issue cost amortization and $1.2 million related to borrowings under the Company’s revolving credit facility. Interest expense on senior notes decreased due to the retirement on March 15, 2005 of the 8.5% senior notes issued on March 14, 2000.

Other income in 2005 was $10.3 million compared to other expense of $67.9 million in 2004. The change in net other income for 2005 from net other expense in 2004 was primarily due to decreased deferrals on retroactive reinsurance agreements with affiliates.

Income Taxes. The Company’s income tax expense is primarily a function of the U.S. statutory tax rate and the impact from tax preferenced investment income. The Company recognized an income tax benefit of $70.2 million in 2005, primarily due to the significant incurred losses related to catastrophes, which resulted in a pre-tax loss for the year. The Company recognized an income tax expense of $56.1 million in 2004, primarily due to pre-tax income of $231.6 million and the impact of various tax issues giving rise to net tax expense in conjunction with the transfer of the Company’s UK branch to Bermuda Re.

Net Income. Net income was $4.7 million in 2005 compared to net income of $175.5 million in 2004, primarily reflecting reduced underwriting profitability due to catastrophe losses, partially offset by favorable prior period reserve development and related tax benefits.

SAFE HARBOR DISCLOSURE
This report contains forward-looking statements within the meaning of the U.S. federal securities laws. The Company intends these forward-looking statements to be covered by the safe harbor provisions for forward looking statements in the federal securities laws. In some cases, these statements can be identified by the use of forward-looking words such as “may”, “will”, “should”, “could”, “anticipate”, “estimate”, “expect”, “plan”, “believe”, “predict”, “potential” and “intend”. Forward-looking statements contained in this report include information regarding the Company’s reserves for losses and LAE, the adequacy of the Company’s provision for uncollectible balances, estimates of the Company’s catastrophe exposure, and the effects of catastrophic events on the Company’s financial statements and the ability of the Company’s subsidiaries to pay dividends. Forward-looking statements only reflect the Company’s expectations and are not guarantees of performance. These statements involve risks, uncertainties and assumptions. Actual events or results may differ materially from the Company’s expectations. Important factors that could cause the Company’s actual events or results to be materially different from the Company’s expectations include those discussed under the caption ITEM 1A, “Risk Factors”. The Company undertakes no obligation to update or revise publicly any forward-looking statements, whether as a result of new information, future events or otherwise.

ITEM 7A. Quantitative and Qualitative Disclosures About Market Risk

Market Sensitive Instruments
The SEC’s Financial Reporting Release #48 requires registrants to clarify and expand upon the existing financial statement disclosure requirements for derivative financial instruments, derivative commodity instruments and other financial instruments (collectively, “market sensitive instruments”). The Company does not generally enter into market sensitive instruments for trading purposes.

The Company’s current investment strategy seeks to maximize after-tax income through a high quality, diversified, taxable and tax-preferenced fixed maturity portfolio, while maintaining an adequate level of liquidity. The Company’s mix of taxable and tax-preferenced investments is adjusted continuously, consistent with its current and projected operating results, market conditions, and the Company’s tax position. The fixed maturities in the investment portfolio are comprised of non-trading available for sale securities. Additionally, the Company invests in equity securities, which it believes will enhance the risk-adjusted total return of the investment portfolio.

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

Interest Rate Risk. The Company’s $8.5 billion investment portfolio at December 31, 2006 is principally comprised of fixed maturity securities, which are generally subject to interest rate risk and 12.0% are subject to foreign currency rate risk, and equity securities, which are subject to price fluctuations. The impact of the foreign exchange risks on the investment portfolio is generally mitigated by changes in the dollar value of foreign currency denominated liabilities and their associated income statement impact.

Interest rate risk is the potential change in value of the fixed maturity portfolio, including short-term investments, from a change in market interest rates. In a declining interest rate environment, it includes prepayment risk on the $466.5 million of mortgage-backed securities in the $6,137.4 million fixed maturity portfolio. Prepayment risk results from potential accelerated principal payments that shorten the average life and thus the expected yield of the security.

The tables below display the potential impact of market value fluctuations and after-tax unrealized appreciation on the Company’s fixed maturity portfolio (including $657.7 million of short-term investments) as of December 31, 2006 and 2005 based on upward and downward parallel and immediate 100 and 200 basis point shifts in interest rates. For legal entities with a U.S. dollar functional currency, this modeling was performed on each security individually. To generate appropriate price estimates on mortgage-backed securities, changes in prepayment expectations under different interest rate environments were taken into account. For legal entities with a non-U.S. dollar functional currency, the effective duration of the involved portfolio of securities was used as a proxy for the market value change under the various interest rate change scenarios. All amounts are in U.S. dollars and are presented in millions.

2006 Interest Rate Shift in Basis Points
	-200			-100			0			100			200
Total Market Value	$	7,432.4		$	7,113.9		$	6,795.1		$	6,436.3		$	6,050.6
Market Value Change from Base (%)		9.4	%		4.7	%		0.0	%		-5.3	%		-11.0	%
Change in Unrealized Appreciation
After-tax from Base ($)	$	414.3		$	207.2		$	-		$	(233.2	)	$	(483.9	)

2005 Interest Rate Shift in Basis Points
	-200			-100			0			100			200
Total Market Value	$	7,236.4		$	6,901.2		$	6,550.6		$	6,165.3		$	5,774.4
Market Value Change from Base (%)		10.5	%		5.4	%		0.0	%		-5.9	%		-11.8	%
Change in Unrealized Appreciation
After-tax from Base ($)	$	445.8		$	227.9		$	-		$	(250.4	)	$	(504.5	)

The Company had $7,397.3 million and $7,729.2 million of reserves for losses and LAE as of December 31, 2006 and 2005, respectively. These amounts are recorded at their nominal value, as opposed to fair value, which would reflect a discount adjustment to reflect the time value of money. Since losses are paid out over a period of time, the fair value of the reserves is less than the nominal value. As interest rates rise, the fair value of the reserves decreases and, conversely, as interest rates decline, the fair value increases. These movements are the opposite of the interest rate impacts on the fair value of investments. While the difference between fair value and nominal value is not reflected in the Company’s financial statements, the Company’s financial results will include investment income over time from the investment portfolio until the claims are paid. The Company’s loss and loss reserve obligations have an expected duration that is reasonably consistent with the Company’s fixed income portfolio.

Equity Risk. Equity risk is the potential change in market value of the common stock and preferred stock portfolios arising from changing equity prices. The Company’s equity investments are mainly exchange traded and mutual fund, which invest principally in high quality common and preferred stocks that are traded on the major exchanges in the U.S. The primary objective in managing the equity portfolio is to provide capital growth over time through market appreciation and income.

The tables below display the impact on market value and after-tax unrealized appreciation of a 10% and 20% change in equity prices up and down as of December 31, 2006 and 2005. The growth in exposure is primarily due to the growth in the equity portfolio. All amounts are in U.S. dollars and are presented in millions.

2006 Change in Equity Values in Percent
	-20%			-10%			0%		10%		20%
Market Value of the Equity Portfolio	$	951.5		$	1,070.4		$	1,189.3	$	1,308.3	$	1,427.2
After-tax Change in Unrealized Appreciation	$	(154.6	)	$	(77.3	)	$	-	$	77.3	$	154.6

2005 Change in Equity Values in Percent
	-20%			-10%			0%		10%		20%
Market Value of the Equity Portfolio	$	819.0		$	921.4		$	1,023.8	$	1,126.2	$	1,228.5
After-tax Change in Unrealized Appreciation	$	(133.1	)	$	(66.5	)	$	-	$	66.5	$	133.1

Foreign Exchange Risk. Foreign currency risk is the potential change in value, income and cash flow arising from adverse changes in foreign currency exchange rates. Each of the Company’s non-U.S. (“foreign”) operations maintains capital in the currency of the country of its geographic location consistent with local regulatory guidelines. Generally, the Company prefers to maintain the capital of its foreign operations in U.S. dollar assets, although this varies by regulatory jurisdiction in accordance with market needs. Each foreign operation may conduct business in its local currency as well as the currency of other countries in which it operates. The primary foreign currency exposures for these foreign operations are the Canadian Dollar, the British Pound Sterling and the Euro. The Company mitigates foreign exchange exposure by generally matching the currency and duration of its assets to its corresponding operating liabilities. In accordance with Financial Accounting Standards Board Statement No. 52, “Foreign Currency Translation”, the Company translates the assets, liabilities and income of non-U.S. dollar functional currency legal entities to the U.S. dollar. This translation amount is reported as a component of other comprehensive income (loss).

The tables below display the potential impact of a parallel 10% and 20% increase and decrease in foreign exchange rates on the valuation of invested assets subject to foreign currency exposure as of December 31, 2006 and 2005. This analysis includes the after-tax impact of translation from transactional currency to functional currency as well as the after-tax impact of translation from functional currency to the U.S. dollar reporting currency. All amounts are in U.S. dollars and are presented in millions.

2006 Change in Foreign Exchange Rates in Percent
			-20%			-10%			0%			10%			20%
Total After-tax Foreign Exchange Exposure			$	(48.1	)	$	(26.6	)	$	-		$	30.4		$	63.5

2005 Change in Foreign Exchange Rates in Percent
			-20%			-10%			0%			10%			20%
Total After-tax Foreign Exchange Exposure			$	(45.4	)	$	(24.6	)	$	-		$	27.3		$	56.7

ITEM 8. Financial Statements and Supplementary Data

The financial statements and schedules listed in the accompanying Index to Financial Statements and Schedules on page F-1 are filed as part of this report.

ITEM 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

None.

ITEM 9A. Controls and Procedures

Disclosure Controls and Procedures
As required by Rule 13a-15(b) of the Securities Exchange Act of 1934 (the Exchange Act), our management, including our Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Exchange Act). Based on that evaluation, the Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures were effective as of the end of the period covered by this annual report.

Management’s Report on Internal Control Over Financial Reporting
Not required for fiscal year ended December 31, 2006.

Changes in Internal Control over Financial Reporting
As required by Rule 13a-15(d) of the Exchange Act, our management, including our Chief Executive Officer and Chief Financial Officer, has evaluated our internal control over financial reporting to determine whether any changes occurred during the fourth fiscal quarter covered by this annual report that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. Based on that evaluation, there has been no such change during the fourth quarter.

ITEM 9B. Other Information

None.

PART III

ITEM 10. Directors and Executive Officers of the Registrant

Information for Item 10 is not required pursuant to General Instruction I(2) of Form 10-K.

ITEM 11. Executive Compensation

Information for Item 11 is not required pursuant to General Instruction I(2) of Form 10-K.

ITEM 12. Security Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters

Information for Item 12 is not required pursuant to General Instruction I(2) of Form 10-K.

ITEM 13. Certain Relationships and Related Transactions

Information for Item 13 is not required pursuant to General Instruction I(2) of Form 10-K.

ITEM 14. Principal Accountant Fees and Services

The PricewaterhouseCoopers LLP (and its worldwide affiliates) fees incurred for the years ended December 31, 2006 and 2005 are as follows:

		2006		2005
(1)	Audit Fees	$	1,785,909	$	1,530,313
(2)	Audit-Related Fees	$	69,000	$	66,000
(3)	Tax Fees	$	27,004	$	105,965
(4)	All Other Fees	$	4,602	$	2,130

Audit fees include the annual and quarterly financial statement audit, subsidiary audits, and procedures required to be performed by the independent auditor to be able to form an opinion on the Company’s consolidated financial statements. These other procedures include information systems and procedural reviews and testing performed in order to understand and place reliance on the systems of internal control, and consultations relating to the audit or quarterly review. Audit fees may also include statutory audits or financial audits for subsidiaries or affiliates of the Company and services associated with SEC registration statements, periodic reports and other documents filed with the SEC or other documents issued in connection with securities offerings.

Audit-related fees include assurance and related services that are reasonably related to the performance of the audit or review of the Company’s financial statements, including due diligence services pertaining to potential business acquisitions/dispositions, accounting consultations related to accounting, financial reporting or disclosure matters not classified as “audit services”; assistance with understanding and implementing new accounting and financial reporting guidance from rule making authorities; financial audits of employee benefit plans; agreed-upon or expanded audit procedures related to accounting and/or billing records required to respond to or comply with financial, accounting or regulatory reporting matters and assistance with internal control reporting requirements.

Tax fees include tax compliance, tax planning and tax advice and is granted general pre-approval by Group’s Audit Committee.

All other fees represent an accounting research subscription and software.

PricewaterhouseCoopers LLP used no leased employees on the Company’s audit engagement.

Under its Charter and the “Audit and Non-Audit Services Pre-Approval Policy” (the “Policy”), Group’s Audit Committee or its delegate (one or more of its members) is required to pre-approve the audit and non-audit services performed by the independent auditor. The Policy requires that any service that has not received a general pre-approval or that exceeds pre-approved cost levels or budgeted amounts requires specific approval by Group’s Audit Committee or its delegate. For both specific and general pre-approval, Group’s Audit Committee will consider whether such services are consistent with the SEC’s rules on auditor independence. Group’s Audit Committee will also consider whether the independent auditor is best positioned to provide the most effective and efficient service and whether the service might enhance the Company’s ability to manage or control risk or improve audit quality. Group’s Audit Committee is also mindful of the relationship between fees for audit and non-audit services in deciding whether to pre-approve any such services and may determine, for each fiscal year, the appropriate ratio between the total amount of fees for audit, audit-related and tax fees and a total amount of fees for certain permissible non-audit services classified as “All Other Fees” above. All such factors will be considered as a whole and no one factor is determinative. Group’s Audit Committee has considered whether the performance by PricewaterhouseCoopers LLP of the services disclosed below is compatible with maintaining their independence.

No portion of the fees listed in (2) through (4) above was approved by Group’s Audit Committee after the beginning of the engagement pursuant to the waiver of the pre-approval requirement for certain de minimis non-audit services described in section 10A of the Securities Exchange Act of 1934 and applicable regulations.

PART IV

ITEM 15. Exhibits and Financial Statement Schedules

Exhibits
The exhibits listed on the accompanying Index to Exhibits on page E-1 are filed as part of this report except that the certifications in Exhibit 32 are being furnished to the SEC, rather than filed with the SEC, as permitted under applicable SEC rules.

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.

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 23, 2007.

	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.

Signature	Title	Date

/s/ JOSEPH V. TARANTO Joseph V. Taranto	Chairman and Chief Executive Officer and Director (Principal Executive Officer)	March 23, 2007
/s/ THOMAS J. GALLAGHER Thomas J. Gallagher	President and Chief Operating Officer and Director	March 23, 2007
/s/ CRAIG EISENACHER Craig Eisenacher	Executive Vice President and Chief Financial Officer and Director (Principal Financial Officer)	March 23, 2007
/s/ KEITH T. SHOEMAKER Keith T. Shoemaker	Vice President and Comptroller (Principal Accounting Officer)	March 23, 2007

INDEX TO EXHIBITS

Exhibit No.

	2.1	Agreement and Plan of Merger among Everest Reinsurance Holdings, Inc., Everest Re Group, Ltd. and Everest Re Merger Corporation, incorporated herein by reference to Exhibit 2.1 to the Registration Statement on Form S-4 (No. 333-87361)

	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 of Everest Reinsurance Holdings, Inc., incorporated herein by reference to Exhibit 3.2 to the Everest Reinsurance Holdings, Inc. Quarterly Report on Form 10-Q for the quarter ended March 31, 2000

	4.1	Indenture, dated March 14, 2000, between Everest Reinsurance Holdings, Inc. and The Chase Manhattan Bank, as Trustee, incorporated herein by reference to Exhibit 4.1 to Everest Reinsurance Holdings, Inc. Form 8-K filed on March 15, 2000

	4.2	First Supplemental Indenture relating to the 8.5% Senior Notes due March 15, 2005, dated March 14, 2000, between Everest Reinsurance Holdings, Inc. and The Chase Manhattan Bank, as Trustee, incorporated herein by reference to Exhibit 4.2 to Everest Reinsurance Holdings, Inc. Form 8-K filed on March 15, 2000

	4.3	Second Supplemental Indenture relating to the 8.75% Senior Notes due March 15, 2010, dated March 14, 2000, between Everest Reinsurance Holdings, Inc. and The Chase Manhattan Bank, as Trustee, incorporated herein by reference to Exhibit 4.3 to the Everest Reinsurance Holdings, Inc. Form 8-K filed on March 15, 2000

	4.4	Junior Subordinated Indenture, dated November 14, 2002, between Everest Reinsurance Holdings, Inc. and JPMorgan Chase Bank as Trustee, incorporated herein by reference to Exhibit 4.5 to the Registration Statement on Form S-3 (No. 333-106595)

	4.5	First Supplemental Indenture relating to Holdings 7.85% Junior Subordinated Debt Securities due November 15, 2032, dated as of November 14, 2002, among Holdings, Group and JPMorgan Chase Bank, as Trustee, incorporated herein by reference to Exhibit 10.2 to Everest Re Group, Ltd. Quarterly Report on Form 10-Q for the quarter ended June 30, 2003 (the “second quarter 2003 10-Q”)

	4.6	Amended and Restated Trust Agreement of Everest Re Capital Trust, dated as of November 14, 2002, incorporated herein by reference to Exhibit 10.1 to the second quarter 2003 10-Q

	4.7	Guarantee Agreement, dated as of November 14, 2002, between Holdings and JPMorgan Chase Bank, incorporated herein by reference to Exhibit 10.3 to the second quarter 2003 10-Q

	4.8	Expense Agreement, dated as of November 14, 2002, between Holdings and Everest Re Capital Trust, incorporated herein by reference to Exhibit 10.4 to the second quarter 2003 10-Q

E-1

	4.9		Second Supplemental Indenture relating to Holdings 6.20% Junior Subordinated Debt Securities due March 29, 2034, dated as of March 29, 2004, among Holdings, Group and JPMorgan Chase Bank, as Trustee, incorporated herein by reference to Exhibit 4.1 to Everest Reinsurance Holdings, Inc. Form 8-K filed on March 30, 2004 (the “March 30, 2004 8-K”)

	4.10		Amended and Restated Trust Agreement of Everest Re Capital Trust II, dated as of March 29, 2004, incorporated herein by reference to Exhibit 4.2 to the March 30, 2004 8-K

	4.11		Guarantee Agreement, dated as of March 29, 2004, between Holdings and JPMorgan Chase Bank, incorporated herein by reference to Exhibit 4.3 to the March 30, 2004 8-K

	4.12		Expense Agreement, dated as of March 29, 2004, between Holdings and Everest Re Capital Trust II, incorporated herein by reference to Exhibit 4.4 to the March 30, 2004 8-K

	4.13		Third Supplemental Indenture relating to Holdings 5.40% Senior Notes due October 15, 2014, dated as of October 12, 2004, among Holdings and JPMorgan Chase Bank, as Trustee, incorporated herein by reference to Exhibit 4.1 to Everest Reinsurance Holdings, Inc. Form 8-K filed on October 12, 2004

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

	*10.2		Amendment of Employment Agreement by and among Everest Reinsurance Company, Everest Reinsurance Holdings, Inc., Everest Re Group, Ltd. and Joseph V. Taranto dated February 15, 2000, incorporated herein by reference to Exhibit 10.29 to Everest Re Group, Ltd. Annual Report on Form 10-K for the year ended December 31, 1999 (the “1999 10-K”)

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

	*10.4		Amendment of Change of Control Agreement by and among Everest Reinsurance Company, Everest Reinsurance Holdings, Inc., Everest Re Group, Ltd. and Joseph V. Taranto dated February 15, 2000, incorporated herein by reference to Exhibit 10.30 to the 1999 10-K

	10.5		Stock Purchase Agreement between The Prudential Insurance Company of America and Everest Reinsurance Holdings, Inc. for the sale of common stock of Gibraltar Casualty Company dated February 24, 2000, incorporated herein by reference to Exhibit 10.32 to the 1999 10-K

	10.6		Amendment No. 1 to Stock Purchase Agreement between The Prudential Insurance Company of America and Everest Reinsurance Holdings, Inc. for the sale of common stock of Gibraltar Casualty Company dated August 8, 2000, incorporated herein by reference to Exhibit 10.1 to the Everest Re Group, Ltd. Quarterly Report on Form 10-Q for the quarter ended June 30, 2000

	10.7		Proportional Excess of Loss Reinsurance Agreement entered into between Gibraltar Casualty Company and Prudential Property and Casualty Insurance Company, incorporated herein by reference to Exhibit 10.24 to the 2000 10-K

	10.8		Guarantee Agreement made by The Prudential Insurance Company of America in favor of Gibraltar Casualty Company, incorporated herein by reference to Exhibit 10.25 to the 2000 10-K

E-2

	10.9	Lease, effective December 26, 2000 between OTR, an Ohio general partnership, and Everest Reinsurance Company, incorporated herein by reference to Exhibit 10.26 to the 2000 10-K

	*10.10	Amendment of Employment Agreement by and among Everest Reinsurance Company, Everest Reinsurance Holdings, Inc., Everest Re Group, Ltd., Everest Global Services, Inc. and Joseph V. Taranto, dated March 30, 2001, incorporated herein by reference to Exhibit 10.1 to Everest Re Group, Ltd. Report on Form 10-Q for the quarter ended March 31, 2001 (the “first quarter 2001 10-Q”)

	*10.11	Amendment of Employment Agreement by and among Everest Reinsurance Company, Everest Reinsurance Holdings, Inc., Everest Re Group, Ltd., Everest Global Services, Inc. and Joseph V. Taranto, dated April 20, 2001, incorporated herein by reference to Exhibit 10.2 to the first quarter 2001 10-Q

	*10.12	Amendment of Change of Control Agreement by and among Everest Reinsurance Company, Everest Reinsurance Holdings, Inc., Everest Re Group, Ltd., Everest Global Services, Inc. and Joseph V. Taranto, dated March 30, 2001, incorporated herein by reference to Exhibit 10.3 to the first quarter 2001 10-Q

	*10.13	Amendment of Employment Agreement by and among Everest Reinsurance Company, Everest Reinsurance Holdings, Inc., Everest Re Group Ltd., Everest Global Services Inc. and Joseph V. Taranto, dated April 18, 2003, incorporated herein by reference to Exhibit 10.1 to Everest Re Group, Ltd. Form 8-K filed on April 21, 2003

	*10.14	Amendment of Employment Agreement by and among Everest Reinsurance Company, Everest Reinsurance Holdings, Inc., Everest Re Group, Ltd., Everest Global Services, Inc. and Joseph V. Taranto, dated August 31, 2005, incorporated by reference to Exhibit 10.1 to Everest Re Group, Ltd. From 8-K filed on August 31, 2005

	10.15	Credit Agreement, dated August 23, 2006, between Everest Reinsurance Holdings, Inc., the lenders named therein and Citibank N.A., as administrative agent, providing for $150.0 million five year senior revolving credit facility, incorporated herein by reference to Exhibit 10.1 to Everest Re Group, Ltd. Quarterly Report on Form 10-Q for the quarter ended September 30, 2006. This new agreement replaces the October 10, 2003 three year senior revolving credit facility which expired on October 10, 2006

	*10.16	Employment Agreement by and among Everest Reinsurance Company, Everest Reinsurance Holdings, Inc., Everest Re Group, Ltd., Everest Global Services, Inc. and Craig E. Eisenacher, dated December 18, 2006, incorporated by reference to Exhibit 10.1 to Everest Re Group, Ltd. Form 8-K filed on December 5, 2006

	23.1	Consent of PricewaterhouseCoopers LLP, filed herewith

	31.1	Section 302 Certification of Joseph V. Taranto, filed herewith

	31.2	Section 302 Certification of Craig Eisenacher, filed herewith

	32.1	Section 906 Certification of Joseph V. Taranto and Craig Eisenacher, furnished herewith


* Management contract or compensatory plan or arrangement.

E-3

INDEX TO FINANCIAL STATEMENTS AND SCHEDULES

Everest Reinsurance Holdings, Inc.		Pages

	Report of Independent Registered Public Accounting Firm	F-2

	Consolidated Balance Sheets at December 31, 2006 and 2005	F-3

	Consolidated Statements of Operations and Comprehensive Income for the Years Ended December 31, 2006, 2005 and 2004	F-4

	Consolidated Statements of Changes in Stockholder’s Equity for the Years Ended December 31, 2006, 2005 and 2004	F-5

	Consolidated Statements of Cash Flows for the Years Ended December 31, 2006, 2005 and 2004	F-6

	Notes to Consolidated Financial Statements	F-7

Schedules

I	Summary of Investments Other Than Investments in Related Parties at December 31, 2006	S-1

II	Condensed Financial Information of Registrant:

	Balance Sheets as of December 31, 2006 and 2005	S-2

	Statements of Operations for the Years Ended December 31, 2006, 2005 and 2004	S-3

	Statements of Cash Flows for the Years Ended December 31, 2006, 2005 and 2004	S-4

III	Supplementary Insurance Information for the Years Ended December 31, 2006, 2005 and 2004	S-5

IV	Reinsurance for the Years Ended December 31, 2006, 2005 and 2004	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

Report of Independent Registered Public Accounting Firm

To the Board of Directors and Stockholder

of Everest Reinsurance Holdings, Inc.:

In our opinion, the consolidated financial statements listed in the accompanying index present fairly, in all material respects, the financial position of Everest Reinsurance Holdings, Inc. and its subsidiaries at December 31, 2006 and 2005, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2006 in conformity with accounting principles generally accepted in the United States of America. In addition, in our opinion, the financial statement schedules listed in the accompanying index present fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. These financial statements and financial statement schedules are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and financial statement schedules based on our audits. We conducted our audits of these statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). 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, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

PricewaterhouseCoopers LLP

New York, New York

March 20, 2007

F-2

EVEREST REINSURANCE HOLDINGS, INC. CONSOLIDATED BALANCE SHEETS
	December 31,
(Dollars in thousands, except par value per share)	2006		2005
ASSETS:
Fixed maturities - available for sale, at market value
(amortized cost: 2006, $5,959,228; 2005, $5,850,541)	$	6,137,410	$	6,036,693
Equity securities, at market value (cost: 2006, $874,289; 2005, $859,425)		1,189,341		1,023,784
Short-term investments		657,674		513,913
Other invested assets (cost: 2006, $329,914; 2005, $215,364)		330,875		216,791
Cash		136,535		66,194

Total investments and cash		8,451,835		7,857,375
Accrued investment income		85,447		82,561
Premiums receivable		939,625		1,053,994
Reinsurance receivables - unaffiliated		751,121		988,725
Reinsurance receivables - affiliated		1,511,856		1,537,355
Funds held by reinsureds		133,965		130,041
Deferred acquisition costs		240,346		202,226
Prepaid reinsurance premiums		391,336		398,583
Deferred tax asset		248,214		261,216
Current federal income tax receivable		-		73,256
Other assets		134,550		115,193

TOTAL ASSETS	$	12,888,295	$	12,700,525

LIABILITIES:
Reserve for losses and loss adjustment expenses	$	7,397,270	$	7,729,171
Unearned premium reserve		1,423,677		1,387,876
Funds held under reinsurance treaties		112,658		263,165
Losses in the course of payment		62,943		(5,471	)
Commission reserves		22,483		20,158
Other net payable to reinsurers		385,926		315,676
Current federal income taxes payable		32,010		-
8.75% Senior notes due 3/15/2010		199,560		199,446
5.4% Senior notes due 10/15/2014		249,652		249,617
Junior subordinated debt securities payable		546,393		546,393
Accrued interest on debt and borrowings		10,041		10,041
Other liabilities		227,298		193,751

Total liabilities		10,669,911		10,909,823

Commitments and Contingencies (Note 14)
STOCKHOLDER'S EQUITY:
Common stock, par value: $0.01; 3,000 shares authorized;
1,000 shares issued and outstanding (2006 and 2005)		-		-
Additional paid-in capital		300,764		292,281
Accumulated other comprehensive income, net of deferred income
taxes of $179.1 million at 2006 and $132.6 million at 2005		332,578		246,285
Retained earnings		1,585,042		1,252,136

Total stockholder's equity		2,218,384		1,790,702

TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY	$	12,888,295	$	12,700,525

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

F-3

EVEREST REINSURANCE HOLDINGS, INC. CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
	Years Ended December 31,
(Dollars in thousands)	2006			2005			2004
REVENUES:
Premiums earned	$	2,247,200		$	2,426,076		$	2,829,151
Net investment income		372,352			325,217			329,184
Net realized capital gains		34,957			64,568			56,710
Other (expense) income		(40,542	)		10,344			(67,881	)

Total revenues		2,613,967			2,826,205			3,147,164

CLAIMS AND EXPENSES:
Incurred losses and loss adjustment expenses		1,557,079			2,202,820			2,172,371
Commission, brokerage, taxes and fees		438,505			513,394			577,499
Other underwriting expenses		98,729			101,324			89,074
Interest expense on senior notes		31,149			35,514			41,954
Interest expense on junior subordinated debt		37,449			37,449			32,392
Amortization of bond issue costs		938			1,019			1,071
Interest and fee expense on credit facility		160			215			1,193

Total claims and expenses		2,164,009			2,891,735			2,915,554

INCOME (LOSS) BEFORE TAXES		449,958			(65,530	)		231,610
Income tax expense (benefit)		117,052			(70,236	)		56,137

NET INCOME	$	332,906		$	4,706		$	175,473

Other comprehensive income (loss), net of tax		101,313			(1,375	)		39,355

COMPREHENSIVE INCOME	$	434,219		$	3,331		$	214,828

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

F-4

EVEREST REINSURANCE HOLDINGS, INC. CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDER'S EQUITY
	Years Ended December 31,
(Dollars in thousands, except stock amounts)	2006			2005			2004
COMMON STOCK (stock outstanding):
Balance, beginning of period		1,000			1,000			1,000
Issued during the period		-			-			-

Balance, end of period		1,000			1,000			1,000

ADDITIONAL PAID-IN CAPITAL:
Balance, beginning of period	$	292,281		$	271,652		$	263,290
Sale of treasury shares, net of tax		-			15,312			-
Share-based compensation plans		8,483			5,118			8,181
Other		-			199			181

Balance, end of period		300,764			292,281			271,652

ACCUMULATED OTHER COMPREHENSIVE INCOME,
NET OF DEFERRED INCOME TAXES:
Balance, beginning of period		246,285			247,660			208,305
Net increase (decrease) during the period		101,313			(1,375	)		39,355
Adjustment to initially apply FASB Statement No. 158, net of tax		(15,020	)		-			-

Balance, end of period		332,578			246,285			247,660

RETAINED EARNINGS:
Balance, beginning of period		1,252,136			1,247,430			1,098,219
Net income		332,906			4,706			175,473
Dividends paid		-			-			(26,262	)

Balance, end of period		1,585,042			1,252,136			1,247,430

TREASURY SHARES AT COST:
Balance, beginning of period		-			(22,950	)		(22,950	)
Sale of treasury shares		-			22,950			-

Balance, end of period		-			-			(22,950	)

TOTAL STOCKHOLDER'S EQUITY, END OF PERIOD	$	2,218,384		$	1,790,702		$	1,743,792

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

F-5

EVEREST REINSURANCE HOLDINGS, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS
	Years Ended December 31,
(Dollars in thousands)	2006			2005			2004
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income	$	332,906		$	4,706		$	175,473
Adjustments to reconcile net income to net cash provided by
operating activities:
Decrease (increase) in premiums receivable		117,936			10,898			(160,533	)
Increase in funds held by reinsured, net		(155,669	)		(92,470	)		(92,946	)
Decrease (increase) in reinsurance receivables		274,443			20,170			(152,062	)
Increase in deferred tax asset		(33,460	)		(79,838	)		(46,184	)
(Decrease) increase in reserve for losses and loss adjustment expenses		(353,176	)		888,552			1,065,839
Increase (decrease) in unearned premiums		32,986			(706	)		120,206
Increase (decrease) in other assets and liabilities		165,796			(188,364	)		67,724
Amortization of bond premium		9,873			3,304			604
Amortization of underwriting discount on senior notes		149			162			204
Realized capital gains		(34,957	)		(64,568	)		(56,710	)

Net cash provided by operating activities		356,827			501,846			921,615

CASH FLOWS FROM INVESTING ACTIVITIES :
Proceeds from fixed maturities matured/called - available for sale		461,341			337,516			376,294
Proceeds from fixed maturities sold - available for sale		45,051			879,097			787,001
Proceeds from equity securities sold		206,522			205,895			17,995
Proceeds from other invested assets sold		54,195			43,739			554
Cost of fixed maturities acquired - available for sale		(599,175	)		(1,134,116	)		(1,800,271	)
Cost of equity securities acquired		(176,678	)		(480,242	)		(437,132	)
Cost of other invested assets acquired		(148,342	)		(144,409	)		(28,888	)
Net (purchases) sales of short-term securities		(143,637	)		5,708			(403,409	)
Net (increase) decrease in unsettled securities transactions		(10,706	)		426			(19,812	)
Proceeds from sale of subsidiary, net of cash disposed		-			-			(2,741	)

Net cash used in investing activities		(311,429	)		(286,386	)		(1,510,409	)

CASH FLOWS FROM FINANCING ACTIVITIES:
Tax benefit from share-based compensation		8,483			5,118			8,181
Dividends from treasury shares		-			199			181
Sale of treasury shares, net of tax		-			38,261			-
(Repayment) proceeds from issuance of senior notes		-			(250,000	)		246,651
Net proceeds from issuance of junior subordinated notes		-			-			319,997
Repayments on revolving credit agreement		-			-			(70,000	)

Net cash provided by (used in) financing activities		8,483			(206,422	)		505,010

EFFECT OF EXCHANGE RATE CHANGES ON CASH		16,460			3,269			(4,423	)

Net increase (decrease) in cash		70,341			12,307			(88,207	)
Cash, beginning of period		66,194			53,887			142,094

Cash, end of period	$	136,535		$	66,194		$	53,887

SUPPLEMENTAL CASH FLOW INFORMATION
Cash transactions:
Income taxes paid, net	$	35,460		$	107,040		$	99,311
Interest paid	$	68,608		$	79,401		$	72,605
Non-cash financing transaction:
Non-cash dividend to parent	$	-		$	-		$	26,262
The accompanying notes are an integral part of the consolidated financial statements.

F-6

EVEREST REINSURANCE HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Years Ended December 31, 2006, 2005 and 2004

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

A. Business and Basis of Presentation
Everest Reinsurance Holdings, Inc. (“Holdings”), a Delaware company and direct subsidiary of Everest Re Group, Ltd. (“Group”), through its subsidiaries, principally provides property and casualty reinsurance and insurance in the United States of America and internationally. As used in this document, the “Company” means Holdings and its subsidiaries.

The accompanying consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America (“GAAP”). The statements include all of the following domestic and foreign direct and indirect subsidiaries of the Company: Everest Reinsurance Company (“Everest Re”), Everest National Insurance Company (“Everest National”), Everest Indemnity Insurance Company (“Everest Indemnity”), Everest Security Insurance Company (“Everest Security”), Everest Insurance Company of Canada (“Everest Canada”), Mt. McKinley Managers, L.L.C., Workcare Southeast, Inc., Workcare Southeast of Georgia, Inc. and Mt. McKinley Insurance Company (“Mt. McKinley”). All amounts are reported in U.S. dollars.

The preparation of financial statements in conformity with GAAP 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. All intercompany accounts and transactions have been eliminated. Ultimate actual results could differ from those estimates.

B. Investments
Fixed maturity investments are all classified as available for sale. Unrealized appreciation and depreciation, as a result of temporary changes in market value during the period, are reflected in stockholder’s equity, net of income taxes in “accumulated other comprehensive income”. Equity securities are carried at market value with unrealized appreciation or depreciation, as a result of temporary changes in market value during the period, reflected in stockholder’s equity, net of income taxes in “accumulated other comprehensive income”. Unrealized losses on fixed maturities and equity securities, which are deemed other than temporary, are charged to net income as realized capital losses. Short-term investments are stated at cost, which approximates market value. Realized gains or losses on sale of investments are determined on the basis of identified cost. For non-publicly traded securities, market prices are determined through the use of pricing models that evaluate securities relative to the U.S. Treasury yield curve, taking into account the issue type, credit quality and cash flow characteristics of each security. For publicly traded securities, market value is based on quoted market prices. Retrospective adjustments are employed to recalculate the values of loan-backed and asset-backed securities. Each acquisition lot is reviewed to recalculate the effective yield. The recalculated effective yield is used to derive a book value as if the new yield were applied at the time of acquisition. Outstanding principal factors from the time of acquisition to the adjustment date are used to calculate the prepayment history for all applicable securities. Conditional prepayment rates, computed with life to date factor histories and weighted average maturities, are used to affect the calculation of projected and prepayments for pass-through security types. Other invested assets include limited partnerships and rabbi trusts. Limited partnerships are valued pursuant to the equity method of accounting, which management believes approximates market value.

F-7

C. Uncollectible Receivable Balances
The Company provides reserves for uncollectible premium receivables and reinsurance recoverable balances based on management’s assessment of the collectibility of the outstanding balances. Such reserves were $99.6 million at December 31, 2006, of which $62.0 million is due to the credit program, and $38.3 million at December 31, 2005.

D. Deferred Acquisition Costs
Acquisition costs, consisting principally of commissions and brokerage expenses and certain premium taxes and fees that vary with and are directly associated with the Company’s reinsurance and 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 acquisition costs are limited to their estimated realizable value by line of business based on the related unearned premiums, anticipated claims and claim expenses and anticipated investment income. Deferred acquisition costs amortized to income were $438.5 million, $513.4 million and $577.5 million in 2006, 2005 and 2004, respectively.

E. Reserve for Losses and Loss Adjustment Expenses
The reserve for losses and loss adjustment expenses (“LAE”) is based on individual case estimates and reports received from ceding companies. A provision is included for losses and LAE incurred but not reported (“IBNR”) based on past experience. A provision is also included for certain potential liabilities relating to asbestos and environmental (“A&E”) exposures, which liabilities cannot be estimated with traditional reserving techniques. See also Note 3. The reserves are reviewed periodically 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 losses and LAE. Loss and LAE reserves are presented gross of reinsurance receivables and incurred losses and LAE are presented net of ceded reinsurance.

Accruals for commissions are established for reinsurance contracts that provide for the stated commission percentage to increase or decrease based on the loss experience of the contract. Changes in estimates for such arrangements are recorded as commission expense. Accruals are determined through the review of the contracts that have these adjustable features and are estimated based on expected loss and LAE.

F. Premium Revenues
Written premiums 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 estimated using pro rata methods based on statistical data. Reinstatement premiums represent additional premium received on catastrophe reinsurance coverages when limits have been exhausted under the original reinsurance contract and additional coverage is granted. 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 ceded reinsurance.

G. Income Taxes
The Company and its wholly-owned subsidiaries file a consolidated U.S. federal income tax return. Foreign branches of subsidiaries file local tax returns as required. Deferred income taxes have been recorded to recognize the tax effect of temporary differences between the financial reporting and income tax bases of assets and liabilities.

H. Foreign Currency
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,

F-8

are excluded from net income and accumulated in stockholder’s equity. Gains and losses resulting from foreign currency transactions are recorded through the statement of operations.

I. Segmentation
The Company, through its subsidiaries, operates in four segments: U.S. Reinsurance, U.S. Insurance, Specialty Underwriting and International. See also Note 16.

J. Retroactive Reinsurance
Premiums on ceded retroactive contracts are earned when written with a corresponding reinsurance recoverable established for the amount of reserves ceded. The initial gain, if applicable, is deferred and amortized into income over an actuarially determined expected payout period. Any future loss is recognized immediately and charged against earnings.

K. Policyholder Dividends
The Company issues certain insurance policies with dividend payment features. These policyholders share in the operating results of their respective policies in the form of dividends declared. Dividends to policyholders are accrued during the period in which the related premiums are earned and are determined based on the terms of the individual policies.

L. Application of New Accounting Standards
In November 2005, the Financial Accounting Standards Board (“FASB”) issued FASB Staff Position (“FSP”) FAS 115-1, “The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments” (“FAS 115-1”), which is effective for reporting periods beginning after December 15, 2005. FAS 115-1 addresses the determination as to when an investment is considered impaired, whether the impairment is other than temporary and the measurement of an impairment loss. FAS 115-1 also includes accounting considerations subsequent to the recognition of an other-than-temporary impairments and requires certain disclosures about unrealized losses not recognized as other-than-temporary impairments. The Company adopted FAS 115-1 prospectively effective January 1, 2006. The Company believes that all unrealized losses in its investment portfolio are temporary in nature.

In July 2006, the FASB released FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes – an interpretation of FASB Statement No. 109” (“FIN 48”), which is effective for fiscal years beginning after December 15, 2006. FIN 48 clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements in accordance with FASB Statement No. 109, “Accounting for Income Taxes” (“FAS 109”). FIN 48 prescribes the recognition and measurement criteria for the financial statements for tax positions taken or expected to be taken in a tax return. Further, FIN 48 expands the required disclosures associated with uncertain tax positions. The Company will adopt FIN 48 on January 1, 2007. The Company does not believe the impact of implementing FIN 48 will be material on its consolidated financial statements.

In September 2006, the FASB issued Statement of Financial Accounting Standards No. 157 “Fair Value Measurements” (“FAS 157”), which is effective for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years. FAS 157 defines fair value, establishes a framework for measuring fair value consistently in GAAP and expands disclosures about fair value measurements. The Company will adopt FAS 157 on January 1, 2008. The Company does not believe the impact of implementing FAS 157 will be material on its consolidated financial statements.

F-9

In September 2006, the FASB issued Statement of Financial Accounting Standards No. 158 “Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans” (“FAS 158”), which is effective for employers with publicly traded equity securities as of the end of the fiscal year ending after December 15, 2006. FAS 158 requires an employer to (a) recognize in its financial statements an asset for a plan’s over funded status or a liability for a plan’s under funded status, (b) measure a plan’s assets and its obligations that determine its funded status as of the end of the employer’s fiscal year and (c) recognize changes in the funded status of a defined benefit postretirement plan in the year in which the changes occur as other comprehensive income. The Company adopted FAS 158 for the reporting period ended December 31, 2006. The impact on the Company’s consolidated balance sheets at December 31, 2006 was a $23.1 million pre-tax, or $15.0 million after-tax reduction to accumulated other comprehensive income.

M. Investments – Interest Only Strips
During 2005 and 2004, the Company invested in interest only strips of mortgage-backed securities (“interest only strips”). These securities give the holder the right to receive interest payments at a stated coupon rate on an underlying pool of mortgages. The interest payments on the outstanding mortgages are guaranteed by entities generally rated AAA. The ultimate cash flow from these investments is primarily dependent upon the average life of the mortgage pool. Generally, as mortgage rates decline, mortgagors are more likely to prepay their mortgage loans which decreases the average life of a mortgage pool and decreases expected cash flows. Conversely, as mortgage rates rise, repayments are more likely to slow and ultimate cash flows will tend to rise. Accordingly, the market value of these investments tends to increase as general interest rates rise and decline as general interest rates fall. These movements are generally counter to the impact of interest rate movements on the Company’s other fixed income investments. The Company held no interest only strips investments at December 31, 2006 and 2005.

The Company accounted for its investment in interest only strips in accordance with Emerging Issues Task Force Issue No. 99-20, “Recognition of Interest Income and Impairment on Purchased and Retained Beneficial Interests in Securitized Financial Assets” (“EITF 99-20”). EITF 99-20 sets forth the rules for recognizing interest income on all credit-sensitive mortgage and asset-backed securities and certain prepayment-sensitive securities, including agency interest only strips, whether purchased or retained in securitization, as well as the rules for determining when these securities must be written down to fair value because of impairment. EITF 99-20 requires decreases in the valuation of residual interests in securitizations to be recorded as a reduction to the carrying value of the residual interests through a charge to earnings, rather than an unrealized loss in stockholders’ equity, when any portion of the decline in fair value is attributable to, as defined by EITF 99-20, an impairment loss. The Company recorded a pre-tax and after-tax realized capital loss due to impairments of $4.1 million and $2.7 million, respectively, for the year ended December 31, 2005 and $43.9 million and $28.5 million, respectively, for the year ended December 31, 2004. As a result of liquidating the interest only strips portfolios, the Company recognized pre-tax and after-tax realized capital gains of $25.3 million and $16.4 million, respectively, for the year ended December 31, 2005 and pre-tax and after-tax realized capital gains of $77.6 million and $50.4 million, respectively, for the year ended December 31, 2004.

F-10

2. INVESTMENTS

The amortized cost, market value, and gross unrealized appreciation and depreciation of fixed maturity investments and equity securities are presented in the tables below:


(Dollars in thousands)	Amortized Cost		Unrealized Appreciation		Unrealized Depreciation			Market Value
As of December 31, 2006
Fixed maturities - available for sale
U.S. Treasury securities and obligations of
U.S. government agencies and corporations	$	85,563	$	467	$	(972	)	$	85,058
Obligations of U.S. states and political subdivisions		3,633,188		164,402		(5,219	)		3,792,371
Corporate securities		961,679		17,061		(9,733	)		969,007
Mortgage-backed securities		475,140		1,605		(10,246	)		466,499
Foreign government securities		354,153		17,441		(1,447	)		370,147
Foreign corporate securities		449,505		10,098		(5,275	)		454,328

Total fixed maturities	$	5,959,228	$	211,074	$	(32,892	)	$	6,137,410

Equity securities	$	874,289	$	315,052	$	-		$	1,189,341

As of December 31, 2005
Fixed maturities - available for sale
U.S. Treasury securities and obligations of
U.S. government agencies and corporations	$	71,913	$	34	$	(1,115	)	$	70,832
Obligations of U.S. states and political subdivisions		3,614,957		153,376		(8,053	)		3,760,280
Corporate securities		894,278		23,557		(12,468	)		905,367
Mortgage-backed securities		477,480		2,540		(10,332	)		469,688
Foreign government securities		357,513		22,103		(958	)		378,658
Foreign corporate securities		434,400		21,638		(4,170	)		451,868

Total fixed maturities	$	5,850,541	$	223,248	$	(37,096	)	$	6,036,693

Equity securities	$	859,425	$	165,344	$	(985	)	$	1,023,784

The amortized cost and market value of fixed maturities are shown in the following table by contractual maturity. Mortgage-backed securities generally are more likely to be prepaid than other fixed maturities. As the stated maturity of such securities may not be indicative of actual maturities, the total for mortgage-backed securities is shown separately.

	December 31, 2006
(Dollars in thousands)	Amortized Cost		Market Value
Fixed maturities – available for sale
Due in one year or less	$	305,369	$	304,456
Due after one year through five years		1,216,669		1,223,108
Due after five years through ten years		943,407		943,941
Due after ten years		3,018,643		3,199,406
Mortgage–backed securities		475,140		466,499

Total	$	5,959,228	$	6,137,410

F-11

The changes in net unrealized gains (losses) of investments of the Company are derived from the following sources:

	Years Ended December 31,
(Dollars in thousands)	2006			2005			2004
Increase (decrease) during the period between the market value and
cost of investments carried at market value, and deferred taxes thereon:
Fixed maturities	$	(7,970	)	$	(85,858	)	$	(21,620	)
Equity securities		150,693			85,206			71,179
Other invested assets		(466	)		289			520

Increase (decrease) in unrealized appreciation, pre-tax		142,257			(363	)		50,079
Deferred taxes		(49,790	)		127			(17,527	)

Increase (decrease) in unrealized appreciation, net of deferred
taxes, included in stockholder's equity	$	92,467		$	(236	)	$	32,552

The Company frequently reviews its investment portfolio for declines in market value and focuses its attention on securities whose fair value has fallen below 80% of their amortized value at the time of review. The Company then assesses whether the decline in value is temporary or “other than temporary”. In making its assessment, the Company evaluates the current market and interest rate environment as well as specific issuer information and the Company’s ability and intent to hold to maturity. Generally, a change in the market or interest rate environment does not constitute impairment but rather a temporary decline in market value. Temporary declines in market value are recorded as an unrealized loss in accumulated other comprehensive income. If the Company determines that the decline is “other than temporary”, the carrying value of the investment is written down to fair value and a realized loss is recorded in the Company’s consolidated statements of operations and comprehensive income. The Company’s assessments are based on the issuer’s current and expected future financial position, timeliness with respect to interest and/or principal payments, speed of repayments on asset-backed securities, as well as relevant information provided by rating agencies, investment advisors and analysts.

The tables below display the aggregate fair value and gross unrealized depreciation, by investment category and maturity category by length of time that individual securities have been in a continuous unrealized loss position as of December 31, 2006:

	Duration of unrealized loss as of December 31, 2006
	Less than 12 months					Greater than 12 months					Total
(Dollars in thousands)	Fair Value		Gross Unrealized Depreciation			Fair Value		Gross Unrealized Depreciation			Fair Value		Gross Unrealized Depreciation
Fixed maturity securities
U.S. government
agencies and authorities	$	9,533	$	(26	)	$	57,477	$	(946	)	$	67,010	$	(972	)
States, municipalities
and political subdivisions		94,242		(363	)		500,006		(4,856	)		594,248		(5,219	)
Foreign governments		115,190		(899	)		51,261		(548	)		166,451		(1,447	)
All other corporate		325,825		(2,314	)		931,976		(22,940	)		1,257,801		(25,254	)

Total fixed maturities		544,790		(3,602	)		1,540,720		(29,290	)		2,085,510		(32,892	)

Equity Securities		-		-			-		-			-		-

Total	$	544,790	$	(3,602	)	$	1,540,720	$	(29,290	)	$	2,085,510	$	(32,892	)

F-12

	Duration of unrealized loss as of December 31, 2006
	Less than 12 months					Greater than 12 months					Total
(Dollars in thousands)	Fair Value		Gross Unrealized Depreciation			Fair Value		Gross Unrealized Depreciation			Fair Value		Gross Unrealized Depreciation
Fixed maturity securities
Due in 1 year or less	$	18,648	$	(48	)	$	214,774	$	(1,521	)	$	233,422	$	(1,569	)
Due after one year through five years		291,163		(967	)		487,638		(8,727	)		778,801		(9,694	)
Due after five years through ten years		101,991		(1,250	)		404,681		(7,800	)		506,672		(9,050	)
Due after ten years		73,919		(1,215	)		64,619		(1,118	)		138,538		(2,333	)
Mortgage-backed securities		59,069		(122	)		369,008		(10,124	)		428,077		(10,246	)

Total	$	544,790	$	(3,602	)	$	1,540,720	$	(29,290	)	$	2,085,510	$	(32,892	)

The aggregate fair value and gross unrealized losses related to investments in an unrealized loss position as of December 31, 2006 is $2,085.5 million and $32.9 million, respectively. There are no material concentrations of unrealized losses by issuer, security type or industry within the fixed maturity portfolio. The $3.6 million of unrealized losses relating to fixed income securities that have been in an unrealized loss position for less than one year are generally comprised of highly rated government, municipal and corporate bonds and are primarily the result of interest rates being higher than when the securities were purchased. All of these unrealized losses are related to securities that are rated investment grade or better by a nationally recognized statistical rating organization.

The $29.3 million of unrealized losses relating to securities that have been in an unrealized loss position for more then one year are also primarily comprised of highly rated government, municipal and corporate bonds and are the result of interest rates being higher than when the securities were purchased. Of these unrealized losses, $26.9 million are related to securities that are rated investment grade or better by a nationally recognized statistical rating organization.

The Company, given the size of its investment portfolio and capital position, has the ability and intent to hold these securities until recovery of market value. In addition, all securities currently in an unrealized loss position are current with respect to principal and interest payments.

F-13

The table below displays the aggregate fair value and gross unrealized depreciation, by investment category and length of time that individual securities have been in a continuous unrealized loss position as of December 31, 2005:

	Duration of unrealized loss as of December 31, 2005
	Less than 12 months					Greater than 12 months					Total
(Dollars in thousands)	Fair Value		Gross Unrealized Depreciation			Fair Value		Gross Unrealized Depreciation			Fair Value		Gross Unrealized Depreciation
Fixed maturity securities
U.S. government
agencies and authorities	$	39,348	$	(522	)	$	24,217	$	(593	)	$	63,565	$	(1,115	)
States, municipalities
and political subdivisions		586,115		(4,007	)		169,256		(4,046	)		755,371		(8,053	)
Foreign governments		102,453		(804	)		6,446		(154	)		108,899		(958	)
All other corporate		690,912		(12,284	)		399,238		(14,686	)		1,090,150		(26,970	)

Total fixed maturities		1,418,828		(17,617	)		599,157		(19,479	)		2,017,985		(37,096	)

Equity securities		15,623		(985	)		-		-			15,623		(985	)

Total	$	1,434,451	$	(18,602	)	$	599,157	$	(19,479	)	$	2,033,608	$	(38,081	)

The aggregate fair value and gross unrealized losses related to investments in an unrealized loss position as of December 31, 2005 were $2,033.6 million and $38.1 million, respectively. The $17.6 million of unrealized losses relating to fixed income securities that have been in an unrealized loss position for less than one year are generally comprised of highly rated government, municipal and corporate bonds and are primarily the result of interest rates being higher than when the securities were purchased. Of these unrealized losses, $15.1 million are related to securities that are rated investment grade or better by a nationally recognized statistical rating organization.

The $19.5 million of unrealized losses relating to securities that have been in an unrealized loss position for more then one year are also primarily comprised of highly rated government, municipal and corporate bonds and are the result of interest rates being higher than when the securities were purchased. Of these unrealized losses, $16.9 million are related to securities that are rated investment grade or better by a nationally recognized statistical rating organization.

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

	Years Ended December 31,
(Dollars in thousands)	2006			2005			2004
Fixed maturities	$	299,570		$	308,254		$	306,892
Equity securities		19,713			16,356			8,453
Short-term investments		26,828			12,325			5,314
Other investment income		41,934			9,019			37,076

Total gross investment income		388,045			345,954			357,735
Interest credited and other expense		(15,693	)		(20,737	)		(28,551	)

Total net investment income	$	372,352		$	325,217		$	329,184

Other net investment income for 2006, 2005 and 2004 primarily includes income earned on limited partnership investments of $38.5 million, $7.5 million and $36.3 million, respectively.

F-14

The Company has contractual commitments to invest up to an additional $189.1 million in its limited partnership investments at December 31, 2006. These commitments will be funded as required by the partnership agreements, which have investment periods that expire no later than 2012.

The components of net realized capital gains are represented in the table below:

	Years Ended December 31,
(Dollars in thousands)	2006			2005		2004
Fixed maturities	$	8,385		$	51,207	$	57,104
Equity securities		26,574			13,361		(395	)
Short-term investments		(2	)		-		1

Total	$	34,957		$	64,568	$	56,710

Proceeds from sales of fixed maturity investments during 2006, 2005 and 2004 were $45.1 million, $879.1 million and $787.0 million, respectively. Gross gains of $8.4 million, $59.8 million and $107.0 million and gross losses of $0.0 million, $4.4 million and $5.4 million were realized on those fixed maturity sales during 2006, 2005 and 2004, respectively. Proceeds from sales of equity security investments during 2006, 2005 and 2004 were $206.5 million, $205.9 million and $18.0 million, respectively. Gross gains of $31.2 million, $16.1 million and $0.5 million and gross losses of $4.6 million, $2.7 million and $0.9 million were realized on those equity sales during 2006, 2005 and 2004, respectively.

Net realized capital gains included $0.0 million, $4.1 million and $43.9 million of realized capital losses for 2006, 2005 and 2004, respectively, related to the impairment of interest only strips in accordance with EITF 99-20. In addition, realized capital losses for 2006, 2005 and 2004 included $0.0 million, $0.0 million and $0.5 million, respectively, related to write-downs in the value of securities deemed to be impaired on an other than temporary basis.

Securities with a carrying value amount of $1,352.8 million at December 31, 2006 were on deposit with various state or governmental insurance departments in compliance with insurance laws.

F-15

3. RESERVES FOR LOSSES AND LAE

Activity in the reserve for losses and LAE is summarized as follows:

	Years Ended December 31,
(Dollars in thousands)	2006		2005			2004
Gross reserves at January 1	$	7,729,171	$	6,846,904		$	6,227,078
Less reinsurance recoverables		2,369,925		2,286,202			2,311,102

Net reserves at January 1		5,359,246		4,560,702			3,915,976

Incurred related to:
Current year		1,489,659		2,270,088			1,998,211
Prior years		67,420		(67,268	)		174,160

Total incurred losses and LAE		1,557,079		2,202,820			2,172,371

Paid related to:
Current year		413,452		432,523			447,825
Prior years		1,299,021		968,980			635,391

Total paid losses and LAE		1,712,473		1,401,503			1,083,216

Sale of UK branch		-		-			503,571
Foreign exchange/translation adjustment		14,416		(2,773	)		59,142

Net reserves at December 31		5,218,268		5,359,246			4,560,702
Plus reinsurance recoverables		2,179,002		2,369,925			2,286,202

Gross reserves at December 31	$	7,397,270	$	7,729,171		$	6,846,904

Gross loss and LAE reserves were $7,397.3 million at December 31, 2006, $7,729.2 million at December 31, 2005, and $6,846.9 million at December 31, 2004. The decrease in 2006 was primarily attributable to lower current year catastrophe losses and a decrease in earned premiums. The increase in 2005 was primarily attributable to increased elevated catastrophe loss reserves, partially offset by an increase in claim settlements, a decrease in premiums earned and favorable net prior period reserve adjustments.

Reinsurance receivables for both paid and unpaid losses totaled $2,263.0 million at December 31, 2006 and $2,526.1 million at December 31, 2005. At December 31, 2006, $1,429.3 million, or 63.2%, was receivable from Everest Reinsurance (Bermuda), Ltd. (“Bermuda Re”) and are collateralized by a combination of letters of credit and trust agreements. In addition, $169.4 million, or 7.5%, was receivable from Transatlantic Reinsurance Company (“Transatlantic”). No other retrocessionaire accounted for more than 5% of the Company’s receivables.

The Company continues to receive claims under expired insurance and reinsurance contracts, asserting alleged injuries and/or damages that occurred while the contracts were in force relating to or resulting from environmental pollution and hazardous substances, including asbestos (i.e. asbestos and environmental (“A&E”)). The Company’s asbestos claims typically involve potential liability for bodily injury from exposure to asbestos or for property damage resulting from asbestos or products containing asbestos. The Company’s environmental claims typically involve potential liability for (a) the mitigation or remediation of environmental contamination or (b) bodily injury or property damages caused by the release of hazardous substances into the land, air or water.

F-16

As of December 31, 2006, approximately 9% of the Company’s gross reserves are an estimate of the Company’s ultimate liability for A&E claims. The Company’s A&E liabilities stem from Mt. McKinley’s direct insurance business and Everest Re’s assumed reinsurance business. This estimate is made based on assessments of the underlying exposures as the result of (1) long and variable reporting delays, both from insureds to insurance companies and from ceding companies to reinsurers; (2) historical data, which is more limited and variable on A&E losses than historical information on other types of casualty claims; and (3) unique aspects of A&E exposures for which ultimate value cannot be estimated using traditional reserving techniques. There are significant uncertainties in estimating the amount of the Company’s potential losses from A&E claims. Among the uncertainties are: (a) potential passing of many years between exposure and manifestation of any bodily injury or property damage; (b) difficulty in identifying sources of asbestos or environmental contamination; (c) difficulty in properly allocating responsibility and/or liability for asbestos or environmental damage; (d) changes in underlying laws and judicial interpretation of those laws; (e) the potential for an asbestos or environmental claim to involve many insurance providers over many policy periods; (f) questions concerning interpretation and application of insurance and reinsurance coverage; and (g) uncertainty regarding the number and identity of insureds with potential asbestos or environmental exposure.

With respect to asbestos claims in particular, several additional factors have emerged in recent years that further compound the difficulty in estimating the Company’s liability. These developments include: (a) the significant growth over a short period of time in the number of claims filed, in part reflecting a much more aggressive plaintiff bar and including claims against defendants who may only have a “peripheral” connection to asbestos; (b) a disproportionate percentage of claims filed by individuals with no physical injury, which should have little to no financial value but which have increasingly been considered in jury verdicts and settlements; (c) the growth in the number and significance of bankruptcy filings by companies as a result of asbestos claims (including, more recently, bankruptcy filings in which companies attempt to resolve their asbestos liabilities in a manner that is prejudicial to insurers and forecloses insurers from participating in the negotiation of asbestos related bankruptcy reorganization plans); (d) the concentration of claims in a small number of states that favor plaintiffs; (e) the growth in the number of claims that might impact the general liability portion of insurance policies rather than the product liability portion; (f) measures adopted by specific courts to ameliorate the worst procedural abuses; (g) an increase in settlement values being paid to asbestos claimants, especially those with cancer or functional impairment; (h) legislation in some states to address asbestos litigation issues; and (i) the potential that other states or the U.S. Congress may adopt legislation on asbestos litigation. Anecdotal evidence suggests that new claims filing rates have decreased, that new filings of asbestos-driven bankruptcies have decreased and legislative reforms are beginning to diminish the potential ultimate liability for asbestos losses.

Management believes that these uncertainties and factors continue to render reserves for A&E and particularly asbestos losses significantly less subject to traditional actuarial analysis than reserves for other types of losses. Given these uncertainties, management believes that no meaningful range for such ultimate losses can be established particularly for asbestos. Further, A&E reserves may be subject to more variability than non-A&E reserves and such variation could have a material adverse effect on the Company’s financial condition, results of operation and/or cash flow. The Company establishes reserves to the extent that, in the judgment of management, the facts and prevailing law reflect an exposure for the Company or its ceding companies.

F-17

The following table summarizes incurred losses and reserve balances with respect to A&E on both a gross and net of retrocessional basis for the years indicated:

(Dollars in thousands)	2006			2005			2004
Gross basis
Beginning of period reserves	$	649,460		$	728,325		$	765,257
Incurred losses		113,400			77,050			171,729
Paid losses		(112,726	)		(155,915	)		(208,661	)

End of period reserves	$	650,134		$	649,460		$	728,325

Net basis
Beginning of period reserves	$	311,552		$	303,335		$	262,990
Incurred losses		27,388			11,451			10,310
Paid losses		(25,632	)		(3,234	)		30,035

End of period reserves	$	313,308		$	311,552		$	303,335

At December 31, 2006, the gross reserves for A&E losses were comprised of $135.6 million representing case reserves reported by ceding companies, $152.1 million representing additional case reserves established by the Company on assumed reinsurance claims, $213.7 million representing case reserves established by the Company on direct excess insurance claims, including Mt. McKinley and $148.7 million representing IBNR reserves. Roughly 89%, or $581.0 million, of gross A&E reserves relate to asbestos of which $320.5 million was for assumed business and $260.5 million was for direct excess business.

In connection with the acquisition of Mt. McKinley, which has significant exposure to A&E claims, LM Property and Casualty Insurance Company (“LM”) provided reinsurance to Mt. McKinley covering 80% ($160.0 million) of the first $200.0 million of any adverse development of Mt. McKinley’s reserves as of September 19, 2000 and The Prudential guaranteed LM’s obligation to Mt. McKinley. Cessions under this reinsurance agreement exhausted the limit available under the contract at December 31, 2003.

4. CREDIT LINES

Effective August 23, 2006, Holdings entered into a new five year, $150.0 million senior revolving credit facility with a syndicate of lenders, replacing the October 10, 2003 three year senior revolving credit facility, which expired on October 10, 2006. Both the August 23, 2006 and October 10, 2003 senior revolving credit agreements, which have similar terms, are referred to as the “Holdings Credit Facility”. Citibank N.A. is the administrative agent for the Holdings Credit Facility. The Holdings Credit Facility is used for liquidity and general corporate purposes. The Holdings Credit Facility provides for the borrowing of up to $150.0 million with interest at a rate selected by Holdings equal to either, (1) the Base Rate (as defined below) or (2) a periodic fixed rate equal to the Eurodollar Rate plus an applicable margin. The Base Rate means a fluctuating interest rate per annum in effect from time to time to be equal to the higher of (a) the rate of interest publicly announced by Citibank as its prime rate or 0.5% per annum above the Federal Funds Rate, in each case plus the applicable margin. The amount of margin and the fees payable for the Holdings Credit Facility depends upon Holdings’ senior unsecured debt rating.

The Holdings Credit Facility requires Holdings to maintain a debt to capital ratio of not greater than 0.35 to 1 and Everest Re to maintain its statutory surplus of no less than $1.5 billion plus 25% of future aggregate net income and 25% of future aggregate capital contributions after December 31, 2005. As of December 31, 2006, Holdings was in compliance with these covenants.

F-18

During the years ended December 31, 2006 and 2005, there were no payments made and no incremental borrowings made under the Holdings Credit Facility. During the year ended December 31, 2004 there were payments made of $70.0 million and no incremental borrowings under the Holdings Credit Facility. As of December 31, 2006 and 2005, there were no outstanding borrowings under the Holdings Credit Facility.

Interest expense and fees incurred in connection with the Holdings Credit Facility were $0.2 million, $0.2 million and $1.2 million for the years ended December 31, 2006, 2005 and 2004, respectively.

5. SENIOR NOTES

On October 12, 2004, Holdings completed a public offering of $250.0 million principal amount of 5.40% senior notes due October 15, 2014. On March 14, 2000, Holdings completed public offerings of $200.0 million principal amount of 8.75% senior notes due March 15, 2010 and $250.0 million principal amount of 8.50% senior notes due and retired on March 15, 2005.

Interest expense incurred in connection with these senior notes was $31.1 million, $35.5 million and $42.0 million for the years ended December 31, 2006, 2005 and 2004, respectively. Market value, which is based on quoted market price at December 31, 2006 and 2005 was $248.1 million and $250.9 million, respectively, for the 5.40% senior notes and $219.8 million and $226.2 million, respectively, for the 8.75% senior notes.

6. JUNIOR SUBORDINATED DEBT SECURITIES PAYABLE

On March 29, 2004, Holdings issued $329.9 million of 6.20% junior subordinated debt securities due March 29, 2034 to Everest Re Capital Trust II (“Capital Trust II”). Holdings can redeem the junior subordinated debt securities before their maturity at 100% of their principal amount plus accrued interest as of the date of redemption, in whole or in part, on one or more occasions at any time on or after March 30, 2009; or at any time, in whole, but not in part, within 90 days of the occurrence and continuation of a determination that the Trust may become subject to tax or the Investment Company Act.

On November 14, 2002, Holdings issued $216.5 million of 7.85% junior subordinated debt securities due November 15, 2032 to Everest Re Capital Trust (“Capital Trust”). Holdings can redeem the junior subordinated debt securities before their maturity at 100% of their principal amount plus accrued interest as of the date of redemption, in whole or in part, on one or more occasions at any time on or after November 14, 2007; or at any time, in whole, but not in part, within 90 days of the occurrence and continuation of a determination that the Trust may become subject to tax or the Investment Company Act.

Fair value, which is primarily based on quoted market price of the related trust preferred securities at December 31, 2006 and 2005, was $316.3 million and $293.5 million, respectively, for the 6.20% junior subordinated debt securities and $221.2 million and $220.5 million, respectively, for the 7.85% junior subordinated debt securities.

Interest expense incurred in connection with these junior subordinated notes was $37.4 million, $37.4 million and $32.4 million for the years ended December 31, 2006, 2005 and 2004, respectively.

F-19

Capital Trust and Capital Trust II are wholly-owned finance subsidiaries of Holdings.

Holdings considers that the mechanisms and obligations relating to the trust preferred securities, taken together, constitute a full and unconditional guarantee by Holdings of Capital Trust and Capital Trust II’s payment obligations with respect to their respective trust preferred securities.

Capital Trust and Capital Trust II must redeem all of the outstanding trust preferred securities when the junior subordinated debt securities are paid at maturity on November 15, 2032 and March 29, 2034, respectively. The Company may elect to redeem the junior subordinated debt securities, in whole or in part, at any time on or after November 14, 2007 and March 30, 2009, respectively. If such an early redemption occurs, the outstanding trust preferred securities would also be proportionately redeemed.

There are certain regulatory and contractual restrictions on the ability of the Company’s operating subsidiaries to transfer funds to the Company in the form of cash dividends, loans or advances. The insurance laws of the State of Delaware, where the Company’s direct insurance subsidiaries are domiciled, require regulatory approval before those subsidiaries can pay dividends or make loans or advances to the Company that exceed certain statutory thresholds. In addition, the terms of the Holdings Credit Facility require Everest Re, the Company’s principal insurance subsidiary, to maintain a certain statutory surplus level as measured at the end of each fiscal year. At December 31, 2006, $2,451.4 million of the $3,102.6 million in net assets of the Company’s consolidated subsidiaries were subject to the foregoing regulatory restrictions.

7. TRUST AGREEMENTS

A subsidiary of the Company, Everest Re, has established a trust agreement as security for assumed losses payable to a non-affiliated ceding company, which effectively uses Everest Re’s investments as collateral. At December 31, 2006, the total amount on deposit in the trust account was $23.6 million.

8. OPERATING LEASE AGREEMENTS

The future minimum rental commitments, exclusive of cost escalation clauses, at December 31, 2006 for all of the Company’s operating leases with remaining non-cancelable terms in excess of one year are as follows:

(Dollars in thousands)
2007	$	7,105
2008		7,236
2009		7,101
2010		6,996
2011		1,221
Thereafter		1,338

Net commitments	$	30,997

All of these leases, the expiration terms of which range from 2008 to 2014, are for the rental of office space. Rental expense was $7.6 million, $6.4 million and $6.7 million for 2006, 2005 and 2004, respectively.

F-20

9. INCOME TAXES

All the income of Holdings’ U.S. subsidiaries is subject to the applicable federal, foreign, state and local taxes on corporations. Additionally, the income of foreign branches of the Company’s insurance operating companies is subject to various income taxes. The provision for income taxes in the consolidated statements of operations and comprehensive income has been determined in accordance with the individual income of each entity and the respective applicable tax laws. The provision reflects the permanent differences between financial and taxable income relevant to each entity. The significant components of the provision are as follows:

	Years Ended December 31,
(Dollars in thousands)	2006			2005			2004
Current tax:
U.S.	$	133,103		$	(3,494	)	$	51,063
Foreign		15,348			4,837			51,259

Total current tax		148,451			1,343			102,322
Total deferred U.S. tax benefit		(31,399	)		(71,579	)		(46,185	)

Total income tax expense (benefit)	$	117,052		$	(70,236	)	$	56,137

A reconciliation of the U.S. federal income tax rate to the Company’s effective tax rate is as follows:

	Years Ended December 31,
	2006			2005			2004
Federal income tax rate		35.0	%		-35.0	%		35.0	%
Increase (reduction) in taxes resulting from:
Tax exempt income		-13.6	%		-88.4	%		-22.3	%
Dividend received deduction		-0.7	%		-5.3	%		-0.9	%
Proration		2.1	%		14.0	%		3.5	%
UK Branch Sale		0.0	%		0.0	%		6.7	%
Other, net		3.2	%		7.5	%		2.2	%

Effective tax rate		26.0	%		-107.2	%		24.2	%

F-21

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 U.S. tax laws and regulations. The principal items making up the net deferred income tax asset are as follows:

	Years Ended December 31,
(Dollars in thousands)	2006		2005
Deferred tax assets:
Reserve for losses and LAE	$	255,327	$	268,029
Unearned premium reserve		72,342		69,510
Impairments		-		1,688
Deferred compensation		14,288		8,778
Deferred reinsurance		35,895		24,689
AMT Credits		35,414		35,737
Foreign tax credit carryforwards		64,576		43,193
Uncollectible reinsurance		35,306		5,693
Minimum pension		9,635		1,547
Other assets		13,256		12,795

Total deferred tax assets		536,039		471,659

Deferred tax liabilities:
Deferred acquisition costs		84,123		70,766
Investments & market discounts		5,122		5,522
Net unrealized appreciation of investments		173,593		123,178
Foreign currency translation		15,123		11,981
Other liabilities		9,864		(1,004	)

Total deferred tax liabilities		287,825		210,443

Net deferred tax assets	$	248,214	$	261,216

For U.S. income tax purposes the Company has foreign tax credit carryforwards of $64.6 million that begin to expire in 2011. In addition, for U.S. income tax purposes the Company has $35.4 million of Alternative Minimum Tax credits that do not expire. 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.

Tax benefits of $5.1 million and $5.1 million related to compensation expense deductions for stock options exercised in 2006 and 2005, respectively, are reflected in the change in stockholder’s equity in “additional paid-in capital”.

10. REINSURANCE

The Company utilizes reinsurance agreements to reduce its exposure to large claims and catastrophic loss occurrences. These agreements provide for recovery from reinsurers of a portion of losses and LAE under certain circumstances without relieving the ceding company of its obligations to the policyholders. Losses and LAE incurred and premiums earned are reported after deduction for reinsurance. In the event that one or more of the reinsurers were unable to meet their obligations under these reinsurance agreements, the Company would not realize the full value of the reinsurance recoverable balances. The Company may hold partial collateral, including letters of credit, trust accounts and funds held, under these agreements. See also Note 1C.

F-22

For years ended December 31, 1999, 2000 and 2001, the Company purchased accident year aggregate excess of loss retrocession coverage that provided up to $175.0 million of coverage for each year. These excess of loss policies provided coverage if Everest Re’s consolidated statutory basis accident year loss ratio exceeded a specified loss ratio attachment point for each year of coverage. The attachment point was net of inuring reinsurance and included adjustable premium provisions that effectively caused the Company to offset, on a pre-tax income basis up to approximately 57% of such ceded losses. The maximum recovery for each year was $175.0 million before giving effect to the adjustable premium. During 2003, the Company ceded $85.0 million of losses to the 2000 cover, effectively exhausting the maximum limit under the contract. The 2001 and 1999 accident year aggregate excess of loss retrocession coverages were fully exhausted prior to January 1, 2003. The Company did not purchase similar corporate level coverage subsequent to December 31, 2001.

In addition, the Company had coverage under an aggregate excess of loss reinsurance agreement provided by LM in connection with the Company’s acquisition of Mt. McKinley in September 2000. This agreement covers 80% or $160.0 million of the first $200.0 million of any adverse loss reserve development on the carried reserves of Mt. McKinley at the date of acquisition and reimburses the Company as such losses are paid by the Company. There were $160.0 million of recoverables under this reinsurance at December 31, 2003. The Prudential continues to guarantee LM’s obligation under this agreement.

Mt. McKinley is a reinsurer of Everest Re. Under a series of transactions dating to 1986, Mt. McKinley reinsured several components of Everest Re’s business. In particular, Mt. McKinley provided stop loss reinsurance protection, in connection with the Company’s October 5, 1995 initial public offering, for any adverse loss development on Everest Re’s June 30, 1995 (December 31, 1994 for catastrophe losses) reserves, with $375.0 million in limits, of which $0.0 million remains available. The Stop Loss Agreement and other reinsurance contracts between Mt. McKinley and Everest Re remain in effect following the acquisition. However, these contracts became transactions with affiliates effective on the date of the Mt. McKinley acquisition, and their financial impact is thereafter eliminated in consolidation. Effective September 19, 2000, Mt. McKinley and Bermuda Re entered into a loss portfolio transfer reinsurance agreement, whereby Mt. McKinley transferred, for what management believes to be arm’s length consideration, all of its net insurance exposures and reserves to Bermuda Re.

Premiums written and earned are comprised of the following:

	Years Ended December 31,
(Dollars in thousands)	2006			2005			2004
Written premiums:
Direct	$	900,381		$	955,611		$	1,256,105
Assumed		2,285,594			2,384,242			2,564,591
Ceded		(895,714	)		(944,203	)		(887,978	)

Net written premiums	$	2,290,261		$	2,395,650		$	2,932,718

Premiums earned:
Direct	$	961,133		$	1,019,288		$	1,142,632
Assumed		2,189,061			2,321,256			2,557,998
Ceded		(902,994	)		(914,468	)		(871,479	)

Net premiums earned	$	2,247,200		$	2,426,076		$	2,829,151

The amounts deducted from losses and LAE incurred for net reinsurance recoveries were $546.4 million, $852.4 million and $712.7 million for the years ended December 31, 2006, 2005 and 2004, respectively.

F-23

As of December 31, 2006, the Company carried as an asset $2,263.0 million in reinsurance receivables with respect to losses ceded. Of this amount, $1,429.3 million, or 63.2%, was receivable from Bermuda Re and secured through the use of trust agreements and $169.4 million, or 7.5%, was receivable from Transatlantic. As of December 31, 2005, the Company had $2,526.1 million in reinsurance receivables. Of this amount, $1,463.1 million, or 57.9%, was receivable from Bermuda Re and secured through the use of trust agreements and $239.8 million, or 9.5% was receivable from subsidiaries of London Reinsurance Group (“London Life”), $171.5 million, or 6.8%, was receivable from Transatlantic and $160.0 million, or 6.3%, was receivable from LM. No other retrocessionaire accounted for more than 5% of the Company’s receivables.

The Company’s arrangements with London Life were managed on funds held basis which means that the Company had retained the premiums earned by the retrocessionaire to secure obligations of the retrocessionaire, recorded them as a liability, credited interest on the balances at a stated contractual rate and reduced the liability account as payments became due. As of December 31, 2005, such funds had reduced the Company’s net exposure to London Life to $115.4 million, effectively 100% of which had been secured by letters of credit.

The Company engages in reinsurance transactions with Bermuda Re and Everest International Reinsurance, Ltd. (“Everest International”), affiliates, primarily driven by capital management considerations under which business is ceded for arm’s length consideration. These transactions include:

•

Effective September 19, 2000, Mt. McKinley and Bermuda Re entered into a loss portfolio transfer reinsurance agreement, whereby Mt. McKinley transferred all of its net insurance exposures and reserves to Bermuda Re.

•

Effective October 1, 2001, Everest Re and Bermuda Re entered into a loss portfolio reinsurance agreement, whereby Everest Re transferred all of its Belgium branch net insurance exposures and reserves to Bermuda Re.

•

For premiums earned and losses incurred for the period January 1, 2002 through December 31, 2002, Everest Re, Everest National Insurance Company and Everest Security Insurance Company entered into an Excess of Loss Reinsurance Agreement with Bermuda Re, covering workers’ compensation losses occurring on and after January 1, 2002, as respects new, renewal and in force policies effective on that date through December 31, 2002. Bermuda Re is liable for any loss exceeding $100,000 per occurrence, with its liability not to exceed $150,000 per occurrence.

•

Effective January 1, 2002 for the 2002 underwriting year, Everest Re ceded 20% of its net retained liability to Bermuda Re through a quota share reinsurance agreement (“whole account quota share”).

•

Effective January 1, 2003, Everest Re and Bermuda Re amended the whole account quota share, through which Everest Re previously ceded 20% of its business to Bermuda Re so that effective January 1, 2003 Everest Re ceded 25% to Bermuda Re of the net retained liability on all new and renewal policies underwritten during the term of this agreement.

•

Effective January 1, 2003, Everest Re entered into a whole account quota share with Bermuda Re, whereby Everest Re’s Canadian branch cedes to Bermuda Re 50% of its net retained liability on all new and renewal property business.

•

Effective January 1, 2004, Everest Re and Bermuda Re amended the whole account quota share through which Everest Re previously ceded 25% of its business to Bermuda Re so that effective January 1, 2004 Everest Re cedes 22.5% to Bermuda Re and 2.5% to Everest International of the net retained liability on all

F-24

new and renewal covered business written during the term of this agreement. This amendment remained in effect through December 31, 2005.

•

Effective January 1, 2006, Everest Re, Bermuda Re and Everest International amended the whole account quota share so that for all new and renewal business recorded on or after January 1, 2006, Everest Re will cede 31.5% and 3.5% of its casualty business to Bermuda Re and Everest International, respectively, and Everest Re will cede 18.0% and 2.0% of its property business to Bermuda Re and Everest International, respectively. However, in no event shall the loss cessions to Bermuda Re and Everest International relating to any one occurrence on the property business exceed $125 million (20% of $625 million).

•

Effective January 1, 2007, Everest Re and Bermuda Re amended the whole account quota share so that for all new and renewal business recorded on or after January 1, 2007, Everest Re will cede 60% of its Canadian branch property business to Bermuda Re.

The following table summarizes the premiums and losses ceded by the Company to Bermuda Re and Everest International, respectively, for the years indicated:

Bermuda Re	Years Ended December 31,
(Dollars in thousands)	2006		2005		2004
Ceded written premiums	$	697,795	$	729,482	$	654,332
Ceded earned premiums		690,677		709,373		659,375
Ceded losses and LAE (a)		396,538		688,162		546,554

Everest International	Years Ended December 31,
(Dollars in thousands)	2006		2005		2004
Ceded written premiums	$	72,465	$	79,755	$	58,910
Ceded earned premiums		69,821		70,281		40,389
Ceded losses and LAE		39,443		66,062		30,957

(a) Ceded losses and LAE include the Mt. McKinley loss portfolio transfer that constitutes losses ceded under retroactive reinsurance and therefore, in accordance with FAS 113, “Accounting and Reporting for Reinsurance of Short-Duration and Long-Duration Contracts,” a deferred gain on retroactive reinsurance is reflected in other expenses on the consolidated statements of operations and comprehensive income.

Effective January 1, 2004, Everest Re sold the net assets of its UK branch to Bermuda Re. In connection with the sale, Everest Re provided Bermuda Re with a reserve indemnity agreement allowing for indemnity payments of up to 90% of £25.0 million in the event December 31, 2002 losses and LAE reserves develop adversely. The limit available under this agreement was fully exhausted at December 31, 2004.

F-25

11. COMPREHENSIVE INCOME (LOSS)

The components of comprehensive income for the years ended December 31, 2006, 2005 and 2004 are shown in the following table:


(Dollars in thousands)	2006			2005			2004
Net income	$	332,906		$	4,706		$	175,473

Other comprehensive income, before tax:
Unrealized gains on securities arising during the period		177,213			64,205			106,789
Less: reclassification adjustment for realized gains
included in net income		(34,957	)		(64,568	)		(56,710	)
Foreign currency translation adjustments		13,611			2,669			10,472
Minimum pension adjustment		-			(4,422	)		-

Other comprehensive income (loss), before tax		155,867			(2,116	)		60,551

Income tax expense related to items of other comprehensive
income (loss):
Tax expense from unrealized gains arising during the period		(62,025	)		(22,471	)		(37,380	)
Tax benefit from realized gains (losses) included in net income		12,235			22,598			19,849
Tax expense from foreign currency translation		(4,764	)		(934	)		(3,665	)
Tax benefit from minimum pension adjustment		-			1,548			-

Total income tax (expense) benefit related to items of other
comprehensive income (loss)		(54,554	)		741			(21,196	)

Other comprehensive income (loss), net of tax		101,313			(1,375	)		39,355

Comprehensive income	$	434,219		$	3,331		$	214,828

The following table shows the components of the change in accumulated other comprehensive income for the years ended December 31, 2006 and 2005.


(Dollars in thousands)	2006			2005
Beginning balance of unrealized gains on securities	$	228,760		$	228,996
Current period change in unrealized gains on securities		92,466			(236	)

Ending balance of unrealized gains on securities	$	321,226		$	228,760

Beginning balance of foreign currency translation adjustments	$	20,399		$	18,664
Current period change in foreign currency translation adjustments		8,847			1,735

Ending balance of foreign currency translation adjustments	$	29,246		$	20,399

Beginning balance of minimum pension adjustment	$	(2,874	)	$	-
Current period change in minimum pension adjustment		-			(2,874	)

Ending balance of minimum pension adjustment	$	(2,874	)	$	(2,874	)

Adjustment to initially apply FASB Statement No. 158, net of tax	$	(15,020	)	$	-

Ending balance of accumulated other comprehensive income	$	332,578		$	246,285

F-26

12. EMPLOYEE BENEFIT PLANS

A. Defined Benefit Pension Plans
The Company maintains both qualified and non-qualified defined benefit pension plans for its U.S. employees. Generally, the Company computes the benefits based on average earnings over a period prescribed by the plans and credited length of service. The Company’s non-qualified defined benefit pension plan, affected in October 1995, provides compensating pension benefits for participants whose benefits have been curtailed under the qualified plan due to Internal Revenue Code limitations.

Although not required to make contributions under Internal Revenue Service regulations, the Company contributed $22.8 million and $3.9 million to the qualified plan in 2006 and 2005, respectively. Pension expense for the Company’s plans for the years ended December 31, 2006, 2005 and 2004 was $9.2 million, $6.9 million and $5.3 million, respectively.

The following table summarizes the status of these defined benefit plans for U.S. employees for the years ended December 31:


(Dollars in thousands)	2006			2005
Change in projected benefit obligation:
Benefit obligation at beginning of year	$	81,269		$	66,164
Service cost		5,089			3,873
Interest cost		4,890			4,036
Actuarial loss		1,977			7,749
Benefits paid		(782	)		(553	)

Projected benefit obligation at end of year		92,443			81,269

Change in plan assets:
Fair value of plan assets at beginning of year		43,609			38,172
Actual return on plan assets		4,510			2,360
Actual contributions during the year		22,859			3,942
Administrative expenses paid		(400	)		(312	)
Benefits paid		(782	)		(553	)

Fair value of plan assets at end of year		69,796			43,609

Funded status at end of year		(22,647	)		(37,660	)

Net amount recognized in the consolidated balance sheets (after FAS 158)	$	(22,647	)

Amounts recognized in the consolidated balance sheets at December 31:


(Dollars in thousands)	2006
Other assets (due beyond one year)	$	1,652
Other liabilities (due within one year)		(1,595	)
Other liabilities (due beyond one year)		(22,704	)

Net amount recognized in the consolidated balance sheet	$	(22,647	)

F-27

Amounts not yet reflected in net periodic benefit cost and included in accumulated other comprehensive income at December 31:

(Dollars in thousands)	2006
Prior service cost	$	(493	)
Accumulated loss		(26,169	)

Accumulated other comprehensive loss		(26,662	)
Change in accumulated other comprehensive income due to application of FAS 158
Additional minimum liaibility (before FAS 158)		(5,042	)
Intangible asset offset (before FAS 158)		620

Accumulated other comprehensive income (before FAS 158)		(4,422	)

Net decrease in accumulated other comprehensive income due to FAS 158	$	(22,240	)

Plan assets consist of shares in investment trusts with approximately 59% and 12% of the underlying assets consisting of equity securities and fixed maturities, respectively, and 29%in cash and cash equivalents due to an employer pension contribution.

Net periodic benefit cost for U.S. employees included the following components for years ended December 31 as indicated:


(Dollars in thousands)	2006			2005			2004
Service cost	$	5,089		$	3,873		$	3,273
Interest cost		4,890			4,036			3,397
Expected return on assets		(3,549	)		(3,032	)		(2,835	)
Amortization of actuarial loss from earlier periods		2,633			1,923			1,357
Amortization of unrecognized prior service cost		127			127			127

Net periodic benefit cost	$	9,190		$	6,927		$	5,319

Other changes recognized in other comprehensive income:
Other comprehensive loss attributable to change from prior year		20,120

Total recognized in net periodic benefit cost and other
comprehensive income	$	29,310

The estimated transition obligation, actuarial loss and prior service cost that will be amortized from accumulated other comprehensive income into net periodic benefit cost over the next year are $0, $1,868,005 and $126,908, respectively.

The weighted average discount rates used to determine the actuarial present value of the projected benefit obligation for 2006, 2005 and 2004 were 5.94%, 5.50% and 5.75%, respectively. The rate of compensation increase used to determine the actuarial present value of the projected benefit obligation for 2006, 2005 and 2004 was 4.5%. The expected long-term rate of return on plan assets for 2006, 2005 and 2004 was 8.0%, 8.0% and 9.0%, respectively, and was based on portfolio returns and allocations.

F-28

The following table summarizes the accumulated benefit obligation for years ended December 31 as indicated:


(Dollars in thousands)	2006		2005
Qualified Plan	$	51,937	$	46,200
Non-qualified Plan		15,602		14,225

Total	$	67,539	$	60,425

The following table displays the plans with projected benefit obligations in excess of plan assets at December 31:


(Dollars in thousands)	2006		2005
Qualified Plan
Projected benefit obligation	$	-	$	60,782
Fair value of plan assets		-		43,609
Non-qualified Plan
Projected benefit obligation	$	24,299	$	20,488
Fair value of plan assets		-		-

The following table displays the plans with accumulated benefit obligations in excess of plan assets at December 31:


(Dollars in thousands)	2006		2005
Qualified Plan
Projected benefit obligation	$	-	$	60,782
Accumulated benefit obligation		-		46,200
Fair value of plan assets		-		43,609
Non-qualified Plan
Projected benefit obligation	$	24,299	$	20,488
Accumulated benefit obligation		15,602		14,225
Fair value of plan assets		-		-

The following table displays the expected benefit payments in the years indicated:

(Dollars in thousands)
2007	$	2,537
2008		2,650
2009		4,862
2010		4,978
2011		5,499
Next 5 years		35,195

F-29

The asset allocation percentages for the qualified benefit plan, by asset category, at December 31 are as follows:


Asset Category:	2006			2005
Equity securities		59.20	%		67.61	%
Debt securities		11.50	%		31.91	%
Other		29.30	%		0.48	%

Total		100.00	%		100.00	%

The Company manages the qualified plan investments for U.S. employees. The assets in the plan consist of debt and equity mutual funds. Due to the long term nature of the plan, the target asset allocation consists of 70% equities and 30% bonds.

The Company expects to contribute approximately $4.0 million in 2007 to the qualified plan.

B. Defined Contribution Plans
The Company also maintains both qualified and non-qualified defined contribution plans (“Savings Plan” and “Non-Qualified Savings Plan”, respectively) covering U.S. employees. Under the plans, the Company contributes up to a maximum 3% of the participants’ compensation based on the contribution percentage of the employee. The Non-Qualified Savings Plan provides compensating savings plan benefits for participants whose benefits have been curtailed under the Savings Plan due to Internal Revenue Code limitations. The Company’s incurred expenses related to these plans were $1.0 million in 2006, 2005 and 2004.

In addition, the Company maintains several defined contribution pension plans covering non-U.S. employees. Each non-U.S. office (Canada and Singapore) maintains a separate plan for the non-U.S. employees working in that location. The Company contributes various amounts based on salary, age and/or years of service. The contributions as a percentage of salary for the branch offices range from 6% to 9%. The contributions are generally used to purchase pension benefits from local insurance providers. The Company’s incurred expenses related to these plans were $0.2 million in 2006, 2005 and 2004.

C. Post-Retirement Plan
Beginning January 1, 2002, the Company established the Retiree Health Plan. This plan provides health care benefits for eligible retired employees (and their eligible dependants), who have elected coverage. The Company currently anticipates that most covered employees will become eligible for these benefits if they retire while working for the Company. The cost of these benefits is shared with the retiree. The Company accrues the post-retirement benefit expense during the period of the employee’s service.

A health care inflation rate for pre-Medicare claims of 10% in 2006 was assumed to decrease to 9% in 2007 and decrease one percentage point annually to 5% in 2011 and then remain at that level.

A health care inflation rate for post-Medicare claims of 6% in 2006 was assumed to decrease to 5% in 2007 and then remain at that level.

F-30

Changes in the assumed health care cost trend can have a significant effect on the amounts reported for the health care plans. A one percent change in the rate would have the following effects on:

(Dollars in thousands)			Percentage Point Increase ($ Impact)						Percentage Point Decrease ($ Impact)
a. Effect on total service and interest cost components			$	258					$	(199	)
b. Effect on accumulated post-retirement benefit obligation				1,753						(1,388	)

Benefit expense for this plan for the years ended December 31, 2006, 2005 and 2004 was $1.1 million, $0.9 million and $0.8 million, respectively.

The following table summarizes the status of this plan for the years ended December 31 as indicated:


(Dollars in thousands)	2006			2005
Change in projected benefit obligation:
Benefit obligation at beginning of year	$	8,582		$	7,111
Service cost		631			490
Interest cost		464			408
Actuarial (gain) loss		(794	)		607
Benefits paid		(103	)		(34	)

Benefit obligation at end of year		8,780			8,582
Change in plan assets:
Fair value of plan assets at beginning of year		-			-
Employer contributions		103			34
Benefits paid		(103	)		(34	)

Fair value of plan assets at end of year		-			-

Funded status at end of year	$	(8,780	)	$	(8,582	)

Amounts recognized in the consolidated balance sheets as December 31:


(Dollars in thousands)	2006
Other liabilities (due within one year)	$	(117	)
Other liabilities (due beyond one year)		(8,663	)

Net amount recognized in the consolidated balance sheets	$	(8,780	)

Amounts not yet reflected in net periodic benefit cost and included in accumulated other comprehensive income at December 31:


(Dollars in thousands)	2006
Accumulated other comprehensive loss	$	(867	)

Net decrease in accumulated other comprehensive income due to FAS 158	$	(867	)

F-31

Net periodic benefit cost included the following components for years ended December 31 as indicated:


(Dollars in thousands)	2006		2005		2004
Service cost	$	631	$	490	$	419
Interest cost		464		408		363
Net loss recognition		50		29		17

Net periodic cost		1,145	$	927	$	799

Other changes recognized in other comprehensive income:
Other comprehensive loss attributable to change from prior year		867

Total recognized in net periodic benefit cost and
other comprehensive income	$	2,012

The weighted average discount rates used to determine the actuarial present value of the benefit obligation for 2006, 2005 and 2004 were 5.94%, 5.75% and 5.50%, respectively.

The following table summarizes the Benefit Obligation for the post-retirement plan for the years ended December 31 as indicated:


(Dollars in thousands)			2006						2005
Post-retirement Plan			$	8,780					$	8,582

The following table displays the expected benefit payments in the years indicated:

(Dollars in thousands)
2007	$	117
2008		140
2009		203
2010		263
2011		328
Next 5 years		2,731

13. DIVIDEND RESTRICTIONS AND STATUTORY FINANCIAL INFORMATION

A. Dividend Restrictions
Delaware law provides that an insurance company which is a member of an insurance holding company system and is domiciled in the state shall not pay dividends without giving prior notice to the Insurance Commissioner of Delaware and may not pay dividends without the approval of the Insurance Commissioner if the value of the proposed dividend, together with all other dividends and distributions made in the preceding twelve months, exceeds the greater of (1) 10% of statutory surplus or (2) net income, not including realized capital gains, each as reported in the prior year’s statutory annual statement. In addition, no dividend may be paid in excess of unassigned earned surplus. At December 31, 2006, Everest Re had $270.4 million available for payment of dividends in 2007 without the need for prior regulatory approval.

F-32

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 the NAIC Accounting Practices and Procedures Manual. The capital and statutory surplus of Everest Re was $2,704.1 million (unaudited) and $2,327.6 million at December 31, 2006 and 2005, respectively. The statutory net income of Everest Re was $298.7 million (unaudited) for the year ended December 31, 2006, the statutory net loss was $26.9 million for the year ended December 31, 2005 and the statutory net income was $175.8 million for the year ended December 31, 2004.

14. CONTINGENCIES

In the ordinary course of business, the Company is involved in lawsuits, arbitrations and other formal and informal dispute resolution procedures, the outcomes of which will determine the Company’s rights and obligations under insurance, reinsurance and other contractual agreements. In some disputes, the Company seeks to enforce its rights under an agreement or to collect funds owing to it. In other matters, the Company is resisting attempts by others to collect funds or enforce alleged rights. These disputes arise from time to time and as they arise are addressed, and ultimately resolved, through both informal and formal means, including negotiated resolution, arbitration and litigation. In all such matters, the Company believes that its positions are legally and commercially reasonable. While the final outcome of these matters cannot be predicted with certainty, the Company does not believe that any of these matters, when finally resolved, will have a material adverse effect on the Company’s financial position or liquidity. However, an adverse resolution of one or more of these items in any one quarter or fiscal year could have a material adverse effect on the Company’s results of operations in that period.

In 1993 and prior, the Company had a business arrangement with The Prudential wherein, for a fee, the Company accepted settled claim payment obligations of certain property and casualty insurers, and, concurrently, became the owner of the annuity or assignee of the annuity proceeds funded by the property and casualty insurers specifically to fulfill these fully settled obligations. In these circumstances, the Company would be liable if The Prudential, which has an A+ (Superior) financial strength rating from A.M. Best Company (“A.M. Best”), were unable to make the annuity payments. The estimated cost to replace all such annuities for which the Company was contingently liable at December 31, 2006 and 2005 was $150.5 million and $155.3 million, respectively.

Prior to its 1995 initial public offering, the Company had purchased annuities from an unaffiliated life insurance company with an A+ (Superior) financial strength rating from A.M. Best to settle certain claim liabilities of the Company. Should the life insurance company become unable to make the annuity payments, the Company would be liable for those claim liabilities. The estimated cost to replace such annuities at December 31, 2006 and 2005 was $20.2 million and $18.8 million, respectively.

15. RELATED-PARTY TRANSACTIONS

During the normal course of business, the Company, through its affiliates, engages in reinsurance and brokerage and commission business transactions, which management believes to be at arm’s length, with companies controlled by or affiliated with its outside directors. Such transactions, individually and in the aggregate, are not material to the Company’s financial condition, results of operation and cash flow.

The Company engages in reinsurance transactions with Bermuda Re and Everest International under which business is ceded for what management believes to be arm’s length consideration. See also Note 10.

F-33

16. SEGMENT REPORTING

The Company, through its subsidiaries, operates in four segments: U.S. Reinsurance, U.S. Insurance, Specialty Underwriting and International. The U.S. Reinsurance operation writes property and casualty reinsurance, on both a treaty and facultative basis, through reinsurance brokers, as well as directly with ceding companies within the U.S. The U.S. Insurance operation writes property and casualty insurance primarily through general agents and surplus lines brokers within the U.S. The Specialty Underwriting operation writes accident and health (“A&H”), marine, aviation and surety business within the U.S. and worldwide through brokers and directly with ceding companies. The International operation writes property and casualty reinsurance through Everest Re’s branches in Canada and Singapore, in addition to foreign business written through Everest Re’s Miami and New Jersey offices.

These segments are managed in a carefully coordinated fashion with strong elements of central control with respect to pricing, risk management, control of aggregate exposures to catastrophe events, capital, investments and support operations. Management generally monitors and evaluates the financial performance of these operating segments based upon their underwriting results. Underwriting results include earned premium less losses and LAE incurred, commission and brokerage expenses and other underwriting expenses and are analyzed using ratios, in particular loss, commission and brokerage and other underwriting expense ratios, which, respectively, divide incurred losses, commission and brokerage and other underwriting expenses by earned premium.

The Company does not maintain separate balance sheet data for its operating segments. Accordingly, the Company does not review and evaluate the financial results of its operating segments based upon balance sheet data.

Effective January 1, 2004, Everest Re sold the net assets of its United Kingdom branch to Bermuda Re, a Bermuda insurance company and direct subsidiary of Group, for $77.0 million. In connection with the sale, Everest Re provided Bermuda Re with a reserve indemnity agreement providing for indemnity payments of up to 90% of £25 million in the event December 31, 2002 loss and LAE reserves develop adversely. The impact on the financial statements for the year ended December 31, 2004 was a dividend to Group of $26.3 million as net assets sold exceeded the purchase price, an underwriting gain of $10.9 million due to the sale related transactions of the 2003 and 2002 whole account quota shares with Bermuda Re (discussed in Note 10) and an increase in the current period incurred losses of $41.7 million relating to liability under the reserve indemnity agreement with Bermuda Re, exhausting the limit available under this agreement at December 31, 2004.

The following tables represent the relevant underwriting results for the operating segments for the three years ended December 31:

U.S. Reinsurance
(Dollars in thousands)	2006		2005			2004
Gross written premiums	$	1,336,728	$	1,386,170		$	1,478,159
Net written premiums		992,819		1,055,815			1,148,522
Premiums earned	$	978,072	$	1,080,453		$	1,155,317
Incurred losses and loss adjustment expenses		721,157		1,152,427			947,467
Commission and brokerage		202,809		259,751			274,370
Other underwriting expenses		24,947		23,980			23,390

Underwriting gain (loss)	$	29,159	$	(355,705	)	$	(89,910	)

F-34

U.S. Insurance
(Dollars in thousands)	2006		2005		2004
Gross written premiums	$	866,294	$	932,469	$	1,167,808
Net written premiums		591,177		618,752		788,457
Premiums earned	$	573,965	$	636,663	$	726,344
Incurred losses and loss adjustment expenses		432,232		415,379		540,734
Commission and brokerage		72,723		93,621		70,881
Other underwriting expenses		48,918		51,726		49,286

Underwriting gain	$	20,092	$	75,937	$	65,443

Specialty Underwriting
(Dollars in thousands)	2006			2005			2004
Gross written premiums	$	251,209		$	314,630		$	487,072
Net written premiums		174,431			222,526			364,256
Premiums earned	$	176,326		$	224,555		$	356,705
Incurred losses and loss adjustment expenses		125,160			225,740			249,086
Commission and brokerage		44,851			55,564			94,680
Other underwriting expenses		6,559			6,756			7,069

Underwriting (loss) gain	$	(244	)	$	(63,505	)	$	5,870

International
(Dollars in thousands)	2006		2005			2004
Gross written premiums	$	731,745	$	706,584		$	687,657
Net written premiums		531,834		498,557			491,732
Premiums earned	$	518,837	$	484,405		$	471,970
Incurred losses and loss adjustment expenses		278,530		409,274			316,517
Commission and brokerage		118,122		104,458			106,606
Other underwriting expenses		13,830		12,621			11,298

Underwriting gain (loss)	$	108,355	$	(41,948	)	$	37,549

F-35

(Dollars in thousands)	2006			2005			2004
Underwriting gain (loss)	$	157,362		$	(385,221	)	$	18,952
UK branch sale and related transactions		-			-			(30,714	)

Underwriting gain (loss)	$	157,362			(385,221	)	$	(11,762	)
Net investment income		372,352			325,217			329,184
Net realized capital gain		34,957			64,568			56,710
Corporate (expense) income		(4,475	)		(6,241	)		1,969
Interest, fee and bond issue cost amortization expense		(69,696	)		(74,197	)		(76,610	)
Other (expense) income		(40,542	)		10,344			(67,881	)

Income (loss) before taxes	$	449,958		$	(65,530	)	$	231,610

The Company produces business in the U.S. and internationally. The net income deriving from and assets residing in the individual foreign countries in which the Company writes business are identifiable in the Company’s financial records. Other than the U.S. no other country represented more than 5% of the Company’s revenues.

Approximately 18.1%, 18.5% and 17.5% of the Company’s gross written premiums in 2006, 2005 and 2004, respectively, were sourced through the Company’s largest intermediary.

17. UNAUDITED QUARTERLY FINANCIAL DATA

Summarized quarterly financial data for the years indicated were as follows:

(Dollars in thousands)	1st Quarter		2nd Quarter		3rd Quarter			4th Quarter
2006 Operating data:
Gross written premiums	$	851,951	$	690,330	$	846,176		$	797,518
Net written premiums		626,251		476,222		621,867			565,921
Premiums earned		603,678		501,488		561,042			580,992
Net investment income		83,905		91,922		84,744			111,781
Net realized capital gain		9,020		2,204		9,025			14,708
Total claims and underwriting expenses		610,392		427,637		458,454			597,830
Net income		43,505		121,382		114,931			53,088
2005 Operating data:
Gross written premiums	$	879,484	$	940,139	$	825,264		$	694,966
Net written premiums		648,640		675,591		630,040			441,379
Premiums earned		619,006		668,325		617,750			520,995
Net investment income		85,922		89,070		67,585			82,640
Net realized capital gain		1,485		18,203		18,633			26,247
Total claims and underwriting expenses		576,204		608,196		895,656			737,482
Net income (loss)		86,913		118,925		(173,552	)		(27,580	)

F-36

EVEREST REINSURANCE HOLDINGS, INC. SCHEDULE I - SUMMARY OF INVESTMENTS - OTHER THAN INVESTMENTS IN RELATED PARTIES DECEMBER 31, 2006
Column A	Column B		Column C		Column D
(Dollars in thousands)	Cost		Market Value		Amount Shown in Balance Sheet
Fixed maturities-available for sale
Bonds:
U.S. government and government agencies	$	85,563	$	85,058	$	85,058
State, municipalities and political subdivisions		3,633,188		3,792,371		3,792,371
Foreign government securities		354,153		370,147		370,147
Foreign corporate securities		449,505		454,328		454,328
Public utilities		105,461		108,497		108,497
All other corporate bonds		846,218		850,022		850,022
Mortgage pass-through securities		475,140		466,499		466,499
Redeemable preferred stock		10,000		10,488		10,488

Total fixed maturities-available for sale		5,959,228		6,137,410		6,137,410
Equity securities		874,289		1,189,341		1,189,341
Short-term investments		657,674		657,674		657,674
Other invested assets		329,914		330,875		330,875
Cash		136,535		136,535		136,535

Total investments and cash	$	7,957,640	$	8,451,835	$	8,451,835

S-1

EVEREST REINSURANCE HOLDINGS, INC. SCHEDULE II - CONDENSED FINANCIAL INFORMATION OF THE REGISTRANT CONDENSED BALANCE SHEETS
	December 31,
(Dollars in thousands, except par value per share)	2006		2005
ASSETS:
Equity securities, at market value (cost: 2006 $16,393; 2005 $16,393)	$	16,393	$	16,393
Short-term investments		74,790		26,653
Cash		360		222
Investment in subsidiaries, at equity in the underlying net assets		3,102,649		2,724,925
Accrued investment income		131		280
Deferred tax asset		-		4,103
Current federal income tax receivable		9,410		2,360
Other assets		20,693		22,431

TOTAL ASSETS	$	3,224,426	$	2,797,367

LIABILITIES:
8.75% Senor notes due 3/15/2010	$	199,560	$	199,446
5.4% Senior notes due 10/15/2014		249,652		249,617
Junior subordinated debt securities		546,393		546,393
Accrued interest on debt and borrowings		10,041		10,041
Due to affiliates		363		1,085
Other liabilities		33		84

Total liabilities		1,006,042		1,006,666

STOCKHOLDER'S EQUITY:
Common stock, par value: $0.01; 3,000 shares authorized;
1,000 shares issued and outstanding (2006 and 2005)		-		-
Additional paid-in capital		300,764		292,281
Accumulated other comprehensive income, net of deferred income
taxes of $0.0 million at 2006 and $0.0 million at 2005		332,578		246,285
Retained earnings		1,585,042		1,252,135

Total stockholder's equity		2,218,384		1,790,701

TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY	$	3,224,426	$	2,797,367

See notes to consolidated financial statements

S-2

EVEREST REINSURANCE HOLDINGS, INC. SCHEDULE II - CONDENSED FINANCIAL INFORMATION OF THE REGISTRANT CONDENSED STATEMENTS OF OPERATIONS
	Years Ended December 31,
(Dollars in thousands)	2006			2005			2004
REVENUES:
Net investment income	$	2,793		$	4,638		$	29,752
Net realized capital gains		-			8,106			6,466
Other expense		(94	)		(1,891	)		(556	)
Equity in earnings of subsidiaries		381,135			55,424			193,224

Total revenues		383,834			66,277			228,886

EXPENSES:
Interest expense		69,696			74,197			76,611
Other expense		1,782			2,002			1,492

Total expenses		71,478			76,199			78,103

INCOME (LOSS) BEFORE TAXES		312,356			(9,922	)		150,783
Income tax benefit		(20,550	)		(14,628	)		(24,690	)

NET INCOME	$	332,906		$	4,706		$	175,473

See notes to consolidated financial statements

S-3

EVEREST REINSURANCE HOLDINGS, INC. SCHEDULE II - CONDENSED FINANCIAL INFORMATION OF THE REGISTRANT CONDENSED STATEMENTS OF CASH FLOWS
	Years Ended December 31,
(Dollars in thousands)	2006			2005			2004
CASH FLOWS FROM OPERATING ACTIVITIES
Net income	$	332,906		$	4,706		$	175,473
Adjustments to reconcile net income to net cash provided
by operating activities:
Equity in earnings of subsidiaries		(381,135	)		(55,424	)		(193,224	)
Dividends received from subsidiaries ⁽¹⁾		100,000			75,000			70,000
Decrease in other assets and liabilities		1,836			515			1,491
(Decrease) increase in accrued interest on debt and borrowings		-			(6,385	)		2,730
(Increase) decrease in federal income tax recoverable		(7,050	)		11,898			-
Decrease (increase) in deferred tax asset		4,103			(1,839	)		(13,567	)
Decrease in due to affiliates		(722	)		(407	)		-
Accrual of bond discount		-			(974	)		(807	)
Amortization of underwriting discount on senior notes		149			162			204
Realized capital gains		-			(8,106	)		(6,466	)

Net cash provided by operating activities		50,087			19,146			35,834

CASH FLOWS FROM INVESTING ACTIVITIES
Additional investment in subsidiaries ⁽¹⁾		(1,925	)		(175,000	)		(140,000	)
Proceeds (cost) from equity securities sold (acquired)		-			47,821			(44,566	)
Net (sales) purchases of short-term securities		(48,137	)		318,735			(321,457	)
UK branch sale		-			-			(26,262	)

Net cash (used in) provided by investing activities		(50,062	)		191,556			(532,285	)

CASH FLOWS FROM FINANCING ACTIVITIES
Dividends from treasury stock		-			199			181
Sale of treasury stock		-			38,261			-
Repayments on revolving credit agreement		-			-			(70,000	)
(Repayment) issuance of senior notes		-			(250,000	)		246,651
Issuance of junior subordinated debt securities, net		-			-			319,997
Tax benefit from share-based compensation		113			211			-

Net cash provided by (used in) financing activities		113			(211,329	)		496,829

Net increase (decrease) in cash		138			(627	)		378
Cash, beginning of period		222			849			471

Cash, end of period	$	360		$	222		$	849

Non-cash financing transaction:
Non-cash contribution from parent	$	8,370		$	4,907		$	8,181
Non-cash contribution to subsidiaries	$	(8,370	)	$	(4,907	)	$	(8,181	)
See notes to consolidated financial statements
⁽¹⁾Dividends received from consolidated subsidiaries (i.e., dividend income) have been appropriately classified as operating activity in 2006, with conforming changes for 2005 and 2004, which were previously recorded as a financing activity.

S-4

EVEREST REINSURANCE HOLDINGS, INC. SCHEDULE III - SUPPLEMENTARY INSURANCE INFORMATION
Column A	Column B		Column C		Column D		Column E		Column F		Column G		Column H		Column I		Column J
Geographic Area (Dollars in thousands)	Deferred Acquisition Costs		Reserve for Losses and Loss Adjustment Expenses		Unearned Premium Reserves		Premiums Earned		Net Investment Income		Incurred Loss and Loss Adjustment Expenses		Amortization of Deferred Acquisition Costs		Other Operating Expenses		Net Written Premium
December 31, 2006
Domestic	$	189,060	$	6,430,793	$	1,228,509	$	1,728,363	$	339,388	$	1,278,549	$	320,383	$	84,899	$	1,758,427
International		51,286		966,477		195,168		518,837		32,964		278,530		118,122		13,830		531,834

Total	$	240,346	$	7,397,270	$	1,423,677	$	2,247,200	$	372,352	$	1,557,079	$	438,505	$	98,729	$	2,290,261

December 31, 2005
Domestic	$	153,603	$	6,657,546	$	1,203,970	$	1,941,671	$	296,796	$	1,793,546	$	408,936	$	88,703	$	1,897,093
International		48,623		1,071,625		183,906		484,405		28,421		409,274		104,458		12,621		498,557

Total	$	202,226	$	7,729,171	$	1,387,876	$	2,426,076	$	325,217	$	2,202,820	$	513,394	$	101,324	$	2,395,650

December 31, 2004
Domestic	$	163,600	$	5,986,100	$	1,226,099	$	2,357,181	$	305,707	$	1,855,854	$	470,893	$	77,776	$	2,440,986
International		40,524		860,804		161,073		471,970		23,477		316,517		106,606		11,298		491,732

Total	$	204,124	$	6,846,904	$	1,387,172	$	2,829,151	$	329,184	$	2,172,371	$	577,499	$	89,074	$	2,932,718

S-5

EVEREST REINSURANCE HOLDINGS, INC. SCHEDULE IV - REINSURANCE
Column A	Column B		Column C		Column D		Column E		Column F
(Dollars in thousands)	Gross Amount		Ceded to Other Companies		Assumed from Other Companies		Net Amount		Assumed to Net
December 31, 2006
Total property and liability
insurance premiums earned	$	961,133	$	902,994	$	2,189,061	$	2,247,200		97.4	%
December 31, 2005
Total property and liability
insurance premiums earned	$	1,019,288	$	914,468	$	2,321,256	$	2,426,076		95.8	%
December 31, 2004
Total property and liability
insurance premiums earned	$	1,142,632	$	871,479	$	2,557,998	$	2,829,151		90.4	%

S-6