UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C 20549
FORM 10-KAnnual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the fiscal year ended December 31, 2006Commission 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 Registered8.75% Senior Notes Due 2010
        
        NYSE5.40% Senior Notes Due 2014
        
        NYSE7.85% Trust Preferred Securities of Everest ReCapital Trust guaranteed by Everest Reinsurance Holdings, Inc.
        NYSE6.20% Trust Preferred Securities of Everest ReCapital Trust II guaranteed by Everest ReinsuranceHoldings, Inc.
        
        NYSESecurities registered pursuant to Section 12(g) of the Act:  NoneIndicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of theSecurities Act.Yes
        
        
        No
        XIndicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.Yes
        
        
        No
        X








Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.Yes
        X
        
        NoIndicate 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
        
        
        No
        XThe 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
        XAt 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.




















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TABLE OF CONTENTS



Item
        PagePART I1.
        Business
        11A.
        Risk Factors
        71B.
        Unresolved Staff Comments
        142.
        Properties
        143.
        Legal Proceedings
        144.
        Submission of Matters to a Vote of Security Holders
        15PART II5.
        Market for Registrants Common Equity, Related Shareholder Matters and Issuer Purchases of Equity Securities
        156.
        Selected Financial Data
        157.
        Managements Discussion and Analysis of Financial Condition and Results of Operations
        167A.
        Quantitative and Qualitative Disclosures About Market Risk
        358.
        Financial Statements and Supplementary Data
        379.
        Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
        379A.
        Controls and Procedures
        379B.
        Other Information
        38PART III10.
        Directors and Executive Officers of the Registrant
        3811.
        Executive Compensation
        3812.
        Security Ownership of Certain Beneficial Owners and Management and Related Shareholder Matters
        3813.
        Certain Relationships and Related Transactions
        3814.
        Principal Accountant Fees and Services
        38PART IV15.
        Exhibits and Financial Statement Schedules
        39






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PART IUnless 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. BusinessThe CompanyHoldings, 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.
|- |  |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

1

| |  |  | 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.

2

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 StrategyThe 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 TransactionsThe 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

3

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 RatingsThe 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

4

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)     |  |        
|Everest National     |           |  | A+ (Superior)     |  |        
|Everest Indemnity    |           |  | A+ (Superior)     |  |        
|Everest Security     |           |  | A+ (Superior)     |  |        
|Mt. McKinley         |           |  | 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 RatingsThe 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) |        
|Trust Preferred Securities |           |  | a-                | (Strong ability) |        

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

5

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.

CompetitionThe 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.

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

6

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.

EmployeesAs 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 InformationThe 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 FactorsIn 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
BUSINESSOur results could be
adversely affected by catastrophic events.

7

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          |                           
|2005          |                           
|2004          |                           
|2003          |                           
|2002          |                           

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:

8

|Calendar year | Effect on pre-tax net income
|------------- | ----------------------------
|2006          |                             
|2005          |                             
|2004          |                             
|2003          |                             
|2002          |                             

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

9

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.

10

(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  | %   
|Affiliated                                                     |      |      |      | 24.2 | %   

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

11

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 | As ofDecember 31, 2006 |  | % of Total
|-------------------------------------- | ---------------------- |  | ----------
|Fixed income:                          |                        |  |           
|Mortgage-backed securities             |                        |  |           
|Other asset-backed                     |                        |  |           
|                                       |                        |  |           
|Total asset-backed                     |                        |  |           
|Other fixed income                     |                        |  |           
|                                       |                        |  |           
|Total fixed income                     |                        |  |           
|Equity securities                      |                        |  |           
|Other invested assets                  |                        |  |           
|Cash and short-term investments        |                        |  |           
|                                       |                        |  |           
|Total investments and cash             |                        |  |           
|                                       |                        |  |           

12

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
REGULATIONInsurance 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.

13

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
SECURITIESBecause 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
CommentsNone.

ITEM 2. PropertiesEverest 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 ProceedingsIn 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.

14

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

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

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

Dividend History and
RestrictionsThe 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 SecuritiesNone.

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

15

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 CONDITIONSThe 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.

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

16

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.

17

FINANCIAL SUMMARYThe 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)
|-------------------------------------------------------- | ------------------------ | ---- | ------------------------------
|
|Gross written premiums                                   |                          |      | $                             
|Net written premiums                                     |                          |      |                               
|REVENUES:                                                |                          |     
|Premiums earned                                          |                          |      | $                             
|Net investment income                                    |                          |      |                               
|Net realized capital gains                               |                          |      |                               
|Other (expense) income                                   |                          |      |                               
|                                                         |                          |      |                               
|Total revenues                                           |                          |      |                               
|                                                         |                          |      |                               
|CLAIMS AND EXPENSES:                                     |                          |     
|Incurred losses and loss adjustment expenses             |                          |      |                               
|Commission, brokerage, taxes and fees                    |                          |      |                               
|Other underwriting expenses                              |                          |      |                               
|Interest, fee and bond issue   cost amortization expense |                          |      |                               
|                                                         |                          |      |                               
|Total claims and expenses                                |                          |      |                               
|                                                         |                          |      |                               
|INCOME (LOSS) BEFORE TAXES                               |                          |      |                               
|Income tax expense (benefit)                             |                          |      |                               
|                                                         |                          |      |                               
|NET INCOME                                               |                          |      | $                             
|                                                         |                          |      |                               
|RATIOS:                                                  |                          |      |                               
|                                                         |                          |      |                               
|Loss ratio                                               |                          |      |                               
|Commission and brokerage ratio                           |                          |      |                               
|Other underwriting expense ratio                         |                          |      |                               
|                                                         |                          |      |                               
|Combined ratio                                           |                          |      |                               
|                                                         |                          |      |                               
|December 31,                                            
|(Dollars in millions)                                    | 2006                     | 2005 | 2004                          
|Stockholder's equity                                     |                          |      | $                             
|                                                         |                          |      |                               
|(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

18

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.

19

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

|                                                       | Year Ended December 31, 2004
|------------------------------------------------------ | ----------------------------
|
|Gross written premiums                                 |                             
|Net written premiums                                   |                             
|REVENUES:                                              |                             
|Premiums earned                                        |                             
|Net investment income                                  |                             
|Net realized capital gains                             |                             
|Other expense                                          |                             
|                                                       |                             
|Total revenues                                         |                             
|                                                       |                             
|CLAIMS AND EXPENSES:                                   |                             
|Incurred losses and loss adjustment expenses           |                             
|Commission, brokerage, taxes and fees                  |                             
|Other underwriting expense                             |                             
|Interest, fee and bond issue cost amortization expense |                             
|                                                       |                             
|Total claims and expenses                              |                             
|                                                       |                             
|INCOME BEFORE TAXES                                    |                             
|                                                       |                             

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 INFORMATIONThe 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.

20

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                            
|--------------------------------------------
|
|Gross written premiums                      
|Net written premiums                        
|Premiums earned                             
|Incurred losses and loss adjustment expenses
|Commission and brokerage                    
|Other underwriting expenses                 
|                                            
|Underwriting gain (loss)                    
|                                            

|U.S. Insurance                              
|--------------------------------------------
|
|Gross written premiums                      
|Net written premiums                        
|Premiums earned                             
|Incurred losses and loss adjustment expenses
|Commission and brokerage                    
|Other underwriting expenses                 
|                                            
|Underwriting gain                           
|                                            

|Specialty Underwriting                      
|--------------------------------------------
|
|Gross written premiums                      
|Net written premiums                        
|Premiums earned                             
|Incurred losses and loss adjustment expenses
|Commission and brokerage                    
|Other underwriting expenses                 
|                                            
|Underwriting (loss) gain                    
|                                            

|International                               
|--------------------------------------------
|
|Gross written premiums                      
|Net written premiums                        
|Premiums earned                             
|Incurred losses and loss adjustment expenses
|Commission and brokerage                    
|Other underwriting expenses                 
|                                            
|Underwriting gain (loss)                    
|                                            

21

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)                               |      |      | $   
|UK Branch Sale and related transactions                |      |      |     
|                                                       |      |      |     
|Underwriting gain (loss)                               |      |      | $   
|Net investment income                                  |      |      |     
|Net Realized capital gain                              |      |      |     
|Corporate  (expense) income                            |      |      |     
|Interest, fee and bond issue cost amortization expense |      |      |     
|Other (expense) income                                 |      |      |     
|                                                       |      |      |     
|Income (loss) before taxes                             |      |      | $   
|                                                       |      |      |     

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
OPERATIONSYEAR ENDED DECEMBER 31, 2006
COMPARED TO YEAR ENDED DECEMBER 31, 2005Premiums 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,

22

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.



ExpensesIncurred 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
|--------------------------------------------------------- | ----------------- |  | -----------------
|
|All Segments                                              |                   |  |                  
|Attritional (a)                                           |                   |  | $                
|Catastrophes                                              |                   |  |                  
|A&E                                                       |                   |  |                  
|                                                          |                   |  |                  
|Total All segments                                        |                   |  | $                
|                                                          |                   |  |                  
|Loss Ratio                                                |                   |  |                  
|(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.

23

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
|------------------------------------------------- | ----------------- |  | -----------------
|
|Attritional                                       |                   |  | $                
|Catastrophes                                      |                   |  |                  
|A&E                                               |                   |  |                  
|                                                  |                   |  |                  
|Total segment                                     |                   |  | $                
|                                                  |                   |  |                  
|Loss Ratio                                        |                   |  |                  
|(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
|------------------------------------------------- | ----------------- |  | -----------------
|
|Attritional                                       |                   |  | $                
|Catastrophes                                      |                   |  |                  
|                                                  |                   |  |                  
|Total segment                                     |                   |  | $                
|                                                  |                   |  |                  
|Loss Ratio                                        |                   |  |                  
|(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.

24

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

|                                                  | December 31, 2006 |  | December 31, 2005
|------------------------------------------------- | ----------------- |  | -----------------
|
|Attritional                                       |                   |  | $                
|Catastrophes                                      |                   |  |                  
|                                                  |                   |  |                  
|Total segment                                     |                   |  | $                
|                                                  |                   |  |                  
|Loss Ratio                                        |                   |  |                  
|(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
|------------------------------------------------- | ----------------- |  | -----------------
|
|Attritional                                       |                   |  | $                
|Catastrophes                                      |                   |  |                  
|                                                  |                   |  |                  
|Total segment                                     |                   |  | $                
|                                                  |                   |  |                  
|Loss Ratio                                        |                   |  |                  
|(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
|----------------------
|
|U.S. Reinsurance      
|U.S. Insurance        
|Specialty Underwriting
|International         

25

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
|-----------------------
|
|U.S. Reinsurance       
|U.S. Insurance         
|Specialty Underwriting 
|International          

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                    |      |  | $   
|Equity securities                   |      |  |     
|Short-term investments              |      |  |     
|Other investment income             |      |  |     
|                                    |      |  |     
|Total gross investment income       |      |  |     
|Interest credited and other expense |      |  |     
|                                    |      |  |     
|Total net investment income         |      |  | $   
|                                    |      |  |     

26

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

|                                                                    | 2006 | 2005
|------------------------------------------------------------------- | ---- | ----
|Imbedded pre-tax yield of cash and invested assets at December 31   |      |     
|Imbedded after-tax yield of cash and invested assets at December 31 |      |     
|Annualized pre-tax yield on average cash and invested assets        |      |     
|Annualized after-tax yield on average cash and invested assets      |      |     

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, 2004Premiums 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

27

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.

ExpensesIncurred 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.

28

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

|                                                          | December 31, 2005 |  | December 31, 2004
|--------------------------------------------------------- | ----------------- |  | -----------------
|
|All Segments                                              |                   |  |                  
|Attritional (a)                                           |                   |  | $                
|Catastrophes                                              |                   |  |                  
|A&E                                                       |                   |  |                  
|                                                          |                   |  |                  
|Total All segments                                        |                   |  | $                
|                                                          |                   |  |                  
|Loss Ratio                                                |                   |  |                  
|(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

29

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
|------------------------------------------------- | ----------------- |  | -----------------
|
|Attritional                                       |                   |  | $                
|Catastrophes                                      |                   |  |                  
|A&E                                               |                   |  |                  
|                                                  |                   |  |                  
|Total segment                                     |                   |  | $                
|                                                  |                   |  |                  
|Loss Ratio                                        |                   |  |                  
|(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.

30

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
|------------------------------------------------- | ----------------- |  | -----------------
|
|Attritional                                       |                   |  | $                
|Catastrophes                                      |                   |  |                  
|                                                  |                   |  |                  
|Total segment                                     |                   |  | $                
|                                                  |                   |  |                  
|Loss Ratio                                        |                   |  |                  
|(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
|------------------------------------------------- | ----------------- |  | -----------------
|
|Attritional                                       |                   |  | $                
|Catastrophes                                      |                   |  |                  
|                                                  |                   |  |                  
|Total segment                                     |                   |  | $                
|                                                  |                   |  |                  
|Loss Ratio                                        |                   |  |                  
|(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.

31

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

|                                                  | December 31, 2005 |  | December 31, 2004
|------------------------------------------------- | ----------------- |  | -----------------
|
|Attritional                                       |                   |  | $                
|Catastrophes                                      |                   |  |                  
|                                                  |                   |  |                  
|Total segment                                     |                   |  | $                
|                                                  |                   |  |                  
|Loss Ratio                                        |                   |  |                  
|(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
|----------------------
|
|U.S. Reinsurance      
|U.S. Insurance        
|Specialty Underwriting
|International         

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.

32

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
|-----------------------
|
|U.S. Reinsurance       
|U.S. Insurance         
|Specialty Underwriting 
|International          

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                    |      |  | $   
|Equity securities                   |      |  |     
|Short-term investments              |      |  |     
|Other investment income             |      |  |     
|                                    |      |  |     
|Total gross investment income       |      |  |     
|Interest credited and other expense |      |  |     
|                                    |      |  |     
|Total net investment income         |      |  | $   
|                                    |      |  |     

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

|                                                                    | 2005 | 2004
|------------------------------------------------------------------- | ---- | ----
|Imbedded pre-tax yield of cash and invested assets at December 31   |      |     
|Imbedded after-tax yield of cash and invested assets at December 31 |      |     
|Annualized pre-tax yield on average cash and invested assets        |      |     
|Annualized after-tax yield on average cash and invested assets      |      |     

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.

33

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 DISCLOSUREThis 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.

34

ITEM 7A. Quantitative and
Qualitative Disclosures About Market Risk

Market Sensitive
InstrumentsThe 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.

35

|2006Interest Rate Shift in Basis Points
|---------------------------------------
|
|Total Market Value                     
|Market Value Change from Base (%)      
|Change in Unrealized Appreciation      
|After-tax from Base ($)                

|2005
Interest Rate Shift in Basis Points
|----------------------------------------
|
|Total Market Value                      
|Market Value Change from Base (%)       
|Change in Unrealized Appreciation       
|After-tax from Base ($)                 

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.

|2006Change in Equity Values in Percent     
|-------------------------------------------
|
|Market Value of the Equity Portfolio       
|After-tax Change in Unrealized Appreciation

|2005
Change in Equity Values in Percent    
|-------------------------------------------
|
|Market Value of the Equity Portfolio       
|After-tax Change in Unrealized Appreciation

36

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.

|2006Change in Foreign Exchange Rates in Percent
|-----------------------------------------------
|
|Total After-tax Foreign Exchange Exposure      

|2005Change in Foreign Exchange Rates in Percent
|-----------------------------------------------
|
|Total After-tax Foreign Exchange Exposure      

ITEM 8. Financial
Statements and Supplementary DataThe 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 DisclosureNone.

ITEM 9A. Controls and
Procedures

Disclosure Controls and
ProceduresAs 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 ReportingNot required for fiscal year ended December
31, 2006.

37

Changes in Internal
Control over Financial ReportingAs 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 IIIITEM 10. Directors and Executive Officers of the RegistrantInformation for Item 10 is not
required pursuant to General Instruction I(2) of Form 10-K.

ITEM 11. Executive
CompensationInformation 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 MattersInformation for Item 12 is not required
pursuant to General Instruction I(2) of Form 10-K.

ITEM 13. Certain
Relationships and Related TransactionsInformation 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        
|(2) |  |      | Audit-Related Fees
|(3) |  |      | Tax Fees          
|(4) |  |      | All Other Fees    

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.

38

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 IVITEM 15. Exhibits and
Financial Statement Schedules

ExhibitsThe 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
SchedulesThe 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.

39

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. TARANTOJoseph 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/JOSEPHV. 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












40

INDEX TO EXHIBITSExhibit 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, 20004.1
        
        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, 20004.2
        
        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, 20004.3
        
        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, 20004.4
        
        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-Q4.7
        
        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-Q4.8
        
        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-K4.11
        
        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-K4.12
        
        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-K4.13
        
        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-K10.5
        
        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-K10.6
        
        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, 200010.7
        
        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-K10.8
        
        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, 200510.15
        
        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, 200623.1
        
        Consent of PricewaterhouseCoopers LLP, filed herewith31.1
        
        Section 302 Certification of Joseph V. Taranto, filed herewith31.2
        
        Section 302 Certification of Craig Eisenacher, filed herewith32.1
        
        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.
        PagesReport of Independent Registered Public Accounting Firm
        F-2Consolidated Balance Sheets at December 31, 2006 and 2005
        F-3Consolidated Statements of Operations and Comprehensive Income for the Years Ended
December 31, 2006, 2005 and 2004
        F-4Consolidated Statements of Changes in Stockholders Equity for the Years Ended
December 31, 2006, 2005 and 2004
        F-5Consolidated Statements of Cash Flows for the Years Ended
December 31, 2006, 2005 and 2004
        F-6Notes to Consolidated Financial Statements
        F-7SchedulesI
        Summary of Investments Other Than Investments in Related Parties at
December 31, 2006
        S-1II
        Condensed Financial Information of Registrant:Balance Sheets as of December 31, 2006 and 2005
        S-2Statements of Operations for the Years Ended December 31, 2006, 2005 and 2004
        S-3Statements of Cash Flows for the Years Ended December 31, 2006, 2005 and 2004
        S-4III
        Supplementary Insurance Information for the Years Ended December 31, 2006, 2005 and 2004
        S-5IV
        Reinsurance for the Years Ended December 31, 2006, 2005 and 2004
        S-6Schedules 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 oftheiroperations and theircash 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 indexpresent fairly, in all material respects, the
information set forth therein when read in conjunction with the related consolidatedfinancial 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                        
|-------------------------------------------------------------------------------------
|
|
|ASSETS:                                                                              
|Fixed maturities - available for sale, at market value                               
|(amortized cost: 2006, $5,959,228; 2005, $5,850,541)                                 
|Equity securities, at market value (cost: 2006, $874,289; 2005, $859,425)            
|Short-term investments                                                               
|Other invested assets (cost: 2006, $329,914; 2005, $215,364)                         
|Cash                                                                                 
|                                                                                     
|Total investments and cash                                                           
|Accrued investment income                                                            
|Premiums receivable                                                                  
|Reinsurance receivables - unaffiliated                                               
|Reinsurance receivables - affiliated                                                 
|Funds held by reinsureds                                                             
|Deferred acquisition costs                                                           
|Prepaid reinsurance premiums                                                         
|Deferred tax asset                                                                   
|Current federal income tax receivable                                                
|Other assets                                                                         
|                                                                                     
|TOTAL ASSETS                                                                         
|                                                                                     
|LIABILITIES:                                                                         
|Reserve for losses and loss adjustment expenses                                      
|Unearned premium reserve                                                             
|Funds held under reinsurance treaties                                                
|Losses in the course of payment                                                      
|Commission reserves                                                                  
|Other net payable to reinsurers                                                      
|Current federal income taxes payable                                                 
|8.75% Senior notes due 3/15/2010                                                     
|5.4% Senior notes due 10/15/2014                                                     
|Junior subordinated debt securities payable                                          
|Accrued interest on debt and borrowings                                              
|Other liabilities                                                                    
|                                                                                     
|Total liabilities                                                                    
|                                                                                     
|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                                                           
|Accumulated other comprehensive income, net of deferred income                       
|taxes of $179.1 million at 2006 and $132.6 million at 2005                           
|Retained earnings                                                                    
|                                                                                     
|Total stockholder's equity                                                           
|                                                                                     
|TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY                                           
|                                                                                     
|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
|-------------------------------------------------------------------------------------------------
|
|
|REVENUES:                                                                                        
|Premiums earned                                                                                  
|Net investment income                                                                            
|Net realized capital gains                                                                       
|Other (expense) income                                                                           
|                                                                                                 
|Total revenues                                                                                   
|                                                                                                 
|CLAIMS AND EXPENSES:                                                                             
|Incurred losses and loss adjustment expenses                                                     
|Commission, brokerage, taxes and fees                                                            
|Other underwriting expenses                                                                      
|Interest expense on senior notes                                                                 
|Interest expense on junior subordinated debt                                                     
|Amortization of bond issue costs                                                                 
|Interest and fee expense on credit facility                                                      
|                                                                                                 
|Total claims and expenses                                                                        
|                                                                                                 
|INCOME (LOSS) BEFORE TAXES                                                                       
|Income tax expense (benefit)                                                                     
|                                                                                                 
|NET INCOME                                                                                       
|                                                                                                 
|Other comprehensive income (loss), net of tax                                                    
|                                                                                                 
|COMPREHENSIVE INCOME                                                                             
|                                                                                                 
|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
|--------------------------------------------------------------------------------------------
|
|
|COMMON STOCK (stock outstanding):                                                           
|Balance, beginning of period                                                                
|Issued during the period                                                                    
|                                                                                            
|Balance, end of period                                                                      
|                                                                                            
|ADDITIONAL PAID-IN CAPITAL:                                                                 
|Balance, beginning of period                                                                
|Sale of treasury shares, net of tax                                                         
|Share-based compensation plans                                                              
|Other                                                                                       
|                                                                                            
|Balance, end of period                                                                      
|                                                                                            
|ACCUMULATED OTHER COMPREHENSIVE INCOME,                                                     
|NET OF DEFERRED INCOME TAXES:                                                               
|Balance, beginning of period                                                                
|Net increase (decrease) during the period                                                   
|Adjustment to initially apply FASB Statement No. 158, net of tax                            
|                                                                                            
|Balance, end of period                                                                      
|                                                                                            
|RETAINED EARNINGS:                                                                          
|Balance, beginning of period                                                                
|Net income                                                                                  
|Dividends paid                                                                              
|                                                                                            
|Balance, end of period                                                                      
|                                                                                            
|TREASURY SHARES AT COST:                                                                    
|Balance, beginning of period                                                                
|Sale of treasury shares                                                                     
|                                                                                            
|Balance, end of period                                                                      
|                                                                                            
|TOTAL STOCKHOLDER'S EQUITY, END OF PERIOD                                                   
|                                                                                            
|The accompanying notes are an integral part of the consolidated financial statements.       

F-5

|EVEREST REINSURANCE HOLDINGS, INC.CONSOLIDATED STATEMENTS OF CASH FLOWS              
|-------------------------------------------------------------------------------------
|
|
|CASH FLOWS FROM OPERATING ACTIVITIES:                                                
|Net income                                                                           
|Adjustments to reconcile net income to net cash provided by                          
|operating activities:                                                                
|Decrease (increase) in premiums receivable                                           
|Increase in funds held by reinsured, net                                             
|Decrease (increase) in reinsurance receivables                                       
|Increase in deferred tax asset                                                       
|(Decrease) increase in reserve for losses and loss adjustment expenses               
|Increase (decrease) in unearned premiums                                             
|Increase (decrease) in other assets and liabilities                                  
|Amortization of bond premium                                                         
|Amortization of underwriting discount on senior notes                                
|Realized capital gains                                                               
|                                                                                     
|Net cash provided by operating activities                                            
|                                                                                     
|CASH FLOWS FROM INVESTING ACTIVITIES :                                               
|Proceeds from fixed maturities matured/called - available for sale                   
|Proceeds from fixed maturities sold - available for sale                             
|Proceeds from equity securities sold                                                 
|Proceeds from other invested assets sold                                             
|Cost of fixed maturities acquired - available for sale                               
|Cost of equity securities acquired                                                   
|Cost of other invested assets acquired                                               
|Net (purchases) sales of short-term securities                                       
|Net (increase) decrease in unsettled securities transactions                         
|Proceeds from sale of subsidiary, net of cash disposed                               
|                                                                                     
|Net cash used in investing activities                                                
|                                                                                     
|CASH FLOWS FROM FINANCING ACTIVITIES:                                                
|Tax benefit from share-based compensation                                            
|Dividends from treasury shares                                                       
|Sale of treasury shares, net of tax                                                  
|(Repayment) proceeds from issuance of senior notes                                   
|Net proceeds from issuance of junior subordinated notes                              
|Repayments on revolving credit agreement                                             
|                                                                                     
|Net cash provided by (used in) financing activities                                  
|                                                                                     
|EFFECT OF EXCHANGE RATE CHANGES ON CASH                                              
|                                                                                     
|Net increase (decrease) in cash                                                      
|Cash, beginning of period                                                            
|                                                                                     
|Cash, end of period                                                                  
|                                                                                     
|SUPPLEMENTAL CASH FLOW INFORMATION                                                   
|Cash transactions:                                                                   
|Income taxes paid, net                                                               
|Interest paid                                                                        
|Non-cash financing transaction:                                                      
|Non-cash dividend to parent                                                          
|The accompanying notes are an integral part of the consolidated financial statements.

F-6

EVEREST REINSURANCE
HOLDINGS, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTSYears Ended December 31, 2006, 2005
and 2004

1.  
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIESA. Business and Basis of
PresentationEverest 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. InvestmentsFixed 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 BalancesThe 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
CostsAcquisition 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 ExpensesThe 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 RevenuesWritten 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 TaxesThe 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 CurrencyAssets 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. SegmentationThe Company, through its subsidiaries, operates in four segments:
U.S. Reinsurance, U.S. Insurance, Specialty Underwriting and
International. See also Note 16.

J. Retroactive ReinsurancePremiums 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 DividendsThe 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 StandardsIn 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 StripsDuring 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.  INVESTMENTSThe amortized cost, market value, and
gross unrealized appreciation and depreciation of fixed maturity investments and equity
securities are presented in the tables below:

|                                                      |  |  |   |          
|----------------------------------------------------- |  |  | - | ---------
|
|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   
|Obligations of U.S. states and political subdivisions |  |  |   | 3,633,188
|Corporate securities                                  |  |  |   | 961,679  
|Mortgage-backed securities                            |  |  |   | 475,140  
|Foreign government securities                         |  |  |   | 354,153  
|Foreign corporate securities                          |  |  |   | 449,505  
|                                                      |  |  |   |          
|Total fixed maturities                                |  |  | $ | 5,959,228
|                                                      |  |  |   |          
|Equity securities                                     |  |  | $ | 874,289  
|                                                      |  |  |   |          
|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   
|Obligations of U.S. states and political subdivisions |  |  |   | 3,614,957
|Corporate securities                                  |  |  |   | 894,278  
|Mortgage-backed securities                            |  |  |   | 477,480  
|Foreign government securities                         |  |  |   | 357,513  
|Foreign corporate securities                          |  |  |   | 434,400  
|                                                      |  |  |   |          
|Total fixed maturities                                |  |  | $ | 5,850,541
|                                                      |  |  |   |          
|Equity securities                                     |  |  | $ | 859,425  
|                                                      |  |  |   |          

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
|-------------------------------------- | -----------------
|
|Fixed maturities  available for sale  |                  
|Due in one year or less                |                  
|Due after one year through five years  |                  
|Due after five years through ten years |                  
|Due after ten years                    |                  
|Mortgagebacked securities             |                  
|                                       |                  
|Total                                  |                  
|                                       |                  

F-11

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

|                                                                         | Years Ended December 31,
|------------------------------------------------------------------------ | ------------------------
|
|Increase (decrease) during the period between the market value and       |                         
|cost of investments carried at market value, and deferred taxes thereon: |                         
|Fixed maturities                                                         |                         
|Equity securities                                                        |                         
|Other invested assets                                                    |                         
|                                                                         |                         
|Increase (decrease) in unrealized appreciation, pre-tax                  |                         
|Deferred taxes                                                           |                         
|                                                                         |                         
|Increase (decrease) in unrealized appreciation, net of deferred          |                         
|taxes, included in stockholder's equity                                  |                         
|                                                                         |                         

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
|-------------------------- | ---------------------------------------------------
|
|
|Fixed maturity securities  |                                                    
|U.S. government            |                                                    
|agencies and authorities   |                                                    
|States, municipalities     |                                                    
|and political subdivisions |                                                    
|Foreign governments        |                                                    
|All other corporate        |                                                    
|                           |                                                    
|Total fixed maturities     |                                                    
|                           |                                                    
|Equity Securities          |                                                    
|                           |                                                    
|Total                      |                                                    
|                           |                                                    

F-12

|                                       | Duration of unrealized loss as of December 31, 2006
|-------------------------------------- | ---------------------------------------------------
|
|
|Fixed maturity securities              |                                                    
|Due in 1 year or less                  |                                                    
|Due after one year through five years  |                                                    
|Due after five years through ten years |                                                    
|Due after ten years                    |                                                    
|Mortgage-backed securities             |                                                    
|                                       |                                                    
|Total                                  |                                                    
|                                       |                                                    

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
|-------------------------- | ---------------------------------------------------
|
|
|Fixed maturity securities  |                                                    
|U.S. government            |                                                    
|agencies and authorities   |                                                    
|States, municipalities     |                                                    
|and political subdivisions |                                                    
|Foreign governments        |                                                    
|All other corporate        |                                                    
|                           |                                                    
|Total fixed maturities     |                                                    
|                           |                                                    
|Equity securities          |                                                    
|                           |                                                    
|Total                      |                                                    
|                           |                                                    

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,
|----------------------------------- | ------------------------
|
|Fixed maturities                    |                         
|Equity securities                   |                         
|Short-term investments              |                         
|Other investment income             |                         
|                                    |                         
|Total gross investment income       |                         
|Interest credited and other expense |                         
|                                    |                         
|Total net investment income         |                         
|                                    |                         

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,
|---------------------- | ------------------------
|
|Fixed maturities       |                         
|Equity securities      |                         
|Short-term investments |                         
|                       |                         
|Total                  |                         
|                       |                         

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

|                                        | Years Ended December 31,
|--------------------------------------- | ------------------------
|
|Gross reserves at January 1             |                         
|Less reinsurance recoverables           |                         
|                                        |                         
|Net reserves at January 1               |                         
|                                        |                         
|Incurred related to:                    |                         
|Current year                            |                         
|Prior years                             |                         
|                                        |                         
|Total incurred losses and LAE           |                         
|                                        |                         
|Paid related to:                        |                         
|Current year                            |                         
|Prior years                             |                         
|                                        |                         
|Total paid losses and LAE               |                         
|                                        |                         
|Sale of UK branch                       |                         
|Foreign exchange/translation adjustment |                         
|                                        |                         
|Net reserves at December 31             |                         
|Plus reinsurance recoverables           |                         
|                                        |                         
|Gross reserves at December 31           |                         
|                                        |                         

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 |      |      | $   
|Incurred losses              |      |      |     
|Paid losses                  |      |      |     
|                             |      |      |     
|End of period reserves       |      |      | $   
|                             |      |      |     
|Net basis                    |      |     
|Beginning of period reserves |      |      | $   
|Incurred losses              |      |      |     
|Paid losses                  |      |      |     
|                             |      |      |     
|End of period reserves       |      |      | $   
|                             |      |      |     

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 LINESEffective 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 NOTESOn 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 PAYABLEOn 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 AGREEMENTSA 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 AGREEMENTSThe 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                   | 
|2008                   | 
|2009                   | 
|2010                   | 
|2011                   | 
|Thereafter             | 
|                       | 
|Net commitments        | 
|                       | 

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 TAXESAll 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,
|---------------------------------- | ------------------------
|
|Current tax:                       |                         
|U.S.                               |                         
|Foreign                            |                         
|                                   |                         
|Total current tax                  |                         
|Total deferred U.S. tax benefit    |                         
|                                   |                         
|Total income tax expense (benefit) |                         
|                                   |                         

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

|                                              | Years Ended December 31,
|--------------------------------------------- | ------------------------
|
|Federal income tax rate                       |                         
|Increase (reduction) in taxes resulting from: |                         
|Tax exempt income                             |                         
|Dividend received deduction                   |                         
|Proration                                     |                         
|UK Branch Sale                                |                         
|Other, net                                    |                         
|                                              |                         
|Effective tax rate                            |                         
|                                              |                         

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,
|------------------------------------------ | ------------------------
|
|Deferred tax assets:                       |                         
|Reserve for losses and LAE                 |                         
|Unearned premium reserve                   |                         
|Impairments                                |                         
|Deferred compensation                      |                         
|Deferred reinsurance                       |                         
|AMT Credits                                |                         
|Foreign tax credit carryforwards           |                         
|Uncollectible reinsurance                  |                         
|Minimum pension                            |                         
|Other assets                               |                         
|                                           |                         
|Total deferred tax assets                  |                         
|                                           |                         
|Deferred tax liabilities:                  |                         
|Deferred acquisition costs                 |                         
|Investments & market discounts             |                         
|Net unrealized appreciation of investments |                         
|Foreign currency translation               |                         
|Other liabilities                          |                         
|                                           |                         
|Total deferred tax liabilities             |                         
|                                           |                         
|Net deferred tax assets                    |                         
|                                           |                         

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. REINSURANCEThe 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,
|-------------------- | ------------------------
|
|Written premiums:    |                         
|Direct               |                         
|Assumed              |                         
|Ceded                |                         
|                     |                         
|Net written premiums |                         
|                     |                         
|Premiums earned:     |                         
|Direct               |                         
|Assumed              |                         
|Ceded                |                         
|                     |                         
|Net premiums earned  |                         
|                     |                         

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,
|------------------------ | ------------------------
|
|Ceded written premiums   |                         
|Ceded earned premiums    |                         
|Ceded losses and LAE (a) |                         

|Everest International  | Years Ended December 31,
|---------------------- | ------------------------
|
|Ceded written premiums |                         
|Ceded earned premiums  |                         
|Ceded losses and LAE   |                         

(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:

|                                                                |  |  |  
|--------------------------------------------------------------- |  |  | -
|
|Net income                                                      |  |  | $
|                                                                |  |  |  
|Other comprehensive income, before tax:                         |  | 
|Unrealized gains on securities arising during the period        |  |  |  
|Less: reclassification adjustment for realized gains            |  | 
|included in net income                                          |  |  |  
|Foreign currency translation adjustments                        |  |  |  
|Minimum pension adjustment                                      |  |  |  
|                                                                |  |  |  
|Other comprehensive income (loss), before tax                   |  |  |  
|                                                                |  |  |  
|Income tax expense related to items of other comprehensive      |  | 
|income (loss):                                                  |  | 
|Tax expense from unrealized gains arising during the period     |  |  |  
|Tax benefit from realized gains (losses) included in net income |  |  |  
|Tax expense from foreign currency translation                   |  |  |  
|Tax benefit from minimum pension adjustment                     |  |  |  
|                                                                |  |  |  
|Total income tax (expense) benefit related to items of other    |  | 
|comprehensive income (loss)                                     |  |  |  
|                                                                |  |  |  
|Other comprehensive income (loss), net of tax                   |  |  |  
|                                                                |  |  |  
|Comprehensive income                                            |  |  | $
|                                                                |  |  |  

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

|                                                                  |  |  |  
|----------------------------------------------------------------- |  |  | -
|
|Beginning balance of  unrealized gains on  securities             |  |  | $
|Current period change in unrealized gains on securities           |  |  |  
|                                                                  |  |  |  
|Ending balance of unrealized gains on securities                  |  |  | $
|                                                                  |  |  |  
|Beginning balance of foreign currency translation adjustments     |  |  | $
|Current period change in foreign currency translation adjustments |  |  |  
|                                                                  |  |  |  
|Ending balance of foreign currency translation adjustments        |  |  | $
|                                                                  |  |  |  
|Beginning balance of minimum pension adjustment                   |  |  | $
|Current period change in minimum pension adjustment               |  |  |  
|                                                                  |  |  |  
|Ending balance of minimum pension adjustment                      |  |  | $
|                                                                  |  |  |  
|Adjustment to initially apply FASB Statement No. 158, net of tax  |  |  | $
|                                                                  |  |  |  
|Ending balance of accumulated other comprehensive income          |  |  | $
|                                                                  |  |  |  

F-26

12.  
EMPLOYEE BENEFIT PLANSA. Defined Benefit
Pension PlansThe 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:

|                                                                         |  |  |  
|------------------------------------------------------------------------ |  |  | -
|
|Change in projected benefit obligation:                                  |  |  |  
|Benefit obligation at beginning of year                                  |  |  | $
|Service cost                                                             |  |  |  
|Interest cost                                                            |  |  |  
|Actuarial loss                                                           |  |  |  
|Benefits paid                                                            |  |  |  
|                                                                         |  |  |  
|Projected benefit obligation at end of year                              |  |  |  
|                                                                         |  |  |  
|Change in plan assets:                                                   |  | 
|Fair value of plan assets at beginning of year                           |  |  |  
|Actual return on plan assets                                             |  |  |  
|Actual contributions during the year                                     |  |  |  
|Administrative expenses paid                                             |  |  |  
|Benefits paid                                                            |  |  |  
|                                                                         |  |  |  
|Fair value of plan assets at end of year                                 |  |  |  
|                                                                         |  |  |  
|Funded status at end of year                                             |  |  |  
|                                                                         |  |  |  
|Net amount recognized in the consolidated balance sheets (after FAS 158) |  |  | $
|                                                                         |  |  |  

Amounts recognized in the
consolidated balance sheets at December 31:

|                                                        | 
|------------------------------------------------------- | 
|
|Other assets (due beyond one year)                      | 
|Other liabilities (due within one year)                 | 
|Other liabilities (due beyond one year)                 | 
|                                                        | 
|Net amount recognized in the consolidated balance sheet | 
|                                                        | 

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                                                             |     
|Accumulated loss                                                               |     
|                                                                               |     
|Accumulated other comprehensive loss                                           |     
|Change in accumulated other comprehensive income due to application of FAS 158 |     
|Additional minimum liaibility (before FAS 158)                                 |     
|Intangible asset offset (before FAS 158)                                       |     
|                                                                               |     
|Accumulated other comprehensive income (before FAS 158)                        |     
|                                                                               |     
|Net decrease in accumulated other comprehensive income due to FAS 158          |     
|                                                                               |     

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:

|                                                                |  |  |  
|--------------------------------------------------------------- |  |  | -
|
|Service cost                                                    |  |  | $
|Interest cost                                                   |  |  |  
|Expected return on assets                                       |  |  |  
|Amortization of actuarial loss from earlier periods             |  |  |  
|Amortization of unrecognized prior service cost                 |  |  |  
|                                                                |  |  |  
|Net periodic benefit cost                                       |  |  | $
|                                                                |  |  |  
|Other changes recognized in other comprehensive income:         |  | 
|Other comprehensive loss attributable to change from prior year |  |  |  
|                                                                |  |  |  
|Total recognized in net periodic benefit cost and other         |  | 
|comprehensive income                                            |  |  | $
|                                                                |  |  |  

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:

|                   |  |  |  
|------------------ |  |  | -
|
|Qualified Plan     |  |  | $
|Non-qualified Plan |  |  |  
|                   |  |  |  
|Total              |  |  | $
|                   |  |  |  

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

|                             |  |  |  
|---------------------------- |  |  | -
|
|Qualified Plan               |  |  |  
|Projected benefit obligation |  |  | $
|Fair value of plan assets    |  |  |  
|Non-qualified Plan           |  | 
|Projected benefit obligation |  |  | $
|Fair value of plan assets    |  |  |  

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

|                               |  |  |  
|------------------------------ |  |  | -
|
|Qualified Plan                 |  |  |  
|Projected benefit obligation   |  |  | $
|Accumulated benefit obligation |  |  |  
|Fair value of plan assets      |  |  |  
|Non-qualified Plan             |  | 
|Projected benefit obligation   |  |  | $
|Accumulated benefit obligation |  |  |  
|Fair value of plan assets      |  |  |  

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

|(Dollars in thousands) | 
|---------------------- | 
|2007                   | 
|2008                   | 
|2009                   | 
|2010                   | 
|2011                   | 
|Next 5 years           | 

F-29

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

|                  |  |  | 
|----------------- |  |  | 
|
|Equity securities |  |  | 
|Debt securities   |  |  | 
|Other             |  |  | 
|                  |  |  | 
|Total             |  |  | 
|                  |  |  | 

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
PlansThe 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 PlanBeginning 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)                                      | PercentagePoint Increase($ Impact) |  | PercentagePoint Decrease($ Impact)
|----------------------------------------------------------- | ---------------------------------- |  | ----------------------------------
|a. Effect on total service and interest cost components     |                                    |  | $                                 
|b. Effect on accumulated post-retirement benefit obligation |                                    |  |                                   

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:

|                                               |  | 
|---------------------------------------------- |  | 
|
|Change in projected benefit obligation:        |  | 
|Benefit obligation at beginning of year        |  | 
|Service cost                                   |  | 
|Interest cost                                  |  | 
|Actuarial (gain) loss                          |  | 
|Benefits paid                                  |  | 
|                                               |  | 
|Benefit obligation at end of year              |  | 
|Change in plan assets:                         |  | 
|Fair value of plan assets at beginning of year |  | 
|Employer contributions                         |  | 
|Benefits paid                                  |  | 
|                                               |  | 
|Fair value of plan assets at end of year       |  | 
|                                               |  | 
|Funded status at end of year                   |  | 
|                                               |  | 

Amounts recognized in the
consolidated balance sheets as December 31:

|                                                         | 
|-------------------------------------------------------- | 
|
|Other liabilities (due within one year)                  | 
|Other liabilities (due beyond one year)                  | 
|                                                         | 
|Net amount recognized in the consolidated balance sheets | 
|                                                         | 

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

|                                                                      | 
|--------------------------------------------------------------------- | 
|
|Accumulated other comprehensive loss                                  | 
|                                                                      | 
|Net decrease in accumulated other comprehensive income due to FAS 158 | 
|                                                                      | 

F-31

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

|                                                                |  |  |   |       | 
|--------------------------------------------------------------- |  |  | - | ----- | 
|
|Service cost                                                    |  |  | $ | 631   | 
|Interest cost                                                   |  |  |   | 464   | 
|Net loss recognition                                            |  |  |   | 50    | 
|                                                                |  |  |   |       | 
|Net periodic cost                                               |  |  |   | 1,145 | 
|                                                                |  |  |   |       | 
|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 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 fiscal year are $0, $0
and $0, respectively.

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:

|                     |  |  |  
|-------------------- |  |  | -
|
|Post-retirement Plan |  |  | $

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

|(Dollars in thousands) | 
|---------------------- | 
|2007                   | 
|2008                   | 
|2009                   | 
|2010                   | 
|2011                   | 
|Next 5 years           | 

13.  
DIVIDEND RESTRICTIONS AND STATUTORY FINANCIAL INFORMATIONA. Dividend RestrictionsDelaware 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
InformationEverest 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.  
CONTINGENCIESIn 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 TRANSACTIONSDuring 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 REPORTINGThe 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                            
|--------------------------------------------
|
|Gross written premiums                      
|Net written premiums                        
|Premiums earned                             
|Incurred losses and loss adjustment expenses
|Commission and brokerage                    
|Other underwriting expenses                 
|                                            
|Underwriting gain (loss)                    
|                                            

F-34

|U.S. Insurance                              
|--------------------------------------------
|
|Gross written premiums                      
|Net written premiums                        
|Premiums earned                             
|Incurred losses and loss adjustment expenses
|Commission and brokerage                    
|Other underwriting expenses                 
|                                            
|Underwriting gain                           
|                                            

|Specialty Underwriting                      
|--------------------------------------------
|
|Gross written premiums                      
|Net written premiums                        
|Premiums earned                             
|Incurred losses and loss adjustment expenses
|Commission and brokerage                    
|Other underwriting expenses                 
|                                            
|Underwriting (loss) gain                    
|                                            

|International                               
|--------------------------------------------
|
|Gross written premiums                      
|Net written premiums                        
|Premiums earned                             
|Incurred losses and loss adjustment expenses
|Commission and brokerage                    
|Other underwriting expenses                 
|                                            
|Underwriting gain (loss)                    
|                                            

F-35

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 for the three years
ended December 31:

|(Dollars in thousands)                                 | 2006 | 2005 | 2004
|------------------------------------------------------ | ---- | ---- | ----
|Underwriting gain (loss)                               |      |      | $   
|UK branch sale and related transactions                |      |      |     
|                                                       |      |      |     
|Underwriting gain (loss)                               |      |      | $   
|Net investment income                                  |      |      |     
|Net realized capital gain                              |      |      |     
|Corporate (expense) income                             |      |      |     
|Interest, fee and bond issue cost amortization expense |      |      |     
|Other (expense) income                                 |      |      |     
|                                                       |      |      |     
|Income (loss) before taxes                             |      |      | $   
|                                                       |      |      |     

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 DATASummarized 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    
|Net written premiums                   |             |             |             | 626,251    
|Premiums earned                        |             |             |             | 603,678    
|Net investment income                  |             |             |             | 83,905     
|Net realized capital gain              |             |             |             | 9,020      
|Total claims and underwriting expenses |             |             |             | 610,392    
|Net income                             |             |             |             | 43,505     
|2005 Operating data:                   |             |            
|Gross written premiums                 |             |             | $           | 879,484    
|Net written premiums                   |             |             |             | 648,640    
|Premiums earned                        |             |             |             | 619,006    
|Net investment income                  |             |             |             | 85,922     
|Net realized capital gain              |             |             |             | 1,485      
|Total claims and underwriting expenses |             |             |             | 576,204    
|Net income (loss)                      |             |             |             | 86,913     

F-36

|EVEREST REINSURANCE HOLDINGS, INC.SCHEDULE I - SUMMARY OF INVESTMENTS -
OTHER THAN INVESTMENTS IN RELATED PARTIESDECEMBER 31, 2006
|----------------------------------------------------------------------------------------------------------------------------------
|
|
|Fixed maturities-available for sale                                                                                               
|Bonds:                                                                                                                            
|U.S. government and government agencies                                                                                           
|State, municipalities and political subdivisions                                                                                  
|Foreign government securities                                                                                                     
|Foreign corporate securities                                                                                                      
|Public utilities                                                                                                                  
|All other corporate bonds                                                                                                         
|Mortgage pass-through securities                                                                                                  
|Redeemable preferred stock                                                                                                        
|                                                                                                                                  
|Total fixed maturities-available for sale                                                                                         
|Equity securities                                                                                                                 
|Short-term investments                                                                                                            
|Other invested assets                                                                                                             
|Cash                                                                                                                              
|                                                                                                                                  
|Total investments and cash                                                                                                        
|                                                                                                                                  

S-1

|EVEREST REINSURANCE HOLDINGS, INC.SCHEDULE II - CONDENSED FINANCIAL INFORMATION
OF THE REGISTRANT CONDENSED BALANCE SHEETS
|--------------------------------------------------------------------------------------------------------------------------
|
|
|ASSETS:                                                                                                                   
|Equity securities, at market value (cost: 2006 $16,393; 2005 $16,393)                                                     
|Short-term investments                                                                                                    
|Cash                                                                                                                      
|Investment in subsidiaries, at equity in the underlying net assets                                                        
|Accrued investment income                                                                                                 
|Deferred tax asset                                                                                                        
|Current federal income tax receivable                                                                                     
|Other assets                                                                                                              
|                                                                                                                          
|TOTAL ASSETS                                                                                                              
|                                                                                                                          
|LIABILITIES:                                                                                                              
|8.75% Senor notes due 3/15/2010                                                                                           
|5.4% Senior notes due 10/15/2014                                                                                          
|Junior subordinated debt securities                                                                                       
|Accrued interest on debt and borrowings                                                                                   
|Due to affiliates                                                                                                         
|Other liabilities                                                                                                         
|                                                                                                                          
|Total liabilities                                                                                                         
|                                                                                                                          
|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                                                                                                
|Accumulated other comprehensive income, net of deferred income                                                            
|taxes of $0.0 million at 2006 and $0.0 million at 2005                                                                    
|Retained earnings                                                                                                         
|                                                                                                                          
|Total stockholder's equity                                                                                                
|                                                                                                                          
|TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY                                                                                
|                                                                                                                          
|See notes to consolidated financial statements                                                                            

S-2

|EVEREST REINSURANCE HOLDINGS, INC.SCHEDULE II - CONDENSED FINANCIAL INFORMATION OF THE
REGISTRANT CONDENSED STATEMENTS OF OPERATIONS
|------------------------------------------------------------------------------------------------------------------------------------
|
|
|REVENUES:                                                                                                                           
|Net investment income                                                                                                               
|Net realized capital gains                                                                                                          
|Other expense                                                                                                                       
|Equity in earnings of subsidiaries                                                                                                  
|                                                                                                                                    
|Total revenues                                                                                                                      
|                                                                                                                                    
|EXPENSES:                                                                                                                           
|Interest expense                                                                                                                    
|Other expense                                                                                                                       
|                                                                                                                                    
|Total expenses                                                                                                                      
|                                                                                                                                    
|INCOME (LOSS) BEFORE TAXES                                                                                                          
|Income tax benefit                                                                                                                  
|                                                                                                                                    
|NET INCOME                                                                                                                          
|                                                                                                                                    
|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                                                                                                             
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
|
|CASH FLOWS FROM OPERATING ACTIVITIES                                                                                                                                                                                                             
|Net income                                                                                                                                                                                                                                       
|Adjustments to reconcile net income to net cash provided                                                                                                                                                                                         
|by operating activities:                                                                                                                                                                                                                         
|Equity in earnings of subsidiaries                                                                                                                                                                                                               
|Dividends received from subsidiaries (1)                                                                                                                                                                                                         
|Decrease in other assets and liabilities                                                                                                                                                                                                         
|(Decrease) increase in accrued interest on debt and borrowings                                                                                                                                                                                   
|(Increase) decrease in federal income tax recoverable                                                                                                                                                                                            
|Decrease (increase) in deferred tax asset                                                                                                                                                                                                        
|Decrease in due to affiliates                                                                                                                                                                                                                    
|Accrual of bond discount                                                                                                                                                                                                                         
|Amortization of underwriting discount on senior notes                                                                                                                                                                                            
|Realized capital gains                                                                                                                                                                                                                           
|                                                                                                                                                                                                                                                 
|Net cash provided by operating activities                                                                                                                                                                                                        
|                                                                                                                                                                                                                                                 
|CASH FLOWS FROM INVESTING ACTIVITIES                                                                                                                                                                                                             
|Additional investment in subsidiaries (1)                                                                                                                                                                                                        
|Proceeds (cost) from equity securities sold (acquired)                                                                                                                                                                                           
|Net (sales) purchases of short-term securities                                                                                                                                                                                                   
|UK branch sale                                                                                                                                                                                                                                   
|                                                                                                                                                                                                                                                 
|Net cash (used in) provided by  investing activities                                                                                                                                                                                             
|                                                                                                                                                                                                                                                 
|CASH FLOWS FROM FINANCING ACTIVITIES                                                                                                                                                                                                             
|Dividends from treasury stock                                                                                                                                                                                                                    
|Sale of treasury stock                                                                                                                                                                                                                           
|Repayments on revolving credit agreement                                                                                                                                                                                                         
|(Repayment) issuance of senior notes                                                                                                                                                                                                             
|Issuance of junior subordinated debt securities, net                                                                                                                                                                                             
|Tax benefit from share-based compensation                                                                                                                                                                                                        
|                                                                                                                                                                                                                                                 
|Net cash provided by (used in) financing activities                                                                                                                                                                                              
|                                                                                                                                                                                                                                                 
|Net increase (decrease) in cash                                                                                                                                                                                                                  
|Cash, beginning of period                                                                                                                                                                                                                        
|                                                                                                                                                                                                                                                 
|Cash, end of period                                                                                                                                                                                                                              
|                                                                                                                                                                                                                                                 
|Non-cash financing transaction:                                                                                                                                                                                                                  
|Non-cash contribution from parent                                                                                                                                                                                                                
|Non-cash contribution to subsidiaries                                                                                                                                                                                                            
|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
|------------------------------------------------------------------------------------
|
|
|December 31, 2006                                                                   
|Domestic                                                                            
|International                                                                       
|                                                                                    
|Total                                                                               
|                                                                                    
|December 31, 2005                                                                   
|Domestic                                                                            
|International                                                                       
|                                                                                    
|Total                                                                               
|                                                                                    
|December 31, 2004                                                                   
|Domestic                                                                            
|International                                                                       
|                                                                                    
|Total                                                                               
|                                                                                    

S-5

|EVEREST REINSURANCE HOLDINGS, INC.SCHEDULE IV - REINSURANCE
|-----------------------------------------------------------
|
|
|December 31, 2006                                          
|Total property and liability                               
|insurance premiums earned                                  
|December 31, 2005                                          
|Total property and liability                               
|insurance premiums earned                                  
|December 31, 2004                                          
|Total property and liability                               
|insurance premiums earned                                  

S-6