UNITED STATESSECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549FORM 10-K

Annual Report Pursuant to Section 13
or 15(d) of the Securities Exchange Act of 1934For the fiscal year ended December 31, 2005

| |                               
| | ------------------------------
| | Commission file number 1-14527

EVEREST REINSURANCE HOLDINGS, INC.(Exact
name of registrant as specified in its charter)

|                                  | 
|--------------------------------- | 
|Delaware                          | 
|(State or other jurisdiction      | 
|of incorporation or organization) | 

477 Martinsville Road
Post Office Box 830Liberty 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                                                                                                   | 
|8.75% Senior Notes Due 2010                                                                                           | 
|5.40% Senior Notes Due 2014                                                                                           | 
|7.85% Trust Preferred Securities of Everest Re Captial Trust
     guaranteed by Everest Reinsurance Holdings, Inc.    | 
|6.20% Trust Preferred Securities of Everest Re Captial Trust II
     guaranteed by Everest Reinsurance Holdings, Inc. | 

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

Indicate
by check mark if the registrant is a well known seasoned issuer, as defined by Rule 405 of the Securities Act.

Yes___     NoX

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

Yes___    NoX

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 requited to file such reports), and (2) has been subject to such filliong requirements for the past 90 days.

Yes X     No___

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 filerX

Indicate
by check mark whether the registrant is an accelerated filer (as defined in Exchange Act rule 12b-2)

Yes___     NoX

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

Yes___     NoX

The
aggregate  market value on June 30, 2005, (the last business day of the  registrants
most recently  completed  second quarter) of the voting stock held by non-affiliates was zero.

At March 15, 2006, the number of common shares of
the registrant oustanding was 1,000, all of which are owned by Everest Re Group, Ltd.

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

2



|TABLE OF CONTENTS
|-----------------
|Item             
|                 
|PART I           
|1.               
|1A.              
|1B.              
|2.               
|3.               
|4.               
|PART II          
|5.               
|6.               
|7.               
|7A.              
|8.               
|9.               
|9A.              
|9B.              
|PART III         
|10.              
|11.              
|12.              
|13.              
|14.              
|PART IV          
|15.              

3



PART I

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

ITEM 1. Business

The 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 2005 of $3.3 billion, with approximately 71% representing reinsurance and 29%
representing insurance, and stockholders equity at December 31, 2005 of $1.8
billion. The Company underwrites reinsurance both through brokers and directly with ceding
companies, giving it the flexibility to pursue business regardless of the ceding
companys preferred reinsurance purchasing method. The Company underwrites insurance
principally through general agent relationships and surplus lines brokers. The
Companys 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:

|o |  | 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, 2005 of $2.3 billion.
|- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|o |  | 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.
|- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|o |  | Everest Indemnity Insurance Company (Everest Indemnity), a Delaware insurance
company and a direct subsidiary of Everest Re, engages in the 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

|o |  | 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.
|- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|o |  | Mt. McKinley (f/k/a Gibraltar Casualty Company, Gibraltar), 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 the 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 what management believes to
be 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
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s strategies include effective management
throughout the property and casualty underwriting cycle.

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s product distribution includes direct and broker
reinsurance channels; U.S. and international markets; treaty and facultative reinsurance
and admitted and non-admitted insurance.

The Companys underwriting
strategy emphasizes underwriting profitability rather than premium volume, writing
specialized property and casualty risks and integration of underwriting expertise across
all business units. Key elements of this strategy are prudent risk selection, appropriate
pricing through strict underwriting discipline and continuous 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 also 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 allowing the Company access to business that would not likely be available
to it 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
$1,790.7 million and $1,743.8 million at December 31, 2005 and 2004, respectively. The
Company has flexibility with respect to

3

capitalization as the result of its perceived
financial strength, including its financial strength ratings as assigned by independent
rating agencies, and its access to the debt and through its parent, equity markets. The
Company continuously monitors its capital and financial position, as well as investment
and security market conditions, both in general and with respect to the Companys
securities, and responds accordingly.

On December 1, 2005, Group and
Holdings, under the new registration and offering revisions to the Securities Act of 1933,
filed a shelf registration statement on Form S-3 with the SEC, as a Well Known Seasoned
Issuer. 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.

|o |  | On December 1, 2005, Group issued 2,238,000 of its common shares at a price of $102.89 per
share, which resulted in $236.4 million of proceeds before expenses of approximately $0.3
million 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 of 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 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 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.

|o |  | 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 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 junior subordinated debt
securities issuance was used for capital contributions to Holdings operating
subsidiaries.
|- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|o |  | On October 6, 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.
|- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|o |  | 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.
|- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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

On July 30, 2002, Group and Holdings
filed a shelf registration statement on Form S-3 with the SEC, providing for the issuance
of up to $475.0 million of securities. Generally, under this shelf registration statement,
Group was authorized to issue common shares, preferred shares, debt securities, warrants
and hybrid securities,

4

Holdings was authorized to issue debt securities and Everest Re
Capital Trust (Capital Trust) was authorized to issue trust preferred
securities. This shelf registration statement became effective on September 26, 2002 and
was effectively exhausted with the April 23, 2003 transaction described below. The
following securities were issued pursuant to that registration statement.

|o |  | On November 14, 2002, pursuant to a trust agreement between the Company and JPMorgan Chase
Bank, the property trustee, and Chase Manhattan Bank USA, the Delaware trustee, Capital
Trust, an unconsolidated affiliate, completed a public offering of $210.0 million of 7.85%
trust preferred securities, resulting in net proceeds of $203.4 million. The proceeds of
the issuance were used to purchase $210 million of 7.85% junior subordinated debt
securities of Holdings that will be held in trust by the property trustee for the benefit
of the holders of the trust preferred securities. In conjunction with the issuance of
Capital Trusts trust preferred securities, Holdings issued $216.5 million of 7.85%
junior subordinated debt securities due November 15, 2032 to Capital Trust. The proceeds
from the junior subordinated debt securities issuance were primarily used for capital
contributions to Holdings operating subsidiaries.
|- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|o |  | On April 23, 2003, Group expanded the size of the remaining shelf registration to $318
million by filing a post-effective amendment under Rule 462(b) of the Securities Act of
1933, as amended, and General Instruction IV of Form S-3 promulgated thereunder. On the
same date, Group issued 4,480,135 of its common shares at a price of $70.75 per share,
which resulted in $317.0 million in proceeds, before expenses of approximately $0.2
million. This transaction effectively exhausted the September 26, 2002 shelf registration.
|- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Capital Trust will redeem all of the
outstanding trust preferred securities when the junior subordinated debt securities are
paid at maturity on November 15, 2032. 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. If such an early redemption occurs, the outstanding trust preferred securities would
also be proportionately redeemed.

On March 14, 2000, the Company
completed a public offering of $200 million principal amount of 8.75% senior notes due
March 15, 2010 and $250 million principal amount of 8.50% senior notes due and retired
March 15, 2005. During 2000, the net proceeds of these offerings and additional funds were
distributed by the Company to Group.

Financial Strength Ratings The following table shows the current
financial strength ratings of the Companys operating subsidiaries as reported by
A.M. Best, Standard & Poors Rating Services (Standard &
Poors) and Moodys Investors Service, Inc. (Moodys).
These ratings are based upon factors of concern to policyholders and should not be considered an indication of the degree or lack of risk involved in a direct or indirect
equity investment in an insurance or reinsurance company.

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

The Company believes that its
ratings, in general, have become increasingly important to its operations because they
provide the Companys customers and investors with an independent assessment of the
Companys underlying financial strength using a scale that provides for relative
comparisons. Strong financial strength is 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.

5

|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. The Companys
          A+ (Superior) rating is the second highest of fifteen
          ratings assigned by A.M. Best, which range from A++"
          (Superior) to F (In Liquidation). 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. The Companys
          AA- rating is the fourth highest of nineteen ratings assigned by
          Standard & Poors, which range from AAA to R.
          Ratings from AA to CCC may be modified by the use of a plus or minus sign to
          show relative standing of the insurer within those rating categories.
          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. Moodys
          rating gradations are shown through the use of nine distinct symbols, each
          symbol representing a group of ratings in which the financial security is
          broadly the same. The Companys Aa3 (Excellent) rating is the
          fourth highest of ratings assigned by Moodys, which range from
          Aaa (Exceptional) to C (Lowest). Moodys appends
          numerical modifiers 1, 2 and 3 to each generic rating classification from Aa
          through Caa.

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 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. The a and a-
ratings are the sixth and seventh highest of 19 ratings assigned by A.M. Best, which range
from aaa to ccc. A debt rating of A- is assigned by
Standard & Poors where the obligor has a strong capacity to meet its financial
commitment on the obligation, although it is somewhat more susceptible to the adverse
effects of changes in circumstances and economic conditions than obligations in higher
rated categories. Standard & Poors assigns a debt rating of BBB to
issues that exhibit adequate protection parameters although adverse economic conditions or
changing circumstances are more likely to lead to a weakened capacity of the obligor to
meet its financial commitment on the obligation. The A- and BBB
ratings from Standard & Poors are the seventh and ninth highest of 24 ratings
assigned by Standard & Poors, which range from AAA to D.
According to Moodys, a debt rating of A3 is assigned

6

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. The A3 and
Baa1 ratings are the seventh and eighth highest of 21 ratings assigned by
Moodys, which range from AAA to C.

Competition The worldwide reinsurance and
insurance businesses are highly competitive; yet 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 background 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 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.

In 2004 and 2005, market conditions
weakened following hard market conditions that had developed from 2000 through 2003.
Pricing for most property and casualty classes declined modestly. Competition increased
modestly as well, in part due to the relative profitability achieved by many reinsurers
from 2002 through 2004, the attendant buildup of capital by these participants and growing
pressures to effectively redeploy this capital. However, this profitability and capital
buildup varied significantly by market participant, reflecting the fact that the industry
was impacted by significant catastrophe losses in the second halves of both 2005 and 2004,
generally weak investment market conditions and ongoing adverse loss development. All of
these factors depressed the industrys aggregate financial performance and
perceptions of individual insurers financial strength during the period.

For the insurance industry, 2005 was
a year of unprecedented catastrophe losses in terms of both frequency and severity, which
negatively impacted the financial results of a broad number of (re)insurance market
participants. The Company believes that the scope and scale of industry losses have helped
to stabilize the weakening that was taking place in many sectors and will lead to
generally improving market conditions during 2006 that are likely to vary by product and
market. For the property catastrophe and retrocession lines, the Company expects that
demand and pricing will increase the most as companies reassess their risk management
approach and rating agencies raise the required capital levels for many industry
participants. The Company believes that price increases for these two lines will be most
pronounced in peak catastrophe zones, such as the southeastern U.S. For remaining property
lines, there will likely be modest rate increases, while the casualty

7

markets have
generally steadied and are expected to stabilize at adequate pricing levels in 2006 for
both insurance and reinsurance.

The Company notes that it continues
to see opportunities for profitable writings in a variety of classes and lines owing
mainly to the general adequacy of underlying pricing. However, the Company continues to
examine its view of price adequacy for property lines in light of 2005s
unprecedented catastrophe experience from both a frequency and severity prespective. This
reexamination is focused on several key factors including the magnitude and character of
catastrophe exposures, the level of required capital to support the Companys
businesses from both the Companys and rating agencies perspectives and the
actual and potential volatility and variability of results, by product, business class and
business unit, including with respect to the reliability of underlying statistical and
modeling techniques.

EmployeesAs of March 1, 2006, the Company
employed 425 persons. Management believes that its 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 Factors
The following risk factors, in
addition to the other information provided in this report, should be considered when
evaluating the Company. If the circumstances contemplated by the individual risk factors
materialize, our business, financial condition or results of operations could be
materially and adversely affected and the trading price of Groups common shares
could decline significantly.

RISKS RELATING TO OUR
BUSINESS

Our results could be
adversely affected by catastrophic events.

Like all property and catastrophe
insurance and reinsurance companies, 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:

8

|Calendar year | Pre-tax catastrophe losses
|------------- | --------------------------
|              |                           
|2005          |                           
|2004          |                           
|2003          |                           
|2002          |                           
|2001          |                           

Our losses from future
catastrophic events could exceed our projections.

As with most industry participants,
we use projections of possible losses from future catastrophic events of varying types and
magnitudes as a strategic underwriting tool. Based upon these loss projections, we may
choose to decline additional business in certain geographical areas, purchase
retrocessional coverage or take other actions to limit the extent of potential losses in a
given geographical area from catastrophic events. 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.

As a result of the significant
hurricane losses over the past two years, vendors for the statistical models are in the
process of recalibrating their models, which may have a material impact on potential loss
projections for us and the insurance industry going forward.

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 employing actuarial and
statistical projections. The data received is not always timely or accurate and can result
in inaccurate loss projections. Because of the uncertainties that surround estimating loss
reserves and LAE, we cannot be certain that ultimate losses will not exceed these
estimates of losses and loss adjustment reserves. If our reserves are insufficient to
cover our actual loss and loss adjustment expenses (LAE), we would be required
to increase loss reserves in the period in which such deficiencies are identified which
would cause a charge to our earnings and a reduction of capital. By way of illustration,
during the past five calendar years, the reserve re-estimation process resulted in a
decrease to our pre-tax net income in four of the years:

|Calendar year | Effect on pre-tax net income
|------------- | ----------------------------
|             
|2005          | $                           
|2004          | $                           
|2003          | $                           
|2002          | $                           
|2001          | $                           

9

During 2005, there were three large
hurricane events, Katrina, Rita and Wilma, as well as other catastrophe losses, which
resulted in significant incurred losses to our Company. The unprecedented magnitude and
nature of these losses, the continuing lack of precise information from ceding companies
regarding exposures, the complexities surrounding claim adjusting and settlement
activities and the potential related regulatory and legal issues, as well as inflation in
repair costs due to the limited availability of labor and materials, all contribute to
uncertainty in the loss estimating process.

Our current estimate for these losses
is based on modeled information, underwriter analysis and judgments, client input and
discussion, event modeling and profiling of exposed limits. We expect it will be several
quarters before relative clarity emerges with respect to ceding companies underlying
losses. As a result, losses may ultimately be materially greater than our initial
estimated losses. Any future adjustments to estimated pre-tax catastrophe losses will have
an impact on incurred losses in the quarters during which such adjustments are made, and
such impacts could be material.

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 2005,
approximately 8% of our gross reserves were comprised of explicit A&E reserves.
A&E liabilities are especially hard to estimate for many reasons, including the long
waiting periods 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
generate a 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
ongoing expansion 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, yet 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 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.

10

In 2004 and 2005, market conditions
weakened following hard market conditions that had developed from 2000 through 2003.
Pricing for most property and casualty classes declined modestly. Competition increased
modestly as well, in part due to the relative profitability achieved by many reinsurers
from 2002 through 2004, the attendant buildup of capital by these participants and growing
pressures to effectively redeploy this capital. However, this profitability and capital
buildup varied significantly by market participant, reflecting the fact that the industry
was impacted by significant catastrophe losses in the second halves of 2005 and 2004,
generally weak investment market conditions, and ongoing adverse loss development. All of
these factors depressed the industrys aggregate financial performance and
perceptions of individual insurers financial strength during this period.

For the insurance industry, 2005 was
a year of unprecedented catastrophe losses in terms of both frequency and severity which
negatively impacted the financial results of a broad number of (re)insurance market
participants. We believe that the scope and scale of industry losses have helped to
stabilize the weakening that was taking place in many sectors and will lead to generally
improving market conditions during 2006 albeit variable by product and market. For the
property catastrophe and retrocession lines, we expect that demand and pricing will likely
increase the most as companies reassess their risk management approach and rating agencies
raise the required capital levels for many industry participants. We believe that price
increases for these two lines will be most pronounced in peak catastrophe zones, such as
the southeastern U.S. For remaining property lines there will likely be modest rate
increases, while the casualty markets have generally steadied and are expected to
stabilize at adequate pricing levels in 2006 for both insurance and reinsurance.

However, beyond 2006, it is possible
that market conditions could weaken again. In that regard, the capital strength of
industry participants, as supplemented by new capital raised, by both existing industry
participants and new opportunistic market entrants, could be perceived as sufficient to
support the industrys aggregate exposures without requiring significant price
increases or any fundamental changes in the pricing of industry products. This development
could have a material and adverse effect on our future prospects for growth and
profitability. Further discussion of competitive issues can be found in ITEM 1,
Business  Competition.

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

Our active insurance company
subsidiaries currently hold financial strength ratings assigned by third-party rating
agencies which assess and rate the claims paying ability and financial strength of
insurers and reinsurers. Our active subsidiaries carry an A+
(Superior) rating from A.M. Best. Everest Re and Everest National hold
an AA (Very Strong) rating from Standard & Poors.
Everest Re holds an Aa3 (Excellent) rating from Moodys.
Financial strength ratings are used by client companies and agents and brokers that place
the business as an important means of assessing the financial strength and quality of
reinsurers. A downgrade or withdrawal of any of these ratings might adversely affect our
ability to market our insurance products and could have a material and adverse effect on
future prospects for growth and profitability.

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

Consistent with market practice, much
of our treaty reinsurance business allows the ceding company to terminate the contract or
seek collateralization of our obligations in the event of a rating downgrade below a
certain threshold. The termination provision would generally be triggered only if a rating
fell below A.M.

11

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 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 2005 and renewed the quota share agreement for 2006 with
Bermuda Re and 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 | 2005  |  | 2004 |       | 2003 |  | 2002  |  | 2001
|-------------------------------------------------------------- | ----- |  | ---- | ----- | ---- |  | ----- |  | ----
|                                                               |       |  |      |       |     
|Unaffiliated                                                   | 4.0%  |  |      | 4.6%  |      |  | 5.2%  |  |     
|Affiliated                                                     | 24.2% |  |      | 18.7% |      |  | 22.9% |  |     

The availability and cost
of unaffiliated reinsurance, generally purchased on a facultative excess basis, are subject to market conditions that are
outside of our control. Over the past five years, such conditions have generally reduced our appetite for reinsurance aimed at
tailoring the risks we assume on a contract or program basis or mitigating or balancing
exposures across our reinsurance operations. Because we have reduced the level of such
reinsurance purchases, our net income could be reduced in the event of a large
unreinsured event or adverse overall experience.

12

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 2006. 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 particularly 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 where 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. Relative
to us, 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 57), President and Chief Operating
Officer, Thomas J. Gallagher (age 57), and Executive Vice President and Chief Financial
Officer, Stephen L. Limauro (age 54). Of those three officers, we only have an employment
contract with Mr. Taranto. That contract has been previously filed with the SEC and was
most recently amended on August 31, 2005 to extend Mr. Tarantos term of employment
from March 31, 2006 until March 31, 2008. 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 as 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 predominantly fixed income portfolio
generally increases or decreases in an inverse relationship with fluctuations in interest
rates. The fair market value of our fixed income securities can also decrease as a result
of any downturn in the business cycle that causes the credit quality of those securities
to

13

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 could
reduce our capital or 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, 2005 | % ofTotal
|-------------------------------------- | ---------------------- | ---------
|                                       |                        |          
|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             |                        |          
|                                       |                       

Further discussion of
market-sensitive instruments can be found in ITEM 7A, Quantitative and Qualitative
Disclosures about Market Risk.

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 U.S. dollar may materially impact our results and financial position. In 2005, we wrote
approximately 16% of our reinsurance coverages in non-U.S. currencies; as of December 31,
2005, we maintained approximately 7% of our investment portfolio in investments
denominated in non-U.S. currencies. During the three years ended December 31, 2005, 2004 and
2003, the impact on our quarterly pre-tax net income from exchange rate fluctuations
ranged from a loss of $5.2 million to a gain if $5.4 million. In addition to net income impacts, changes
in foreign exchange rates resulted in pre-tax translation adjustments through other
comprehensive income of $2.7 million and $10.5 million for the years ended December 31, 2005 and 2004, respectively. On a cumulative,
after-tax basis, translation

14

adjustments have increased equity by $20.4 million and $18.7 million at December 31, 2005 and 2004,
respectively. Further discussion of
foreign currency rate risk can be found in ITEM 7A, Quantitative and Qualitative
Disclosures About Market Risk.

RISKS RELATING TO
REGULATION

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

We are subject to extensive and
increasing regulation under U.S., state and foreign insurance laws. These laws limit the
amount of dividends that can be paid to us by our operating subsidiaries, impose
restrictions on the amount and type of investments that we can hold, prescribe solvency,
accounting and internal control standards that must be met and maintained and require us
to maintain reserves. These laws also require disclosure of material intercompany
transactions and require prior approval of extraordinary transactions. These
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 the ability to expand business operations through
acquisitions of new insurance subsidiaries. In addition, we may not have or maintain all
required licenses and approvals or fully comply with the wide variety of applicable laws
and regulations or the relevant authoritys interpretation of the laws and
regulations. If we do not have the requisite licenses and approvals or do not comply with
applicable regulatory requirements, the insurance regulatory authorities could preclude or
temporarily suspend us from carrying on some or all activities or monetarily penalize us.
These types of actions could have a material adverse effect on our business. To date, no
material fine, penalty or restriction has been imposed on us for failure to comply with
any insurance law or regulation.

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

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

At this time, it appears the effects
of these investigations will have more of an impact on specific companies being
investigated rather than the industry as a whole, with greater transparency and financial
reporting disclosures being required for the entire industry in these areas. In May 2005, the Company received and responded to a subpoena from the SEC seeking information for certain loss mitigation products.
The Company is cooperating with the SEC on this matter. See ITEM 3, Legal Proceedings.
The future impact, if any, on our operation, net income or financial condition can not be
determined at this time.

RISK RELATING TO OUR
SECURITIES

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

15

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

ITEM 1B. Unresolved Staff
Comments

None.

ITEM 2. Properties

Everest Res corporate offices
are located in approximately 129,700 square feet of leased office space in Liberty Corner,
New Jersey. The Companys other twelve locations occupy a total of approximately
70,800 square feet, all of which are leased. Management believes that the above-described
office space is adequate for its current and anticipated needs.

ITEM 3.Legal Proceedings

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

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

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

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

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

16

PART II

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

Market Information and
Holder of Common StockAs of December 31, 2005, 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 2005 and 2003. 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 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 $1.4 billion at December 31,
2005, 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 2006 without
triggering the requirement for prior approval of regulatory authorities in connection with
a dividend is $232.8 million.

Recent Sales of
Unregistered Securities

None.

ITEM 6. Selected
Financial Data

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

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

RESTRUCTURINGOn February 24, 2000, a corporate
restructuring was completed and Group became the new parent holding company of the
Company, which remains the holding company for Groups U.S. operations. Holders of
the Companys common stock automatically became holders of the same number of
Groups common shares. See ITEM 1, Business  The Company for a
further discussion.

17

INDUSTRY CONDITIONSThe worldwide reinsurance and
insurance businesses are highly competitive yet 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 background 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 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 provides additional sources of potential reinsurance and
insurance capacity and competition.

In 2004 and 2005, market conditions
weakened following hard market conditions that had developed from 2000 through 2003.
Pricing for most property and casualty classes declined modestly. Competition increased
modestly as well, in part due to the relative profitability achieved by many reinsurers
from 2002 through 2004, the attendant buildup of capital by these participants and growing
pressures to effectively redeploy this capital. However, this profitability and capital
buildup varied significantly by market participant, reflecting the fact that the industry
was impacted by significant catastrophe losses in the second halves of both 2005 and 2004,
generally weak investment market conditions and ongoing adverse loss development. All of
these factors depressed the industrys aggregate financial performance and
perceptions of individual insurers financial strength during the period.

For the insurance industry, 2005 was
a year of unprecedented catastrophe losses in terms of both frequency and severity, which
negatively impacted the financial results of a broad number of (re)insurance market
participants. The Company believes that the scope and scale of industry losses have helped
to stabilize the weakening that was taking place in many sectors and will lead to
generally improving market conditions during 2006 that are likely to vary by product and
market. For the property catastrophe and retrocession lines, the Company expects that
demand and pricing will increase the most as companies reassess their risk management
approach and rating agencies raise the required capital levels for many industry
participants. The Company believes that price increases for these two lines will be most
pronounced in peak catastrophe zones, such as the southeastern U.S. For remaining property
lines, there will likely be modest rate increases, while the casualty markets have
generally steadied and are expected to stabilize at adequate pricing levels in 2006 for
both insurance and reinsurance.

The Company notes that it continues
to see opportunities for profitable writings in a variety of classes and lines owing
mainly to the general adequacy of underlying pricing. However, the Company continues to
examine its view of price adequacy for property lines in light of 2005s
unprecedented catastrophe experience from both a frequency and severity perspective. This
reexamination is focused on several key factors including the

18

magnitude and character of
catastrophe exposures, the level of required capital to support the Companys
businesses from both the Companys and rating agencies perspectives and the
actual and potential volatility and variability of results, by product, business class and
business unit, including with respect to the reliability of underlying statistical and
modeling techniques.

FINANCIAL SUMMARY The Companys management
monitors and evaluates overall Company performance based upon financial results. The
following table displays a summary of the consolidated net income for the periods
indicated:

|                                             | Years Ended December 31,
|-------------------------------------------- | ------------------------
|                                             |                         
|(Dollars in thousands)                       | 2005                    
|                                             |                         
|Gross written premiums                       |                         
|Net written premiums                         |                         
|REVENUES:                                    |                         
|Premiums earned                              |                         
|Net investment income                        |                         
|Net realized capital gains (losses)          |                         
|Other income (expense)                       |                         
|                                             |                         
|Total revenues                               |                         
|                                             |                         
|CLAIMS AND EXPENSES:                         |                         
|Incurred losses and loss adjustment expenses |                         
|Commission, brokerage, taxes and fees        |                         
|Other underwriting expenses                  |                         
|Interest expense and fees                    |                         
|                                             |                         
|Total claims and expenses                    |                         
|                                             |                         
|(LOSS) INCOME BEFORE TAXES                   |                         
|Income tax (benefit) expense                 |                         
|                                             |                         
|NET INCOME                                   |                         
|                                             |                         
|RATIOS:                                      |                         
|Loss ratio                                   |                         
|Commission and brokerage ratio               |                         
|Other underwriting expense ratio             |                         
|                                             |                         
|                                             |                         
|Combined ratio                               |                         
|                                             |                         
|Stockholders' equity                         |                         
|                                             |                         

Overall the Company was disappointed
with its 2005 results. The Company generated income of $4.7 million, which was $170.8
million less than 2004s net income of $175.5 million. This $170.8 million decrease
was principally driven by $576.7 million of higher pre-tax catastrophe losses, which were
partially offset by $353.6 million of improved non-catastrophe prior year reserve
development year over year. The Company incurred $833.0 million of pre-tax catastrophe
losses in 2005 driven extensively by Hurricanes Katrina, Rita and Wilma. These three devastating
events resulted in the worst catastrophe loss year in history for both the insurance
industry and the Company.

Catastrophe risk is a fundamental
risk element to which the Company is exposed. The Companys risk management framework considers such
exposures carefully. As a consequence of the 2005 catastrophe

19

experience, the Company
continues to re-examine and adjust its comprehensive framework of risk assessment,
accumulation monitoring and risk mitigation seeking balance between risk versus reward in
the context of changing market conditions.

Meanwhile, the Company is well
positioned to respond to generally improving market conditions in 2006 in the aftermath of
unprecedented catastrophe losses in late 2005. First, the Companys non-catastrophe
operating fundamentals remain very strong. Second, the Companys broad and
diversified business and low-cost operating platform provide a wide spectrum of
opportunities in a variety of product classes and markets. Lastly, the discipline with
which the Company approaches its business remains intact, causing it to look
opportunistically at improving market conditions while providing its underwriters with the
flexibility to decline business that does not meet its objectives regarding underwriting
profitability.

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. In order to provide comparability of the financial results
between the years, the 2003 results were adjusted to exclude the UK branch activity. For
the year ended December 31, 2003, gross written premiums, net written premiums, premiums
earned, incurred losses and LAE, commission, brokerage, taxes and fees and other
underwriting expense would decrease by $443.5 million, $325.9 million, $290.3 million,
$202.7 million, $61.2 million and $7.1 million, respectively. Effectively, these
adjustments remove the UK branch from the operating results for the year ended December
31, 2003.

20

The following table reflect the
reconciliation from reported to proforma for the periods indicated:

|                                             | Year Ended December 31, 2003
|-------------------------------------------- | ----------------------------
|(Dollars in thousands)                       | As Reported                 
|Gross written premiums                       |                             
|Net written premiums                         |                             
|REVENUES:                                    |                             
|Premiums earned                              |                             
|Net investment income                        |                             
|Net realized capital losses                  |                             
|Other expense                                |                             
|                                             |                             
|Total revenues                               |                             
|                                             |                             
|CLAIMS AND EXPENSES:                         |                             
|Incurred losses and loss adjustment expenses |                             
|Commission, brokerage, taxes and fees        |                             
|Other underwriting expense                   |                             
|Interest expense                             |                             
|                                             |                             
|Total claims and expenses                    |                             
|                                             |                             
|INCOME BEFORE TAXES                          |                             
|                                             |                             

Additionally, in order to provide
comparability of the financial results between the years, the 2004 results were adjusted
to exclude the non-recurring impact associated with the UK Branch Sale. As a result of
that adjustment, net written premiums would decrease by $139.8 million and premiums
earned, incurred losses and LAE and underwriting expenses would decrease by $118.8
million, $118.6 million and $30.9 million, respectively. This adjusts the operating
results for the year ended December 31, 2004 to exclude the one-time effects related to
the sale.

21

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

|                                             | Year Ended December 31, 2004
|-------------------------------------------- | ----------------------------
|(Dollars in thousands)                       | As Reported                 
|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 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.

Revenues.    
          Gross written premiums decreased 12.6% to $3.3 billion in 2005 from $3.8 billion
          in 2004, reflecting the Companys disciplined response to modest market
          softening in most sectors, particularly earlier in the year. The Company adapted
          its operations to slow its growth and even decrease writings for some classes of
          business and reemphasize its focus on profitability as opposed to volume. The
          classes most affected by these actions were workers compensation
          insurance, individual risk (re)insurance, medical stop loss reinsurance and
          select U.S. casualty reinsurance classes. As a result, the U.S. Insurance
          segment decreased 20.2% due to declines in its predominant workers
          compensation book, while the reinsurance segments declined 9.3% in the
          aggregate.

Net written premiums declined 14.2%
to $2.4 billion in 2005 as compared to $2.8 billion in 2004, which was consistent with the
decrease in gross written premiums. Net earned premiums declined 10.5% to $2.4 billion in
2005 as compared to $2.7 billion in 2004.

Net investment income was $325.2
million in 2005, a decrease of 1.2% compared with 2004, primarily due to lower returns
from the Companys equity investments in limited partnerships. The Companys
invested asset base at year-end 2005 was $7.9 billion, up $0.4 billion over the prior
year, which was mainly driven by cash flow from operations, partially offset by $250.0
million of senior debt repayment in 2005. Cash flows, which have been trending down over
the past two years due to increased catastrophe losses and reduced premiums written,
remain strong and are reflective of strong operating fundamentals.

22

Net realized capital gains were $64.6
million in 2005, driven by gains on the sale of the Companys interest only strips of
mortgage-backed securities (interest only strips) investment portfolio and
other portfolio management activities in response to interest rate and credit market
movements.

Other expenses decreased by $81.4
million in 2005, primarily as a result of decreased deferrals on the retroactive
reinsurance agreements with affiliates.

Expenses.Incurred losses and LAE for 2005 were $2.2 billion, an increase of $0.1
          billion over 2004, principally related to $0.6 billion higher level of
          catastrophe losses, partially offset by a $0.4 billion decrease in
          non-catastrophe prior period reserve adjustments and lower earned premiums. The
          Companys non-catastrophe incurred losses were down 23.8% in 2005. The
          Companys 2005 incurred losses benefited from $67.3 million of favorable
          prior period reserve adjustments in 2005, comprised of $156.3 million of
          favorable reserve development on non-catastrophe, non-A&E reserves,
          principally related to property business classes, partially offset by
          catastrophe reserve development of $77.6 million, mostly from 2004 Florida
          hurricane events and A&E development of $11.5 million.

Commission, brokerage and tax
expenses for 2005 were $513.4 million, a decrease of $33.1 million compared to 2004,
principally reflecting decreases in premium volume and changes in business mix. However,
the Companys commission expense ratio increased by 1.0 point, primarily due to an
increase in contingent commissions and premium based taxes. Other underwriting expenses
for 2005 were $100.1 million, a $15.5 million increase, principally reflective of the
continued build-out of the U.S. Insurance platform.

The Company generated an income tax
benefit of $70.2 million in 2005, equating to an effective tax rate of 107.2% applied to
its pre-tax loss of $65.5 million for the year. This elevated effective tax rate reflected
the impact of the years catastrophe losses on U.S. operations, producing a
significant tax loss.

The Company generated net income of
$4.7 million in 2005 compared to net income of $175.5 million in 2004. This $170.8 million
deterioration in 2005 was principally driven by $576.7 million of higher pre-tax
catastrophe losses, tempered somewhat by improved non-catastrophe prior year reserve
development of $353.6 million.

The Companys stockholders
equity increased modestly by $0.1 billion to $1.8 billion at year-end 2005, primarily due to
break-even earnings and the sale of treasury shares.

SEGMENT INFORMATION The Company, through its
subsidiaries, operates in four segments: U.S. Reinsurance, U.S. Insurance, Specialty
Underwriting and International. The U.S. Reinsurance operation writes property and
casualty 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 agent relationships 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, monitoring aggregate exposures to catastrophic 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

23

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.

Effective January 1, 2004, Everest Re
sold its United Kingdom branch to Bermuda Re, a Bermuda insurance company and direct
subsidiary of Group. Business for this branch was previously included in the International
segment and is now included as an element of the Bermuda segment of Group. Due to the sale
and in accordance with Statement of Financial Accounting
Standards No. 131, Disclosures about Segments of an Enterprise and Related
Information (FAS 131), the Company restated the International segment for the
year ended December 31, 2003 to conform to December 31, 2005 and 2004 segment reporting.
For the year ended December 31, 2003 the International segment was adjusted to exclude the
UK branch activity. As a result of that adjustment, gross written premiums, net written
premiums, premiums earned, incurred losses and LAE, commission, brokerage, taxes and fees
and other underwriting expenses decreased by $443.5 million, $325.9 million, $290.3
million, $202.7 million, $61.2 million and $7.1 million, respectively. Effectively, these
adjustments remove the UK branch from the 2003 International segment, making period over
period results comparable.

The following table reflects the
reconciliation from reported to proforma for the International segment for the period
indicated:

|                                             | Year Ended December 31, 2003
|-------------------------------------------- | ----------------------------
|(Dollars in thousands)                       | As Reported                 
|Gross written premiums                       |                             
|Net written premiums                         |                             
|Premiums earned                              |                             
|Incurred losses and loss adjustment expenses |                             
|Commission and brokerage                     |                             
|Other underwriting expenses                  |                             
|                                             |                             
|Underwriting gain                            |                             
|                                             |                             

In 2003, Everest National, another
subsidiary of the Company, opened a regional office in California to better serve its
western U.S. insurance business. The business produced through this additional office is
included in the U.S. Insurance operation.

24

The following tables present the
relevant operating results for the operating segments for the three years ended December
31, 2005, 2004 and 2003:

|U.S. Reinsurance                            
|--------------------------------------------
|(Dollars in thousands)                      
|                                            
|Gross written premiums                      
|Net written premiums                        
|Premiums earned                             
|Incurred losses and loss adjustment expenses
|Commission and brokerage                    
|Other underwriting expenses                 
|                                            
|Underwriting (loss) gain                    
|                                            

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

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

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

25

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

|(Dollars in thousands)                  | 2005 |  | 2004 |          | 2003 |  
|--------------------------------------- | ---- |  | ---- | -------- | ---- | -
|                                        |      |  |     
|Underwriting (loss) gain                |      |  | $    | (383,986 | )    | $
|UK Branch Sale and related transactions |      |  |      | -        |      |  
|                                        |      |  |     
|Underwriting (loss) gain                |      |  |      | (383,986 | )    |  
|Net investment income                   |      |  |      | 325,217  |      |  
|Realized gain (loss)                    |      |  |      | 64,568   |      |  
|Corporate (expense) income              |      |  |      | (6,235   | )    |  
|Interest expense and fees               |      |  |      | (73,178  | )    |  
|Other income (expense)                  |      |  |      | 8,084    |      |  
|                                        |      |  |     
|(Loss) income before taxes              |      |  | $    | (65,530) |      | $
|                                        |      |  |     

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

CONSOLIDATED RESULTS OF
OPERATIONS

YEAR ENDED DECEMBER 31, 2005
COMPARED TO YEAR ENDED DECEMBER 31, 2004 Premiums Written.Gross
written premiums decreased 12.6% to $3,339.9 million in 2005 from $3,820.7 million in 2004,
reflecting a disciplined underwriting response to modest reinsurance market softening that
affected all segments, resulting in an overall premium decline. Premiums declined 35.4%
($172.4 million) in the Specialty Underwriting operation, primarily due to a $145.4
million decrease in A&H business and a $47.9 million decrease in surety business,
partially offset by a $20.9 million increase in marine and aviation business. The U.S.
Insurance operation decreased 20.2% ($235.3 million), principally as a result of a $242.6
million decrease in workers compensation, resulting primarily from changes in the
California workers compensation market. The U.S. Reinsurance operation decreased
6.2% ($92.0 million), principally related to a $173.1 million decrease in treaty casualty
business and a $29.3 million decrease in facultative business, partially offset by a
$118.9 million increase in treaty property business. The International operation increased
2.8% ($18.9 million), resulting primarily from a $75.0 million increase in Asian business,
partially offset by a $43.6 million decrease in international business written through the
Miami and New Jersey offices, representing primarily Latin American business and an $11.3
million decrease in Canadian business.

Ceded premiums decreased to $944.2
million in 2005 from $1,027.7 million in 2004, principally resulting from the decrease in
gross written premiums in the U.S. Insurance operation. Ceded premiums relate primarily
to quota share reinsurance agreements between Everest Re and Bermuda Re and Everest
International. Under these agreements Everest Re ceded to Bermuda Re 22.5% and to Everest
International 2.5% of its net retained liability on all new and renewal policies written
for underwriting years 2005 and 2004, Everest Re ceded to Bermuda Re 25% of its net
retained liability on all new and renewal policies written for underwriting year 2003,
Everest Re ceded to Bermuda Re 20% of its net retained liability on all new and renewal
polices written for underwriting year 2002, and Everest Res Canadian branch ceded to
Bermuda Re 50% of its net retained liability on all new and renewal property polices
written for the 2005, 2004 and 2003 underwriting years.

Net written premiums decreased by
14.2% to $2,395.7 million in 2005 from $2,793.0 million in 2004, reflecting the decrease
in gross written premiums, combined with a slightly smaller decrease in ceded premiums.

26

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 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. Partially tempering the decline in net premiums earned in 2005
were $52.5 million of reinstatement premiums 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. This
additional premium is referred to as reinstatement premium. There were no such
reinstatement premiums for 2004. These net premiums earned 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, can and does introduce appreciable
background variability in various underwriting line items. Changes in estimates related to
unreported reinsurance activity may also affect premiums earned.

ExpensesIncurred Losses and
LAE. Incurred loss 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 non-catastrophe prior period reserve development and a lower level of
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 increase in ceded
losses was primarily the result of fluctuations in losses ceded under the specific
reinsurance coverages purchased by the U.S. Insurance operation.

The Companys loss ratio, which
is calculated by dividing incurred losses and LAE by net premiums earned, increased by 15.0
percentage 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 a 25.6 point increase due to catastrophe
losses, partially offset by a 13.7 point improvement in non-catastrophe prior year reserve
development.

The following table shows the loss
ratios for each of the Companys operating segments for the years ended December 31,
2005 and 2004. The loss ratios for all operations were impacted by the factors noted
above.

|Segment Loss Ratios   
|----------------------
|                      
|Segment               
|                      
|U.S. Reinsurance      
|U.S. Insurance        
|Specialty Underwriting
|International         

The segment components of the
increase in incurred losses and LAE in 2005 from 2004 were a 29.3% ($92.8 million)
increase in the International operation and a 21.8% ($205.0 million) increase in the U.S.
Reinsurance operation, partially offset by a 23.2% ($125.4 million) decrease in the U.S.
Insurance operation and a 9.4% ($23.3 million) decrease in the Specialty Underwriting
operation. These changes reflect variability in premiums earned and changes in the loss
expectation assumptions for business written, as well as the net prior period reserve
development and catastrophe losses discussed below. Incurred losses and LAE for each
operation were

27

also impacted by changes in the pricing of the underlying business, as well
as variability relating to changes in the mix of business by class and type.

The following table shows the net
catastrophe losses for each of the Companys operating segments for years ended
December 31, 2005 and 2004:

|(Dollars in millions)         
|------------------------------
|Segment Net Catastrophe Losses
|                              
|Segment                       
|                              
|U.S. Reinsurance              
|U.S. Insurance                
|Specialty Underwriting        
|International                 
|                              
|Total                         
|                              

Incurred losses and LAE include
catastrophe losses, which include the impact of both current period events and favorable
and unfavorable development on prior period 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.

The following table shows net prior
period reserve adjustments for each of the Companys operating segments for the years
ended December 31, 2005 and 2004.

|(Dollars in millions)                       
|--------------------------------------------
|Segment Net Prior Period Reserve Adjustments
|                                            
|Segment                                     
|                                            
|U.S. Reinsurance                            
|U.S. Insurance                              
|Specialty Underwriting                      
|International                               
|                                            
|Total                                       
|                                            

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

28

net unfavorable A&E
adjustments of $11.5 million. For the year ended December 31, 2004, the unfavorable prior
period reserve adjustments included net unfavorable non-A&E, non-catastrophe
adjustments of $198.5 million relating 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.

The U.S. Reinsurance segment
accounted for $24.7 million of net unfavorable prior period reserve adjustments for the
year ended December 31, 2005, which included $54.3 million of unfavorable catastrophe
prior period reserve adjustments, partially offset by favorable net non-A&E,
non-catastrophe reserve adjustments of $41.0 million. Net unfavorable prior period reserve
adjustments were $103.4 million for the year ended December 31, 2004, which included
$127.9 million of unfavorable non-A&E, non-catastrophe prior period reserve
adjustments, partially offset by $34.8 million of favorable development primarily due to
reserve reduction related to catastrophe losses from the 2001 World Trade Center losses.
Asbestos exposures accounted for $11.5 million and $10.3 million of unfavorable reserve
adjustments for the years ended December 31, 2005 and 2004, respectively. The non-A&E
unfavorable development is primarily the result of a proliferation of claims related to
bankruptcies and other financial management improprieties during the late 1990s and early
2000s. This increased number of claims, combined with larger claims, has significantly
increased incurred losses on the professional liability policies. In the general casualty
area, the Company continues to experience losses greater than historical trends for
accident years 1998 through 2001. These losses are being driven by adverse trends in
litigation and economic variability.

The U.S. Insurance segment reflected
$19.4 million of net favorable prior period reserve adjustments for the year ended
December 31, 2005 and $54.0 million of net unfavorable prior period reserve adjustments
for the year ended December 31, 2004. The 2005 favorable prior period reserve adjustments
related principally to California workers compensation for the 2004 accident year as
the results of benefit reform have become clearer and the 2004 unfavorable prior period
reserve adjustments related principally to the casualty classes related to 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 Specialty Underwriting segment
had $25.4 million of net favorable prior period reserve adjustments for the year ended
December 31, 2005 and $17.5 million of net unfavorable prior period reserve adjustments
for the year ended December 31, 2004. In 2005, net favorable prior period reserve
adjustments reflected $38.6 million of non-A&E, non-catastrophe favorable development
on the marine, aviation, surety and A&H classes of business, partially offset by
unfavorable catastrophe development of $13.2 million. In 2004, net unfavorable prior
period reserve adjustments related to the surety and A&H classes of business,
partially offset by favorable development in the marine and aviation business lines.

The International segment had $47.2
million of favorable net prior period reserve adjustments for the year ended December 31,
2005 and $0.7 million of net favorable prior period reserve adjustments for the year ended December 31, 2004. The favorable development in 2005 related primarily to favorable
non-asbestos, non-catastrophe reserve development on the Canadian, Asian, and
international business of $57.3 million, partially offset by unfavorable property
catastrophe loss development of $10.1 million on the same business. The favorable
development in 2004 related primarily to 2003 Canadian property catastrophe, international
and Asian business.

29

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 contracts 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.

In all cases, the prior period
reserve development, sometimes referred to as reserve strengthening, reflects
managements judgment as to the implications of losses and claim information reported
during the period on the Companys reserve balances.

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 23.3% in 2004.

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

|Segment Expense Ratios
|----------------------
|                      
|Segment               
|                      
|U.S. Reinsurance      
|U.S. Insurance        
|Specialty Underwriting
|International         

Segment underwriting expenses
decreased by 4.1% to $607.2 million in 2005 from $633.1 million in 2004. Commission,
brokerage, taxes and fees decreased by $33.1 million, principally reflecting decreases in
premium volume and changes in the mix of business. Segment other underwriting expenses
increased by $7.2 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 24.5% ($28.4 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 17.0 percentage points to
116.1% in 2005 as compared to 99.1% in 2004, with the increase principally resulting from
elevated catastrophe losses, partially offset by improved prior year development.

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

|Segment Combined Ratios
|-----------------------
|                       
|Segment                
|                       
|U.S. Reinsurance       
|U.S. Insurance         
|Specialty Underwriting 
|International          

30

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 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 a
comparison of various investment yields for the periods indicated:

|                                                                   
|-------------------------------------------------------------------
|                                                                   
|                                                                   
|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
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). 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.

Other Income
(Expense). Other income in 2005 was $8.1 million compared to other
expense of $73.4 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.

Corporate 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.

Interest expense and fees in 2005
were $73.2 million compared to $75.5 million in 2004. Interest expense and fees in 2005
included $35.5 million relating to the senior notes, $37.4 million relating to the junior
subordinated debt securities and $0.2 million relating to the credit line under the
Companys revolving credit facility. Interest expense and fees in 2004 included $42.0
million relating to senior notes, $32.4 million relating to the junior subordinated debt
securities and $1.2 million relating to borrowings under the Companys revolving
credit facility. The lower interest expense on senior notes was due to the retirement of
the 8.5% senior notes due March 15, 2005, partially offset by the issuance of new 5.4%
senior notes on October 12, 2004.

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 income
tax benefits of $70.2 million in 2005, primarily due to the significant incurred losses
relating to catastrophes resulting, ultimately, in a pre-tax loss for the year. The
Company recognized an income tax expense of $56.1 million in 2004, reflecting pre-tax
income of $231.6 million and the impact of various tax issues giving rise to net tax
expenses in conjunction with the transfer of the Companys UK branch to Bermuda Re.

31

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

YEAR ENDED DECEMBER 31,
2004 COMPARED TO YEAR ENDED DECEMBER 31, 2003 Premiums Written.Gross
written premiums decreased 0.8% to $3,820.7 million in 2004 from $3,850.1 million in 2003,
reflecting increased competitive pressures on pricing, particularly on U.S. Reinsurance
property and casualty classes of business. Adjusting to these market conditions, the U.S.
Reinsurance operation decreased 15.6% ($274.1 million), principally relating to a $142.5
million decrease in treaty casualty business, a $74.9 million decrease in facultative
business, a $32.6 million decrease in treaty property business and a $19.8 million
decrease in treaty non-property business. The Specialty Underwriting operation decreased
3.1% ($15.8 million), resulting primarily from a $70.4 million decrease in A&H
business, partially offset by an increase in surety business of $29.6 million and an
increase in marine and aviation business of $25.0 million. Partially offsetting these
decreases were areas where the company continued to grow. The International operation saw
a 30.9% ($162.2 million) increase, primarily due to a $97.7 million increase in
international business written through the Miami and New Jersey offices, representing
primarily Latin American business, and a $67.2 million increase in Asian business. The
U.S. Insurance operation grew 9.2% ($98.3 million), principally as a result of a $193.8
million increase in program business other than workers compensation, partially
offset by a $95.5 million decrease in workers compensation business.

Ceded premiums decreased to $1,027.7
million in 2004 from $1,088.4 million in 2003, principally resulting from the inclusion in
2003 of $49.6 million in adjustment premiums relating to claims made under the 2000
accident year aggregate excess of loss element of the Companys corporate
retrocessional programs, compared with no such adjustment premiums in 2004. Ceded premiums
relate primarily to quota share reinsurance agreements between Everest Re and Bermuda Re
and Everest International. Under these agreements Everest Re ceded to Bermuda Re 22.5% and
to Everest International 2.5% of its net retained liability on all new and renewal
policies written for underwriting year 2004, Everest Re ceded to Bermuda Re 25% of its net
retained liability on all new and renewal policies written for underwriting year 2003,
Everest Re ceded to Bermuda Re 20% of its net retained liability on all new and renewal
polices written for underwriting year 2002, and Everest Res Canadian branch ceded to
Bermuda Re 50% of its net retained liability on all new and renewal property polices
written for the 2004 and 2003 underwriting years.

Net written premiums increased by
1.1% to $2,793.0 million in 2004 from $2,761.7 million in 2003, reflecting the decrease in
gross written premiums, combined with a slightly larger decrease in ceded premiums.

Premium
Revenues. Net premiums earned increased by 9.8% to $2,710.3 million in 2004
from $2,467.4 million in 2003. Contributing to this increase were a 45.7% ($148.1 million)
increase in the International operation, a 9.0% ($95.0 million) increase in the U.S.
Reinsurance operation and a 6.2% ($42.4 million) increase in the U.S. Insurance operation,
partially offset by a 10.6% ($42.5 million) decrease in the Specialty Underwriting
operation. These net premiums earned 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, can and does introduce appreciable background variability in various
underwriting line items. Changes in estimates related to the reporting patterns of
companies may also affect premiums earned.

32

ExpensesIncurred Losses and
LAE. Incurred loss and LAE increased by 14.3% to $2,053.8 million in 2004
from $1,796.9 million in 2003. The increase in incurred losses and LAE was principally
attributable to the provision for estimated catastrophe losses from Hurricanes Charley,
Frances, Ivan and Jeanne, the Pacific typhoons, the Asian tsunami and the net reserve
adjustments for prior period losses, together with the mitigating effects of the impact of
favorable changes in the Companys underlying business mix and aggregate rates, terms
and conditions. Incurred losses and LAE in 2004 reflected ceded losses and LAE of $789.6
million compared to ceded losses and LAE in 2003 of $688.8 million. Ceded losses and LAE
in 2004 included $480.2 of ceded losses relating to the quota share reinsurance
transactions noted earlier between Everest Re and Bermuda Re and Everest International as
compared with ceded losses of $422.9 million for 2003. The ceded losses and LAE for 2003
included $85.0 million of losses ceded under the 2000 accident year aggregate excess of
loss component of the Companys corporate retrocessional program and $81.1 million
under an aggregate excess of loss reinsurance agreement provided by LM Property and
Casualty Insurance Company (LM). The Prudential continues to guarantee
LMs obligation under this agreement. Cessions under this reinsurance agreement
exhausted the limit available under the contract at December 31, 2003.

The Companys loss ratio, which
is calculated by dividing incurred losses and LAE by net premiums earned, increased by 3.0
percentage points to 75.8% in 2004 from 72.8% in 2003, reflecting the impact of the
changes in premiums earned and incurred losses and LAE discussed above, as well as
favorable changes in the underlying business mix and aggregate rates, terms and
conditions.

The following table shows the loss
ratios for each of the Companys operating segments for the years ended December 31,
2004 and 2003. The loss ratios for all operations were impacted by the factors noted
above.

|Segment Loss Ratios   
|----------------------
|                      
|Segment               
|                      
|U.S. Reinsurance      
|U.S. Insurance        
|Specialty Underwriting
|International         

The segment components of the
increase in incurred losses and LAE in 2004 from 2003 were a 42.2% ($94.0 million)
increase in the International operation, a 23.9% ($182.7 million) increase in the U.S.
Reinsurance operation and a 3.9% ($20.4 million) increase in the U.S. Insurance operation.
These increases were partially offset by a 13.9% ($40.2 million) decrease in the Specialty
Underwriting operation. These changes reflect variability in premiums earned and changes
in the loss expectation assumptions for business written, as well as the net prior period
reserve development and catastrophe losses discussed below. Incurred losses and LAE for
each operation were also impacted by generally improved pricing of the underlying
business, as well as variability relating to changes in the mix of business by class and
type, which in general reflected a more favorable mix.

33

The following table shows the net
catastrophe losses for each of the Companys operating segments for the years ended
December 31, 2004 and 2003.

|(Dollars in millions)         
|------------------------------
|Segment Net Catastrophe Losses
|                              
|Segment                       
|                              
|U.S. Reinsurance              
|U.S. Insurance                
|Specialty Underwriting        
|International                 
|                              
|Total                         
|                              

Incurred losses and LAE include
catastrophe losses, which include the impact of both current period events and favorable
and unfavorable development on prior period events and are net of reinsurance. Individual
catastrophe losses are reported net of specific reinsurance, but before recoveries under
corporate level reinsurance and potential IBNR 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 in 2005, industrial risk losses
were excluded from catastrophe losses. As such, prior periods were adjusted for comparison
reasons. Catastrophe losses, net of contract specific cessions and the inter-affiliate
quota share reinsurance described above, 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
events. Catastrophe losses, net of contract specific cessions and the inter-affiliate
quota share reinsurance described above, were $20.1 million in 2003, relating principally
to the May 2003 tornado and hailstorm events and Hurricanes Fabian and Isabel.

The following table shows the net
prior period reserve adjustments for each of the Companys operating segments for the
years ended December 31, 2004 and 2003.

|(Dollars in millions)                       
|--------------------------------------------
|Segment Net Prior Period Reserve Adjustments
|                                            
|Segment                                     
|                                            
|U.S. Reinsurance                            
|U.S. Insurance                              
|Specialty Underwriting                      
|International                               
|                                            
|Total                                       
|                                            

Net unfavorable prior period reserve
adjustments for the year ended December 31, 2004 were $174.2 million compared to $129.1
million in 2003. For the year ended December 31, 2004, the unfavorable prior period reserve adjustments included net unfavorable non-A&E, non-catastrophe adjustments of
$198.5 million relating primarily to casualty reinsurance, in particular, workers
compensation and net unfavorable A&E adjustments of $10.3 million, partially offset by
favorable development of $34.6 million relating to the reduction of reserves for the 2001
World Trade Center events. For the year ended December 31, 2003, net unfavorable
non-A&E, non-catastrophe prior period reserve adjustments were $114.6 million, which
were net of a cession of $85 million under the 2000 accident year aggregate excess of loss
component of the Companys corporate retrocessional program and net unfavorable
A&E adjustments of $16.8 million partially offset by net favorable catastrophe prior
period reserve adjustments of $2.3 million. It is important to note that adverse
non-A&E accident year reserve development arises from the reevaluation of accident
year results, that such reevaluations

34

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.

The U.S. Reinsurance segment
accounted for $103.4 million of net unfavorable prior period reserve adjustments for the
year ended December 31, 2004, which included $34.2 million of favorable development due to
the reserve reduction related to the catastrophe losses from the 2001 World Trade Center
events, as compared to net unfavorable prior period reserve adjustments of $150.9 million
for the year ended December 31, 2003. Asbestos exposures accounted for $10.3 million and
$16.8 million of unfavorable reserve adjustments for the years ended December 31, 2004 and
2003, respectively, with the remainder principally attributable to professional liability
and casualty business classes. During the late 1990s and early 2000s, there had been a
proliferation of claims relating to bankruptcies and other financial management
improprieties. This increased number of claims, combined with larger claims, has
significantly increased incurred losses on the professional liability policies. In the
general casualty area, the Company continues to experience losses greater than historical
trends for accident years 1998 through 2001. These losses are being driven by adverse
trends in litigation and economic variability. In both the professional liability and
general casualty reinsurance areas, the Company relies upon loss reports from ceding
companies. Although the Company may record reserves at higher levels than those reported
by ceding companies, actual reported results have exceeded the initial loss indications.

The U.S. Insurance segment reflected
$54.0 million and $58.7 million of net unfavorable prior period reserve adjustments for
the years ended December 31, 2004 and 2003, respectively. The unfavorable prior period
reserve adjustments were principally due to accident years 2000 through 2002, where the
Company strengthened its reserves for California workers compensation insurance.
This was a relatively new book of business and was written in a challenging political and
economic environment. While management believes that cumulative results through 2004
remained quite positive, there had been some deterioration in claim frequency and severity
related to accident years 2001 and 2002.

The Specialty Underwriting segment
had $17.5 million of net unfavorable prior period reserve adjustments for the year ended
December 31, 2004, principally related to net unfavorable prior period reserve adjustments
in the surety and A&H business lines, partially offset by favorable development from
marine and aviation. The net favorable prior period reserve adjustments for the year ended
December 31, 2003 were $23.9 million, primarily related to A&H business.

The International segment had $0.7
million and $56.6 million of net favorable prior period reserve adjustments for the years
ended December 31, 2004 and 2003, respectively. The favorable prior period reserve
adjustments in 2004 related primarily to 2003 Canadian property catastrophe, international
and Asia business. The prior period reserve development for 2003 related primarily to
general casualty business written on both a quota share and excess basis for accident
years 1996 through 2002.

Aggregate reserve development related
to A&E exposures was $10.3 million and $16.8 million for the years ended December 31,
2004 and 2003, 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 $10.3 million in 2004. Substantially all of the
Companys A&E exposures relate to insurance and reinsurance contracts 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.

In all cases, the prior period
development, sometimes referred to as reserve strengthening, reflects managements
judgment as to the implications of losses and claim information reported during the period
on the Companys reserve balances.

35

Underwriting
Expenses.The Companys expense ratio, which is calculated by dividing
underwriting expenses by net premiums earned, was 23.3% in 2004 compared to 24.8% in 2003.

The following table shows the expense
ratios for each of the Companys operating segments for the years ended December 31,
2004 and 2003.

|Segment Expense Ratios
|----------------------
|                      
|Segment               
|                      
|U.S. Reinsurance      
|U.S. Insurance        
|Specialty Underwriting
|International         

Segment underwriting expenses
increased by 3.7% to $633.1 million in 2004 from $610.8 million in 2003. Commission,
brokerage, taxes and fees increased by $12.2 million, principally reflecting increases in
premium volume and changes in the mix of business. Segment other underwriting expenses
increased by $10.1 million as the Company continues to expand operations to support its
increased business. Contributing to the segment underwriting expense increases were
a 53.4% ($41.0 million) increase in the International operation and a 4.8% ($13.7 million)
increase in the U.S. Reinsurance operation, which were all partially offset by a 18.9%
($27.0 million) decrease in the U.S. Insurance operation and a 5.1% ($5.4 million)
decrease in the Specialty Underwriting 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 1.4 percentage points to
99.1% for the year ended December 31, 2004 compared to 97.7% for the year ended December
31, 2003.

The following table shows the
combined ratios for each of the Companys operating segments for the year ended
December 31, 2004 and 2003. The combined ratios for all operations were impacted by the
loss and expense ratio variability noted above.

|Segment Combined Ratios
|-----------------------
|                       
|Segment                
|                       
|U.S. Reinsurance       
|U.S. Insurance         
|Specialty Underwriting 
|International          

Investments.
          Net investment income increased 15.6% to $329.2 million in 2004 from $284.8
          million in 2003, principally reflecting the effects of investing $921.6 million
          of cash flow from operations for the twelve months ended December 31, 2004, as
          well as $320.0 million of net proceeds from the issuance of junior subordinated debt
          securities in March 2004 and $246.7 million of net proceeds from the issuance of senior
          notes in October 2004, all partially offset by the effects of the lower interest
          rate environment and a $6.0 million decrease from the impact of the UK Branch
          Sale. The increase also reflected $32.7 million representing an atypical
          increase in the carrying value of a limited partnership investment.

36

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

|                                                                   
|-------------------------------------------------------------------
|                                                                   
|                                                                   
|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 were $56.7
million in 2004, reflecting realized capital gains on the Companys investments of
$107.4 million, including $77.6 million on the sale of interest only strip investments.
This was 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. Net realized
capital losses of $22.9 million in 2003 reflected realized capital losses on the
Companys investments of $51.5 million, which included $16.4 million relating to
write-downs in the value of securities deemed to be impaired on an other than temporary
basis and $25.2 million related to the impairment on interest only strips, partially
offset by $28.6 million of realized capital gains, which included $12.5 million of
realized capital gains on sales of the interest only strips.

The Company has one credit default
swap, a type of contract which it no longer writes. This contract meets the definition of
a derivative under Financial Accounting Standards No. 133, Accounting for Derivative
Instruments and Hedging Activities (FAS 133). There was no net
derivative expense from this credit default transaction in 2004 and 2003.

Other Expense.
Other expense was $73.4 million and $14.0 million in 2004 and 2003, respectively. This
change was primarily due to increased deferrals on the retroactive reinsurance agreements
with affiliates for asbestos reserve strengthening.

Corporate charges not allocated to
segments were income of $2.0 million in 2004 as compared to corporate expense of $2.1
million in 2003.

Interest expense in 2004 was $75.5
million compared to $57.3 million in 2003. Interest expense in 2004 included $42.0 million
related to the senior notes, $32.4 million related to the junior subordinated debt
securities and $1.2 million related to borrowings under the Companys revolving
credit facility. Interest expense in 2003 reflected $38.9 million related to the issuance
of the senior notes, $17.0 million related to the junior subordinated debt securities and
$1.4 million related to borrowings under the Companys revolving credit facility. The
increase in interest expense in 2004 was due to the additional issuance of $320 million of junior
subordinated debt securities in March 2004 and the issuance of $250 million of senior
notes in October 2004.

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. Additionally, in conjunction
with the transfer of the Companys UK branch to Bermuda Re, there were various tax
issues giving rise to net tax expenses. The Company recognized income tax expense of $56.1
million in 2004 compared to $61.0 million in 2003.

Net Income. Net
income was $175.5 million in 2004 compared to net income of $206.5 million in 2003,
reflecting a decrease in underwriting results due to 2004 catastrophe losses, partially
offset by an improvement in investment income, realized capital gains and decreased income
taxes.

37

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, the effects
of catastrophic events including the most recent hurricanes, 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 below
under the caption ITEM 1A, Risk Factors. The Company undertakes no obligation to
update or revise publicly any forward-looking statements, whether as a result of new
information, future events or otherwise.

ITEM 7A. Quantitative and
Qualitative Disclosures About Market Risk

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

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

The overall investment strategy
considers the scope of present and anticipated Company operations. In particular,
estimates of the financial impact resulting from non-investment asset and liability
transactions, together with the Companys capital structure and other factors, are
used to develop a net liability analysis. This analysis includes estimated payout
characteristics for which the investments of the Company provide liquidity. This analysis
is considered in the development of specific investment strategies for asset allocation,
duration, and credit quality. The change in overall market sensitive risk exposure
principally reflects the asset changes that took place during the period, including the
acquisition of interest only strips in which market value increases as interest rates rise
and decreases as interest rates fall. The addition of these securities to the portfolio
has reduced the impact of interest rate shift on the entire portfolio.

The Companys $7.9 billion
investment portfolio at December 31, 2005 is principally comprised of fixed maturity
securities, which are subject to interest rate risk and foreign currency rate risk, and
equity securities, which are subject to equity price risk. The impact of these risks on
the investment portfolio is generally mitigated by changes in the value of operating
assets and liabilities and their associated income statement impact.

38

Interest rate risk is the potential
change in value of the fixed maturity portfolio, including short-term investments, due to
change in market interest rates. In a declining interest rate environment, it includes
prepayment risk on the $469.7 million of mortgage-backed securities in the $6,036.7
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 as of December 31, 2005 and 2004 based on parallel
200 basis point shifts in interest rates up and down in 100 basis point increments. 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.

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

|2004Interest Rate Shift in Basis Points
|---------------------------------------
|                                       
|                                       
|                                       
|Total Market Value                     
|Market Value Change from Base (%)      
|Change in Unrealized Appreciation      
|After-tax from Base ($)                

The Company had $7,729.2 million and
$6,846.9 million of reserves for losses and LAE as of December 31, 2005 and December 31,
2004. These amounts are recorded at their nominal or estimated ultimate payment amount, 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
decrease and conversely, if interest rates decline, the fair value will increase. These
movements are the opposite of the interest rate impacts on the fair value of investments
since reserves are future obligations. 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. The existence of such obligations, and the variable differential between
ultimate and fair value, which in theory applies equally to invested assets and insurance
liability, provides substantial mitigation of the economic effects of interest rate
variability even though such mitigation is not reflected in the Companys financial
statements.

Foreign currency rate 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,

39

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 a general matching of the currency and duration of its assets to its
corresponding operating liabilities. In accordance with Financial Accounting Standards
Board Statement No. 52, 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.

The tables below display the
potential impact of a parallel 20% increase and decrease in foreign exchange rates on the
valuation of invested assets subject to foreign currency exposure in 10% increments as of
December 31, 2005 and 2004. 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. The growth in
exposure between 2005 and 2004 principally arises from increases in the level of foreign
currency investments, which is generally commensurate with changes in the Companys
mix of business. All amounts are in U.S. dollars and are presented in millions.

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

|2004Change in Foreign Exchange Rates in Percent
|-----------------------------------------------
|                                               
|                                               
|                                               
|Total After-tax Foreign Exchange Exposure      

Equity risk is the potential change
in market value of the common stock and preferred stock portfolios arising from changing
equity prices. The Company invests in high quality common and preferred stocks that are
traded on the major exchanges in the U.S. and in funds investing in such securities. The
primary objective in managing the equity portfolio is to provide long-term capital growth
through market appreciation and income.

The tables below display the impact
on market value and after-tax unrealized appreciation of a 20% change in equity prices up
and down in 10% increments as of December 31, 2005 and 2004. 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.

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

|2004Change in Equity Values in Percent     
|-------------------------------------------
|                                           
|                                           
|                                           
|Market Value of the Equity Portfolio       
|After-tax Change in Unrealized Appreciation

40

ITEM 8.Financial
Statements and Supplementary Data

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

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

None.

ITEM 9A.Controls and
Procedures

Disclosure Controls and
Procedures

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

Managements Report on
Internal Control Over Financial ReportingNot required for fiscal year ended December
31, 2005.

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

ITEM 9B. Other Information

None.

PART III

ITEM 10. Directors and Executive Officers
 of the Registrant

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

ITEM 11. Executive
Compensation

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

41

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

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

ITEM 13. Certain Relationships
and Related Transactions

Information for this 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, 2005 and 2004 are as follows:

|   | 2005 |                    | 2004 |          
|-- | ---- | ------------------ | ---- | ---------
|   |      |                   
|(1 | )    | Audit Fees         | $    | 1,477,333
|(2 | )    | Audit-Related Fees | $    | 66,000   
|(3 | )    | Tax Fees           | $    | 4,126    
|(4 | )    | All Other Fees     | $    | 2,130    

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

Audit-related fees include assurance
and related services that are reasonably related to the performance of the audit or review
of the Companys financial statements, including due diligence services pertaining to
potential business acquisitions/dispositions, accounting consultations related to
accounting, financial reporting or disclosure matters not classified as audit
services; assistance with understanding and implementing new accounting and
financial reporting guidance from rulemaking 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

42

by Groups Audit Committee
or its delegate. For both specific and general pre-approval, Groups Audit Committee
will consider whether such services are consistent with the SECs rules on auditor
independence. Groups Audit Committee will also consider whether the independent
auditor is best positioned to provide the most effective and efficient service and whether
the service might enhance the Companys ability to manage or control risk or improve
audit quality. Groups Audit Committee is also mindful of the relationship between
fees for audit and non-audit services in deciding whether to pre-approve any such services
and may determine, for each fiscal year, the appropriate ratio between the total amount of
fees for audit, audit-related and tax fees and a total amount of fees for certain
permissible non-audit services classified as All Other Fees above. All such
factors will be considered as a whole, and no one factor is determinative. Groups
Audit Committee has considered whether the performance by PricewaterhouseCoopers LLP of
the services disclosed below is compatible with maintaining their independence.

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

PART IV

ITEM 15. Exhibits and Financial Statement Schedules

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.

43

# 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 31, 2006.

| | EVEREST REINSURANCE HOLDINGS, INC.    
| | --------------------------------------
| | By:/s/  
JOSEPH V. TARANTO            
| | Joseph V. Taranto                     
| | (Chairman and Chief
Executive Officer)

|/s/ JOSEPH V. TARANTO
       Joseph V. Taranto     | Chairman and Chief Executive Officer and Director
(Principal Executive Officer)                  | March 31, 2006
|-------------------------------------------------- | ------------------------------------------------------------------------------------------------ | --------------
|/s/ THOMAS J. GALLAGHER
       Thomas J. Gallagher | President and Chief Operating Officer and Director                                               | March 31, 2006
|/s/ STEPHEN L. LIMAURO
       Stephen L. Limauro   | Executive Vice President and Chief Financial 
Officer and Director (Principal Financial Officer) | March 31, 2006
|/s/ KEITH T. SHOEMAKER
       Keith T. Shoemaker   | Vice President and Comptroller (Principal Accounting Officer)                                    | March 31, 2006

44



|INDEX TO EXHIBITS                                            
|-------------------------------------------------------------
|Exhibit No.                                                  
|2.1                                                          
|3.1                                                          
|3.2                                                          
|4.1                                                          
|4.2                                                          
|4.3                                                          
|4.4                                                          
|4.5                                                          
|4.6                                                          
|4.7                                                          
|4.8                                                          
|                                                             
|4.9                                                          
|4.10                                                         
|4.11                                                         
|4.12                                                         
|4.13                                                         
|*10.1                                                        
|*10.2                                                        
|*10.3                                                        
|*10.4                                                        
|10.5                                                         
|10.6                                                         
|10.7                                                         
|                                                             
|10.8                                                         
|10.9                                                         
|10.10                                                        
|10.11                                                        
|10.12                                                        
|10.13                                                        
|*10.14                                                       
|*10.15                                                       
|*10.16                                                       
|10.17                                                        
|*10.18                                                       
|                                                             
|10.19                                                        
|*10.20                                                       
|23.1                                                         
|31.1                                                         
|31.2                                                         
|32.1                                                         
|___________________                                          
|*    Management contract or compensatory plan or arrangement.
|                                                             

|INDEX TO FINANCIAL STATEMENTS AND
SCHEDULES                                                                         
|--------------------------------------------------------------------------------------------------------------------
|Everest Reinsurance Holdings, Inc.                                                                                  
|                                                                                                                    
|Report of Independent Registered Public Accounting Firm                                                             
|Consolidated Balance Sheets at December 31, 2005 and 2004                                                           
|Consolidated Statements of Operations and Comprehensive Income for the Years Ended                                  
|December 31, 2005, 2004 and 2003                                                                                    
|Consolidated Statements of Changes in Shareholders Equity for the Years Ended                                      
|December 31, 2005, 2004 and 2003                                                                                    
|Consolidated Statements of Cash Flows for the Years Ended                                                           
|December 31, 2005, 2004 and 2003                                                                                    
|Notes to Consolidated Financial Statements                                                                          
|                                                                                                                    
|Schedules                                                                                                           
|I       Summary of Investments Other Than Investments in Related Parties at                                         
|December 31, 2005                                                                                                   
|II     Condensed Financial Information of Registrant:                Balance Sheets as of December 31, 2005 and 2004
|Statements of Operations for the Years Ended December 31, 2005, 2004 and 2003                                       
|Statements of Cash Flows for the Years Ended December 31, 2005, 2004 and 2003                                       
|III    Supplementary Insurance Information as of December 31, 2005 and 2004                                         
|and for the Years Ended December 31, 2005, 2004 and 2003                                                            
|IV    Reinsurance for the Years Ended December 31, 2005, 2004 and 2003                                              

Schedules other than those listed above are omitted for the reason that they are not applicable or the information is otherwise
contained in the Financial Statements.

F-1



REPORT OF INDEPENDENT
REGISTERED PUBLIC ACCOUNTING FIRM

REPORT OF INDEPENDENT
REGISTERED PUBLIC ACCOUNTING FIRM

To
the Board of Directors and Stockholdersof 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. at December 31, 2005 and 2004, and the
results of its operations and its cash flows for each of the three years in the
period ended December 31, 2005 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
consolidated financial statements. These financial statements and financial
statement schedules are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements and
financial statement schedules based on our audits. We conducted our audits of
these statements in accordance with the standards of the Public Company
Accounting Oversight Board(United
States). Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.

PricewaterhouseCoopers LLP
New York, New YorkMarch 30, 2006

F-2



|                                                                                      |     
|------------------------------------------------------------------------------------- | ----
|December 31,                                                                         
|(Dollars in thousands, except par value per share)                                    | 2005
|ASSETS:                                                                               |     
|Fixed maturities - available for sale, at market value                                |     
|(amortized cost: 2005, $5,850,541; 2004, $5,887,529)                                  |     
|Equity securities, at market value (cost: 2005, $859,425; 2004, $571,717)             |     
|Short-term investments                                                                |     
|Other invested assets (cost: 2005, $215,364; 2004, $113,050)                          |     
|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                                                 |     
|Contingent commissions                                                                |     
|Other net payable to reinsurers                                                       |     
|Current federal income taxes                                                          |     
|8.5% Senior notes due 3/15/2005                                                       |     
|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 (2005 and 2004)                                   |     
|Additional paid-in capital                                                            |     
|Accumulated other comprehensive income, net of deferred income                        |     
|taxes of $132.6 million at 2005 and $133.4 million at 2004                            |     
|Retained earnings                                                                     |     
|Treasury Shares, at cost; 0.0 million shares at 2005 and 0.5 millions shares at 2004  |     
|                                                                                      |     
|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 | Years Ended December 31,
|------------------------------------------------------------------------------------------------- | ------------------------
|(Dollars in thousands)                                                                            | 2005                    
|
|REVENUES:                                                                                         |                         
|Premiums earned                                                                                   |                         
|Net investment income                                                                             |                         
|Net realized capital gains (losses)                                                               |                         
|Other income (expense)                                                                            |                         
|                                                                                                  |                         
|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                                                      |                         
|Interest expense and fees on credit facility                                                      |                         
|                                                                                                  |                         
|Total claims and expenses                                                                         |                         
|                                                                                                  |                         
|(LOSS) INCOME BEFORE TAXES                                                                        |                         
|Income tax (benefit) expense                                                                      |                         
|                                                                                                  |                         
|NET INCOME                                                                                        |                         
|                                                                                                  |                         
|Other comprehensive (loss) income, 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 | Years Ended December 31,
|--------------------------------------------------------------------------------------------- | ------------------------
|(Dollars in thousands, except stock amounts)                                                  | 2005                    
|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                                                           |                         
|Tax benefit from stock options exercised                                                      |                         
|Dividends from treasury shares                                                                |                         
|                                                                                              |                         
|Balance, end of period                                                                        |                         
|                                                                                              |                         
|ACCUMULATED OTHER COMPREHENSIVE INCOME,                                                       |                         
|NET OF DEFERRED INCOME TAXES:                                                                 |                         
|Balance, beginning of period                                                                  |                         
|Net (decrease) increase during the period                                                     |                         
|                                                                                              |                         
|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

---

|                                                                                      |      |     
|------------------------------------------------------------------------------------- | ---- | ----
|Years Ended December 31,                                                             
|(Dollars in thousands)                                                                | 2005 | 2004
|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) decrease in funds held by reinsured, net                                   |      |     
|Decrease (increase) in reinsurance receivables                                        |      |     
|Increase in deferred tax asset                                                        |      |     
|Increase in reserve for losses and loss adjustment expenses                           |      |     
|(Decrease) increase in unearned premiums                                              |      |     
|Increase (decrease) in other assets and liabilities                                   |      |     
|Amortization of bond premium/(accrual of bond discount)                               |      |     
|Amortization of underwriting discount on senior notes                                 |      |     
|Realized capital (gains) losses                                                       |      |     
|                                                                                      |      |     
|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 sales (purchases) 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 stock options exercised                                              |      |     
|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 (used in) provided by 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 transactions:                                                      |      |     
|Non-cash dividend to parent                                                           |      |     
|Non-cash tax benefit from stock options exercised                                     |      |     
|The accompanying notes are an integral part of the consolidated financial statements. |      |     

F-6

---

EVEREST REINSURANCE HOLDINGS, INC.NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS

Years Ended December 31, 2005, 2004
and 2003

1.    
          SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

A. Business and Basis of
PresentationEverest Re Group, Ltd. (Group), a Bermuda company, was established in 1999 as a wholly-owned
subsidiary of Everest Reinsurance Holdings, Inc. (Holdings). On February 24,
2000, a corporate restructuring was completed and Group became the new parent holding
company of Holdings. Holders of shares of common stock of Holdings automatically became
holders of the same number of common shares of Group. The Company means
Holdings and its subsidiaries, unless the context otherwise requires. The Company, through
its subsidiaries, principally provides property and casualty reinsurance and insurance in
the United States of America and internationally.

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 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 Re Holdings, Ltd. (Everest Ltd.), Everest Security
Insurance Company (Everest Security), formerly Southeastern Security Insurance
Company, Everest Insurance Company of Canada (Everest Canada), Mt. McKinley
Managers, L.L.C. (Managers), Workcare Southeast, Inc. (Workcare
Southeast), Workcare Southeast of Georgia, Inc. (Workcare Georgia) 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, are 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

F-7

pursuant to the equity
method of accounting, which management believes approximates market value. The
Supplemental Retirement Plan Rabbi Trust, the Deferred Compensation Plan Rabbi Trust and
the Supplemental Savings Plan Rabbi Trust are carried at market value. Cash includes cash
and bank time deposits with original maturities of ninety days or less.

C. Uncollectible
Receivable Balances The Company provides reserves for
uncollectible premium receivables and reinsurance recoverable balances based on
managements assessment of the collectibility of the outstanding balances. Such
reserves were $38.3 million and $36.7 million at December 31, 2005 and 2004, respectively.
See also Note 10.

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 based on the related
unearned premiums, anticipated claims and claim expenses and anticipated investment
income. Deferred acquisition costs amortized to income were $513.4 million, $577.5 million
and $595.5 million in 2005, 2004 and 2003, respectively.

E. Reserve for Losses and
Loss Adjustment Expenses The reserve for losses and loss
adjustment expenses (LAE) is based on individual case estimates and reports
received from ceding companies. A provision is included for losses and LAE incurred but
not reported (IBNR) based on past experience. A provision is also included for
certain potential liabilities relating to asbestos and environmental (A&E)
exposures, which liabilities cannot be estimated with traditional reserving techniques.
See also Note 3. The reserves are reviewed continually and any changes in estimates are
reflected in earnings in the period the adjustment is made. Management believes that
adequate provision has been made for the Companys 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 contingent commission
liabilities 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 the estimated liability for such arrangements are recorded as
contingent commissions. Accruals for contingent commission liabilities 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
computed using pro rata methods based on statistical data. Reinstatement premiums are
earned when written and relate to additional premium received on catastrophe reinsurance
coverage when limits are exhausted, but additional coverage is requested. 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.

F-8

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, 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 in other income (expense).

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

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

K. Policyholder 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 Standards In January 2003, the Financial
Accounting Standards Board (FASB) issued Financial Interpretation No. 46,
Consolidation of Variable Interest Entities (FIN 46). FIN 46
addresses whether certain types of entities, referred to as variable interest entities
(VIEs), should be consolidated or deconsolidated in a companys financial
statements. During December 2003, the FASB issued FIN 46R, replacing FIN 46. FIN 46R
became effective, for entities that had not adopted FIN 46 as of December 24, 2003. The
Company adopted FIN 46R in the first quarter of 2004, resulting in the deconsolidation of
Everest Re Capital Trust (Capital Trust) and Everest Re Capital Trust II
(Capital Trust II). For 2003, where applicable, the financial statements have
been restated to reflect the deconsolidation.

In November 2005, the FASB issued the
FASB Staff Position (FSP) FAS 115-1, The Meaning of Other-Than-Temporary
Impairment and Its Application to Certain Investments, (FAS 115-1), which was
issued to replace the guidance set forth in paragraphs 10-18 of Emerging Issues Task Force
(EITF) Issue No. 03-1, The Meaning of Other-Than-Temporary Impairments
and its Application to Certain Investments (EITF 03-1), with references
to existing other than temporary impairment guidance. FAS 115-1 would be applied
prospectively and the effective date would be reporting periods beginning after December
15, 2005. The Company continues to apply Statement of Financial Accounting Standards No.
115,  Accounting for Certain Investments in Debt and Equity Securities
(FAS 115), and the Securities and Exchange Commission (SEC)s
Staff Accounting Bulletin Topic 5:M, Other Than Temporary Impairment Of Certain
Investments In Debt And Equity Securities and believes that unrealized losses in its
investment portfolio are temporary in nature.

F-9

M. Investments 
Interest Only StripsDuring 2005, 2004 and 2003, the
Company invested in interest only strips of mortgage-backed securities (interest
only strips) in response to movement in, and levels of, capital market interest
rates. 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 market interest rates and, more specifically, market mortgage rates decline,
mortgagors tend to refinance which will decrease the average life of a mortgage pool and
decrease expected cash flows. Conversely, as market interest rates and, more specifically,
mortgage rates rise, repayments will slow and the 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, 2005.

The Company accounts 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; $43.9 million and $28.5 million,
respectively, for the year ended December 31, 2004 and $25.2 million and $16.4 million,
respectively, for the year ended December 31, 2003. As a result of liquidating the
interest only strips portfolios, the Company recognized pre-tax and after-tax realized
capital gains of $25.3 million and $16.4 million, respectively, for the year ended
December 31, 2005 and pre-tax and after-tax realized capital gains of $77.6 million and
$50.4 million, respectively, for the year ended December 31, 2004.

F-10

2. INVESTMENTS

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

|(Dollars in thousands)                               | Amortized     
Cost | Unrealized     
Appreciation | Unrealized     
Depreciation | Market     
    Value
|---------------------------------------------------- | ------------------- | ---------------------------- | ---------------------------- | ---------------------
|As of December 31, 2005                              |                     |                              |                              |                      
|Fixed maturities  - available for sale:              |                     |                             
|U.S. Treasury securities and obligations of          |                     |                             
|U.S. government agencies and coporations             |                     |                              | $                            | 71,913               
|Obligations of U.S. states and political subdivision |                     |                              |                              | 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              
|                                                     |                    
|As of December 31, 2004                              |                     |                             
|Fixed maturities - available for sale:               |                     |                             
|U.S. Treasury securities and obligations of          |                     |                             
|U.S. government agencies and coporations             |                     |                              | $                            | 67,006               
|Obligations of U.S. states and political subdivision |                     |                              |                              | 3,281,442            
|Corporate securities                                 |                     |                              |                              | 1,294,255            
|Mortgage-backed securities                           |                     |                              |                              | 486,178              
|Foreign government securities                        |                     |                              |                              | 310,081              
|Foreign corporate securities                         |                     |                              |                              | 448,567              
|                                                     |                    
|Total fixed maturities                               |                     |                              | $                            | 5,887,529            
|                                                     |                    
|Equity securities                                    |                     |                              | $                            | 571,717              
|                                                     |                    

F-11

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.

|                                      
|--------------------------------------
|(Dollars in thousands)                
|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                                 
|                                      

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

|                                                                | Years Ended December 31,
|--------------------------------------------------------------- | ------------------------
|                                                                |                         
|(Dollars in thousands)                                          | 2005                    
|                                                                |                         
|(Decrease) increase 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                                           |                         
|Deferred taxes                                                  |                         
|                                                                |                         
|(Decrease) increase in unrealized appreciation, net of deferred |                         
|taxes, included in stockholders' 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 financial position and timeliness with respect to interest and/or principal
payments, and speed of repayments on asset-backed securities, as well as relevant
information provided by rating agencies, investment advisors and analysts.

F-12

The tables below display 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 and 2004:

|                           | Duration of unrealized loss as of December 31, 2005 |                       
|-------------------------- | --------------------------------------------------- | ----------------------
|                           | Less than 12 months                                 | Greater than 12 months
|(Dollars in thousands)     | FairValue                                           |                       
|                           |                                                     |                       
|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 is $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 one year or
less are primarily comprised of highly rated government, municipal and corporate bonds and
are primarily related to the general movements in interest rates throughout the year. 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 $1.0 million of unrealized losses
relating to equity securities that have been in an unrealized loss position for less than
one year are primarily comprised of individual equity holdings whose respective market
sectors have experienced some negative price volatility in the latter part of the year.

The $19.5 million of unrealized
losses relating to securities that have been in an unrealized loss position for more than
one year are also primarily comprised of highly rated government, municipal and corporate
bonds and generally relate to the general rise in interest rates occurring throughout the
year. 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 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

|                           | Duration of unrealized loss as of December 31,2004 |                       
|-------------------------- | -------------------------------------------------- | ----------------------
|                           | Less than 12 months                                | Greater than 12 months
|(Dollars in thousands)     | FairValue                                          |                       
|                           |                                                    |                       
|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,
2004 was $905.1 million and $12.1 million, respectively. The $7.8 million of unrealized
losses relating to securities that were in an unrealized loss position for one year or
less are primarily comprised of highly rated government, municipal and corporate bonds and
are primarily related to the general movements in interest rates throughout the year. Of
these unrealized losses, $6.0 million were related to securities that are rated investment
grade or better by a Nationally Recognized Statistical Rating Organization.

The $4.3 million of unrealized losses
relating to securities that have been in an unrealized loss position for one year or more
are also primarily comprised of highly rated government, municipal and corporate bonds and
generally relate to the general rise in interest rates occurring throughout the year. Of
these unrealized losses, $2.9 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 presented in the table below:

|                                | Years Ended December 31,
|------------------------------- | ------------------------
|                                |                         
|(Dollars in thousands)          | 2005                    
|                                |                         
|Fixed maturities                |                         
|Equity securities               |                         
|Short-term investments          |                         
|Other investment income         |                         
|                                |                         
|Total gross investment income   |                         
|                                |                         
|Interest credited on funds held |                         
|Other investment expenses       |                         
|                                |                         
|Total investment expenses       |                         
|                                |                         
|Total net investment income     |                         
|                                |                         

Other net investment income for 2005,
2004 and 2003 primarily includes income on limited partnership investments of $7.5
million, $36.3 million and $12.1 million, respectively.

The Company has contractual
commitments to invest up to an additional $224.6 million related to its limited
partnership investments at December 31, 2005. These commitments will be funded as required
by the partnership agreements, which have investment periods that expire no later than
2011.

F-14

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

|                       | Years Ended December 31,
|---------------------- | ------------------------
|                       |                         
|(Dollars in thousands) | 2005                    
|                       |                         
|Fixed maturities       |                         
|Equity securities      |                         
|Short-term investments |                         
|                       |                         
|Total                  |                         
|                       |                         

Proceeds from sales of fixed maturity
investments during 2005, 2004 and 2003 were $879.1 million, $787.0 million and $599.9
million, respectively. Gross gains of $59.8 million, $107.0 million and $27.8 million and
gross losses of $4.4 million, $5.4 million and $9.8 million were realized on those fixed
maturity sales during 2005, 2004 and 2003, respectively. Proceeds from sales of equity
security investments during 2005, 2004 and 2003 were $205.9 million, $18.0 million and
$8.1 million, respectively. Gross gains of $16.1 million, $0.5 million and $0.8 million
and gross losses of $2.7 million, $0.9 million and $0.0 million were realized on those
equity sales during 2005, 2004 and 2003, respectively.

Realized capital gains (losses)
include $4.1 million, $43.9 million and $25.2 million of realized capital losses for 2005,
2004 and 2003, respectively, related to the impairment of interest only strips in
accordance with EITF 99-20. In addition, realized capital losses for 2005, 2004 and 2003
included $0.0 million, $0.5 million and $16.4 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 $1,319.4 million at December 31, 2005 were on deposit with various state or
governmental insurance departments in compliance with insurance laws.

3.    
          RESERVES FOR LOSSES AND LAE

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

|                                        | Years Ended December 31,
|--------------------------------------- | ------------------------
|                                        |                         
|(Dollars in thousands)                  | 2005                    
|                                        |                         
|Reserves at January 1                   |                         
|Less reinsurance recoverables           |                         
|                                        |                         
|Net balance 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 balance at December 31              |                         
|Plus reinsurance recoverables           |                         
|                                        |                         
|Balance at December 31                  |                         
|                                        |                         

F-15

Gross loss and LAE reserves totaled
$7,729.2 million at December 31, 2005, $6,846.9 million at December 31, 2004, and $6,227.1
million at December 31, 2003. The increase in 2005 is primarily attributable to elevated
catastrophe loss reserves, partially offset by an increase in claim settlements, a
decrease in premiums earned and favorable net prior period reserve adjustments. The
increase in 2004 was primarily attributable to increased premiums earned, net prior period
reserve adjustments in select areas, an increase in catastrophe losses and normal
variability in claim settlements.

Reinsurance receivables for both paid
and unpaid losses totaled $2,526.1 million at December 31, 2005 and $2,560.4 million at
December 31, 2004. At December 31, 2005, $1,537.4 million, or 60.9%, was receivable from Everest Reinsurance (Bermuda), Ltd.
(Bermuda Re) and $239.8 million, or 9.5%, was receivable from subsidiaries of
London Reinsurance Group (London Life). These receivables are collateralized
by a combination of letters of credit and funds held arrangements under which the Company
has retained the premium payments due the retrocessionaire, recognized liabilities for
such amounts and reduced such liabilities as payments are due from the retrocessionaire.
In addition, $171.5 million, or 6.8%, was receivable from Transatlantic Reinsurance Company
(Transatlantic) and $160.0 million, or 6.3%, was receivable from LM Property
and Casualty Insurance Company (LM) and whose obligations are guaranteed by
The Prudential Insurance Company of America (The Prudential). No other
retrocessionaire accounted for more than 5% of the Companys receivables.

The Companys current estimate
for recent catastrophe losses is based on modeled information, underwriter analysis and
judgments, client input and discussion, event modeling and profiling of exposed limits.
The Company expects it will be several quarters before relative clarity emerges with
respect to ceding companies underlying losses. As a result, losses may ultimately be
materially greater than the Companys initial estimated losses. Any future
adjustments to estimated pre-tax catastrophe losses will have an impact on incurred losses
in the quarters during which such adjustments are made, and such impacts could be
material.

The Company continues to receive
claims under expired contracts, both insurance and reinsurance, asserting alleged injuries
and/or damages relating to or resulting from environmental pollution and hazardous
substances, including asbestos (i.e. 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.

As of December 31, 2005,
approximately 8% of the Companys gross reserves are an estimate of the
Companys ultimate liability for A&E claims. This estimate is made based on a
judgmental assessment 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)
potentially long waiting periods 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)
continued

F-16

growth in the number of claims filed, in part reflecting a much more aggressive
plaintiff bar and including claims against defendants who may only have had a
peripheral condition to asbestos; (b) a disproportionate percentage of claims
filed by individuals with no functional injury, which should have little to no financial
value but that 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.

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 operations and/or cash flows. 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.

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 periods indicated:

|                             | As of December 31,
|---------------------------- | ------------------
|(Dollars in thousands)       | 2005              
|                             |                   
|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       |                   
|                             |                   

The Companys gross A&E
liabilities stem from Mt. McKinleys direct excess insurance business and Everest
Res assumed business. At December 31, 2005, the gross reserves for A&E losses
were comprised of $125.2 million representing case reserves reported by ceding companies,
$157.6 million representing additional case reserves established by the Company on assumed
reinsurance claims, $243.5 million representing case reserves established by the Company
on direct excess insurance claims, including Mt. McKinley and $123.2 million representing
IBNR reserves. Approximately 88%, or $568.9 million, of gross A&E reserves relate to
asbestos of which $313.4 million was for assumed business and $255.5 million was for
direct excess business.

The Companys net A&E
liabilities reflect credit for reinsurance from Mt. McKinley as an affiliated 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
protection in connection with the

F-17

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 $5.4 million remains
available (the Stop Loss Agreement). The Stop Loss Agreement and other
reinsurance contracts between Mt. McKinley and Everest Re remain in effect following the
Companys acquisition of Mt. McKinley. However, these contracts became transactions
with affiliates effective on the date of the Mt. McKinley acquisition. 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 reinsurance exposures and reserves to Bermuda Re.

In connection with the Companys
acquisition of Mt. McKinley, which has significant exposure to A&E claims, 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 obligations to Mt. McKinley. Cessions under this
reinsurance agreement exhausted the limit available under the contract at December 31,
2003.

With respect to Mt. McKinley, where
the Company has a direct relationship with policyholders, the Companys aggressive
litigation posture and the uncertainties inherent in the asbestos coverage and bankruptcy
litigation have provided an opportunity to actively engage in settlement negotiations with
a number of those policyholders who have potentially significant asbestos liabilities.
Those discussions are oriented towards achieving reasonable negotiated settlements that
limit Mt. McKinleys liability to a given policyholder to a sum certain. In 2004 and
2005, the Company concluded such settlements or reached agreement in principle with 13 of
its high profile policyholders. The Company has currently identified 10 policyholders
based on their past claim activity and/or potential future liabilities as High
Profile Policyholders and its settlement efforts are generally directed at such
policyholders, in part because their exposures have developed to the point where both the
policyholder and the Company have sufficient information to be motivated to settle. The
Company believes that this active approach will ultimately result in a more cost-effective
liquidation of Mt. McKinleys liabilities than a passive approach, although it may
also introduce additional variability in Mt. McKinleys losses and cash flows as
reserves are adjusted to reflect the development of negotiations and, ultimately,
potentially accelerated settlements.

There is less potential for similar
settlements with respect to the Companys reinsurance asbestos claims. Ceding
companies, with their direct obligation to insureds and overall responsibility for claim
settlements, are not consistently aggressive in developing claim settlement information
and conveying this information to reinsurers, which can introduce significant and perhaps
inappropriate delays in the reporting of asbestos claims/exposures to reinsurers. These
delays not only extend the timing of reinsurance claim settlements, but also restrict the
information available to estimate the reinsurers ultimate exposure.

Due to the uncertainties discussed
above, the ultimate losses may vary materially from current loss reserves and, depending
on coverage under the Companys various reinsurance arrangements, could have a
material adverse effect on the Companys future financial condition, result of
operations and/or cash flows.

4.    
          CREDIT LINE

Effective October 10, 2003, Holdings
entered into a three year, $150.0 million senior revolving credit facility with a
syndicate of lenders, replacing the December 21, 1999, three year senior revolving credit
facility, which expired on December 19, 2003. Both the October 10, 2003 and December 21,
1999 senior revolving credit agreements, which have similar terms, are referred to as the
Holdings Credit Facility. Wachovia Bank 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) an adjusted

F-18

London Interbank Offered Rate
(LIBOR) plus a margin. The Base Rate is the higher of the rate of interest
established by Wachovia Bank from time to time as its prime rate or the Federal Funds
rate, in each case plus 0.5% per annum. 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, Holdings to
maintain a minimum interest coverage ratio of 2.5 to 1 and Everest Re to maintain its
statutory surplus at $1.0 billion plus 25% of future aggregate net income and 25% of
future aggregate capital contributions after December 31, 2002. As of December 31, 2005,
the Company was in compliance with these covenants.

During the year ended December 31,
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 $70.0 million in
payments and no incremental borrowings under the Holdings Credit Facility. During the year
ended December 31, 2003, there were no payments made and no incremental borrowings under
the Holdings Credit Facility. As of December 31, 2005 and 2004, there were no outstanding
Holdings Credit Facility borrowings.

Interest expense and fees incurred in
connection with the Holdings Credit Facility were $0.2 million, $1.2 million and $1.4
million for the years ended December 31, 2005, 2004 and 2003, respectively.

5.    
          SENIOR NOTES

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

Interest expense incurred in
connection with these senior notes was $35.5 million, $42.0 million and $38.9 million for
the years ended December 31, 2005, 2004 and 2003, respectively. Market value, which is
based on quoted market price at December 31, 2005 and 2004 was $250.9 million and $250.3
million, respectively, for the 5.40% senior notes and $226.2 million and $236.7 million,
respectively, for the 8.75% senior notes.

6.    
          JUNIOR SUBORDINATED DEBT SECURITIES PAYABLE

On March 29, 2004, Holdings issued
$329.9 million of 6.20% junior subordinated debt securities due March 29, 2034 to 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 specific events.

On November 14, 2002, Holdings issued
$216.5 million of 7.85% junior subordinated debt securities due November 15, 2032 to
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 specific events.

Fair value, which is primarily based
on quoted market price of the related trust preferred securities at December 31, 2005 and
2004, was $293.5 million and $309.9 million, respectively, for the 6.20% junior
subordinated debt securities and $220.5 million and $238.8 million, respectively, for the
7.85% junior subordinated debt securities.

F-19

Interest expense incurred in
connection with these junior subordinated notes was $37.5 million, $32.4 million and $17.0
million for the years ended December 31, 2005, 2004 and 2003, respectively.

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.

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, 2005, $2,112.0 million
of the $2,724.9 million in net assets of the Companys consolidated subsidiaries were
subject to the foregoing regulatory restrictions.

7.    
          TRUST AGREEMENTS

A subsidiary of the Company, Everest
Re, has established a trust agreement as security for assumed losses payable to a
non-affiliated ceding company, which effectively uses Everest Res investments as
collateral. At December 31, 2005, the total amount on deposit in the trust account was
$21.1 million.

8.    
          OPERATING LEASE AGREEMENTS

The future minimum rental
commitments, exclusive of cost escalation clauses, at December 31, 2005 for all of the
Companys operating leases with remaining non-cancelable terms in excess of one year
are as follows:

|(Dollars in thousands) | 
|---------------------- | 
|2006                   | 
|2007                   | 
|2008                   | 
|2009                   | 
|2010                   | 
|Thereafter             | 
|                       | 
|Net commitments        | 
|                       | 

All of these leases, the expiration
terms of which range from 2007 to 2013, are for the rental of office space. Rental
expense, net of sublease rental income, was $6.4 million, $6.7 million and $6.5 million
for 2005, 2004 and 2003, respectively.

9.    
          INCOME TAXES

All the income of the 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 by
reference to the individual income of each entity and the

F-20

respective applicable tax laws.
It reflects the permanent differences between financial and taxable income relevant to
each entity. The significant components of the
provision are as follows:

|                                   | Years Ended December 31,
|---------------------------------- | ------------------------
|                                   |                         
|(Dollars in thousands)             | 2005                    
|                                   |                         
|Current tax:                       |                         
|U.S                                |                         
|Foreign                            |                         
|                                   |                         
|Total current tax                  |                         
|Total deferred U.S. tax benefit    |                         
|                                   |                         
|Total income tax (benefit) expense |                         
|                                   |                         

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

|                                              | Years Ended December 31,
|--------------------------------------------- | ------------------------
|                                              |                         
|(Dollars in thousands)                        | 2005                    
|                                              |                         
|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,
|------------------------------------------ | ------------------------
|                                           |                         
|(Dollars in thousands)                     | 2005                    
|                                           |                         
|Deferred tax assets:                       |                         
|Reserve for losses and LAE                 |                         
|Unearned premium reserve                   |                         
|Impairments                                |                         
|Deferred compensation                      |                         
|Deferred reinsurance                       |                         
|Sale of UK Branch                          |                         
|AMT Credits                                |                         
|Foreign tax credit carryforwards           |                         
|Other assets                               |                         
|                                           |                         
|Total deferred tax assets                  |                         
|                                           |                         
|Deferred tax liabilities:                  |                         
|Deferred acquisition costs                 |                         
|Investments                                |                         
|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 $43.2 million that begin to expire in
2011. In addition, for U.S. income tax purposes the Company has $35.7 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 $8.2
million related to compensation expense deductions for stock options exercised in 2005 and
2004, respectively, are reflected in the change in stockholders equity in
additional paid-in capital. In addition, during 2005, the Company sold
treasury shares resulting in gross proceeds of $46.5 million compared with a cost basis of $23.0
million. Additional paid-in capital was reduced by $8.2 million of income taxes resulting
from this transaction.

10. REINSURANCE

The Company utilizes reinsurance
agreements to reduce its exposure to large claims and catastrophic loss occurrences. These
agreements provide for recovery from reinsurers of a portion of losses and LAE under
certain circumstances without relieving the insurer of its obligation to the policyholder.
Losses and LAE incurred and premiums earned are after deduction for reinsurance. In the
event reinsurers were unable to meet their obligations under reinsurance agreements, the
Company would not be able to 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

Premiums written and earned are
comprised of the following:

|                       | Years Ended December 31,
|---------------------- | ------------------------
|                       |                         
|(Dollars in thousands) | 2005                    
|                       |                         
|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 $852.4 million, $712.7 million and $760.4
million for the years ended December 31, 2005, 2004 and 2003, respectively.

The Company considers purchasing
corporate level retrocessional protection covering the potential accumulation of
exposures. Such consideration includes balancing the underlying exposures against the
availability of cost-effective retrocessional protection. 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 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 is
$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 million of the first $200 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 cessions under this
reinsurance at December 31, 2003, exhausting the limit available under the contract. 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
          $5.4 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.

F-23

As of December 31, 2005, the Company
carried as an asset $2,526.1 million in reinsurance receivables with respect to losses
ceded. Of this amount, $1,537.4 million, or 60.9%, was receivable from Bermuda Re, $239.8
million, or 9.5%, was receivable from subsidiaries of London Life, $171.5 million, or
6.8%, was receivable from Transatlantic and $160.0 million, or 6.3%, was receivable from
LM. As of December 31, 2004, the Company carried as an asset $2,560.4 million in
reinsurance receivables with respect to losses ceded. Of this amount, $1,394.5 million, or
54.5%, was receivable from Bermuda Re, $405.0 million, or 15.8% was receivable from
subsidiaries of London Life, $160.0 million, or 6.3%, was receivable from LM and $132.5
million, or 5.2%, was receivable from Transatlantic. No other retrocessionaire accounted
for more than 5% of the Companys receivables. See also Note 3.

The Companys arrangements with
Bermuda Re are secured through the use of trust agreements. The Companys
arrangements with London Life are managed on a funds held basis, which means that the
Company has not released premium payments to the retrocessionaire but rather retains such
payments to secure obligations of the retrocessionaire, records them as a liability,
credits interest on the balances at a stated contractual rate and reduces the liability
account as payments become 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
has been secured by letters of credit. As of December 31, 2004, such funds had
reduced the Companys net exposure to London Life to $184.1 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 what management believes to be arms length
consideration. These transactions include:

|o |  | 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.
|- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|o |  | 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 and subsequently closed its Belgium branch.
|- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|o |  | 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.
|- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|o |  | 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).
|- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|o |  | 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.
|- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|o |  | 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.
|- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F-24

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

|o |  | 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).
|- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

|                         | Bermuda Re              
|------------------------ | ------------------------
|                         | Years Ended December 31,
|                         |                         
|(Dollars in thousands)   | 2005                    
|                         |                         
|Ceded written premiums   |                         
|Ceded earned premiums    |                         
|Ceded losses and LAE (a) |                         
|                         | Everest International   
|                         | Years Ended December 31,
|                         |                         
|(Dollars in thousands)   | 2005                    
|                         |                         
|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 amount included in incurred losses and LAE for the year ended
December 31, 2004 was $41.7 million, exhausting the limit available under the agreement.

F-25

11.    
          COMPREHENSIVE INCOME

The components of comprehensive
income for the periods ended December 31, 2005, 2004 and 2003 are shown in the following
table:

|(Dollars in thousands)                                                             | 2005 |  | 2004 |         | 2003 |  
|---------------------------------------------------------------------------------- | ---- |  | ---- | ------- | ---- | -
|                                                                                   |      |  |     
|Net income                                                                         |      |  | $    | 4,706   |      | $
|                                                                                   |      |  |     
|Other comprehensive income, before tax:                                            |      | 
|Foreign currency translation adjustments                                           |      |  |      | 2,669   |      |  
|Unrealized gains on securities                                                     |      | 
|arising during the period                                                          |      |  |      | 64,205  |      |  
|Less:  reclassification adjustment for                                             |      | 
|realized (gains) losses  included in net income                                    |      |  |      | (64,568 | )    |  
|Minimum pension adjustment                                                         |      |  |      | (4,422  | )    |  
|                                                                                   |      |  |     
|Other comprehensive (loss) income, before tax                                      |      |  |      | (2,116  | )    |  
|                                                                                   |      |  |     
|Income tax expense related to                                                      |      | 
|items of other comprehensive (loss) income:                                        |      | 
|Tax expense                                                                        |      | 
|from foreign currency translation                                                  |      |  |      | 934     |      |  
|Tax expense from unrealized                                                        |      | 
|gains arising during the period                                                    |      |  |      | 22,471  |      |  
|Less:  reclassification adjustment                                                 |      | 
|for tax (expense) benefit from realized (gains)      losses included in net income |      |  |      | (22,598 | )    |  
|Tax benefit from minimum pension adjustment                                        |      |  |      | (1,548  | )    |  
|                                                                                   |      |  |     
|Income tax (benefit) expense related to                                            |      | 
|items of other comprehensive (loss) income                                         |      |  |      | (741    | )    |  
|                                                                                   |      |  |     
|Other comprehensive (loss) income, net of tax                                      |      |  |      | (1,375  | )    |  
|Comprehensive income                                                               |      |  | $    | 3,331   |      | $
|                                                                                   |      |  |     

F-26

The following table shows the
components of the change in accumulated other comprehensive income for the years ended
December 31, 2005 and 2004.

|(Dollars in thousands)               | 2005 | 2004
|------------------------------------ | ---- | ----
|                                     |      |     
|Beginning balance of accumulated     |      |     
|other comprehensive income           |      |     
|                                     |      |     
|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           |      |     
|                                     |      |     
|Beginning balance of                 |      |     
|unrealized gains on  securities      |      |     
|Current period change                |      |     
|in unrealized gains on securities    |      |     
|                                     |      |     
|Ending balance of unrealized         |      |     
|gains on securities                  |      |     
|                                     |      |     
|Current period change in accumulated |      |     
|other comprehensive income           |      |     
|                                     |      |     
|Ending balance of accumulated        |      |     
|other comprehensive income           |      |     
|                                     |      |     

12.    
          EMPLOYEE BENEFIT PLANS

A. 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 guidelines, the Company contributed $3.9
million and $3.2 million to the qualified and non-qualified plans, respectively, in 2005
and $3.3 million and $1.5 million to the qualified and non-qualified plans, respectively,
in 2004. Pension expense for the Companys plans for the years ended December 31,
2005, 2004 and 2003 were $7.1 million, $4.8 million and $3.7 million, respectively.

F-27

The following table summarizes the
status of these defined benefit plans for its U.S. employees for the periods indicated:

|                                               | Years Ended December 31,
|---------------------------------------------- | ------------------------
|                                               |                         
|(Dollars in thousands)                         | 2005                    
|                                               |                         
|Change in projected benefit obligation:        |                         
|Benefit obligation at beginning of year        |                         
|Service cost                                   |                         
|Interest cost                                  |                         
|Actuarial loss                                 |                         
|Administrative expenses paid                   |                         
|Benefits paid                                  |                         
|                                               |                         
|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                                  |                         
|Unrecognized prior service cost                |                         
|Unrecognized net loss                          |                         
|                                               |                         
|Net amount recognized                          |                         
|                                               |                         

Plan assets are comprised of shares
in investment trusts with approximately 68% and 32% of the underlying assets consisting of
equity securities and fixed maturities, respectively.

Net periodic pension cost for U.S.
employees included the following components for the periods indicated:

|                                                | Years Ended December 31,
|----------------------------------------------- | ------------------------
|                                                |                         
|(Dollars in thousands)                          | 2005                    
|                                                |                         
|Service cost                                    |                         
|Interest cost                                   |                         
|Expected return on assets                       |                         
|Amortization of net loss from earlier periods   |                         
|Amortization of unrecognized prior service cost |                         
|                                                |                         
|Net periodic pension cost                       |                         
|                                                |                         

The weighted average discount rates
used to determine the actuarial present value of the projected benefit obligation for
2005, 2004 and 2003 were 5.5%, 5.75% and 6.0%, respectively. The rate of compensation
increase used to determine the actuarial present value of the projected benefit obligation
for 2005, 2004 and 2003 was 4.5%. The expected long-term rate of return on plan assets for
2005, 2004 and 2003 was 8.0%, 9.0% and 9.0%, respectively, and was based on portfolio
returns and allocations.

F-28

Amounts recognized in the statement
of financial position for the periods indicated consist of:

|                                       | Pension Benefits
|-------------------------------------- | ----------------
|                                       |                 
|(Dollars in thousands)                 | 2005            
|                                       |                 
|Prepaid benefit cost                   |                 
|Accrued benefit cost                   |                 
|Intangible assets                      |                 
|Accumulated other comprehensive income |                 
|                                       |                 
|Net amount recognized                  |                 
|                                       |                 

The following table summarizes the
Accumulated Benefit Obligation for years ended December 31, 2005, and 2004, respectively.

|(Dollars in thousands)               | Pension Plan | Supplemental Plan | Total  
|------------------------------------ | ------------ | ----------------- | -------
|                                     |              |                   |        
|Accumulated Benefit Obligation- 2005 | $46,200      | $14,225           | $60,425
|Accumulated Benefit Obligation- 2004 | $39,248      | $ 9,652           | $48,900

The asset allocation percentages for
the qualified and non-qualified benefit plans at December 31, 2005 and 2004, by asset
category, are as follows:

|                  | Qualified Benefit Plan |     | Non-Qualified Benefit Plan
|----------------- | ---------------------- | --- | --------------------------
|                  |                        |     |                           
|Asset Category:   | 2                      | 005 | 2                         
|                  |                        |     |                           
|Equity securities |                        |     |                           
|Debt securities   |                        |     |                           
|Other             |                        |     |                           
|                  |                        |     |                           
|Total             |                        |     |                           

The Company engages a third party
investment administrator to manage the qualified and non-qualified plan for its U.S.
employees. The assets in both plans consist of debt and equity mutual funds. Due to the
long-term nature of the plans, the target asset allocation for each plan consists of 70%
equities and 30% bonds.

The Company expects to contribute
approximately $4.0 million and $2.4 million in 2006 to the qualified and non-qualified
plan, respectively.

B. Defined Contribution
Plans The Company also maintains both
qualified and non-qualified defined contribution plans (Savings Plan and
Non-Qualified Savings Plan, respectively) covering U.S. employees. Under the
plans, the Company contributes up to a maximum 3% of the participants compensation
based on the contribution percentage of the employee. The Non-Qualified Savings Plan
provides compensating savings plan benefits for participants whose benefits have been
curtailed under the Savings Plan due to Internal Revenue Code limitations. The
Companys incurred expenses related to these plans were $1.0 million, $1.0 million
and $0.8 million for 2005, 2004 and 2003, respectively.

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, $0.2 million and $0.4 million for 2005, 2004 and 2003, respectively.

F-29

C. Post-retirement Plan Beginning January 1, 2002, the
Company established the Retiree Health Plan. This plan provides health care benefits for
eligible retired employees (and their eligible dependents), 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 2005 was assumed to change to 10% in 2006, 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 2005 was assumed to remain at 6% in 2006, decrease one
percentage point annually to 5% in 2007 and then remain at that level.

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

|(Dollars in thousands)                                  | Percentage Point
Increase
($ Impact) | Percentage Point
Decrease
($ Impact)
|------------------------------------------------------- | ------------------------------------ | ------------------------------------
|a. Effect on total service and interest cost components |                                      |                                     
|b. Effect on accumulated post-retirement                |                                      |                                     

Benefit expense for this plan for the
year ended December 31, 2005, 2004 and 2003 was $0.9 million, $0.8 million and $0.7
million, respectively.

The following table summarizes the
status of these plans for the periods indicated:

|                                       
|---------------------------------------
|(Dollars in thousands)                 
|Change in projected benefit obligation:
|Benefit obligation at beginning of year
|Service cost                           
|Interest cost                          
|Actuarial (gain) loss                  
|Assumption change                      
|Liability loss (gain)                  
|Benefits paid                          
|                                       
|Benefit obligation at end of year      
|                                       
|Funded status                          
|Unrecognized net loss                  
|                                       
|(Accrued) post-retirement benefit cost 
|                                       

F-30

Net periodic cost included the
following components for the periods indicated:

|                       | Years Ended December 31,
|---------------------- | ------------------------
|(Dollars in thousands) | 2005                    
|Service cost           |                         
|Interest cost          |                         
|Net loss recognition   |                         
|                       |                         
|Net periodic cost      |                         
|                       |                         

The following table summarizes the
Accumulated Benefit Obligation for the years ended December 31, 2005 and 2004,
respectively.

|(Dollars in thousands)               | Post-retirement Plan
|------------------------------------ | --------------------
|                                     |                     
|Accumulated Benefit Obligation- 2005 |                     
|Accumulated Benefit Obligation- 2004 |                     

13.    
          DIVIDEND RESTRICTIONS AND STATUTORY FINANCIAL INFORMATION

A. 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, 2005, Everest Re had
$232.8 million available for payment of dividends in 2006 without prior regulatory
approval.

B. Statutory Financial
Information Everest Re prepares its statutory
financial statements in accordance with accounting practices prescribed or permitted by
the National Association of Insurance Commissioners (NAIC) and the Delaware
Insurance Department. Prescribed statutory accounting practices are set forth in the NAIC
Accounting Practices and Procedures Manual. The capital and statutory surplus of Everest
Re was $2,327.6 million (unaudited) and $2,093.2 million at December 31, 2005 and 2004,
respectively. The statutory net loss of Everest Re was $26.9 million (unaudited) for the
year ended December 31, 2005 and the statutory net income was $175.8 million and $164.6
million for the years ended December 31, 2004 and 2003, respectively.

14.    
          CONTINGENCIES

In the ordinary course of business,
the Company is involved in lawsuits, arbitrations and other formal and informal dispute
resolution procedures, the outcomes of which will determine the Companys rights and
obligations under insurance, reinsurance and other contractual agreements. In some
disputes, the Company seeks to enforce its rights under an agreement or to collect funds
owing to it. In other matters, the Company is resisting attempts by others to collect
funds or enforce alleged rights. These disputes arise from time to time and as they arise
are addressed, and ultimately resolved, through 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

F-31

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, 2005 and 2004 was $155.3 million and
$156.0 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, 2005 and 2004 was $18.8 million and $17.4
million, respectively.

15.    
          RELATED-PARTY TRANSACTIONS

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

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.

16.    
          SEGMENT REPORTING

The Company, through its
subsidiaries, operates in four segments: U.S. Reinsurance, U.S. Insurance, Specialty
Underwriting and International. The U.S. Reinsurance operation writes property and
casualty reinsurance, on both a treaty and facultative basis, through reinsurance brokers,
as well as directly with ceding companies within the U.S. The U.S. Insurance operation
writes property and casualty insurance primarily through general agent relationships 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, monitoring 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.

F-32

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. Business for the UK branch was previously
reported as part of the Companys International segment.

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

|U.S. Reinsurance                            
|--------------------------------------------
|(Dollars in thousands)                      
|                                            
|Gross written premiums                      
|Net written premiums                        
|Premiums earned                             
|Incurred losses and loss adjustment expenses
|Commission and brokerage                    
|Other underwriting expenses                 
|                                            
|Underwriting (loss) gain                    
|                                            

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

F-33

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

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

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

|(Dollars in thousands)                  | 2005 |  | 2004 |          | 2003 |  
|--------------------------------------- | ---- |  | ---- | -------- | ---- | -
|                                        |      |  |     
|Underwriting (loss) gain                |      |  | $    | (383,986 | )    | $
|UK branch sale and related transactions |      |  |      | -        |      |  
|                                        |      |  |     
|Underwriting (loss) gain                |      |  |      | (383,986 | )    |  
|Net investment income                   |      |  |      | 325,217  |      |  
|Realized gain (loss)                    |      |  |      | 64,568   |      |  
|Corporate (expense) income              |      |  |      | (6,235   | )    |  
|Interest expense                        |      |  |      | (73,178  | )    |  
|Other income (expense)                  |      |  |      | 8,084    |      |  
|                                        |      |  |     
|(Loss) income before taxes              |      |  | $    | (65,530  | )    | $
|                                        |      |  |     

The comparability of the
International segment underwriting results has been impacted by the sale of the UK branch
from Everest Re to Bermuda Re. In order to provide comparability, the 2003 results for the
International segment were adjusted to exclude the UK branch activity. Effectively, these
adjustments remove the UK branch from 2003 in the International segment underwriting
results, allowing for the comparability of the results period over period.

F-34

The following table reflects the
underwriting results for the International segment as reported for the years ended
December 31, 2005 and 2004 and proforma for the year ended December 31, 2003:

|                                             | Years Ended December 31,
|-------------------------------------------- | ------------------------
|                                             |                         
|                                             | International Segment   
|(Dollars in thousands)                       | 2005As Reported         
|
|Gross written premiums                       |                         
|Ceded written premiums                       |                         
|                                             |                         
|Net written premiums                         |                         
|Premiums earned                              |                         
|Incurred losses and loss adjustment expenses |                         
|Commission, brokerage, taxes and fees        |                         
|Other underwriting expenses                  |                         
|                                             |                         
|Underwriting (loss) gain                     |                         
|                                             |                         

The Company produces business in its
U.S. and international operations. The net income and assets of the individual foreign
countries in which the Company writes business are not 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 18.5%, 17.5% and 15.7%
of the Companys gross written premiums in 2005, 2004 and 2003, respectively, were
sourced through the Companys largest intermediary.

17.    
          UNAUDITED QUARTERLY FINANCIAL DATA

|(Dollars in thousands)                 | 1st Quarter | 2nd Quarter | 3rd Quarter | 4th Quarter
|-------------------------------------- | ----------- | ----------- | ----------- | -----------
|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 |             |             |             | 575,675    
|Net income (loss)                      |             |             |             | 86,913     
|2004 Operating data:                   |             |            
|Gross written premiums                 |             |             | $           | 992,166    
|Net written premiums                   |             |             |             | 915,013    
|Premiums earned                        |             |             |             | 800,719    
|Net investment income                  |             |             |             | 65,823     
|Net realized capital (loss) gain       |             |             |             | (27,046    
|Total claims and underwriting expenses |             |             |             | 781,159    
|Net income                             |             |             |             | 7,340      

F-35

---

|EVEREST REINSURANCE HOLDINGS, INC.                                                              
|------------------------------------------------------------------------------------------------
|SCHEDULE I  SUMMARY OF INVESTMENTS 
OTHER THAN INVESTMENTS IN RELATED PARTIESDECEMBER 31, 2005
|Column A                                                                                        
|                                                                                                
|(Dollars in thousands)                                                                          
|                                                                                                
|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
|                                                                                        
|                                                                                        
|(Dollars in thousands, except par value per share)                                      
|                                                                                        
|ASSETS:                                                                                 
|Equity securities                                                                       
|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:                                                                            
|8.5% Senior notes due 3/15/2005                                                         
|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 (2005 and 2004)                                     
|Additional paid-in capital                                                              
|Accumulated other comprehensive income, net of deferred income                          
|taxes of $0.0 million at 2005 and $0.5 million at 2004                                  
|Retained earnings                                                                       
|Treasury shares, at cost; 0.0 million at 2005 and 0.5 million at 2004                   
|                                                                                        
|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
|                                                                                                  
|                                                                                                  
|(Dollars in thousands)                                                                            
|                                                                                                  
|REVENUES:                                                                                         
|Net investment income                                                                             
|Net realized capital gains                                                                        
|Other expense                                                                                     
|Equity in undistributed change in retained earnings of subsidiaries                               
|                                                                                                  
|Total revenues                                                                                    
|                                                                                                  
|EXPENSES:                                                                                         
|Interest expense                                                                                  
|Other expense                                                                                     
|                                                                                                  
|Total expenses                                                                                    
|                                                                                                  
|(LOSS) INCOME 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 CASHFLOWS
|                                                                                                    
|                                                                                                    
|(Dollars in thousands)                                                                              
|                                                                                                    
|CASH FLOWS FROM OPERATING ACTIVITIES                                                                
|Net income                                                                                          
|Adjustments to reconcile net income to net cash provided                                            
|by operating activities:                                                                            
|Equity in undistributed change in retained earnings of subsidiaries                                 
|Decrease in other assets and  liabilities                                                           
|(Decrease) increase in accrued interest on debt and borrowings                                      
|Decrease in federal income tax recoverable                                                          
|(Increase) decrease in deferred tax asset                                                           
|(Decrease) increase in due to affiliates                                                            
|Accrual of bond discount                                                                            
|Amortization of underwriting discount on senior notes                                               
|Realized capital gains                                                                              
|                                                                                                    
|Net cash used in operating activities                                                               
|                                                                                                    
|CASH FLOWS FROM INVESTING ACTIVITIES                                                                
|Additional investment in subsidiaries, net of cash acquired                                         
|Proceeds (cost) from equity securities sold (acquired)                                              
|Net sales (purchases) of short-term securities                                                      
|UK branch sale                                                                                      
|                                                                                                    
|Net cash provided by (used in) 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 stock options exercised                                                            
|Dividend from subsidiaries                                                                          
|                                                                                                    
|Net cash (used in) provided by financing activities                                                 
|                                                                                                    
|Net increase in cash                                                                                
|Cash, beginning of period                                                                           
|                                                                                                    
|Cash, end of period                                                                                 
|                                                                                                    
|See notes to consolidated financial statements                                                      

S-4

---

|EVEREST REINSURANCE HOLDINGS, INC.                
|--------------------------------------------------
|SCHEDULE III  SUPPLEMENTARY INSURANCE INFORMATION
|Column A                                          
|                                                  
|Geographic Area(Dollars in thousands)             
|                                                  
|December 31, 2005                                 
|Domestic                                          
|International                                     
|                                                  
|Total                                             
|                                                  
|December 31, 2004                                 
|Domestic                                          
|International                                     
|                                                  
|Total                                             
|                                                  
|December 31, 2003                                 
|Domestic                                          
|International                                     
|                                                  
|Total                                             
|                                                  

S-5

---

|EVEREST REINSURANCE HOLDINGS, INC.
|----------------------------------
|SCHEDULE IV  REINSURANCE         
|Column A                          
|                                  
|(Dollars in thousands)            
|                                  
|December 31, 2005                 
|Total property and liability      
|insurance premiums earned         
|December 31, 2004                 
|Total property and liability      
|insurance premiums earned         
|December 31, 2003                 
|Total property and liability      
|insurance premiums earned         

S-6

---