---

# SECURITIES AND
EXCHANGE COMMISSION

# Washington, D.C. 20549

_________________

# FORM 10-K

_________________

# ANNUAL REPORT PURSUANT
TO SECTION 13 OR 15(d) OF THE

# SECURITIES EXCHANGE
ACT OF 1934

|                                            | 
|------------------------------------------- | 
|For the fiscal year ended December 31, 2003 | 

# 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 830

# Liberty Corner, New
Jersey 07938-0830

# (908) 604-3000

| |  |  |  | (Address, including zip code, and telephone number, including area code, of registrants
principal executive office)
| |  |  |  | --------------------------------------------------------------------------------------------------------------------

_________________

# Securities registered
pursuant to Section 12(b) of the Act:

|                                 | 
|-------------------------------- | 
|                                 | 
|Title of Each Class              | 
|8.5% Senior Notes Due 2005       | 
|8.75% Senior Notes Due 2010      | 
|7.85% Trust Preferred Securities | 

_________________

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

_________________

Indicate
by check mark whether the registrant: (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the registrant was required to file such reports), and
(2) has been subject to such filing requirements for the past 90 days.

Yes _X_  No ___

Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrants knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this Form
10-K. [ X ]

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

Yes ___ No _X_

The
aggregate market value on June 28, 2003 (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, 2004, the number of common shares of the registrant outstanding was 1,000, all
of which are owned by Everest Re Group, Ltd.

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

---

|         |  |                                                                                               
|-------- |  | ----------------------------------------------------------------------------------------------
|Item     |  |                                                                                               
|PART I   | 
|1        |  | Business                                                                                      
|2        |  | Properties                                                                                    
|3        |  | Legal Proceedings                                                                             
|4        |  | Submission of Matters to a Vote of Security Holders                                           
|PART II  | 
|5        |  | Market for Registrants Common Equity and Related Stockholder Matters                         
|6        |  | Selected Financial Data                                                                       
|7        |  | Managements Discussion and Analysis of Financial Condition and Results of Operations         
|7A       |  | Quantitative and Qualitative Disclosures About Market Risk                                    
|8        |  | Financial Statements and Supplementary Data                                                   
|9        |  | Changes in and Disagreements with Accountants on Accounting and Financial Disclosure          
|9A       |  | Controls and Procedures                                                                       
|PART III | 
|10       |  | Directors and Executive Officers of the Registrant                                            
|11       |  | Executive Compensation                                                                        
|12       |  | Security Ownership of Certain Beneficial Owners and Management and Related Shareholder Matters
|13       |  | Certain Relationships and Related Transactions                                                
|14       |  | Principal Accountant Fees and Services                                                        
|PART IV  | 
|15       |  | Exhibits, Financial Statement Schedules, and Reports on Form 8-K                              

# PART I

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

# ITEM 1. Business

The Company

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

The Companys principal
business, conducted through its operating subsidiaries, is the underwriting of reinsurance
and insurance in the U.S. and international markets. The Company 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 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), an independent
insurance industry rating organization that rates insurance companies on factors of
concern 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 the United Kingdom, Canada and Singapore. Everest Re underwrites
property and casualty reinsurance on a treaty and facultative basis for insurance and
reinsurance companies in the U.S. and international markets. Everest Re had statutory
surplus at December 31, 2003 of $1.7 billion.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | o |  | Everest National Insurance Company (Everest National), an Arizona 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 in the
jurisdictions in which it is licensed. This is called writing insurance on an admitted
basis. The majority of Everest Nationals business is reinsured by its parent,
Everest Re.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

1

| | 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. 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. This is often called writing insurance on a
non-admitted basis. 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.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 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 Managers, L.L.C. (Managers), a New Jersey limited liability
company and a direct subsidiary of Holdings, is licensed in New Jersey as an insurance
producer. An insurance producer is any intermediary, such as an agent or broker, which
acts as the conduit between an insurance company and an insured. Managers, which is
licensed to act in New Jersey as an insurance producer in connection with policies written
on both an admitted and a non-admitted basis, is the underwriting manager for Everest
Indemnity.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 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 engage in the excess
and surplus lines insurance business in the U.S. In 1985, Mt. McKinley ceased writing new
and renewal insurance and now its ongoing operations relate to servicing claims arising
from its previously written business. Mt. McKinley was a subsidiary of Everest Re until
1991 when Everest Re distributed the stock of Mt. McKinley to a wholly-owned subsidiary of
The Prudential.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | o |  | Everest
Re Holdings,  Ltd.  ("Everest  Ltd."), a Bermuda company and a direct subsidiary of
Everest Re, was formed in 1998 and          owned Everest Re Ltd., a United  Kingdom
 company that was dissolved  after its  reinsurance  operations  were  converted into
         branch  operations  of Everest  Re.  Everest  Ltd.  holds $80.3  million of
 investments  and cash,  the  management  of which          constitutes its principal
operations.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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 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.

2

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, for amounts in excess of the dollar limits of their reinsurance treaties and for
unusual risks.

Both treaty and facultative
reinsurance can be written on either a pro rata basis or an excess of loss basis. Under
pro rata reinsurance, the ceding company and the reinsurer share the premiums as well as
the losses and expenses in an agreed proportion. Under excess of loss reinsurance, the
reinsurer indemnifies the ceding company against all or a specified portion of losses and
expenses in excess of a specified dollar amount, known as the ceding companys
retention or reinsurers attachment point, generally subject to a negotiated
reinsurance contract limit.

In pro rata reinsurance, the
reinsurer generally pays the ceding company a ceding commission. The ceding commission
generally is based on the ceding companys cost of acquiring the business being
reinsured (commissions, premium taxes, assessments and miscellaneous administrative
expense). Premiums paid by the ceding company to a reinsurer for excess of loss
reinsurance are not directly proportional to the premiums that the ceding company receives
because the reinsurer does not assume a proportionate risk. There is usually no ceding
commission on excess of loss reinsurance.

Reinsurers may purchase reinsurance
to cover their own risk exposure. Reinsurance of a reinsurers business is called a
retrocession. Reinsurance companies cede risks under retrocessional agreements to other
reinsurers, known as retrocessionaires, for reasons similar to those that cause insurers
to purchase reinsurance: to reduce net liability on individual or classes of risks,
protect against catastrophic losses, stabilize financial ratios and obtain additional
underwriting capacity.

Reinsurance can be written through
intermediaries, generally professional reinsurance brokers, or directly with ceding
companies. From a ceding companys perspective, both the broker and the direct
distribution channels have advantages and disadvantages. A ceding companys decision
to select one distribution channel over the other will be influenced by its perception of
such advantages and disadvantages relative to the reinsurance coverage being placed.

Business Strategy

The Companys underwriting
strategies seek to capitalize on its financial strength and capacity, its employee
expertise and its flexibility to offer multiple products through multiple distribution
channels. The Companys strategies include effective management of the property and
casualty underwriting cycle, which refers to the tendency of insurance premiums, profits
and the demand for and availability of coverage to rise and fall over time. The Company
also seeks to manage its catastrophe exposures and retrocessional costs. Efforts to
control expenses and to operate in a cost-efficient manner are also a continuing focus for
the Company.

The Companys products include:
(1) 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.

3

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 underwriting 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 inappropriate concentrations of geographic or other risk.

Capital Transactions

The Companys business
operations are in part dependent on the Companys financial strength, and the
markets perception thereof, as measured by stockholders equity, which was
$1,546.9 million and $1,266.4 million at December 31, 2003 and 2002, respectively. The
Company has flexibility with respect to 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.

Group filed a shelf registration
statement on Form S-3 with the SEC that provides for the issuance of up to $975 million of
securities. 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 II and III
are authorized to issue trust preferred securities. The registration statement was
declared effective by the SEC on December 22, 2003.

In November 2002, pursuant to a trust
agreement between Holdings and JPMorgan Chase Bank, the property trustee, and Chase
Manhattan Bank USA, the Delaware trustee, Capital Trust 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 $210.0 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.

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. Holdings may elect to redeem the junior
subordinated debt securities, in whole or in part, at any time after November 14, 2007. If
such an early redemption occurs, the outstanding trust preferred securities would also be
proportionately redeemed.

4

On March 14, 2000, Holdings 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 March 15, 2005. During
2000, the net proceeds of these offerings and additional funds were distributed by
Holdings to Group.

Ratings

The following table shows the
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 shared with and partially dependent upon the ratings of Group and its
other subsidiaries and are based upon factors of concern to policyholders and should not
be considered an indication of the degree or lack of risk involved in an equity investment
in an insurance company.

|                     |  |  |              
|-------------------- |  |  | -------------
|Operating Subsidiary |  |  | A.M. Best    
|                     |  |  |              
|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 A+
          (Superior) rating is the second highest of fifteen ratings assigned
          by A.M. Best, which range from A++ (Superior) to
          F (In Liquidation). Additionally, A.M. Best has five
          classifications within the Not Rated category. 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 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 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. Numeric modifiers are used to refer to the
          ranking within a group  with 1 being the highest and 3 being the lowest.

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.

5

The following table shows the debt
ratings by A.M. Best, Standard & Poors and Moodys of the Companys
senior notes due March 15, 2005, the Companys senior notes due March 15, 2010 and
Capital Trusts trust preferred securities due November 15, 2032, 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
|                           |  |  |          
|Senior Notes               |  |  | a        
|Trust Preferred Securities |  |  | a-       

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 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.

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

The Company believes that its
ratings, in general, are 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.

Competition

The worldwide reinsurance and
insurance businesses are highly competitive, yet cyclical by product and market.
Competition with respect to the types of reinsurance and insurance business in which the
Company is engaged is based on many factors, including the perceived overall financial
strength of the reinsurer or insurer, A.M. Bests and/or Standard & Poors
rating of the reinsurer or insurer, 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. The Company competes in the U.S. and international reinsurance and insurance
markets with numerous international and domestic reinsurance and insurance companies. 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 potential for securitization of reinsurance and
insurance risks through capital markets provides an additional source of potential
reinsurance and insurance capacity and competition.

6

In 2003, the improving market trends
established in 2000 and 2001 have continued, generally sustaining upward pressure on
pricing, continued constriction of terms, conditions and coverages and constrained
capacity. There are signs that pressures for incremental firming have abated for property
classes, but these are partially offset by signs that pressures for incremental firming
continue for casualty classes in general. More broadly, the industry remains exposed to
fundamental issues that negatively impacted its aggregate capacity in 2002, including weak
investment market conditions and adverse loss emergence, both of which have continued to
depress the industrys aggregate financial performance and affect perceptions of the
financial strength of industry participants. These factors suggest that the current
favorable market conditions are likely to persist until further corrective actions,
possibly combined with improving investment market conditions, restore more normal
competitive conditions.

These current trends reflect a clear
reversal of the general trend from 1987 through 1999, which were characterized by
increasingly competitive global market conditions across most lines of business, as
reflected by decreasing prices and broadening contract terms. The earlier trend resulted
from a number of factors, including the emergence of significant reinsurance capacity in
Bermuda, changes in the Lloyds market, consolidation and increased capital levels in
the insurance and reinsurance industries, as well as the emergence of new reinsurance and
financial products addressing traditional exposures in alternative fashions. Many of these
factors continue to operate and may take on additional importance as the result of the
firming market conditions that have emerged.

The terrorist attacks on September
11, 2001 (the September 11 attacks) solidified and amplified the trend
reversal that began in 2000. These attacks resulted in losses which reduced industry
capacity and were of sufficient magnitude to cause most companies to reassess their
capital position, tolerance for risk, exposure control mechanisms and the pricing terms
and conditions at which they are willing to take on risk. The gradual and variable
improving trend that had been apparent through 2000 and earlier in 2001 firmed
significantly after the September 11 attacks. This firming generally took the form of
immediate and significant upward pressure on prices, more restrictive terms and conditions
and a reduction of coverage limits and capacity availability. Such pressures were
widespread, with variability depending on the product and markets involved, but mainly
depending on the characteristics of the underlying risk exposures. The magnitude of the
changes was sufficient to create temporary disequilibrium in some markets as individual
buyers and sellers adapted to changes in both their internal and market dynamics.

Through 2002 reinsurance and
insurance markets generally continued to firm, reflecting the continuing implications of
losses arising from the September 11 attacks as well as aggregate company reactions to
broad and growing recognition that competition in the late 1990s reached extremes in many
classes and markets, which ultimately led to inadequate pricing and overly broad terms,
conditions and coverages. The effect of these extremes, which had become apparent through
excessive loss emergence, varied widely by company depending on product offerings, markets
accessed, underwriting and operating practices, competitive strategies and business
volumes. Across all market participants, however, the aggregate general effect was
impaired financial results and erosion of the industry capital base. Coupled with
deteriorating investment market conditions and results, and renewed concerns regarding
longer term industry specific issues, including asbestos exposure and sub-par capital
returns, these financial impacts introduced substantial, and in some cases extreme,
pressure for the initiation and/or strengthening of corrective action by individual market
participants. These pressures, aggregating across industry participants, resulted in
firming prices, more restrictive terms and conditions, tightened coverage availability
across most classes and markets and increasing concern with respect to the financial
security of insurance and reinsurance providers, impacts which set the stage for the 2003
trends discussed above.

7

The Company is generally encouraged
by recent industry developments, which have operated to its advantage, and more broadly,
by continued favorable current market conditions. However, the Company cannot predict with
any reasonable certainty whether and to what extent these conditions will persist.

Employees

As of March 1, 2004, the Company
employed 377 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 Information

The Companys Annual Reports on
Form 10-K, Quarterly Reports on Form 10-Q and 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 2. Properties

Everest Res corporate offices
are located in approximately 115,000 square feet of leased office space in Liberty Corner,
New Jersey. The Companys other eleven locations occupy a total of approximately
56,000 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

The Company does not believe that
there are any material pending legal proceedings to which it or any of its subsidiaries is
a party or of which any of their property is the subject.

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 and reinsurance agreements and other more general contracts.
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. Such disputes are resolved through formal and
informal means, including litigation and arbitration.

In all such matters, the Company
believes that its positions are legally and commercially reasonable. The Company also
regularly evaluates those positions, and where appropriate, establishes or adjusts
insurance reserves to reflect its evaluation. The Companys aggregate reserves take
into account the possibility that the Company may not ultimately prevail in each and every
disputed matter. The Company believes its aggregate reserves reduce the potential that an
adverse resolution of one or more of these matters, at any point in time, would have a
material impact on the Companys financial condition or results of operations.
However, there can be no assurances that adverse resolutions of such matters in any one
period or in the aggregate will not result in a material adverse effect on the
Companys results of operations.

8

# 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.

PART II

# ITEM 5. Market for
Registrants Common Equity and Related Stockholder Matters

Market Information and
Holder of Common Stock

As of December 31, 2003, all of the
Companys common stock was owned by Group and was not publicly traded.

Dividend History and
Restrictions

The Company did not pay any dividends
during 2003, 2002 and 2001. 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 $1.1
billion at December 31, 2003, 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 2004 without triggering the requirement for prior approval of
regulatory authorities in connection with a dividend is $171.6 million. See Note 14A of
Notes to Consolidated Financial Statements.

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 Operations

The following is a discussion of the
results of operations of the Company. This discussion and analysis should be read in
conjunction with the Consolidated Financial Statements and the notes thereto presented
under ITEM 8.

9

Restructuring

On 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. based 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.

Acquisitions

On September 19, 2000, the Company
completed the acquisition of all of the issued and outstanding capital stock of Gibraltar
from The Prudential for $51.8 million, which approximated book value. As a result of the
acquisition, Gibraltar became a wholly-owned subsidiary of the Company and, immediately
following the acquisition, its name was changed to Mt. McKinley. In connection with the
acquisition of Mt. McKinley, which has significant exposure to asbestos and environmental
(A&E) claims, Prudential Property and Casualty Insurance Company of
Indiana (Prupac), a subsidiary of The Prudential, 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. In addition, The
Prudential guaranteed Prupacs obligation to Mt. McKinley. There were $81.1 million,
$56.7 million and $22.2 million of cessions under this reinsurance for years ended
December 31, 2003, 2002 and 2001, respectively, exhausting the limit available under this
contract.

In connection with the Mt. McKinley
acquisition, Prupac also provided excess of loss reinsurance for 100% of the first $8.5
million of loss with respect to certain of Mt. McKinleys retrocessions and
potentially uncollectible reinsurance coverage. There were no cessions under this
reinsurance for the years ended December 31, 2003 and 2002, maintaining the limit
available under the contract at $2.4 million. There was $3.6 million of cessions under
this reinsurance for the year ended December 31, 2001.

Mt.    
          McKinley, a run-off property and casualty insurer in the U.S., had a long
          relationship with the Company and its principal operating company, Everest Re.
          Mt. McKinley was formed in 1978 by Everest Re and wrote insurance until 1985,
          when it was placed in run-off. In 1991, Mt. McKinley became a subsidiary of The
          Prudential. Mt. McKinley is also 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 $103.9 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 acquisition.
          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 insurance exposures and reserves
          to Bermuda Re.

Industry Conditions

The worldwide reinsurance and
insurance businesses are highly competitive yet cyclical by product and market.
Competition with respect to the types of reinsurance and insurance business in which the
Company is engaged is based on many factors, including the perceived overall financial
strength of the reinsurer or insurer, A.M. Bests and/or Standard & Poors
rating of the reinsurer or insurer, 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. The Company competes in the U.S. and international reinsurance and insurance
markets with numerous international and domestic reinsurance and insurance companies. 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 potential for securitization of reinsurance and
insurance risks through capital markets provides an additional source of potential
reinsurance and insurance capacity and competition.

10

In 2003, the improving market trends
established in 2000 and 2001 have continued generally sustaining upward pressure on
pricing, continued constriction of terms, conditions and coverages and constrained
capacity. There are signs that pressures for incremental firming have abated for property
classes, but these are partially offset by signs that pressures for incremental firming
continue for casualty classes in general. More broadly, the industry remains exposed to
fundamental issues that negatively impacted its aggregate capacity in 2002, including weak
investment market conditions and adverse loss emergence, both of which have continued to
depress the industrys aggregate financial performance and affect perceptions of the
financial strength of industry participants. These factors suggest that the current
favorable market conditions are likely to persist until further corrective actions,
possibly combined with improving investment market conditions, restore more normal
competitive conditions.

These current trends reflect a clear
reversal of the general trend from 1987 through 1999, which were characterized by
increasingly competitive global market conditions across most lines of business, as
reflected by decreasing prices and broadening contract terms. The earlier trend resulted
from a number of factors, including the emergence of significant reinsurance capacity in
Bermuda, changes in the Lloyds market, consolidation and increased capital levels in
the insurance and reinsurance industries, as well as the emergence of new reinsurance and
financial products addressing traditional exposures in alternative fashions. Many of these
factors continue to operate and may take on additional importance as the result of the
firming market conditions that have emerged.

The September 11 attacks solidified
and amplified the trend reversal that began in 2000. These attacks resulted in losses
which reduced industry capacity and were of sufficient magnitude to cause most companies
to reassess their capital position, tolerance for risk, exposure control mechanisms and
the pricing terms and conditions at which they are willing to take on risk. The gradual
and variable improving trend that had been apparent through 2000 and earlier in 2001
firmed significantly after the September 11 attacks. This firming generally took the form
of immediate and significant upward pressure on prices, more restrictive terms and
conditions and a reduction of coverage limits and capacity availability. Such pressures
were widespread with variability depending on the product and markets involved, but mainly
depending on the characteristics of the underlying risk exposures. The magnitude of the
changes was sufficient to create temporary disequilibrium in some markets as individual
buyers and sellers adapted to changes in both their internal and market dynamics.

Through 2002 reinsurance and
insurance markets generally continued to firm, reflecting the continuing implications of
losses arising from the September 11 attacks as well as aggregate company reactions to
broad and growing recognition that competition in the late 1990s reached extremes in many
classes and markets, which ultimately led to inadequate pricing and overly broad terms,
conditions and coverages. The effect of these extremes, which had become apparent through
excessive loss emergence, varied widely by company depending on product offerings, markets
accessed, underwriting and operating practices, competitive strategies and business
volumes. Across all market participants, however, the aggregate general effect was
impaired financial results and erosion of the industry capital base. Coupled with
deteriorating investment market conditions and results, and renewed concerns regarding
longer term industry specific issues, including asbestos exposure and sub-par capital
returns, these financial impacts introduced substantial, and in some cases extreme,
pressure for the initiation and/or strengthening of corrective action by individual market
participants. These pressures, aggregating across industry participants, resulted in
firming prices, more restrictive terms and conditions, tightened coverage availability
across most classes and markets and increasing concern with respect to the financial
security of insurance and reinsurance providers, impacts which set the stage for the 2003
trends discussed above.

11

The Company is generally encouraged
by recent industry developments, which have operated to its advantage, and more broadly,
by continued favorable current market conditions. However, the Company cannot predict with
any reasonable certainty whether and to what extent these conditions will persist.

12

Financial Summary

The Company's  management  monitors
and evaluates  overall  Company  performance  based  principally  upon  underwriting  and
financial results.  The following is a three year summary of consolidated underwriting
results and net income:

|                               |  |  |  
|------------------------------ |  |  | -
|                               |  |  |  
|(Dollars in thousands)         |  |  |  
|                               |  |  |  
|Gross written premiums         |  |  | $
|Net written premiums           |  |  |  
|Premiums earned                |  |  | $
|Incurred losses and loss       |  | 
|adjustment expenses            |  |  |  
|Commission, brokerage, taxes   |  |  |  
|fees                           |  |  |  
|Other underwriting expenses    |  |  |  
|                               |  |  |  
|Underwriting gain (loss)       |  |  |  
|Net investment income          |  |  |  
|Net realized capital loss      |  |  |  
|Net derivative expense         |  |  |  
|Corporate expenses             |  |  |  
|Distributions related to trust |  |  |  
|preferred securities           |  |  |  
|Interest expense               |  |  |  
|Other (expense) income         |  |  |  
|                               |  |  |  
|Income before taxes            |  |  |  
|Income tax expense (benefi     |  |  |  
|                               |  |  |  
|Net Income                     |  |  | $
|                               |  |  |  

|                                 |  |  | 
|-------------------------------- |  |  | 
|Loss ratio                       |  |  | 
|Commission and expense ratio     |  |  | 
|Other underwriting expense ratio |  |  | 
|                                 |  |  | 
|                                 |  |  | 
|Combined ratio                   |  |  | 
|                                 |  |  | 

As indicated in the preceding
Industry Conditions section, the reinsurance and insurance industry has experienced very
favorable market conditions over the past three years. The favorable market conditions
coupled with the Companys financial strength, strategic positioning and market and
underwriting expertise enabled it to significantly increase its volume of business. As a
result, gross written premiums for the year ended December 31, 2003 increased by 55.8%
compared with the year ended December 31, 2002, which had increased 49.0% compared with
the year ended December 31, 2001. Gross written premiums for the year ended December 31,
2001 had increased by 34.6% compared with the year ended December 31, 2000. Due to the
nature of its businesses, the Company is unable to precisely differentiate the effects of
price changes as compared to changes in exposure. Similarly, because individual
reinsurance arrangements often reflect revised coverages, structuring, pricing, terms
and/or conditions from period to period, the Company is unable to differentiate between
the premium volumes attributable to new business as compared to renewal business.
Management believes however, that on balance, during the past three years, the more
significant component of growth related to growth in exposures underwritten with a lesser
but still significant component relating to increased pricing and/or improved terms and
conditions. Management believes further that market conditions are generally more
favorable for casualty business classes than for property business classes; however,
management notes that it continues to see business opportunities in virtually all
operating classes and markets. Although premium volumes have increased significantly, the
Company continues to decline business that does not meet its objectives regarding
underwriting profitability.

13

The other components of underwriting
gain (loss) are highly correlated to the level of premium volume. The amount of net
written premiums reflects gross written premiums less ceded premiums. Premiums ceded were
$1,206.0 million (28.1% of gross written premiums), $565.9 million (20.5% of gross written
premiums) and $432.9 million (23.4% of gross written premiums) for the years ended
December 31, 2003, 2002 and 2001, respectively. The increase in ceded premiums was
principally attributable to a quota share agreement between Everest Re and Bermuda Re
whereby 25% and 20% of Everest Res net retained liabilities on all new and renewal
policies for underwriting years 2003 and 2002, respectively, were ceded to Bermuda Re.
Under this agreement, $980.0 million and $372.9 million were ceded for the years ended
December 31, 2003 and 2002, respectively. Ceded premiums also included adjustment premiums
related to claims made under the Companys accident year aggregate excess of loss
retrocessional programs. The amount of the adjustment premiums was $49.6 million, $54.5
million and $139.4 million for years ended December 31, 2003, 2002 and 2001, respectively.
The larger amount of adjustment premium for 2001 relates primarily to losses ceded in
conjunction with the September 11 attacks and the Enron bankruptcy.

Incurred losses and loss adjustment
expenses (LAE) also increased as a result of the increased premium volume.
However, the percentage increase in losses was less than the percentage increase in
premium volume since part of the premium increase represented improvement in pricing,
terms and conditions, as opposed to an increase in exposures. Partially offsetting the
impact of improved pricing was the effect of prior year loss reserve strengthening. The
increase in losses relating to prior period reserve strengthening was $229.0 million and
$119.2 million for years ended December 31, 2003, and 2002, respectively. There was a $5.2
million decrease to prior period loss provisions for the year ended December 31, 2001.
Three active classes of business are the principal contributors to the 2003 and 2002
reserve strengthening: professional liability reinsurance, general casualty reinsurance
and workers compensation insurance.

In the professional liability
reinsurance class, the late 1990s and early 2000s saw a proliferation of claims relating
to bankruptcies and other corporate, financial and/or management improprieties. This
resulted in an increase in the frequency and severity of claims on the professional
liability policies reinsured by the Company. In the general casualty area, the Company
continues to experience claim frequency and severity greater than expected in the
Companys pricing and reserving assumptions, particularly for accident years 1998
through 2001. These losses reflect unfavorable trends in litigation and economic
variability. With respect to both of these classes, another factor was the increasingly
competitive conditions in insurance and reinsurance markets during this period. While the
Company seeks to manage the impact of competitive condition changes on its results, it is
generally unable to divorce itself entirely from the underlying industry cycles of its
principal business.

In the workers compensation
insurance class, the majority of which was written in California, the Company has
experienced adverse development primarily for accident years 2001 and 2002. As a result of
significant growth in this book of business in a challenging business environment, the
Companys writings in this class were relatively more subject to variability than are
some of its more established and/or stable lines of business. Although cumulative results
through 2003 continue to be profitable for this book of business, there has been some
deterioration in claim frequency and severity related to accident years 2001 and 2002,
which the Company generally attributes to the growth of this portfolio of business.

14

The Companys reserving
methodologies continuously monitor the emergence of loss and loss development trends,
seeking on a timely basis, to both adjust reserves, for the impact of trend shifts and to
factor the impact of such shifts into its underwriting and pricing on a prospective basis.

Commission, brokerage and tax expense
also increased as a result of the increasing premium volume as these generally vary in
direct proportion to premium. However, the percentage increase was generally less than the
percentage increase in premium volume, reflecting the generally improving market
conditions, which tend to provide the Company a relatively greater ability to exert
downward pressure on commission and brokerage rates.

The increase in net investment income
to $284.3 million, $257.9 million and $265.9 million for the years ended December 31,
2003, 2002 and 2001, respectively, is also correlated to the increased premium volume.
Premiums are generally collected over the first 12 to 15 months of the reinsurance
contract while related losses are typically paid out over numerous years, resulting in an
increase in cash flow when premiums are increasing. The Companys cash flow from
operations was $1,051.0 million, $425.2 million and $303.8 million for the years ended
December 31, 2003, 2002 and 2001, respectively. Coupled with the issuance of trust
preferred securities in November 2002, this facilitated the growth in the Companys
total investments and cash to $6,405.9 million, $5,142.7 million and $4,469.8 million as
of December 31, 2003, 2002 and 2001, respectively. The impact on net investment income
resulting from the growth in the investment portfolio was partially offset by an overall
decline in interest rates during this same time period.

Net realized capital losses of $22.9
million, $53.1 million and $15.7 million for the years ended December 31, 2003, 2002 and
2001, respectively, were primarily the result of write-downs in the value of securities
deemed to be impaired on an other than temporary basis, partially offset by realized
gains.

The Company generated an income tax
expense of $61.0 million and $24.8 million for the years ended December 31, 2003 and 2002,
respectively, generally reflecting improved underwriting and investment income results.
The income tax benefit of $9.2 million for the year ended December 31, 2001 primarily
reflected a tax benefit from various unusual loss events in 2001, in particular the
September 11 attacks and Enron, which were partially offset by taxable income on a former
clients demutualization.

The increase in net income to $206.5
million and $115.1 million for the years ended December 31, 2003 and 2002, respectively,
generally reflects improved underwriting and investment results partially offset by
increased income taxes. The net income of $38.3 million for the year ended December 31,
2001 reflects the impact of the unusual loss events in 2001.As a result of the
September 11 attacks, the Company incurred pre-tax losses in 2001, based on an estimate of
ultimate exposure developed through a review of its coverages, of $213.2 million gross of
reinsurance and $55.0 million net of reinsurance. Associated with this reinsurance was
$60.0 million of pre-tax charges, predominantly from adjustment premiums, which resulted
in a total pre-tax loss from the September 11 attacks of $115.0 million. After tax
recoveries relating specifically to this unusual loss event, the net loss from the
September 11 attacks totaled $75.0 million. Over 90% of the losses ceded by the Company
were pursuant to treaties where the reinsurers obligations are secured, which the
Company believes eliminates material reinsurance collection risk. As a result of the Enron
bankruptcy, the Company incurred losses in 2001, amounting to $18.6 million after-tax and
net of reinsurance. This unusual loss reflected all of the Companys exposures to
this event, including underwriting, credit and investment. Impact on net income of the
above-mentioned unusual 2001 events was partially offset by non-recurring income in 2001
received from a former clients demutualization.

15

The Companys stockholders
equity increased to $1,546.9 million, $1,266.4 million and $1,111.4 million as of December
31, 2003, 2002 and 2001, respectively. This increase is due to increased net income and
increased unrealized appreciation on the Companys investments. Management believes
that the Company generally has sufficient capital and resources to meet its known
obligations.

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 the Companys branches in London, Canada, and Singapore, in
addition to foreign business written through the Companys Miami and New Jersey
offices.

These segments are managed in a
carefully coordinated fashion with strong elements of central control, including with
respect to capital, investments and support operations. As a result, management monitors
and evaluates the financial performance of these operating segments principally based upon
their underwriting results. For selected financial information regarding these segments,
see Note 17 of Notes to Consolidated Financial Statements.

The following tables present the
relevant underwriting results for the operating segments for the three years ended
December 31, 2003, 2002 and 2001.

|                            |  |  |     
|--------------------------- |  |  | ----
|U.S. Reinsurance            | 
|                            |  |  |     
|(Dollars in thousands)      |  |  | 2003
|                            |  |  |     
|Gross written premiums      |  |  | $   
|Net written premiums        |  |  |     
|                            |  |  |     
|Premiums earned             |  |  | $   
|Incurred losses and loss    |  |  |     
|adjustment expenses         |  |  |     
|Commission and brokerage    |  |  |     
|Other underwriting expenses |  |  |     
|                            |  |  |     
|Underwriting gain (loss)    |  |  | $   
|                            |  |  |     

16

|                            |  |  |     
|--------------------------- |  |  | ----
|U.S. Insurance              | 
|                            |  |  |     
|(Dollars in thousands)      |  |  | 2003
|                            |  |  |     
|Gross written premiums      |  |  | $   
|Net written premiums        |  |  |     
|                            |  |  |     
|Premiums earned             |  |  | $   
|Incurred losses and loss    |  |  |     
|adjustment expenses         |  |  |     
|Commission and brokerage    |  |  |     
|Other underwriting expenses |  |  |     
|                            |  |  |     
|Underwriting gain (loss)    |  |  | $   
|                            |  |  |     

|                            |  |  |     
|--------------------------- |  |  | ----
|Specialty Underwriting      | 
|                            |  |  |     
|(Dollars in thousands)      |  |  | 2003
|                            |  |  |     
|Gross written premiums      |  |  | $   
|Net written premiums        |  |  |     
|                            |  |  |     
|Premiums earned             |  |  | $   
|Incurred losses and loss    |  |  |     
|adjustment expenses         |  |  |     
|Commission and brokerage    |  |  |     
|Other underwriting expenses |  |  |     
|                            |  |  |     
|Underwriting gain (loss)    |  |  | $   
|                            |  |  |     

|                            |  |  |     
|--------------------------- |  |  | ----
|International               | 
|                            |  |  |     
|(Dollars in thousands)      |  |  | 2003
|                            |  |  |     
|Gross written premiums      |  |  | $   
|Net written premiums        |  |  |     
|                            |  |  |     
|Premiums earned             |  |  | $   
|Incurred losses and loss    |  |  |     
|adjustment expenses         |  |  |     
|Commission and brokerage    |  |  |     
|Other underwriting expenses |  |  |     
|                            |  |  |     
|Underwriting gain (loss)    |  |  | $   
|                            |  |  |     

The Company has recently announced
that one of its subsidiaries, Everest Re, has reached agreement to sell its United Kingdom
branch to a related company, Bermuda Re. Business for this branch is currently reported
through the International segment; however, upon completion of the transaction, the
business will no longer be part of the Companys operating results. As such,
appropriate disclosures will be made in future filings to address the segment financial
fluctuations resulting from the transfer.

The Company has also recently
announced that another subsidiary, Everest National, has opened a regional office in
California to better serve its western U.S. Insurance business. The additional office will
not affect segment reporting.

17

Year Ended December 31,
2003 Compared to Year Ended December 31, 2002

Premiums.Gross written premiums increased 55.8% to $4,293.6 million in 2003 from
          $2,755.4 million in 2002, as the Company took advantage of the general firming
          of rates, terms and conditions and selected growth opportunities, while
          continuing to maintain a disciplined underwriting approach. Premium growth areas
          included a 95.9% ($857.7 million) increase in the U.S. Reinsurance operation,
          principally related to a $519.4 million increase in treaty casualty business, a
          $253.9 million increase in treaty property business and a $62.8 million increase
          in facultative business. The International operation increased 75.9% ($418.0
          million) primarily due to a $256.9 million increase in premiums from the London
          branch, a $79.6 million increase in international business written through the
          home office representing primarily Latin American business and a $67.4 million
          increase to Canadian business. The U.S. Insurance operation grew 30.2% ($248.1
          million) principally as a result of a $73.2 million increase in excess and
          surplus lines insurance and an $89.5 million increase in workers
          compensation. The Specialty Underwriting operation increased 2.9% ($14.3
          million) resulting primarily from a $38.0 million increase in A&H business
          and a $19.0 million decrease in marine and aviation. Ceded premiums increased to
          $1,206.0 million in 2003 from $565.9 million in 2002. This increase was
          principally attributable to $980.0 million of ceded premiums relating to quota
          share reinsurance agreements between Everest Re and Bermuda Re. Under these
          agreements 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
          policies 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 policies written for the 2003 underwriting year. In addition,
          ceded premiums for 2003 included $49.6 million in adjustment premium for the
          Companys corporate retrocessional programs, while ceded premiums for 2002
          included $5.1 million and $49.4 million in adjustment premium relating to claims
          made under the 2001 and 2000 accident year aggregate excess of loss elements of
          the Companys corporate retrocessional programs, respectively.

Net written premiums increased by
41.0% to $3,087.6 million in 2003 from $2,189.5 million in 2002, reflecting the increase
in gross written premiums, combined with the growth in ceded premiums.

Premium Revenues. Net premiums
earned increased by 40.9% to $2,757.7 million in 2003 from $1,957.3 million in 2002.
Contributing to this increase was a 61.1% ($402.2 million) increase in the U.S.
Reinsurance operation, a 46.9% ($218.2 million) increase in the U.S. Insurance operation
and a 50.2% ($205.4 million) increase in the International operation, which was partially
offset by a 6.0% ($25.5 million) decrease in the Specialty Underwriting operation. All of
these changes reflect period to period changes in net written premiums and business mix
together with normal variability in earnings patterns. Business mix changes occur not only
as the Company shifts emphasis between products, lines of business, distribution channels
and markets but also as individual contracts renew or non-renew, almost always with
changes in coverage, structure, prices and/or terms, and as new contracts are accepted
with coverages, structures, prices and terms different from those of expiring contracts.
As premium reporting and earnings and 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.

Expenses.    
          Incurred loss and LAE increased by 42.9% to $1,999.7 million in 2003 from
          $1,399.0 million in 2002. The increase in incurred losses and LAE was
          principally attributable to the increase in net premiums earned, the impact of
          changes in the Companys mix of business and reserve adjustments for prior
          period losses.

18

Net prior period reserve adjustments
for non-A&E exposures for the year ended December 31, 2003 were $212.3 million, which
amount is net of a 2000 accident year cession of $85.0 million, and were comprised of an
$133.3 million increase relating principally to the casualty exposures (including D&O
liability exposures) in the U.S. Reinsurance operation, a $24.3 million decrease relating
to the surety exposures in the Specialty Underwriting operation, a $44.6 million increase
relating mainly to the casualty exposures of the London and Canadian branch elements in
the International operation and a $58.7 million increase relating to the workers
compensation exposures in the U.S. Insurance operation. The increase for the U.S.
Insurance operation relates to the 2001 and 2002 accident exposure years and all other
reserve adjustments relate to the 1996-2000 accident exposure years.

Net prior period reserve adjustments
related to A&E exposures were $16.8 million and $6.2 million for the years ended
December 31, 2003 and 2002, 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 development on business written by
the Company, net of reinsurance, was $16.8 million and the net development on the acquired
business was $0.0 million. Substantially all of the Companys A&E exposures
relate to insurance and reinsurance contracts with coverage periods prior to 1986.

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. A
catastrophe is an event that causes a pre-tax loss on property exposures of at least $5.0
million and has an event date of January 1, 1988 or later. Catastrophe losses, net of
contract specific cessions, were $24.9 million in 2003, relating principally to May 2003
tornado and hailstorm events and hurricanes Fabian and Isabel, compared to $30.2 million
in 2002.

Incurred losses and LAE for 2003
reflected ceded losses and LAE of $760.3 million compared to ceded losses and LAE in 2002
of $486.1 million. Ceded losses and LAE in 2003 include $494.4 million of ceded losses
relating to the quota share reinsurance transactions noted earlier between Everest Re and
Bermuda Re as compared with ceded losses of $178.6 million for 2002. The ceded losses and
LAE for 2003 also included $85.0 million of losses ceded under the 2000 accident year
aggregate excess of loss component of the Companys corporate retrocessional program.
The ceded losses and LAE for 2002 included $11.0 million and $90.0 million of losses ceded
under the 2001 and 2000 accident year aggregate excess of loss component of the
Companys corporate retrocessional program, respectively.

The segment components of the
increase in incurred losses and LAE in 2003 from 2002 were a 63.0% ($164.4 million)
increase in the International operation, a 52.7% ($263.8 million) increase in the U.S.
Reinsurance operation and a 50.7% ($175.0 million) increase in the U.S. Insurance
operation. These increases were partially offset by a 0.9% ($2.5 million) decrease in the
Specialty Underwriting operation. These fluctuations generally reflected the changes in
premiums earned, changes in the current year loss expectation assumptions for business
written (generally reflecting continued improvement in market conditions) and pricing and
the net prior period reserve development discussed above. Incurred losses and LAE for each
operation were also impacted by variability relating to changes in the level of premium
volume and mix of business by class and type.

19

The Companys loss ratio, which
is calculated by dividing incurred losses and LAE by net premiums earned, increased by 1.0
percentage points to 72.5% in 2003 from 71.5% in 2002, reflecting the combined impact of
premiums earned and incurred losses and LAE discussed above.

The following table shows the loss
ratios for each of the Companys operating segments for 2003 and 2002. The loss
ratios for all operations were impacted by the expense factors noted above.

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

Segment underwriting expenses
increased by 22.9% to $679.1 million in 2003 from $552.7 million in 2002. Commission,
brokerage, taxes and fees increased by $107.1 million, principally reflecting an increase
of $343.1 million in the expenses due to premium volume which was partially offset by an
increase in ceded commissions of $236.0 million. Other underwriting expenses increased by
$19.4 million. Contributing to the $126.4 million increase in expenses were a 55.5%
($101.3 million) increase in the U.S. Reinsurance operation, a 37.2% ($39.4 million)
increase in the International operation, and a 3.9% ($5.3 million) increase in the U.S.
Insurance operation, partially offset by a 15.5% ($19.6 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 reinsurance,
including with Bermuda Re, and the underwriting performance of the underlying business.
The Companys expense ratio, which is calculated by dividing underwriting expenses by
net premiums earned, was 24.7% for 2003 compared to 28.3% for 2002.

The Companys combined ratio,
which is the sum of the loss and expense ratios, decreased by 2.5 percentage points to
97.2% in 2003 compared to 99.7% in 2002. The following table shows the combined ratios for
each of the Companys operating segments for 2003 and 2002. 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           |  | 

Investment.Net investment income increased 10.2% to $284.3 million in 2003 from $257.9
          million in 2002, principally reflecting the effects of investing the $1,051.0
          million of cash flow from operations in 2003 and $203.4 million of net proceeds
          from Capital Trusts issuance of trust preferred securities in November
          2002, all partially offset by the effect of the lower interest rate environment.

20

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, 2003 and 2002           |  | 
|Imbedded after-tax yield of cash and invested  |  | 
|assets at December 31, 2003 and 2002           |  | 
|Annualized pre-tax yield on average cash and   |  | 
|invested assets for the twelve months ended    |  | 
|December 31, 2003 and 2002                     |  | 
|Annualized after-tax yield on average cash and |  | 
|invested assets for the twelve months ended    |  | 
|December 31, 2003 and 2002                     |  | 

Net realized capital losses were
$22.9 million in 2003, reflecting 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 in accordance with Emerging
Issues Task Force No. 99-20, Recognition of Interest Income and Impairment on
Purchased and Beneficial Interests in Securitized Financial Assets (EITF
99-20), partially offset by $28.6 million of realized capital gains, which included
$12.5 million of realized capital gains on the interest only strips (see Note 1P of Notes
to Consolidated Financial Statements), compared to net realized capital losses of $53.1
million in 2002. The net realized capital loss in 2002 reflected realized capital losses
of $108.9 million, which included $79.7 million relating to write-downs in the value of
securities, of which $25.7 million was for WorldCom, Inc., deemed to be impaired on an
other than temporary basis, partially offset by $55.8 million of realized capital gains.
The Company owned no interest only strips during 2002.

The Company has in its product
portfolio a credit default swap 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
2003, compared to the $3.5 million derivative expense for 2002.

Other expense for 2003 was $14.0
million compared to other expense of $21.8 million for 2002. This change is primarily due
to less deferrals of the retroactive reinsurance agreements with affiliates.

Interest expense was $40.3 million in
2003 compared to $42.4 million for 2002. Interest expense in 2003 reflected $38.9 million
relating to the senior notes and $1.4 million relating to borrowings under the revolving
credit facility. Interest expense for 2002 reflected $38.9 million relating to the senior
notes and $3.5 million relating to borrowings under the revolving credit facility.

Distributions on the trust preferred
securities are cumulative and pay quarterly in arrears. Distributions relating to the
trust preferred securities were $16.5 million in 2003 compared to $2.1 million in 2002.
These securities were issued in November 2002.

Income Taxes.The Company
recognized income tax expense of $61.0 million in 2003 compared to an income tax expense
of $24.8 million in 2002. The increase in taxes generally reflects the improved
underwriting and investment income results. Net Income.Net income was $206.5
million in 2003 compared to a net income of $115.1 million in 2002, reflecting improved
underwriting and investment income results partly offset by increased income taxes.

21

Net Income.      Net income was $206.5
million in 2003 compared to a net income of $115.1 million in 2002, reflecting improved
underwriting and investment income results partly offset by increased income taxes.

Year Ended December 31,
2002 Compared to Year Ended December 31, 2001

Premiums.Gross written premiums increased 49.0% to $2,755.4 million in 2002 from
          $1,849.8 million in 2001, as the Company took advantage of selected growth
          opportunities and improving pricing in many classes of business, while
          continuing to maintain a disciplined underwriting approach. Premium growth areas
          included a 70.5% ($227.9 million) increase in the International operation,
          mainly attributable to growth in the London, Canadian and Latin American
          markets, a 63.5% ($319.1 million) increase in the U.S. Insurance operation,
          principally attributable to growth in workers compensation insurance, a
          46.5% ($284.1 million) increase in the U.S. Reinsurance operation, primarily
          reflecting growth across property and casualty lines, and an 18.0% ($74.6
          million) increase in the Specialty Underwriting operation, mainly attributable
          to growth in marine, aviation and surety business. The Company continued to
          decline business that did not meet its objectives regarding underwriting
          profitability.

Ceded premiums increased to $565.9
million in 2002 from $432.9 million in 2001. This increase was principally attributable to
$372.9 million of ceded premiums relating to a Quota Share Reinsurance Agreement between
Everest Re and Bermuda Re, whereby Everest Re cedes 20% of its net retained liability on
all new and renewal policies written during the term of this agreement, and an Excess of
Loss Agreement between Everest Re, Everest National, Everest Security and Bermuda Re,
whereby Bermuda Re assumes liability for primary insurance workers compensation
losses exceeding $100,000 per occurrence, with its liability not to exceed $150,000 per
occurrence. Ceded premiums in 2002 included $5.1 million and $49.4 million in adjustment
premiums relating to claims made under the 2001 and 2000 accident year aggregate excess of
loss elements of the Companys corporate retrocessional program, respectively. Ceded
premiums in 2001 included $81.3 million and $58.1 million in adjustment premiums relating
to claims made under the 2001 and 1999 accident year aggregate excess of loss elements of
the Companys corporate retrocessional program, respectively, with the 2001 accident
year cessions principally relating to losses incurred as a result of the September 11
attacks and the Enron bankruptcy.

Net written premiums increased by
54.5% to $2,189.5 million in 2002 from $1,416.9 million in 2001. This increase was a
result of the increase in gross written premiums and ceded written premiums.

Premium Revenues.Net
premiums earned increased by 46.8% to $1,957.3 million in 2002 from $1,333.5 million in
2001. Contributing to this increase was an 140.7% ($239.0 million) increase in the
International operation, a 58.3% ($171.5 million) increase in the U.S. Insurance
operation, a 32.3% ($160.5 million) increase in the U.S. Reinsurance operation and a 14.2%
($52.9 million) increase in the Specialty Underwriting operation. All of these changes
reflect period to period variability in gross written and ceded 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 and earnings and 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.

22

Expenses.Incurred loss and LAE increased by 29.6% to $1,399.0 million in 2002
          from $1,079.2 million in 2001. The increase in incurred losses and LAE was
          principally attributable to the increase in net premiums earned and modest net
          prior reserve adjustments in select areas, most notably in D&O liability,
          surety and workers compensation lines and with respect to asbestos
          exposures, partially offset by lower catastrophe losses and improvements in
          rates, terms and conditions in many classes of business, as well as the impact
          of changes in the Companys mix of business.

Incurred losses and LAE include
catastrophe losses, which reflect the impact both of current period events and favorable
and unfavorable development on prior period events and are net of reinsurance. A
catastrophe is an event that causes a pre-tax loss on property exposures of at least $5.0
million and has an event date of January 1, 1988 or later. Catastrophe losses, net of
contract specific cessions but before cessions under the corporate retrocessional program,
were $30.2 million in 2002, principally relating to European flood losses and Hurricanes
Isidore and Kenna, compared to net catastrophe losses of $222.6 million in 2001, which was
principally related to the September 11 attacks.

Incurred losses and LAE in 2002
reflected ceded losses and LAE of $486.1 million compared to ceded losses and LAE in 2001
of $619.4 million. Ceded losses and LAE in 2002 include $178.6 million of ceded losses
relating to the reinsurance transactions noted earlier between the Company and Bermuda Re.
The ceded losses and LAE in 2002 included $11.0 million and $90.0 million of losses ceded
under the 2001 and 2000 accident year aggregate excess of loss components of the
Companys corporate retrocessional program, respectively. The ceded losses and LAE in
2001 included $164.0 million and $105.0 million of losses ceded under the 2001 and 1999
accident year aggregate excess of loss components of the Companys corporate
retrocessional program, respectively, with the 2001 accident year cessions relating
principally to losses incurred as the result of the September 11 attacks.

Contributing to the increase in
incurred losses and LAE in 2002 from 2001 was an 198.4% ($173.4 million) increase in the
International operation, a 63.4% ($134.0 million) increase in the U.S. Insurance
operation, principally reflecting increased premium volume coupled with changes in this
segments specific reinsurance programs and an 11.4% ($51.4 million) increase in the
U.S. Reinsurance operation, principally due to increased premium volume, partially offset
by decreased catastrophe losses. These increases were partially offset by an 11.8% ($39.1
million) decrease in the Specialty Underwriting operation, principally attributable to
decreased catastrophe losses. Incurred losses and LAE for each operation were also
impacted by variability relating to changes in the level of premium volume and mix of
business by class and type.

The Companys loss ratio, which
is calculated by dividing incurred losses and LAE by premiums earned, decreased by 9.4
percentage points to 71.5% in 2002 from 80.9% in 2001, reflecting the premiums earned and
incurred losses and LAE discussed above. The following table shows the loss ratios for
each of the Companys operating segments for 2002 and 2001. The loss ratios for all
operations were impacted by the expense factors noted above as well as by the impact on
ceded premiums of the adjustment premiums under the Companys corporate
retrocessional program.

23

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

Segment underwriting expenses
increased by 23.5% to $552.7 million in 2002 from $447.6 million in 2001. Commission,
brokerage, taxes and fees increased by $94.8 million, principally reflecting increases in
premium volume and changes in the mix of business. Other underwriting expenses increased
by $10.3 million as the Company expanded its operations to support its increased business
volume. Contributing to the underwriting expense increase were a 66.1% ($54.7 million)
increase in the U.S. Insurance operation, a 17.6% ($19.0 million) increase in the
Specialty operation, a 13.8% ($12.8 million) increase in the International operation and
an 11.4% ($18.7 million) increase in the U.S. Reinsurance 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, the
underwriting performance of the underlying business. The Companys expense ratio,
which is calculated by dividing underwriting expenses by premiums earned, decreased by 5.4
percentage points to 28.3% in 2002 compared to 33.7% in 2001.

The Companys combined ratio,
which is the sum of the loss and expense ratios, decreased by 14.9 percentage points to
99.7% in 2002 compared to 114.6% in 2001. The following table shows the combined ratios
for each of the Companys operating segments for 2002 and 2001. The combined ratios
for all operations were impacted by the loss and expense ratio variability noted above as
well as by the impact on ceded premiums of the adjustment premiums under the
Companys corporate retrocessional program.

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

Investments.  Net investment  income
 decreased by 3.0% to $257.9 million in 2002 from $265.9 million in 2001,  principally
 reflecting the lower interest rate  environment,  partially  offset by the effect of
investing the $425.2 million of cash flow from  operations in 2002 and $203.4 million of
net proceeds from Capital  Trust's  issuance of trust  preferred  securities in November
2002. The following table shows a comparison of various investment yields as of December
31, 2002 and 2001, respectively, and for the periods then ended.

24

|                                               |  | 
|---------------------------------------------- |  | 
|                                               |  | 
|                                               |  | 
|Imbedded pre-tax yield of cash and invested    |  | 
|assets at December 31, 2002 and 2001           |  | 
|Imbedded after-tax yield of cash and invested  |  | 
|assets at December 31, 2002 and 2001           |  | 
|Annualized pre-tax yield on average cash and   |  | 
|invested assets for the twelve months ended    |  | 
|December 31, 2002 and 2001                     |  | 
|Annualized after-tax yield on average cash and |  | 
|invested assets for the twelve months ended    |  | 
|December 31, 2002 and 2001                     |  | 

Net realized capital losses were
$53.1 million in 2002, reflecting realized capital losses on the Companys
investments of $108.9 million, which includes $79.7 million relating to write-downs in the
value of securities deemed to be impaired on an other than temporary basis, of which $25.7
million were for WorldCom, partially offset by $55.8 million of realized capital gains,
compared to net realized capital losses of $15.7 million in 2001. The net realized capital
losses in 2001 reflected realized capital losses of $45.5 million, which included $16.7
million relating to write-downs in the value of securities deemed to be impaired on an
other than temporary basis, which were partially offset by $29.8 million of realized
capital gains.

The Company has in its product
portfolio a credit default swap, which it no longer writes. This product meets the
definition of a derivative under FAS 133. Net derivative expense, essentially reflecting
changes in fair value from this credit default transaction in 2002, was $3.5 million,
compared to $7.0 million in 2001. See also Note 2 of Notes to the Consolidated Financial
Statements.

Other expense was $21.8 million in
2002 compared to other income of $26.6 million in 2001. Significant contributors to other
expense in 2002 were deferred gains principally on the Mt. McKinley reinsurance
transaction with Bermuda Re, which is retroactive in nature, foreign exchange losses,
normal provision for uncollectible audit premium in the U.S. Insurance operation and the
amortization of deferred expenses relating to the Companys issuance of senior notes
and Capital Trusts issuance of trust preferred securities in November 2002,
partially offset by fee income. Other income for 2001 includes $25.9 million arising from
a non-recurring receipt of shares in connection with the demutualization of a former
insurance company client that had issued annuities to the Company in connection with
certain claim settlement transactions. In addition, other income for 2001 includes foreign
exchange gains as well as fee income, offset by the amortization of deferred expenses
relating to the Companys issuance of senior notes.

Interest expense was $42.4 million
for 2002 compared to $46.0 million for 2001. Interest expense for 2002 reflects $38.9
million relating to the Companys senior notes and $3.5 million relating to the
Companys borrowing under its revolving credit facility. Interest expense for 2001
reflects $38.9 million relating to the Companys senior notes and $7.1 million
relating to the Companys borrowing under its revolving credit facility. In addition,
2002 includes incurred expense of $2.1 million for distributions on Capital Trusts
trust preferred securities.

Income Taxes.The Company
generated income tax expense of $24.8 million in 2002 compared to an income tax benefit of
$9.2 million in 2001. The tax expense in 2002 was mainly attributable to improved
underwriting results. The tax benefit in 2001 primarily resulted from the impact of losses
relating to the September 11 attacks, the Enron bankruptcy and realized capital losses
recognized in 2001, which reduced taxable income, partially offset by taxable income
relating to the non-recurring receipt of shares in connection with a former clients
demutualization.

25

Net Income.Net income was
$115.1 million in 2002 compared to $38.3 million in 2001. This increase generally reflects
the improved underwriting results, partially offset by increased tax expense, realized
capital losses and a decrease in other income.

# Safe Harbor Disclosure

This report contains forward-looking
statements within the meaning of the U.S. federal securities laws. The Company intends
these forward-looking statements to be covered by the safe harbor provisions for
forward-looking statements in the federal securities laws. In some cases, these statements
can be identified by the use of forward-looking words such as may,
will, should, could, anticipate,
estimate, expect, plan, believe,
predict, potential and intend. Forward looking
statements contained in this report include information regarding the Companys
reserves for losses and LAE, the adequacy of the Companys provision for
uncollectible balances, estimates of the Companys catastrophe exposure and the
effects of catastrophe events on the Companys financial statements and the ability
of the Companys subsidiaries to pay dividends. Forward-looking statements only
reflect the Companys expectations and are not guarantees of performance. These
statements involve risks, uncertainties and assumptions. Actual events or results may
differ materially from the Companys expectations. Important factors that could cause
the Companys actual results to be materially different from its expectations include
the uncertainties that surround the estimating of reserves for losses and LAE, those
discussed in Note 3 of Notes to Consolidated Financial Statements included in this report
and those discussed below under the caption 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.

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, the Companys business, financial condition or results of operations
could be materially and adversely affected.

The Companys
results could be adversely affected by catastrophic events.

Like all insurance and reinsurance
companies, the Company is exposed to unpredictable catastrophic events, including
weather-related and other natural catastrophes, as well as acts of terrorism. Any material
reduction in the Companys operating results caused by the occurrence of one or more
catastrophes could inhibit its ability to pay dividends or to meet its interest and
principal payment obligations. The Company defines a catastrophe as an event that causes a
pre-tax loss on property exposures of at least $5.0 million and has an event date of
January 1, 1998 or later. 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:

26

|              |  | 
|------------- |  | 
|Calendar year |  | 
|              | 
|1999          |  | 
|2000          |  | 
|2001          |  | 
|2002          |  | 
|2003          |  | 

If the Companys net loss
reserves are inadequate to meet its actual losses, net income would be reduced or it could
incur a loss.

The Company is required to maintain
reserves to cover its estimated ultimate liability of losses and LAE for both reported and
unreported claims incurred. These reserves are only estimates of what the Company believes
the settlement and administration of claims will cost based on facts and circumstances
known to it. In setting reserves for its reinsurance liabilities, the Company relies on
claim data supplied by its ceding companies and brokers. This information is not always
timely or accurate and can result in inaccurate loss projections. Because of the
uncertainties that surround estimating loss reserves and LAE, the Company cannot be
certain that ultimate losses will not exceed these estimates of losses and loss adjustment
reserves. If the Companys reserves are insufficient to cover its actual losses and
loss adjustment expenses, the Company would have to augment its reserves and incur a
charge to its earnings. These charges could be material. By way of illustration, during
the past five calendar years, the reserve re-estimation process affected the
Companys net income in the following manner:

|              |  | 
|------------- |  | 
|Calendar year |  | 
|              | 
|1999          |  | 
|2000          |  | 
|2001          |  | 
|2002          |  | 
|2003          |  | 

The difficulty in estimating the
Companys reserves is increased because loss reserves include reserves for potential
A&E liabilities. 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 could reduce the Companys net income or increase the
Companys net loss.

The Companys success depends on
its ability to accurately assess the risks associated with the business on which the risk
is retained. If the Company fails to accurately assess the risks it retains, it may fail
to establish adequate premium rates to cover its losses and LAE. This could reduce the
Companys net income and even result in an operating loss. Losses may arise from
events or exposures that are not anticipated when the coverage is priced. An example of an
unanticipated event is the September 11 attacks. The Companys loss from those
attacks, after reinsurance and taxes, was $75 million. 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 the Company priced its coverages.
In addition to unanticipated events, the Company also faces the unanticipated expansion of
its exposures, particularly in long-tail liability lines.

Decreases in pricing for property
and casualty reinsurance and insurance could reduce the Companys net income.

The Company writes primarily property
and casualty reinsurance and insurance. The worldwide reinsurance and insurance businesses
are highly competitive, yet cyclical by product and market. These cycles, as well as other
business, economic and societal trends that influence aggregate supply and demand for
property and casualty insurance and reinsurance products, are outside of the
Companys control. The phase of the industry cycle that prevailed from 1987 through
1999 was characterized by increasingly competitive global market conditions across most
lines of business, leading to decreasing prices and broadening contract terms, which in
turn had a negative impact on insurers financial results and eroded the industry
capital base. These trends resulted from a number of factors, including the emergence of
significant reinsurance capacity in Bermuda, changes in the Lloyds market,
consolidation and increased capital levels in the insurance and reinsurance industries and
the emergence of new reinsurance and financial products addressing traditional exposures
in alternative fashions. This industry cycle began to reverse in 2000, when the industry
entered a period of firming prices, more restrictive terms and conditions and tightened
coverage availability across most classes and markets. These new trends were intensified
and accelerated by losses from the September 11 attacks, which reduced industry capacity
and were of sufficient magnitude to cause most insurers to reassess their capital
position, tolerance for risk, exposure control mechanisms and the pricing terms and
conditions at which they are willing to take on risk. Additional contributing factors
included deteriorating investment market conditions and results and renewed concerns
regarding longer-term industry-specific issues, such as A&E exposures. Although the
industry is currently in a favorable phase of the pricing cycle, the Company cannot assure
that this favorable phase will continue. Many of the factors that contributed to
decreasing prices during the prior phase of the cycle continue to exist and new and
unanticipated factors could emerge. Any significant decrease in pricing for property and
casualty insurance or reinsurance could reduce the Companys ability to write
business profitably and reduce its net income. Further discussion of competition issues
can be found in ITEM 1, Business  Competition.

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

The Companys insurance company
subsidiaries, other than Mt. McKinley, currently hold an A+
(Superior) financial strength rating from A.M. Best. Everest Re and
Everest National hold an AA (Very Strong) financial strength
rating from Standard & Poors. Everest Re holds an Aa3
(Excellent) financial strength rating from Moodys. Financial
strength ratings are used by insurers and reinsurance and insurance intermediaries as an
important means of assessing the financial strength and quality of reinsurers. In
addition, an unfavorable rating or the lack of a rating of its reinsurers may adversely
affect the rating of a company purchasing reinsurance. A downgrade or withdrawal of any of
these ratings might adversely affect, the Companys ability to market its 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 the Company has
experienced a credit rating downgrade. However, the Company cannot assure that no credit
downgrade will ever occur in the future. Consistent with market practice, roughly 20% to
30% of the Companys treaty reinsurance business allows the ceding company to
terminate the contract or seek collateralization of the Companys obligations in the
event of a rating downgrade below a certain threshold. The termination provision would
generally be triggered only if a rating fell below A.M. Bests A- rating level, which
is three levels below Everest Res current rating of A+. Everest Re also has more
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.

28

The Companys
reinsurers may not satisfy their obligations.

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

If the Company is unable or
chooses not to purchase reinsurance and transfer risk to reinsurers, its net income could
be reduced or it could incur a net loss in the event of an unusual loss experience.

The Company has a quota share
agreement with an affiliate, Bermuda Re whereby the Company cedes a percentage of its net
retained liability on new and renewal policies, 25% and 20% for the years ended December
31, 2003 and 2002, respectively. This agreement enables the Company to write higher levels
of gross premiums than it may be able to without the agreement. If this quota share
arrangement became unavailable and could not be replaced at acceptable terms and
conditions, the Company might need to reduce its premium volume, which could have a
negative impact on net income. The Company generally evaluates, underwrites, selects and
prices its products prior to consideration of the quota share reinsurance. Furthermore,
the Companys underwriters generally consider purchasing reinsurance with respect to
specific insurance contracts or programs, and its senior management generally considers
purchasing aggregate excess of loss reinsurance with respect to its overall operations,
where reinsurance is deemed prudent from a risk mitigation perspective or is expected to
have a positive cost/benefit relationship. The percentage of business that it has
reinsured is indicated in the chart below.

|                       |  |  |       |  | 
|---------------------- |  |  | ----- |  | 
|                       |  |  |       |  | 
|                       |  |  | 2003  |  | 
|                       | 
|Percentage of ceded    |  | 
|written premiums to    |  | 
|gross written premiums |  |  | 28.1% |  | 

The Companys industry is
highly competitive and it may not be able to compete successfully in the future.

The Companys industry is highly
competitive and has experienced significant price competition over most of the last
decade. In addition, a number of new well-capitalized competitors have entered the market
recently, and the Company expects to face further competition from new market entrants in
the future. The Company competes globally in the U.S. and other international markets.
According to the 2003 edition of Standard & Poors special report on the global
reinsurance industry, there are 240 reinsurance organizations operating worldwide, from 41
countries. Market share is largely concentrated within the top 25 groups, one of which is
the Company. The Company considers the 15 groups that have financial strength ratings
generally comparable to or above its rating to be its primary competitors. The leaders in
this market are Munich Re, Swiss Re, Berkshire Hathaway, Hannover Re and Employers Re.
Some of these competitors have greater financial resources than the Company does, have
been operating for longer than the Company has and have established long-term and
continuing business relationships throughout the industry, any of which can be a
significant competitive advantage. In addition, the Company expects to face further
competition in the future and may not be able to compete successfully in the future.

29

The Company is dependent
on its key personnel.

The Companys 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 the ability of the
Company to conduct business. Generally, the Company considers 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 55),
President and Chief Operating Officer, Thomas J. Gallagher (age 55), and Executive Vice
President and Chief Financial Officer, Stephen L. Limauro (age 52). Of those three
officers, the Company only has an employment contract with Mr. Taranto. That contract has
been previously filed with the SEC and was most recently amended on April 18, 2003 to
extend Mr. Tarantos term of employment from March 31, 2004 until March 31, 2006. The
Company is not aware that any of the above three officers are planning to leave the
company or retire in the near future. The Company does not maintain any key employee
insurance on any of its employees.

The value of the Companys
investment portfolio and the investment income it receives from that portfolio could
decline as a result of market fluctuations and economic conditions.

A significant portion of the
Companys investment portfolio consists of fixed income securities and a smaller
portion consists of equity securities. Both the fair market value of these assets and the
investment income from these assets fluctuate depending on general economic and market
conditions. For example, the fair market value of the Companys fixed income
securities generally increases or decreases in an inverse relationship with fluctuations
in interest rates. The fair market value of its 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 deteriorate. The net investment income that the Company realizes 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 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
the Companys securities are classified as available for sale, changes in the market
value of its securities are reflected in its financial statements. Similar treatment is
not available for liabilities. As a result, a decline in the value of the securities in
the Companys portfolio could reduce its net income or cause it to incur a loss. The
following table quantifies the portion of the Companys investment portfolio that
consists of fixed income securities, equity securities and investments that carry
prepayment risk.

30

|                                | 
|------------------------------- | 
|(Dollars in thousands)          | 
|                                | 
|Type of Security                | 
|                                | 
|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.

The Company may
experience foreign currency exchange losses.

The Companys reporting currency
is the U.S. dollar. However, the Company is comprised of entities and branches whose
functional currency is other than the U.S. dollar. Maintaining assets and liabilities in
currencies other than the functional currency of these entities or branches subjects the
Company to foreign exchange exposure. Consequently, exchange rate fluctuations derived
from relative movements in currency spot rates of assets and liabilities denominated in
currencies other than the functional currency of the entity or branch can have a material
impact on the Companys net income. The Company mitigates foreign exposure by a
general matching of the currency and duration of its assets to its corresponding operating
liabilities. During the year ended December 31, 2003, the Company wrote approximately
26.5% of its reinsurance coverages in currencies that are subject to foreign exchange
exposure. To mitigate this risk, the Company also maintains a portion of its investment
portfolio in currencies that are subject to similar foreign exchange exposure. As of
December 31, 2003, the Company maintained approximately 4% of its investment portfolio in
securities that are subject to foreign exchange exposure. During 2003, 2002, 2001, the
impact on the Companys quarterly pre-tax net income from exchange rate fluctuations
ranged from a loss of $4.0 million to a gain of $5.4 million. 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 the Companys ability to operate and any failure to comply with those laws
and regulations could have a material adverse effect on its business.

The Company is subject to extensive
regulation under U.S., state and foreign insurance laws. These laws limit the amount of
dividends that can be paid to the Company by its operating subsidiaries, impose
restrictions on the amount and type of investments that the Company can hold, prescribe
solvency standards that must be met and maintained and require the Company 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
the Companys 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, the Company cannot assure
that it will have or can maintain all required licenses and approvals or that its business
fully complies with the wide variety of applicable laws and regulations or the relevant
authoritys interpretation of the laws and regulations. If the Company does not have
the requisite licenses and approvals or does not comply with applicable regulatory
requirements, the insurance regulatory authorities could preclude or temporarily suspend
the Company from carrying on some or all activities or monetarily penalize the Company.
These types of actions could have a material adverse effect on the Companys
business. To date, no material fine, penalty or restriction has been imposed on the
Company for failure to comply with any insurance law or regulation.

31

Risk Relating to the
Companys Securities

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

The Company is a holding company,
whose most significant assets consists of the stock of its operating subsidiaries. As a
result, the Companys ability to pay dividends, interest or other payments on its
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 it. This ability is subject to general economic, financial, competitive,
regulatory and other factors beyond the Companys 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 the Company in the future, which could prevent it
from paying dividends, interest or other payments on its securities.

# 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 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 Company has also engaged in a credit default
swap, the market sensitivity of which is believed not to be material.

32

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 year including the
acquisition of interest only strips in which the 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 $6,405.9 million
investment portfolio is comprised principally of fixed maturity securities that are
subject to interest rate risk and foreign currency rate risk, and equity securities that
are subject to equity price risk. The impact of these risks in the investment portfolio is
generally mitigated by changes in the value of operating assets and liabilities and their
associated income statement impact.

Interest rate risk is the potential
change in value of the fixed maturity portfolio, including short-term investments, due to
change in market interest rates. In a declining interest rate environment, it includes
prepayment risk on the $501.5 million of mortgage-backed securities in the $5,942.9
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
fixed maturity portfolio as of December 31, 2003 and 2002 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
are 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. In general, the reduced volatility is
attributable to the Companys investment in interest only strips (see Note 1P of
Notes to Consolidated Financial Statements), the effect of which was to reduce overall
portfolio duration and therefore sensitivity to interest rate moves.

33

|                                    |  |  |      |       |    
|----------------------------------- |  |  | ---- | ----- | ---
|2003                               
|Interest Rate Shift in Basis Points
|                                    |  |  |      |       |    
|                                    |  |  | -200 | -100  | 0  
|                                    |  |  |      |       |    
|Total Market Value                  |  |  | $    | 6,818 | .2 
|Market Value Change from Base       |  | 
|(%)                                 |  |  |      | 12    | .6%
|Change in Unrealized                |  | 
|Appreciation After-tax from         |  | 
|Base ($)                            |  |  | $    | 495   | .4 

|                                    |  |  |      |       |    
|----------------------------------- |  |  | ---- | ----- | ---
|2002                               
|Interest Rate Shift in Basis Points
|                                    |  |  |      |       |    
|                                    |  |  | -200 | -100  | 0  
|                                    |  |  |      |       |    
|Total Market Value                  |  |  | $    | 5,711 | .7 
|Market Value Change from Base       |  | 
|(%)                                 |  |  |      | 15    | .7%
|Change in Unrealized                |  | 
|Appreciation After-tax from         |  | 
|Base ($)                            |  |  | $    | 504   | .2 

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 foreign operations maintains capital
in the currency of the country of its geographic location consistent with local regulatory
guidelines. Generally, the Company prefers to maintain the capital of its foreign
operations in U.S. dollar assets although this varies by regulatory jurisdiction in
accordance with market needs. Each foreign operation may conduct business in its local
currency as well as the currency of other countries in which it operates. The primary
foreign currency exposures for these foreign operations are the Canadian Dollar, the
British Pound Sterling and the Euro. The Company mitigates foreign exchange exposure by 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 primary functional foreign currency exposures
for these foreign operations are the Canadian Dollar, the Euro and the British Pound
Sterling.

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, 2003 and 2002. 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 2003 and 2002 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.

34

|                                                     |  |  |      |      |    
|---------------------------------------------------- |  |  | ---- | ---- | ---
|2003                                                
|Change in Foreign Exchange Exchange Rates in Percent
|                                                     |  |  |      |      |    
|                                                     |  |  | -20% | -10% | 0% 
|                                                     |  |  |      |      |    
|Total After-tax Foreign                              |  | 
|Exchange Exposure                                    |  |  | $    | (73  | .4)
|                                                     |  |  |      |      |    

|                                                     |  |  |      |      |    
|---------------------------------------------------- |  |  | ---- | ---- | ---
|2002                                                
|Change in Foreign Exchange Exchange Rates in Percent
|                                                     |  |  |      |      |    
|                                                     |  |  | -20% | -10% | 0% 
|                                                     |  |  |      |      |    
|Total After-tax Foreign                              |  | 
|Exchange Exposure                                    |  |  | $    | (29  | .9)
|                                                     |  |  |      |      |    

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 funds investing in such securities. The
primary objective in managing the $147.9 million 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, 2003 and 2002. The growth in exposure is
primarily due to the growth in equity portfolio. All amounts are in U.S. dollars and are
presented in millions.

|                                              |  |  |      |      |    
|--------------------------------------------- |  |  | ---- | ---- | ---
|2003                                         
|Change in Equity Values in Percent           
|                                              |  |  |      |      |    
|                                              |  |  | -20% | -10% | 0% 
|                                              |  |  |      |      |    
|Market Value of the Equity Portfolio          |  |  | $    | 118  | .3 
|After-tax Change in Unrealized   Appreciation |  | 
|                                              |  |  | $    | (19  | .2)
|                                              |  |  |      |      |    

|                                              |  |  |      |      |    
|--------------------------------------------- |  |  | ---- | ---- | ---
|2002                                         
|Change in Equity Values in Percent           
|                                              |  |  |      |      |    
|                                              |  |  | -20% | -10% | 0% 
|                                              |  |  |      |      |    
|Market Value of the Equity Portfolio          |  |  | $    | 38   | .0 
|After-tax Change in Unrealized   Appreciation |  | 
|                                              |  |  | $    | (6   | .2)
|                                              |  |  |      |      |    

# 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.

35

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

None.

# ITEM 9A. Controls and
Procedures

The Companys management, under
the supervision and with the participation of the Chief Executive Officer and Chief
Financial Officer, evaluated the effectiveness of the Companys disclosure controls
and procedures and internal control over financial reporting (each as defined in Rule
13a-15 under the Securities Exchange Act of 1934) and concluded that (i) the
Companys disclosure controls and procedures were effective as of December 31, 2003
and (ii) no change in the Companys internal control over financial reporting
occurred during the quarter ended December 31, 2003 that has materially affected, or is
reasonably likely to materially affect, the Companys internal control over financial
reporting.

# 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.

# 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 fees billed to the Company by
PricewaterhouseCoopers LLP (and its worldwide affiliates) in 2003 and 2002 are as follows:

| |    |   |                   
| | -- | - | ------------------
| |    |   |                   
| |    |   |                   
| | (1 | ) | Audit Fees        
| | (2 | ) | Audit-Related Fees
| | (3 | ) | Tax Fees          
| | (4 | ) | All Other Fees    

36

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 may be granted general pre-approval by Groups Audit
Committee.

All other fees represent an
accounting research subscription.

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

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

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

37

# PART IV

# ITEM 15. Exhibits,
Financial Statement Schedules, and Reports on Form 8-K

Financial Statements and
Schedules

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

Exhibits

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

38

# 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 18, 2004.

EVEREST REINSURANCE HOLDINGS, INC.

/s/
JOSEPH V. TARANTO Joseph V. Taranto
Chairman and Chief Executive Officer

Pursuant to the  requirements  of
the  Securities  Exchange  Act of 1934,  this report has been signed below by the
following persons on behalf of the registrant and in the capacities and on the dates
indicated.

|                       |  |  | 
|---------------------- |  |  | 
|/s/ JOSEPH V. TARANTO  |  |  | 
|Joseph V. Taranto      |  |  | 
|                       | 
|/s/ STEPHEN L. LIMAURO |  |  | 
|Stephen L. Limauro     |  |  | 
|                       | 
|/s/ KEITH T. SHOEMAKER |  |  | 
|                      
|Keith T. Shoemaker     |  |  | 

INDEX TO EXHIBITS

Exhibit
No. Page

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

| | 3.1 |  | Certificate
 of  Incorporation  of  Everest  Reinsurance   Holdings,   Inc.,
                        incorporated  herein  by  reference  to  Exhibit  4.1  to  the
 Registration                         Statement on Form S-8 (No. 333-05771)
| | --- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

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

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

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

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

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

E-1

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

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

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

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

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

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

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

| | 10.5 |  | Credit
Agreement Between Everest Reinsurance Holdings, Inc., the Lenders Named Therein and First
Union National Bank dated December 21, 1999 providing for a $150 million Senior Revolving
Credit Facility, incorporated herein by reference to Exhibit 10.30 to Everest Reinsurance
Holdings, Inc.  Form 8-K filed on December 28, 1999
| | ---- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

E-2

| | 10.6 |  | First
 Amendment to Credit  Agreement  dated as of December 21, 1999 between
                        Everest  Reinsurance  Holdings,  Inc.,  the Lenders  Named
Therein and First                         Union  National Bank,  incorporated  herein by
reference to Exhibit 10.19 to                         Everest  Re  Group,  Ltd.  Annual
 Report  on Form  10-K for the year  ended                         December 31, 2000 (the
"2000 10-K")
| | ---- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 10.7 |  | Parent
Guaranty dated February 24, 2000 made by Everest Re Group, Ltd. In favor of the Lenders
under Everest Reinsurance Holdings, Inc.s Credit Facility, incorporated herein by
reference to Exhibit 10.33 to the 1999 10-K
| | ---- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 10.8 |  | Guarantor
Consent dated December 18, 2000 made by Everest Re Group, Ltd. In favor of the Lenders
under Everest Reinsurance Holdings, Inc.s Credit Facility, incorporated herein by
reference to Exhibit 10.21 to the 2000 10-K
| | ---- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 10.9 |  | Stock
Purchase Agreement between The Prudential Insurance Company of America and Everest
Reinsurance Holdings, Inc. for the sale of common stock of Gibraltar Casualty Company
dated February 24, 2000, incorporated herein by reference to Exhibit 10.32 to the 1999
10-K
| | ---- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 10.10 |  | Amendment
 No.  1  to  Stock  Purchase   Agreement  between  The  Prudential
                        Insurance Company of America and Everest Reinsurance Holdings,
 Inc. for the                         sale of common stock of  Gibraltar  Casualty
 Company  dated August 8, 2000,                         incorporated  herein by
 reference  to Exhibit 10.1 to the Everest Re Group,                         Ltd.
Quarterly Report on Form 10-Q for the quarter ended June 30, 2000
| | ----- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 10.11 |  | Proportional
Excess of Loss Reinsurance Agreement entered into between Gibraltar Casualty Company and
Prudential Property and Casualty Insurance Company, incorporated herein by reference to
Exhibit 10.24 to the 2000 10-K
| | ----- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 10.12 |  | Guarantee
Agreement made by The Prudential Insurance Company of America in favor of Gibraltar
Casualty Company, incorporated herein by reference to Exhibit 10.25 to the 2000 10-K
| | ----- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 10.13 |  | Lease,
effective December 26, 2000 between OTR, an Ohio general partnership, and Everest
Reinsurance Company, incorporated herein by reference to Exhibit 10.26 to the 2000 10-K
| | ----- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | *10.14 |  | Amendment of Employment  Agreement by and among Everest Reinsurance Company,
                        Everest Reinsurance  Holdings,  Inc., Everest Re Group, Ltd.,
Everest Global                         Services,  Inc. and Joseph V.  Taranto,  dated
March 30, 2001,  incorporated                         herein by  reference  to Exhibit
 10.1 to Everest Re Group,  Ltd.  Report on                         Form 10-Q for the
quarter  ended March 31,  2001 (the  "first  quarter  2001                         10-Q")
| | ------ |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

E-3

| | *10.15 |  | Amendment of Employment  Agreement by and among Everest Reinsurance Company,
                        Everest Reinsurance  Holdings,  Inc., Everest Re Group, Ltd.,
Everest Global                         Services,  Inc. and Joseph V.  Taranto,  dated
April 20, 2001,  incorporated                         herein by reference to Exhibit 10.2
to the first quarter 2001 10-Q.
| | ------ |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | *10.16 |  | Amendment of Change of Control  Agreement by and among  Everest  Reinsurance
                        Company,  Everest  Reinsurance  Holdings,  Inc.,  Everest  Re
 Group,  Ltd.,                         Everest Global Services,  Inc. and Joseph V.
Taranto,  dated March 30, 2001,                         incorporated  herein by reference
to Exhibit 10.3 to the first  quarter 2001                         10-Q
| | ------ |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 10.17 |  | Second
Amendment to Credit Agreement dated as of November 21, 2002 between Everest Reinsurance
Holdings, Inc., the Lenders Named Therein and Wachovia Bank, National Association
(formerly known as First Union National Bank), incorporated herein by reference to
Exhibit 10.31 to Everest Re Group, Ltd. Annual Report on Form 10-K for the year ended
December 31, 2002
| | ----- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | *10.18 |  | Amendment
of Employment  Agreement by and among Everest Reinsurance Company,
                        Everest  Reinsurance  Holdings,  Inc., Everest Re Group Ltd.,
Everest Global                         Services  Inc. and Joseph V.  Taranto,  dated
April 18,  2003,  incorporated                         herein by  reference  to Exhibit
 10.1 to Everest  Re Group,  Ltd.  Form 8-K                         filed on April 21,
2003
| | ------ |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 10.19 |  | Credit
Agreement, dated October 10, 2003, between Everest Reinsurance Holdings, Inc., the
lenders named therein and Wachovia Bank, National Association, as administrative agent,
providing for a $150.0 million revolving credit facility, incorporated herein by
reference to Exhibit 10.1 to Everest Re Group, Ltd. Quarterly Report on Form 10-Q for the
quarter ended September 30, 2003
| | ----- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 23.1 |  | Consent
of PricewaterhouseCoopers LLP
| | ---- |  | -------------------------------------

| | 31.1 |  | Section
302 Certification of Joseph V. Taranto
| | ---- |  | ----------------------------------------------

| | 31.2 |  | Section
302 Certification of Stephen L. Limauro
| | ---- |  | -----------------------------------------------

E-4

| | 32.1 |  | Section
906 Certification of Joseph V. Taranto and Stephen L. Limauro
| | ---- |  | ---------------------------------------------------------------------

_________________

* Management contract or compensatory
plan or arrangement.

E-5

|                                                                                                             |  |      
|------------------------------------------------------------------------------------------------------------ |  | -----
|                                                                                                             |  | Pages
|Everest Reinsurance Holdings, Inc.                                                                           | 
|Report of Independent Auditors on Financial Statements and Schedules                                         |  | F-2  
|Consolidated Balance Sheets at December 31, 2003 and 2002                                                    |  | F-3  
|Consolidated Statements of Operations and Comprehensive Income for the                                       | 
|Years Ended December 31, 2003, 2002 and 2001                                                                 |  | F-4  
|Consolidated Statements of Changes in Shareholders Equity for the Years Ended                               | 
|December 31, 2003, 2002 and 2001                                                                             |  | F-5  
|Consolidated Statements of Cash Flows for the Years Ended December 31, 2003,                                 | 
|2002 and 2001                                                                                                |  | F-6  
|Notes to Consolidated Financial Statements                                                                   |  | F-7  
|                                                                                                            
|Schedules                                                                                                   
|I       Summary of Investments Other Than Investments in Related Parties at                                  |  |      
|December 31, 2003                                                                                            |  | S-1  
|II     Condensed Financial Information of Registrant:        Balance Sheets as of December 31, 2003 and 2002 |  | S-2  
|Statements of Operations for the Years Ended December 31, 2003, 2002,              and 2001                  |  | S-3  
|Statements of Cash Flows for the Years Ended December 31, 2003, 2002                                         | 
|and 2001                                                                                                     |  | S-4  
|III    Supplementary Insurance Information as of December 31, 2003 and                                       |  |      
|2002 and for the Years Ended December 31, 2003, 2002 and 2001                                                |  | S-5  
|IV    Reinsurance for the Years Ended December 31, 2003, 2002 and 2001                                       |  | S-6  

F-1

# Report of Independent
Auditors

To the Board of Directors
and Stockholderof Everest Reinsurance Holdings, Inc.

In our opinion, the consolidated
financial statements listed in the accompanying index present fairly, in all material
respects, the financial position of Everest Reinsurance Holdings, Inc. and its
subsidiaries at December 31, 2003 and 2002, and the results of their operations and their
cash flows for each of the three years in the period ended December 31, 2003 in conformity
with accounting principles generally accepted in the United States of America. In
addition, in our opinion, the financial statement schedules listed in the accompanying
index present fairly, in all material respects, the information set forth therein when
read in conjunction with the related consolidated financial statements. These financial
statements and financial statement schedules are the responsibility of the Companys
management; our responsibility is to express an opinion on these financial statements and
financial statement schedules based on our audits. We conducted our audits of these
statements in accordance with auditing standards generally accepted in the United States
of America, which 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 LLPNew
York, New YorkJanuary 29, 2004

F-2

EVEREST
REINSURANCE HOLDINGS, INC.

CONSOLIDATED
BALANCE SHEETS

|                                                                             |  | 
|---------------------------------------------------------------------------- |  | 
|                                                                             |  | 
|                                                                             | 
|(Dollars in thousands, except par value per share)                           |  | 
|                                                                             | 
|ASSETS:                                                                      |  | 
|Fixed maturities - available for sale, at market value                       |  | 
|(amortized cost: 2003, $5,649,269; 2002, $4,569,844)                         |  | 
|Equity securities, at market value (cost:  2003, $139,911; 2002, $56,841)    |  | 
|Short-term investments                                                       |  | 
|Other invested assets (cost: 2003, $59,183 ; 2002, $42,338)                  |  | 
|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                                                           |  | 
|Other assets                                                                 |  | 
|                                                                             | 
|TOTAL ASSETS                                                                 |  | 
|                                                                             | 
|LIABILITIES:                                                                 |  | 
|Reserve for losses and adjustment expenses                                   |  | 
|Unearned premium reserve                                                     |  | 
|Funds held under reinsurance treaties                                        |  | 
|Losses in the course of payment                                              |  | 
|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                                             |  | 
|Revolving credit agreement borrowings                                        |  | 
|Company-obligated mandatorily redeemable preferred securities                |  | 
|of subsidiary trusts holding solely subordinated debentures ("trust          |  | 
|preferred securities")                                                       |  | 
|Interest accrued on debt and borrowings                                      |  | 
|Other liabilities                                                            |  | 
|                                                                             | 
|Total liabilities                                                            |  | 
|                                                                             | 
|STOCKHOLDERS' EQUITY:                                                        |  | 
|Common stock, par value: $0.01; 200 million shares authorized;               |  | 
|1,000 shares issued in 2003 and 2002                                         |  | 
|Additional paid-in capital                                                   |  | 
|Treasury shares, at cost; 0.5 million in 2003 and 0.5 million shares in 2002 |  | 
|Accumulated other comprehensive income, net of                               |  | 
|deferred income taxes of  $117.5 million in 2003 and $75.1                   |  | 
|million in 2002                                                              |  | 
|Retained earnings                                                            |  | 
|                                                                             | 
|Total stockholders' equity                                                   |  | 
|                                                                             | 
|TOTAL LIABILITIES AND STOCKHOLDERS' 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)                              |  |  |                         
|                                                    | 
|REVENUES:                                           |  | 
|Premiums earned                                     |  |  |                         
|Net investment income                               |  |  |                         
|Net realized capital loss                           |  |  |                         
|Net derivative expense                              |  |  |                         
|Other (expense) income                              |  |  |                         
|                                                    | 
|Total revenues                                      |  |  |                         
|                                                    | 
|CLAIMS AND EXPENSES:                                |  | 
|Incurred losses and loss adjustment expenses        |  |  |                         
|Commission, brokerage, taxes and fees               |  |  |                         
|Other underwriting expenses                         |  |  |                         
|Distributions related to trust preferred securities |  |  |                         
|Interest expense on senior notes                    |  |  |                         
|Interest expense on credit facility                 |  |  |                         
|                                                    | 
|Total claims and expenses                           |  |  |                         
|                                                    | 
|INCOME BEFORE TAXES                                 |  |  |                         
|Income tax expense (benefit)                        |  |  |                         
|                                                    | 
|NET INCOME                                          |  |  | $                       
|                                                    | 
|Other comprehensive 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 STOCKHOLDERS EQUITY

|                                             |  |  |                         
|-------------------------------------------- |  |  | ------------------------
|                                             |  |  | Years Ended December 31,
|                                             | 
|(Dollars in thousands, except share amounts) |  |  |                         
|                                             | 
|COMMON STOCK (shares outstanding):           |  | 
|Balance, beginning of period                 |  |  |                         
|Issued during the period                     |  |  |                         
|                                             | 
|Balance, end of period                       |  |  |                         
|                                             | 
|ADDITIONAL PAID IN CAPITAL:                  |  | 
|Balance, beginning of period                 |  |  |                         
|Tax benefit from exercised stock options     |  |  |                         
|                                             | 
|Balance, end of period                       |  |  |                         
|                                             | 
|ACCUMULATED OTHER COMPREHENSIVE INCOME,      |  | 
|NET OF DEFERRED INCOME TAXES:                |  | 
|Balance, beginning of period                 |  |  |                         
|Net increase during the period               |  |  |                         
|                                             | 
|Balance, end of period                       |  |  |                         
|                                             | 
|RETAINED EARNINGS:                           |  | 
|Balance, beginning of period                 |  |  |                         
|Net income                                   |  |  |                         
|                                             | 
|Balance, end of period                       |  |  |                         
|                                             | 
|TREASURY SHARES AT COST:                     |  | 
|Balance, beginning of period                 |  |  |                         
|Treasury shares acquired during the period   |  |  |                         
|                                             | 
|Balance, end of period                       |  |  |                         
|                                             | 
|TOTAL STOCKHOLDERS' EQUITY, END OF PERIOD    |  |  | $                       
|                                             | 

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

F-5

EVEREST
REINSURANCE HOLDINGS, INC.

CONSOLIDATED
STATEMENTS OF CASH FLOWS

|                                                                   |  |  |                         
|------------------------------------------------------------------ |  |  | ------------------------
|                                                                   |  |  | Years Ended December 31,
|                                                                   | 
|(Dollars in thousands)                                             |  |  |                         
|                                                                   | 
|CASH FLOWS FROM OPERATING ACTIVITIES:                              |  | 
|Net income                                                         |  |  | $                       
|Adjustments to reconcile net income  to net cash provided by       |  | 
|operating activities:                                              |  | 
|Increase in premiums receivable                                    |  |  |                         
|Decrease in funds held by reinsureds, net                          |  |  |                         
|Increase in reinsurance receivables                                |  |  |                         
|Increase in deferred tax asset                                     |  |  |                         
|Increase in reserve for losses and loss adjustment expenses        |  |  |                         
|Increase in unearned premiums                                      |  |  |                         
|(Decrease) increase decrease in other assets and liabilities       |  |  |                         
|Accrual of bond discount/amortization of bond premium              |  |  |                         
|Amortization of underwriting discount on senior notes              |  |  |                         
|Realized capital 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 in unsettled securities transactions                  |  |  |                         
|                                                                   | 
|Net cash used in investing activities                              |  |  |                         
|                                                                   | 
|CASH FLOWS FROM FINANCING ACTIVITIES:                              |  | 
|Tax benefit from exercise of stock options                         |  |  |                         
|Dividend from parent                                               |  |  |                         
|Acquisition of treasury stock                                      |  |  |                         
|Proceeds from trust preferred securities                           |  |  |                         
|Borrowings on revolving credit agreement                           |  |  |                         
|Repayments on revolving credit agreement                           |  |  |                         
|                                                                   | 
|Net cash provided by (used in) financing activities                |  |  |                         
|                                                                   | 
|EFFECT OF EXCHANGE RATE CHANGES ON CASH                            |  |  |                         
|                                                                   | 
|Net increase (decrease) in cash                                    |  |  |                         
|Cash, beginning of period                                          |  |  |                         
|                                                                   | 
|Cash, end of period                                                |  |  | $                       
|                                                                   | 
|SUPPLEMENTAL CASH FLOW INFORMATION                                 |  | 
|Cash transactions:                                                 |  | 
|Income taxes paid, net                                             |  |  | $                       
|Interest paid                                                      |  |  | $                       
|Non-Cash operating/investing transaction:                          |  | 
|Shares received from demutualization                               |  |  | $                       

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

F-6

EVEREST RE HOLDINGS, INC.

Notes to Consolidated
Financial Statements

Years Ended December
31, 2003, 2002 and 2001

# 1. Summary of
Significant Accounting Policies

A. Business and Basis of
Presentation

Everest Re Group, Ltd.
(Group), a Bermuda company with its principal executive office in Barbados,
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 generally accepted accounting
principles in the United States of America. The statements include the following domestic
and foreign direct and indirect subsidiaries of the Company: Everest Re Capital Trust
(Capital Trust) 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), Workcare, Inc and Mt. McKinley Insurance Company
(Mt. McKinley). All amounts are reported in U.S. dollars.

The preparation of financial
statements in conformity with generally accepted accounting principles in the United
States of America 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. Actual results could differ from those
estimates.

Certain balances in 2002 were
reclassified to conform to the 2003 presentation.

B. Investments

Fixed maturity investments are all
classified as available for sale. Unrealized appreciation and depreciation, as a result of
temporary changes in market value during the period, are reflected in stockholders
equity, net of income taxes in accumulated other comprehensive income. Equity
securities are carried at market value with unrealized appreciation or depreciation, as a
result of temporary changes in market value during the period, 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

F-7

through the use of pricing models
that evaluate securities relative to the U.S. Treasury yield curve, taking into account
the issue type, credit quality and cash flow characteristics of each security. For
publicly traded securities, market value is based on quoted market prices. Retrospective
adjustments are employed to recalculate the values of loan-backed and asset-backed
securities. Each acquisition lot is reviewed to recalculate the effective yield. The
recalculated effective yield is used to derive a book value as if the new yield were
applied at the time of acquisition. Outstanding principal factors from the time of
acquisition to the adjustment date are used to calculate the prepayment history for all
applicable securities. Conditional prepayment rates, computed with life to date factor
histories and weighted average maturities, are used to affect the calculation of projected
and prepayments for pass through security types. Other invested assets include limited
partnerships and rabbi trusts. Limited partnerships are valued pursuant to the equity
method of accounting, which management believes approximates market value. 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
Reinsurance Balances

The Company provides reserves for
uncollectible reinsurance balances based on managements assessment of the
collectibility of the outstanding balances. Such reserves were $33.3 million at December
31, 2003 and $31.3 million at December 31, 2002. See also Note 11.

D. Deferred Acquisition
Costs

Acquisition costs, consisting
principally of commissions and brokerage expenses and certain premium taxes and fees
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 $595.5 million, $488.4 million and $393.6 million in 2003, 2002
and 2001, 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 an LAE.

F-8

F. Premium Revenues

Written premiums are earned ratably
over the periods of the related insurance and reinsurance contracts or policies. Unearned
premium reserves are established to cover the remainder of the unexpired contract period.
Such reserves are established based upon reports received from ceding companies or
computed using pro rata methods based on statistical data. Written and earned premiums,
and the related costs, which have not yet been reported to the Company are estimated and
accrued. Premiums are net of ceded reinsurance.

G. Income Taxes

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

H. Foreign Currency

Assets and liabilities relating to
foreign operations are translated into U.S. dollars at the exchange rates in effect at the
balance sheet date; revenues and expenses are translated into U.S. dollars using average
exchange rates. Gains and losses resulting from translating foreign currency financial
statements, net of deferred income taxes, are excluded from net income and accumulated in
stockholders equity. Gains and losses resulting from foreign currency transactions
are recorded through the statement of operations.

I. Unusual Loss Events in
2001

In 2001, as a result of the terrorist
attacks at the World Trade Center, the Pentagon and on various airlines on September 11,
2001 (collectively the September 11 attacks), the Company incurred pre-tax
losses based on an estimate of ultimate exposure developed through a review of its
coverages, of $213.2 million gross of reinsurance and $55.0 million net of reinsurance.
Associated with this reinsurance were $60.0 million of pre-tax charges, predominantly from
adjustment premiums, resulting in a total pre-tax loss from the September 11 attacks of
$115.0 million. After tax recoveries relating specifically to this unusual loss event, the
net loss from the September 11 attacks totaled $75.0 million. Over 90% of the losses ceded
by the Company were pursuant to treaties, where the reinsurers obligations are
secured, which the Company believes eliminates material reinsurance collection risk.

As a result of the Enron bankruptcy
in 2001, the Company incurred losses after-tax and net of reinsurance, amounting to $18.6
million. This unusual loss reflects all of the Companys exposures to this event,
including underwriting, credit and investment.

J. Segmentation

K. Codification

The NAIC has published a codification
of statutory accounting principles, which has been adopted by the states of domicile of
the Companys U.S. operating subsidiaries with an effective date of January 1, 2001.
On January 1, 2001, significant changes to the statutory basis of accounting became
effective. The cumulative effect of these changes has been recorded as a direct adjustment
to statutory surplus. See also Note 14C.

L. Derivatives

The Company has in its product
portfolio a credit default swap, which it no longer offers. This product meets the
definition of a derivative under Statement of Financial Accounting Standards

F-9

No.    
          133, Accounting for Derivative Instruments and Hedging Activities
          (FAS 133). The Companys position in this contract is unhedged
          and is accounted for as a derivative in accordance with FAS 133. Accordingly,
          this contract is carried at fair value and is recorded in Other
          liabilities in the statement of financial position and changes in fair
          value are recorded in the statement of operations.

M. Retroactive Reinsurance

Premiums 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 actuarial determined pay out 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 actuarial determined expected pay out period. Any future
loss is recognized immediately and charged against earnings.

N. Policyholder Dividends

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

O. Application of New
Accounting Standards

In June 2001, the Financial
Accounting Standards Board (FASB) issued Statement of Financial Accounting
Standards No. 142, Goodwill and Other Intangible Assets (FAS 142).
FAS 142 established new accounting and reporting standards for acquired goodwill and other
intangible assets. It requires that an entity determine if other intangible assets have an
indefinite useful life or a finite useful life. Goodwill and those intangible assets with
indefinite useful lives are not subject to amortization and must be tested at least
annually for impairment. Those with finite useful lives are subject to amortization and
must be tested annually for impairment. This statement is effective for all fiscal
quarters of all fiscal years beginning after December 15, 2001. The Company adopted FAS
142 on January 1, 2002. The implementation of this statement did not have a material
impact on the financial position, results of operations or cash flows of the Company.

In May 2003, the FASB issued
Statement of Financial Accounting Standards No. 150, Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and Equity (FAS
150). The company adopted the accounting treatment in accordance with FAS 150, and
has reclassified its trust preferred securities as a liability in its financial statements
for the period ended June 30, 2003.

In January 2003, the 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 in a companys
financial statements. During October 2003, the FASB deferred the effective date of FIN 46
provisions for VIEs created prior to February 1, 2003 to the first reporting period ending
after December 15, 2003. During December 2003, the FASB issued FIN 46R, which replaced FIN
46. FIN 46R is effective for entities that had not adopted FIN 46 as of December 24, 2003
no later than the end of the first reporting period that ends after March 15, 2004. Upon
adoption of FIN 46R, trust preferred securities that are deemed VIEs, will be
de-consolidated with the resulting liabilities to

F-10

the trust included as a component of
long-term debt with no change in the reporting of distributions.

P. Investments 
Interest Only Strips

Commencing with the second quarter of
2003, the Company has invested in interest only strips of mortgage-backed securities
(interest only strips). These securities give the holder the right to receive
interest payments at a stated coupon rate on an underlying pool of mortgages. The interest
payments on the outstanding mortgages are guaranteed by entities generally rated AAA. The
ultimate cash flow from these investments is primarily dependent upon the average life of
the mortgage pool. Generally, as market interest rates and more specifically market
mortgage rates decline, mortgagees 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 tend 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 total market value of the interest only
strips investments was $203.8 million at December 31, 2003.

The Company accounts for its
investment in interest only strips in accordance with Emerging Issues Task Force No.
99-20, Recognition of Interest Income and Impairment on Purchases and Beneficial
Interests in Securtized 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 and determining when
these securities must be written down to fair value because of impairment. EITF 99-20
requires 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 an impairment loss. As such, the Company recorded
a pre-tax realized capital loss from impairments on its interest only strips of $25.2
million for the twelve months ended December 31, 2003.

F-11

# 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:

|                                                                                             |  |  |   |          
|-------------------------------------------------------------------------------------------- |  |  | - | ---------
|                                                                                             |  |  |   | Amortized
|(Dollars in thousands)                                                                       |  |  |   | Cost     
|                                                                                             |  |  |   |          
|                                                                                             |  |  |   |          
|As of December 31, 2003                                                                      |  | 
|Fixed maturities - available for sale                                                        |  | 
|U.S. Treasury securities and     obligations of U.S.government     agencies and corporations |  |  | $ | 167,861  
|Obligations of U.S. states and political                                                     |  | 
|subdivisions                                                                                 |  |  |   | 2,798,386
|Corporate securities                                                                         |  |  |   | 1,201,459
|Mortgage-backed securities                                                                   |  |  |   | 494,164  
|Foreign government securities                                                                |  |  |   | 646,347  
|Foreign corporate securities                                                                 |  |  |   | 341,052  
|                                                                                             |  |  |   |          
|                                                                                             |  |  |   |          
|Total fixed maturities                                                                       |  |  | $ | 5,649,269
|                                                                                             |  |  |   |          
|                                                                                             |  |  |   |          
|Equity securities                                                                            |  |  | $ | 139,911  
|                                                                                             |  |  |   |          
|                                                                                             |  |  |   |          

|                                                                                             |  |  |   |          
|-------------------------------------------------------------------------------------------- |  |  | - | ---------
|As of December 31, 2002                                                                      |  | 
|Fixed maturities - available for sale                                                        |  | 
|U.S. Treasury securities and     obligations of U.S.government     agencies and corporations |  |  | $ | 344,957  
|Obligations of U.S. states and political                                                     |  | 
|subdivisions                                                                                 |  |  |   | 2,520,597
|Corporate securities                                                                         |  |  |   | 879,592  
|Mortgage-backed securities                                                                   |  |  |   | 376,251  
|Foreign government securities                                                                |  |  |   | 249,055  
|Foreign corporate securities                                                                 |  |  |   | 199,392  
|                                                                                             |  |  |   |          
|                                                                                             |  |  |   |          
|Total fixed maturities                                                                       |  |  | $ | 4,569,844
|                                                                                             |  |  |   |          
|                                                                                             |  |  |   |          
|Equity securities                                                                            |  |  | $ | 56,841   
|                                                                                             |  |  |   |          
|                                                                                             |  |  |   |          

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.

F-12

|                                       |  | 
|-------------------------------------- |  | 
|                                       |  | 
|                                       |  | 
|                                       |  | 
|(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                                  |  | 
|                                       |  | 

Proceeds from sales of fixed maturity
investments during 2003, 2002 and 2001 were $599.9 million, $1,087.0 million and $470.6
million, respectively. Gross gains of $27.8 million, $54.9 million and $16.4 million, and
gross losses of $9.8 million, $28.9 million and $28.7 million were realized on those fixed
maturity sales during 2003, 2002 and 2001, respectively. Proceeds from sales of equity
security investments during 2003, 2002 and 2001 were $8.1 million, $ 43.0 million and
$33.4 million, respectively. Gross gains of $0.8 million, $0.9 million and $13.4 million
and gross losses of $0.0 million, $0.3 million and $0.1 million were realized on those
equity sales during 2003, 2002 and 2001, respectively.

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)                           |  |  |                         
|                                                 |  |  |                         
|                                                 |  |  |                         
|Increase (decrease) during the period            |  | 
|between the market value and cost of             |  | 
|investments carried at market value, and         |  | 
|deferred tax thereon:                            |  | 
|Fixed maturities                                 |  |  | $                       
|Equity securities                                |  |  |                         
|Other invested assets                            |  |  |                         
|Deferred taxes                                   |  |  |                         
|                                                 |  |  |                         
|                                                 |  |  |                         
|Increase in unrealized appreciation, net of      |  | 
|deferred taxes, included in shareholders 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. 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. The Companys assessments are based on the
issuers current financial position and timeliness with respect to interest and/or
principal payments as well as relevant information provided by rating agencies, investment
advisors and analysts.

F-13

The table below displays the
aggregate fair value and gross unrealized depreciation, by investment category and length
of time that individual securities have been in a continuous unrealized loss position as
of December 31, 2003:

|                           |  |                     |  |                             |   |             
|-------------------------- |  | ------------------- |  | --------------------------- | - | ------------
|                           |  |                     |  | Duration of unrealized loss
|                           |  | Less than 12 months |  | Greater than 12 months      |   | Total       
|                           |  |                     |  |                             |   |             
|                           |  |                     |  | Gross                       |   |             
|                           |  |                     |  | Unrealized                  |   |             
|(Dollars in thousands)     |  | Fair Value          |  | Depreciation                |   | Fair Value  
|                           |  |                     |  |                             |   |             
|Fixed maturity securities  | 
|U.S. government            | 
|agencies and authorities   |  | $     2,495         |  | $   (8                      | ) | $         --
|States, municipalities and | 
|                           |  |                     |  |                             |   |             
|political subdivisions     |  | 117,549             |  | (2,206                      | ) | 64,553      
|                           |  |                     |  |                             |   |             
|Foreign governments        |  | 303,713             |  | (2,060                      | ) | --          
|All other corporate        |  | 396,231             |  | (11,742                     | ) | 32,992      
|                           |  |                     |  |                             |   |             
|Total fixed maturities     |  | 819,988             |  | (16,016                     | ) | 97,545      
|                           |  |                     |  |                             |   |             
|Equity Securities          |  | --                  |  | --                          |   | 611         
|                           |  |                     |  |                             |   |             
|Total                      |  | $819,988            |  | $(16,016                    | ) | $98,156     
|                           |  |                     |  |                             |   |             

The aggregate fair value and gross
unrealized losses related to investments in an unrealized loss position as of December 31,
2003 is $918.1 million and $21.3 million, respectively. The $16.0 million of unrealized
losses related to securities that have been in an unrealized loss position for one year or
less and were primarily comprised of highly rated government, municipal and corporate
bonds. The unrealized losses are primarily related to the general movements in interest
rates throughout the year. Each security when evaluated individually has an immaterial
impact on the Companys financial position, results of operations and cash flow.

The $5.3 million of unrealized losses
related to securities that have been in an unrealized loss position for one year or more
relate primarily to two collateralized debt obligations where the Company has a mid-level
tranche position in each security. Given that the Companys position in each security
is adequately collateralized, impairment was not warranted.

F-14

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

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

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

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

The net realized capital losses for
2003 include $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 in accordance with EITF 99-20. Net realized losses for 2002 and 2001
included $79.7 million and $16.7 million relating to write-downs in the value of
securities deemed to be impaired on another than temporary basis.

Securities with a carrying value
amount of $755.1 million at December 31, 2003 were on deposit with various state or
governmental insurance departments in compliance with insurance laws.

During 2000, the Company entered into
a credit swap derivative contract, which provides credit default protection on a portfolio
of referenced securities. Due to changing credit market conditions and defaults, the
Company recorded net after-tax losses from this contract of $0.0 million and $2.3 million
and $4.6 million in 2003, 2002 and 2001, respectively, to reflect it at fair value, with
the 2001 losses principally attributable to the Companys exposure to the Enron
bankruptcy. As of December 31, 2003, there is no remaining maximum after-tax net loss
exposure under this contract.

The Companys position in this
contract is unhedged and is accounted for as a derivative in accordance with FAS 133.
Accordingly, this contract is carried at fair value with changes in fair value recorded in
the statement of operations.

F-15

# 3. Reserves for Losses
and LAE

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

|                              |  |  |                         
|----------------------------- |  |  | ------------------------
|                              |  |  |                         
|                              |  |  | Years Ended December 31,
|                              |  |  |                         
|(Dollar values in thousands)  |  |  |                         
|                              |  |  |                         
|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     |  |  |                         
|                              |  |  |                         
|Net balance at December 31    |  |  |                         
|Plus reinsurance recoverables |  |  |                         
|                              |  |  |                         
|Balance at December 31        |  |  | $                       
|                              |  |  |                         

Gross loss and LAE reserves totaled
$6,227.1 million at December 31, 2003, $4,875.2 million at December 31, 2002, and $4,274.3
million at December 31, 2001. The increase in 2003 is primarily attributable to increased
earned premiums, net prior period reserve adjustments in select areas and normal
variability in claim settlement. The increase in 2002 was primarily attributable to
increased earned premiums, modest reserve strengthening in select areas and normal
variability in claim settlements.

Reinsurance receivables totaled
$2,402.5 million at December 31, 2003, $1,840.1 million at December 31, 2002, and $1,471.4
million at December 31, 2001, with the changes in 2003 consisting of the increase in
reinsurance receivables reflecting an additional $85.0 million cession under the 2000
accident year aggregate excess of loss element of the Companys corporate
retrocessional program and $81.1 million losses ceded as part of a reinsurance agreement
between Mt. McKinley and Prupac. At December 31, 2003, $1,156.6 million, or 48.1% was
receivable from Bermuda Re, $494.5 million, or 20.6% was receivable from subsidiaries of
London Reinsurance Group. These receivables are effectively secured 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,
$160.0 million, or 6.7% was receivable from the Prudential Property and Casualty Insurance
Company of Indiana (Prupac) and $145.0 million, or 6.0% was receivable from
Continental Insurance Company (Continental), which is partially secured by
funds held arrangements. No other retrocessionaire accounted for more than 5% of the
Companys receivables.

Prior year incurred losses increased
by $229.0 million and $119.2 million in 2003 and 2002, respectively. Prior year incurred
losses decreased $5.2 million in 2001. The increases were the result of modest reserve
strengthening in select areas, most notably in directors and officers
(D&O), surety and workers compensation lines, and with respect to
asbestos exposures.

F-16

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

The Companys reserves include
an estimate of the Companys ultimate liability for A&E claims 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) potential for an asbestos
or environmental claim to involve many insurance providers over many policy periods; (f)
long reporting delays, both from insureds to insurance companies and from ceding companies
to reinsurers; (g) historical data on A&E losses, which is more limited and variable
than historical information on other types of casualty claims; (h) questions concerning
interpretation and application of insurance and reinsurance coverage; and (i) 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 recently that further compound the
difficulty in estimating the Companys liability. These developments include: (a)
continued growth in the number of claims filed, in part reflecting a much more aggressive
plaintiff bar; (b) a disproportionate percentage of claims filed by individuals with no
functional injury from asbestos, claims with 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 the negotiation of bankruptcy plans); (d) the growth in claim filings against
defendants formerly regarded as peripheral; (e) the concentration of claims in
a small number of states that favor plaintiffs; (f) the growth in the number of claims
that might impact the general liability portion of insurance policies rather than the
product liability portion; (g) responses in which specific courts have adopted measures to
ameliorate the worst procedural abuses; (h) an increase in settlement values being paid to
asbestos claimants; and (i) the potential that the U. S. Congress and state legislatures
may adopt legislation to address the asbestos litigation issue.

Management believes that these
uncertainties and factors continue to render reserves for A&E losses significantly
less subject to traditional actuarial analysis than are reserves for other types of
losses. Given these uncertainties; management believes that no meaningful range for such
ultimate losses can be established. 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. In connection with the acquisition of Mt. McKinley, which
has significant exposure to A&E claims, Prupac, a subsidiary of The Prudential,
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 Prupacs obligations to Mt. McKinley. Through
December 31, 2003, cessions under this reinsurance agreement have reduced the available
remaining limits to $0.0 million net of coinsurance.

F-17

The following table shows the
development of prior year A&E reserves on both a gross and net of retrocessional basis
for the years ended December 31, 2003, 2002 and 2001:

|                       |  |  |  
|---------------------- |  |  | -
|(Dollars thousands)    |  |  |  
|                       |  |  |  
|                       |  |  |  
|Gross basis            |  | 
|Beginning of reserves  |  |  | $
|Incurred losses        |  |  |  
|Paid losses            |  |  |  
|                       |  |  |  
|End of period reserves |  |  | $
|                       |  |  |  
|Net basis              |  | 
|Beginning of reserves  |  |  | $
|Incurred losses        |  |  |  
|Paid losses            |  |  |  
|                       |  |  |  
|End of period reserves |  |  | $
|                       |  |  |  

At December 31, 2003, the gross
reserves for A&E losses were comprised of $123.1 million representing case reserves
reported by ceding companies, $109.1 million representing additional case reserves
established by the Company on assumed reinsurance claims, $251.3 million representing case
reserves established by the Company on direct excess insurance claims, including Mt.
McKinley, and $281.8 million representing IBNR reserves.

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
          $103.9 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 acquisition. 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 insurance exposures and reserves to Bermuda Re.

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, results of
operations and cash flows.

F-18

# 4. Credit Line

Effective October 10, 2003, Holdings
entered into a new 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
Credit Facility. Wachovia Bank is the administrative agent for the Credit
Facility. The Credit Facility is used for liquidity and general corporate purposes. The
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 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 plus 0.5% per annum. The amount of margin and the
fees payable for the Credit Facility depend upon the Companys senior unsecured debt
rating.

The Credit Facility requires the
Company to maintain a debt to capital ratio of not greater than 0.35 to 1 and to maintain
a minimum interest coverage ratio of 2.5 to 1 as well as 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. As of December 31, 2003, the Company was in
compliance with these covenants. During the year ended December 31, 2003, the Company made
no payments on and had no borrowings under the Credit Facility. During the years ended
December 31, 2002 and 2001, the Company made payments on the Credit Facility of $80.0
million and $152.0 million, respectively. During the years ended December 31, 2002 and
2001, the Company had new Credit Facility borrowings of $45.0 million and $22.0 million,
respectively. As of December 31, 2003 and 2002, the Company had outstanding Credit
Facility borrowings of $70.0 million. Interest expense incurred in connection with these
borrowings was $1.4 million, $3.5 million and $7.1 million for the years ended December
31, 2003, 2002 and 2001, respectively.

# 5. Senior Notes

On March 14, 2000, the Company
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 8.5% senior notes due March 15,
2005. Interest expense incurred in connection with these senior notes was $38.9 million,
for the years ended December 31, 2003, 2002, and 2001.

# 6. Trust Preferred
Securities

Capital Trust is a wholly-owned
finance subsidiary of the Company. The Company considers that the mechanisms and
obligations relating to the trust preferred securities, taken together, constitute a full
and unconditional guarantee by the Company of Capital Trusts payment obligation with
respect to the 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.

F-19

In addition, the terms of the
Companys Credit Facility require Everest Re, the Companys principal insurance
subsidiary, to maintain a certain statutory surplus level.  At December 31, 2003,
$1,045.8 million of the $1,546.9 million in net assets of the Companys consolidated
subsidiaries were subject to the foregoing regulatory restrictions.

In November 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 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 the Company that will be held in trust by the property
trustee for the benefit of the holders of the trust preferred securities. The Company used
the proceeds from the sale of the junior subordinated debt for general corporate purposes
and made capital contributions to its operating subsidiaries.

The Company may elect to redeem the
junior subordinated debt securities, in whole or in part, at any time after November 14,
2007. If such an early redemption occurs, Capital Trusts outstanding trust preferred
securities would also be proportionately redeemed. If there is no early redemption,
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.

Distributions on the trust preferred
securities are cumulative and pay quarterly in arrears. Distributions relating to the
trust preferred securities for the year ended December 31, 2003 and 2002 were $16.5
million and $2.1 million, respectively.

# 7. Letters of Credit

The Company has arrangements
available for the issuance of letters of credit, which letters are generally
collateralized by the Companys cash and investments. Under these arrangements, at
December 31, 2003 and 2002, letters of credit for $104.3 million and $67.1 million,
respectively, were issued and outstanding, generally supporting reinsurance provided by
the Companys non-U.S. operations. The following table summarizes the Companys
letters of credit as of December 31, 2003.

|                  |  |  |           
|----------------- |  |  | ----------
|                  |  |  |           
|Bank              |  |  | Commitment
|                  |  |  |           
|Citibank (London) |  |  | Individual
|                  |  |  | Individual
|                  |  |  | Individual
|                  |  |  | Individual
|                  |  |  |           
|                  |  |  |           
|                  |  |  |           

# 8. Trust Agreements

The Company has established trust
agreements for non-affiliates, which are collateralized by the Companys investments
for the benefit of ceding companies. At December 31, 2003, the total amount of the trusts
was $21.7 million.

F-20

# 9. Operating Lease
Agreements

The future minimum rental
commitments, exclusive of cost escalation clauses, at December 31, 2003 for all of the
Companys operating leases with remaining non-cancelable terms in excess of one year
are as follows:

|                       | 
|---------------------- | 
|(Dollars in thousands) | 
|2004                   | 
|2005                   | 
|2006                   | 
|2007                   | 
|2008                   | 
|Thereafter             | 
|                       | 
|Net commitments        | 
|                       | 

All of these leases, the expiration
terms of which range from 2004 to 2013, are for the rental of office space. Rental
expense, net of sublease rental income, was $6.5 million, $6.5 million and $5.6 million
for 2003, 2002 and 2001, respectively.

# 10. Income Taxes

All the income of the U.S.
subsidiaries is subject to the applicable federal, foreign, state and local taxes on
corporations. The provision for income taxes in the consolidated statement of income has
been determined by reference to the individual income of each entity and the 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)                    |  |                          |  
|                                          |  |                          |  
|Current tax:                              |  |                         
|U.S                                       |  |                          | $
|Foreign                                   |  |                          |  
|                                          |  |                          |  
|Total current tax                         |  |                          |  
|Total deferred U.S. tax (benefit) expense |  |                          |  
|                                          |  |                          |  
|Total income tax expense (benefit)        |  |                          | $
|                                          |  |                          |  

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

|                                              |  |  |                         
|--------------------------------------------- |  |  | ------------------------
|                                              |  |  |                         
|                                              |  |  | Years Ended December 31,
|                                              |  |  |                         
|                                              |  |  | 2003                    
|                                              |  |  |                         
|                                              |  |  |                         
|Federal income tax rate                       |  |  |                         
|Increase (reduction) in taxes resulting from: |  | 
|Tax exempt income                             |  |  |                         
|Other, net                                    |  |  |                         
|                                              |  |  |                         
|Effective tax rate                            |  |  |                         
|                                              |  |  |                         
|                                              |  |  |                         

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

F-21

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

|                                                        |  | 
|------------------------------------------------------- |  | 
|                                                        |  | 
|                                                        |  | 
|                                                        |  | 
|(Dollars in thousands)                                  |  | 
|                                                        |  | 
|Deferred tax assets:                                    |  | 
|Reserve for losses and LAE                              |  | 
|Unearned premium reserve                                |  | 
|Foreign currency translation                            |  | 
|Impairments                                             |  | 
|Deferred compensation                                   |  | 
|Capital loss carryforward                               |  | 
|Net operating loss and 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 $6.1 million expiring in 2006, $7.8
million expiring in 2007 and $7.9 million expiring in 2008. In addition, for U.S. income
tax purposes the Company has $9.3 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 $3.5 million and $0.7
million related to compensation expense deductions for stock options exercised in 2003 and
2002, respectively, are reflected in the change in stockholders equity in
additional paid in capital.

# 11. 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 and funds
held, under these agreements. See also Note 1C.

Effective January 1, 2003 and 2002,
Everest Re and Bermuda Re entered into Quota Share Reinsurance Agreements, for what
management believes to be arms-length consideration, whereby Everest Re cedes 25%
and 20% of the net retained liability on all new and renewal policies written during the
term of these agreements, respectively.



F-22

Effective January 1, 2002, Everest Re, Everest National and
Everest Security entered into an excess of loss reinsurance agreement with Bermuda Re, for
what management believes to be arms-length consideration, covering workers
compensation losses occurring on and after January 1, 2002, as respects new, renewal and
in force policies effective on that date. Bermuda Re is liable for any loss exceeding
$100,000 per occurrence, with its liability not to exceed $150,000 per occurrence.

Effective January 1, 2003, Everest Re
and Bermuda Re entered into a Quota Share Reinsurance Agreement for what management
believes to be arms-length consideration, whereby Everest Re cedes 50% of its Canadian
branch property business retained liability on all new and renewal policies written during
the term of this agreement.

Effective October 1, 2001, Everest Re
and Bermuda Re entered into a loss portfolio transfer reinsurance agreement which are
accounted for on a retroactive basis, whereby Everest Re transferred, for what management
believes to be arms-length consideration, its Belgium branches net insurance
exposures and reserves, including allocated and unallocated loss adjustment expenses to
Bermuda Re.

Effective September 19, 2000, Mt.
McKinley and Bermuda Re entered into a loss portfolio transfer reinsurance agreement which
are accounted for on a retroactive basis, whereby Mt. McKinley transferred, for what
management believes to be arms-length consideration, all of its net insurance
exposures and reserves, including allocated and unallocated loss adjustment expenses to
Bermuda Re.

The following table summarizes the
premiums and losses ceded by the Company to Bermuda Re:

|                       |  |  |                         
|---------------------- |  |  | ------------------------
|                       |  |  | Years Ended December 31,
|                       |  |  |                         
|(Dollars in thousands) |  |  |                         
|                       |  |  |                         
|Ceded written premiums |  |  | $                       
|Ceded earned premiums  |  |  |                         
|Ceded losses and LAE   |  |  | $                       

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 2001 and 2002, the
Company ceded $164.0 million and $11.0 million of losses, respectively, to the 2001 cover,
reducing the limit available under the contract to $0.0 million. During 2002 and 2003, the
Company ceded $90.0 million and $85.0 million of losses, respectively, to the 2000 cover,
reducing the limit available under the contract to $0.0 million. During 2001, the Company
ceded $105.0 million of losses to the 1999 cover, reducing the limit available under the
contract to $0.0 million. The Company has not purchased similar coverage for the period
subsequent to December 31, 2001.

F-23

In addition, the Company has coverage
under an aggregate excess of loss reinsurance agreement provided by Prupac, 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 $81.1 million,
$56.7 million and $22.2 million of cessions under this reinsurance for years ended
December 31, 2003, 2002 and 2001, respectively, exhausting the limit available under this
contract.

In connection with the Mt. McKinley
acquisition, Prupac also provided excess of loss reinsurance for 100% of the first $8.5
million of loss with respect to certain of Mt. McKinleys retrocessions and
potentially uncollectible reinsurance coverage. There were no cessions under this
reinsurance during the periods ending December 31, 2003 and 2002, maintaining the limit
available under the contract at $2.4 million. There was $3.6 million of cessions under
this reinsurance during the period ended December 31, 2001.

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
          $103.9 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 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.

Written and earned premiums are
comprised of the following:

|                       |  |  |                         
|---------------------- |  |  | ------------------------
|                       |  |  |                         
|                       |  |  | Years Ended December 31,
|                       |  |  |                         
|(Dollars in thousands) |  |  |                         
|                       |  |  |                         
|Direct                 |  |  | $                       
|Assumed                |  |  |                         
|Ceded                  |  |  |                         
|                       |  |  |                         
|Net written premiums   |  |  | $                       
|                       |  |  |                         
|Premiums earned:       |  | 
|Direct                 |  |  | $                       
|Assumed                |  |  |                         
|Ceded                  |  |  |                         
|                       |  |  |                         
|Net premiums earned    |  |  | $                       
|                       |  |  |                         

F-24

The amounts deducted from losses and
LAE incurred for net reinsurance recoveries were $761.0 million, $486.1 million and $619.4
million for the years ended December 31, 2003, 2002 and 2001, respectively.

As of December 31, 2003, the Company
carried as an asset $2,402.5 million in reinsurance receivables with respect to losses
ceded. Of this amount, $1,156.6 million, or 48.1% was receivable from Bermuda Re, $494.5
million, or 20.6% was receivable from subsidiaries of London Reinsurance Group
(London Life), $160.0 million, or 6.7% was receivable from Prupac and $145.0
million, or 6.0%, was receivable from Continental. As of December 31, 2002, the Company
carried as an asset $1,840.1 million in reinsurance receivables with respect to losses
ceded. Of this amount, $735.2 million, or 40.0% was receivable from Bermuda Re, $440.0
million, or 23.9% was receivable from subsidiaries of London Life and $145.0 million, or
7.9% was receivable from Continental. 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 and Continental 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 and reduces the liability account as
payments become due. As of December 31, 2003, such funds had reduced the
Companys net exposure to London Life to $204.9 million, effectively 100% of which
has been secured by letters of credit, and its exposure to Continental to $53.3 million.
As of December 31, 2002, such funds had reduced the Companys net exposure to
London Life to $190.2 million, 100% of which has been secured by letters of credit and its
exposure to Continental to $60.9 million.

F-25

# 12. Comprehensive Income

The components of comprehensive
income for the periods ended December 31, 2003, 2002 and 2001 are shown in the following
table:

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

F-26

The following table shows the
components of the change in accumulated other comprehensive income for the years ended
December 31, 2003 and 2002.

|                                          |  |  |   |        
|----------------------------------------- |  |  | - | -------
|(Dollars in thousands)                    |  |  |   | 2003   
|                                          |  |  |   |        
|                                          |  |  |  
|Beginning balance of accumulated other    |  | 
|comprehensive income                      |  |  |   |        
|                                          |  |  |   |        
|Beginning balance of foreign currency     |  | 
|translation adjustments                   |  |  | $ | (9,220 
|Current period change in foreign currency |  | 
|translation adjustments                   |  |  |   | 21,082 
|                                          |  |  |  
|Ending balance of foreign currency        |  | 
|translation adjustments                   |  |  |   | 11,862 
|                                          |  |  |   |        
|Beginning balance of unrealized gains on  |  | 
|securities                                |  |  |   | 147,376
|Current period change in unrealized gains |  | 
|on securities                             |  |  |   | 49,067 
|                                          |  |  |   |        
|Ending balance of unrealized gains on     |  | 
|securities                                |  |  |   | 196,443
|                                          |  |  |   |        
|Current period change in accumulated      |  | 
|other comprehensive income                |  |  |   |        
|                                          |  |  |   |        
|Ending balance of accumulated other       |  | 
|comprehensive income                      |  |  |   |        
|                                          |  |  |   |        

13.
Employee Benefit Plans

A. Defined Benefit
Pension Plans

The Company maintains both qualified
and non-qualified defined benefit pension plans for its U.S. employees. Generally, the
Company computes the benefits based on average earnings over a period prescribed by the
plans and credited length of service. The Companys non-qualified defined benefit
pension plan, effected 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 $7.7
million and $1.2 million to the qualified, and non-qualified plans, respectively, in 2003
and $3.2 million and $2.0 million to the qualified and non-qualified plans, respectfully,
in 2002. The change in the accumulated pension benefit obligation reflects the net effect
of amendments made to the plans during 2002. Pension expense for the Companys plans
for the years ended December 31, 2003, 2002 and 2001 were $3.7 million, $3.6 million and
$1.6 million, respectively.

F-27

The following table summarizes the
status of these plans:

|                                               |  | 
|---------------------------------------------- |  | 
|                                               |  | 
|                                               |  | 
|                                               |  | 
|(Dollars in thousands)                         |  | 
|                                               |  | 
|Change in projected benefit obligation:        |  | 
|Benefit obligation at beginning of year        |  | 
|Service cost                                   |  | 
|Interest cost                                  |  | 
|Actuarial gain                                 |  | 
|Plan change                                    |  | 
|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                          |  | 
|                                               |  | 
|Prepaid (accrued) pension cost                 |  | 
|                                               |  | 

Plan assets are comprised of shares
in investment trusts with approximately 71% and 29% of the underlying assets consisting of
equity securities and fixed maturities, respectively.

Net periodic pension cost included
the following components:

|                                                |  |  |                         
|----------------------------------------------- |  |  | ------------------------
|                                                |  |  |                         
|                                                |  |  | Years Ended December 31,
|                                                |  |  |                         
|(Dollars in thousands)                          |  |  |                         
|                                                |  |  |                         
|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
2003, 2002 and 2001 were 6.0%, 6.75% and 7.0%, respectively. The rate of compensation
increase used to determine the actuarial present value of the projected benefit obligation
for 2003, 2002 and 2001 was 4.50%. The expected long-term rate of return on plan assets
for 2003, 2002 and 2001 was 9.0%.

F-28

Amounts recognized in the statement
of financial position consist of:

|                                       |  |                 
|-------------------------------------- |  | ----------------
|                                       |  | Pension Benefits
|                                       |  |                 
|                                       |  | 2003            
|                                       |  |                 
|Prepaid/(accrued) benefit cost         |  | $ 1,317         
|Intangible assets                      |  | 245             
|Accumulated other comprehensive income |  | (245            
|                                       |  |                 
|Net amount recognized                  |  | $ 1,317         
|                                       |  |                 

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 $0.8 million, $0.7 million
and $0.6 million for 2003, 2002 and 2001, respectively.

In addition, the Company maintains
several defined contribution pension plans covering non-U.S. employees. Each non-U.S.
office (Canada, London, Belgium, Hong Kong 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 2% to 12%. The contributions are generally used to
purchase pension benefits from local insurance providers. The Companys incurred
expenses related to these plans were $0.4 million for 2003, 2002 and 2001, respectively.

The following table summarizes the
Accumulated Benefit Obligation for years ended December 31, 2003, and 2002, respectively.

|                                     |  |              | 
|------------------------------------ |  | ------------ | 
|(Dollars in thousands)               |  | Pension Plan | 
|                                     |  |              | 
|Accumulated Benefit Obligation- 2003 |  | $30,762      | 
|Accumulated Benefit Obligation- 2002 |  | $23,041      | 

The asset allocation percentages for
the qualified and non-qualified benefit plans at December 31, 2003 and 2002, by asset
category are as follows:

|                  |  |                        |        |                           
|----------------- |  | ---------------------- | ------ | --------------------------
|                  |  | Qualified Benefit Plan |        | Non-Qualified Benefit Plan
|                  |  |                        |        |                           
|Asset Category:   |  |                        | 2003   |                           
|                  |  |                        |        |                           
|Equity securities |  |                        | 70.59% |                           
|Debt securities   |  |                        | 28.66% |                           
|Other             |  |                        | 0.75%  |                           
|                  |  |                        |        |                           
|Total             |  |                        | 100.0% |                           

F-29

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
between $1.0 million and $2.0 million to the qualified plan in 2004.

B. Post-retirement Plan

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

A health care inflation rate for
pre-medicare claims of 12% in 2003 was assumed to change to 11% in 2004; and then decrease
one percentage point annually to 5% in 2010, and then remain at that level.

A health care inflation rate for
post-medicare claims of 8% in 2003 was assumed to change to 7% in 2004; and then decrease
one percentage point annually to 5% in 2006, 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)         |  | 
|                               |  | 
|                               |  | 
|a. Effect on total service and |  | 
|interest cost components       |  | 
|b. Effect on accumulated       |  | 
|postretirement                 |  | 

Pension expense for this plan for the
year ended December 31, 2003 was $0.7 million.

F-30

The following table summarizes the
status of these plans:

|                                        |  |                         
|--------------------------------------- |  | ------------------------
|                                        |  | Years Ended December 31,
|                                        |  |                         
|(Dollars in thousands)                  |  |                         
|                                        |  |                         
|Change in projected benefit obligation: |  |                         
|Benefit obligation at beginning of year |  |                         
|Initial Accrual for Retiree Health Plan |  |                         
|Service cost                            |  |                         
|Interest cost                           |  |                         
|Assumption change                       |  |                         
|Liability loss                          |  |                         
|Actuarial loss (gain)                   |  |                         
|Benefits paid                           |  |                         
|                                        |  |                         
|Benefit obligation at end of year       |  |                         
|                                        |  |                         
|Funded status                           |  |                         
|Unrecognized net loss (gain)            |  |                         
|                                        |  |                         
|(Accrued) postretirement benefit cost   |  |                         
|                                        |  |                         

Net periodic cost included the
following components:

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

The following table summarizes the Accumulated
Benefit Obligation for the years ended December 31, 2003 and 2002, respectively.

|                                     | 
|------------------------------------ | 
|                                     | 
|                                     | 
|Accumulated Benefit Obligation- 2003 | 
|Accumulated Benefit Obligation- 2002 | 

# 14. Dividend
Restrictions and Statutory Financial Information

A. Dividend Restrictions

Delaware law provides that an
insurance company which is either an insurance holding company or a member of an insurance
holding 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,
2003, Everest Re had $171.6 million available for payment of dividends in 2004 without
prior regulatory approval.

F-31

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 $1,715.5 million (unaudited) and $1,494.0 million at December 31, 2003 and 2002,
respectively. The statutory net income of Everest Re was $164.6 million (unaudited), $77.6
million and $78.9 million for the years ended December 31, 2003, 2002 and 2001,
respectively.

C. Codification

The Companys operating
subsidiaries file statutory basis financial statements with the state departments of
insurance in the states in which the subsidiary is licensed. On January 1, 2001,
significant changes to the statutory-basis of accounting became effective. The cumulative
effect of these changes has been recorded as a direct adjustment to statutory surplus. The
cumulative effect of these changes in 2001 increased Everest Res statutory surplus
by $57.1 million.

# 15. Contingencies

The Company does not believe that
there are any material pending legal proceedings to which it or any of its subsidiaries is
a party or of which any of their properties are subject.

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 and reinsurance agreements and other more general contracts.
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. Such disputes are resolved through formal and
informal means, including litigation and arbitration.

In all such matters, the Company
believes that its positions are legally and commercially reasonable. The Company also
regularly evaluates those positions, and where appropriate, establishes or adjusts
insurance reserves to reflect the results of its evaluation. The Companys aggregate
reserves take into account the possibility that the Company may not ultimately prevail in
each and every disputed matter. The Company believes its aggregate reserves reduce the
potential that an adverse resolution of one or more of these matters, at any point in
time, would have a material impact on the Companys financial condition or results of
operations. However, there can be no assurances that adverse resolutions of such matters
in any one period or in the aggregate will not result in a material adverse effect on the
Companys results of operations.

The Prudential sells annuities, which
are purchased by property and casualty insurance companies to settle certain types of
claim liabilities. In 1993 and prior years, the Company, for a fee, accepted the claim
payment obligation of these property and casualty insurers, and, concurrently, became the
owner of the annuity or assignee of the annuity proceeds. In these circumstances, the
Company would be liable if The Prudential were unable to make the annuity payments. The
estimated cost to replace all such annuities for which the

F-32

Company was contingently liable at
December 31, 2003 and 2002 was $153.8 million and $150.5 million, respectively. The
Company has purchased annuities from an unaffiliated life insurance company with an A+
(Superior) 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, 2003 and 2002 as $16.0 million and $14.8 million, respectively.

# 16. 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 arms-length with companies
controlled or affiliated with its outside directors. Such transactions individually and in
the aggregate are immaterial to the Companys financial condition, results of
operations and cash flows.

The Company engages in business
transactions with Group and Bermuda Re. See also Note 11.

# 17. 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, 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 the Companys branches in London, Canada, and
Singapore, in addition to foreign business written through the Companys Miami and
New Jersey offices.

These segments are managed in a
carefully coordinated fashion with strong elements of central control, including with
respect to capital, investments and support operations. As a result, management monitors
and evaluates the financial performance of these operating segments based upon their
underwriting gain or loss (underwriting results). Underwriting results include
earned premium less losses and LAE incurred, commission and brokerage expenses and other
underwriting expenses. The accounting policies of the operating segments are the same as
those described in Note 1J, Summary of Significant Accounting Policies.

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.

The Company has recently announced
that one of its subsidiaries, Everest Re has reached agreement to sell its United Kingdom
branch to a related company, Bermuda Re. Business for this branch is currently reported
through the International segment; however, upon completion of the transaction, the
business will no longer be part of the Companys

F-33

operating results. As such,
appropriate disclosures will be made in future filings to address the segment financial
fluctuations resulting from the transfer.

The following tables present the
relevant underwriting results for the operating segments for the three years ended
December 31, 2003, 2002 and 2001.

|                            |  |  |     
|--------------------------- |  |  | ----
|U.S. Reinsurance            | 
|                            |  |  |     
|(Dollars in thousands)      |  |  | 2003
|                            |  |  |     
|Gross written premiums      |  |  | $   
|Net written premiums        |  |  |     
|                            |  |  |     
|Premiums earned             |  |  | $   
|Incurred losses and loss    |  |  |     
|adjustment expenses         |  |  |     
|Commission and brokerage    |  |  |     
|Other underwriting expenses |  |  |     
|                            |  |  |     
|Underwriting gain (loss)    |  |  | $   
|                            |  |  |     

|                            |  |  |     
|--------------------------- |  |  | ----
|U.S. Insurance              | 
|                            |  |  |     
|(Dollars in thousands)      |  |  | 2003
|                            |  |  |     
|Gross written premiums      |  |  | $   
|Net written premiums        |  |  |     
|                            |  |  |     
|Premiums earned             |  |  | $   
|Incurred losses and loss    |  |  |     
|adjustment expenses         |  |  |     
|Commission and brokerage    |  |  |     
|Other underwriting expenses |  |  |     
|                            |  |  |     
|Underwriting gain (loss)    |  |  | $   
|                            |  |  |     

|                            |  |  |     
|--------------------------- |  |  | ----
|Specialty Underwriting      | 
|                            |  |  |     
|(Dollars in thousands)      |  |  | 2003
|                            |  |  |     
|Gross written premiums      |  |  | $   
|Net written premiums        |  |  |     
|                            |  |  |     
|Premiums earned             |  |  | $   
|Incurred losses and loss    |  |  |     
|adjustment expenses         |  |  |     
|Commission and brokerage    |  |  |     
|Other underwriting expenses |  |  |     
|                            |  |  |     
|Underwriting gain (loss)    |  |  | $   
|                            |  |  |     

F-34

|                            |  |  |     
|--------------------------- |  |  | ----
|International               | 
|                            |  |  |     
|(Dollars in thousands)      |  |  | 2003
|                            |  |  |     
|Gross written premiums      |  |  | $   
|Net written premiums        |  |  |     
|                            |  |  |     
|Premiums earned             |  |  | $   
|Incurred losses and loss    |  |  |     
|adjustment expenses         |  |  |     
|Commission and brokerage    |  |  |     
|Other underwriting expenses |  |  |     
|                            |  |  |     
|Underwriting gain (loss)    |  |  | $   
|                            |  |  |     

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:

|                                |  |  |  
|------------------------------- |  |  | -
|(Dollar values in thousands)    |  |  |  
|                                |  |  |  
|Underwriting gain (loss)        |  |  | $
|Net investment income           |  |  |  
|Realized loss                   |  |  |  
|Net derivative income (expense) |  |  |  
|Corporate expenses              |  |  |  
|Distributions on trust          |  | 
|preferred securities            |  |  |  
|Interest expense                |  |  |  
|Other (expense) income          |  |  |  
|                                |  |  |  
|Income before taxes             |  |  | $
|                                |  |  |  

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. The largest country, other than the U.S. in which the Company writes
business is the United Kingdom, with $333.1 million for the year ended December 31, 2003.
No other country represented more than 5% of the Companys revenues.

Approximately 15.7%, 16.5% and 13.6%
of the Companys gross written premiums in 2003, 2002 and 2001, respectively, were
sourced through the Companys largest intermediary.

F-35

# 18. Unaudited Quarterly
Financial Data

Summarized quarterly financial data
were as follows:

|                                                |  |  |   |        
|----------------------------------------------- |  |  | - | -------
|(Dollar in thousands, except per share amounts) |  |  |   | 1st    
|                                                |  |  |   | Quarter
|                                                |  |  |   |        
|2003 Operating data:                            |  | 
|Gross written premiums                          |  |  | $ | 961,326
|Net written premiums                            |  |  |   | 684,707
|Premiums earned                                 |  |  |   | 531,691
|Net investment income                           |  |  |   | 67,586 
|Net realized capital (loss) gain                |  |  |   | (10,075
|Total claims and underwriting expenses          |  |  |   | 499,114
|Net income                                      |  |  | $ | 59,588 
|                                                |  |  |   |        
|                                               
|2002 Operating data:                            |  | 
|Gross written premiums                          |  |  | $ | 590,884
|Net written premiums                            |  |  |   | 514,095
|Premiums earned                                 |  |  |   | 458,118
|Net investment income                           |  |  |   | 64,799 
|Net realized capital loss                       |  |  |   | 1,039  
|Total claims and underwriting expenses          |  |  |   | 453,701
|Net income                                      |  |  | $ | 46,315 

F-36

EVEREST REINSURANCE HOLDINGS, INC.

SCHEDULE I  - SUMMARY OF INVESTMENTS-OTHER THAN INVESTMENTS IN RELATED PARTIES DECEMBER 31, 2003

|                                                 |  |  |         
|------------------------------------------------ |  |  | --------
|Column A                                         |  |  | Column B
|                                                
|Amount                                          
|Shown in                                        
|                                                 |  |  |         
|(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                                                             |  | 
|Short-term investments                                             |  | 
|Cash                                                               |  | 
|Investment in subsidiaries, at equity in the underlying net assets |  | 
|Receivable from affliate                                           |  | 
|Deferred tax asset                                                 |  | 
|Accrued investment income                                          |  | 
|Other assets                                                       |  | 
|                                                                   | 
|Total assets                                                       |  | 
|                                                                   | 
|LIABILITIES                                                        |  | 
|8.5% Senior notes due 3/15/2005                                    |  | 
|8.75% Senior notes due 3/15/2010                                   |  | 
|Revolving credit facility                                          |  | 
|Current federal income taxes                                       |  | 
|Accrued interest on debt and borrowings                            |  | 
|Due to affiliates                                                  |  | 
|Other liabilities                                                  |  | 
|Subordinated Debentures                                            |  | 
|                                                                   | 
|Total liabilities                                                  |  | 
|                                                                   | 
|SHAREHOLDERS' EQUITY                                               |  | 
|Common stock, par value:                                           |  | 
|$0.01; 200 million shares authorized;                              |  | 
|1,000 issued in 2003 and 2002                                      |  | 
|Paid-in capital                                                    |  | 
|Accumulated other comprehensive income, net of deferred taxes      |  | 
|of $117.5 million in 2003 and $75.1 million in 2002                |  | 
|Treasury shares, at cost; 0.5 million shares in 2003 and 2002      |  | 
|Retained earnings                                                  |  | 
|                                                                   | 
|Total shareholders' equity                                         |  | 
|                                                                   | 
|Total liabilities and shareholders' 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

|                                                                    |  |  |                         
|------------------------------------------------------------------- |  |  | ------------------------
|                                                                    |  |  | Years Ended December 31,
|                                                                    | 
|(Dollars in thousands)                                              |  |  |                         
|                                                                    | 
|REVENUES                                                            |  | 
|Net investment income                                               |  |  | $                       
|Net realized capital gain                                           |  |  |                         
|Other (expense)                                                     |  |  |                         
|Equity in undistributed change in retained earnings of subsidiaries |  |  |                         
|                                                                    | 
|Total revenues                                                      |  |  |                         
|                                                                    | 
|EXPENSES                                                            |  | 
|Interest expenses                                                   |  |  |                         
|Other expenses                                                      |  |  |                         
|                                                                    | 
|Income before taxes                                                 |  |  |                         
|Income tax expense (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

|                                                                    |  |  |                             
|------------------------------------------------------------------- |  |  | ----------------------------
|                                                                    |  |  | For Years Ended December 31,
|                                                                    | 
|(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) increase in other liabilities                            |  |  |                             
|Increase (decrease) in accrued interest on debt and borrowings      |  |  |                             
|Decrease (increase) in deferred tax asset                           |  |  |                             
|(Increase) decrease in other assets                                 |  |  |                             
|(Increase) decrease in receivable from affliates                    |  |  |                             
|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 from equity securities acquired                            |  |  |                             
|Cost of equity securities acquired                                  |  |  |                             
|Net (purchases) sales of short-term securities                      |  |  |                             
|                                                                    | 
|NET CASH (USED IN) PROVIDED BY INVESTING ACTIVITIES                 |  |  |                             
|                                                                    | 
|CASH FLOWS FROM FINANCING ACTIVITIES                                |  | 
|Dividend from parent                                                |  |  |                             
|Acquisition of treasury stock                                       |  |  |                             
|Borrowing on revolving credit line                                  |  |  |                             
|Repayments on revolving credit line                                 |  |  |                             
|Proceeds from issuance of subordinated debentures                   |  |  |                             
|Contribution from subsidiaries                                      |  |  |                             
|                                                                    | 
|NET CASH PROVIDED BY (USED IN) 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               |  |  |   | Column B   |  |   | Column C   |  | Column D
|                      
|                       |  |  |   |            |  |   | Reserve    |  |         
|                       |  |  |   |            |  |   | for Losses |  |         
|Geographic Area        |  |  |   | Deferred   |  |   | and Loss   |  |         
|                       |  |  |   | Acquistion |  |   | Adjustment |  |         
|(Dollars in thousands) |  |  |   | Costs      |  |   | Expenses   |  |         
|                      
|December  31, 2003     |  | 
|Domestic               |  |  | $ | 169,765    |  | $ | 5,137,233  |  | $       
|International          |  |  | $ | 50,912     |  | $ | 1,089,845  |  | $       
|                       | 
|Total                  |  |  | $ | 220,677    |  | $ | 6,227,078  |  | $       
|                       | 
|December  31, 2002     |  | 
|Domestic               |  |  | $ | 133,824    |  | $ | 4,125,389  |  | $       
|International          |  |  | $ | 27,626     |  | $ | 749,836    |  | $       
|                       | 
|Total                  |  |  | $ | 161,450    |  | $ | 4,875,225  |  | $       
|                       | 
|December  31, 2001     |  | 
|Domestic               |  |  | $ | 98,491     |  | $ | 3,641,323  |  | $       
|International          |  |  | $ | 16,457     |  | $ | 633,012    |  | $       
|                       | 
|Total                  |  |  | $ | 114,948    |  | $ | 4,274,335  |  | $       
|                       | 

S-5

EVEREST REINSURANCE HOLDINGS, INC.

SCHEDULE IV 
REINSURANCE

|                             |  |          |         |  | 
|---------------------------- |  | -------- | ------- |  | 
|Column  A                    |  | Column B |         |  | 
|                             | 
|                             |  |          |         |  | 
|                             |  |          | Gross   |  | 
|(Dollars in thousands)       |  |          | Amount  |  | 
|                             | 
|December 31, 2003            |  |         
|Total property and liability |  |         
|insurance premiums earned    |  | $        | 983,221 |  | 
|December 31, 2002            |  |         
|Total property and liability |  |         
|insurance premiums earned    |  | $        | 667,151 |  | 
|December 31, 2001            |  |         
|Total property and liability |  |         
|insurance premiums earned    |  | $        | 380,178 |  | 

S-6