UNITED STATESSECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

_________________FORM 10-K 
_________________

Annual Report Pursuant to Section 13
or 15(d) of theSecurities Exchange Act of 1934

|                                            | 
|------------------------------------------- | 
|For the fiscal year ended December 31, 2004 | 

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

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

477 Martinsville Road
Post Office Box 830Liberty Corner, New Jersey 07938-0830(908) 604-3000 (Address, including zip code, and
telephone number, including area code, of registrants principal executive office)

_________________

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

|                                                                                                                      | 
|--------------------------------------------------------------------------------------------------------------------- | 
|                                                                                                                      | 
|Title of Each Class                                                                                                   | 
|8.5% Senior Notes Due 2005                                                                                            | 
|8.75% Senior Notes Due 2010                                                                                           | 
|5.4% Senior Notes Due 2014                                                                                            | 
|7.85% Trust Preferred Securities of Everest Re Captial Trust
     guaranteed by Everest Reinsurance Holdings, Inc.    | 
|6.20% Trust Preferred Securities of Everest Re Captial Trust II
     guaranteed by Everest Reinsurance Holdings, Inc. | 

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

Indicate
by check mark 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___     NoX

The
aggregate  market value on June 30, 2004, 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, 2005, the number of common shares of
the registrant oustanding was 1,000, all of which are owned by Everest Re Group, Ltd.

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

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

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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.); Everest Re
means Everest Reinsurance Company and its subsidiaries (unless the context otherwise
requires) and the Company means Holdings and its subsidiaries (unless the
context otherwise requires).

ITEM 1. Business

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

The Companys principal
business, conducted through its operating subsidiaries, is the underwriting of reinsurance
and insurance in the U.S. and international markets. The Company 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 (through July 12, 2004), Canada and Singapore. Everest Re
underwrites property and casualty reinsurance for insurance and reinsurance companies in
the U.S. and international markets. Everest Re had statutory surplus at December 31, 2004
of $2.1 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.
|- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|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 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
|- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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| | 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 (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. Effective September 19, 2000, Mt. McKinley and Everest
Reinsurance (Bermuda), Ltd. (Bermuda Re), an affiliate, 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.
|- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|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 $79 million of investments  and cash, the
     management of which constitutes its principal operations.
|- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Reinsurance Industry
OverviewReinsurance is an arrangement in
which an insurance company, the reinsurer, agrees to indemnify another insurance company,
the ceding company, against all or a portion of the insurance risks underwritten by the
ceding company under one or more insurance contracts. Reinsurance can provide a ceding
company with several benefits, including a reduction in net liability on individual risks
or classes of risks, catastrophe protection from large or multiple losses and assistance
in maintaining acceptable financial ratios. Reinsurance also provides a ceding company
with additional underwriting capacity by permitting it to accept larger risks and write
more business than would be possible without a concomitant increase in capital and
surplus. Reinsurance, however, does not discharge the ceding company from its liability to
policyholders.

There are two basic types of
reinsurance arrangements: treaty and facultative reinsurance. In treaty reinsurance, the
ceding company is obligated to cede and the reinsurer is obligated to assume a specified
portion of a type or category of risks insured by the ceding company. Treaty reinsurers do
not separately evaluate each of the individual risks assumed under their treaties and,
consequently, after a review of the ceding companys underwriting practices, are
largely dependent on the original risk underwriting decisions made by the ceding company.
In facultative reinsurance, the ceding company cedes and the reinsurer assumes all or part
of the risk under a single insurance contract. Facultative reinsurance is negotiated
separately for each insurance contract that is reinsured. Facultative reinsurance normally
is purchased by ceding companies for individual risks not covered by their reinsurance
treaties, for amounts in excess of the dollar limits of their reinsurance treaties or for
unusual risks.

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

2



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
the full range of property and casualty reinsurance and insurance coverages, including
marine, aviation, surety, errors and omissions liability (E&O),
directors and officers liability (D&O), medical malpractice,
other specialty lines, accident and health (A&H) and workers
compensation. The Companys product distribution includes direct and broker
reinsurance channels; U.S. and international markets; treaty and facultative reinsurance
and admitted and non-admitted insurance.

The Companys underwriting
strategy emphasizes underwriting profitability rather than premium volume, writing
specialized property and casualty risks and integration of underwriting expertise across
all 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

3



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 TransactionsThe Companys business
operations are in part dependent on the Companys financial strength, and the
markets perception thereof, as measured by stockholders equity, which was
$1,743.8 million and $1,546.9 million at December 31, 2004 and 2003, 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 and Holdings have a shelf registration
statement on Form S-3 on file with the SEC, which was declared effective by the SEC on
December 22, 2003, 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 (Capital Trust
II) and Everest Re Capital Trust III (Capital Trust III) are authorized
to issue trust preferred securities. The following securities have been issued pursuant to
that registration statement, which at December 31, 2004, has a remaining balance of $405.0
million.

|o | On
March 29, 2004, Capital Trust II, an unconsolidated affiliate, issued trust preferred
securities resulting in a takedown from the shelf registration statement of $320 million.
In conjunction with the issuance of Capital Trust IIs trust preferred securities,
Holdings issued $329.9 million of 6.20% junior subordinated debt securities due March 29,
2034 to Capital Trust II. Part of the proceeds from the junior subordinated debt
securities issuance was used for capital contributions to Holdings operating
subsidiaries.
|- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|o | On
October 6, 2004, Holdings completed a public offering of $250.0 million principal amount
of 5.40% senior notes due October 15, 2014 pursuant to its currently effective shelf
registration statement. The net proceeds will be utilized to retire existing debt of the
Company, which is coming due in March 2005, and for other general corporate purposes.
|- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

On July 30, 2002, Group and Holdings filed a shelf
registration statement on Form S-3 with the SEC, providing for the issuance of up to
$475.0 million of securities. Generally, under this shelf registration statement, Group
was authorized to issue common shares, preferred shares, debt securities, warrants and
hybrid securities, Holdings was authorized to issue debt securities and Everest Re Capital
Trust (Capital Trust) was authorized to issue trust preferred securities. This
shelf registration statement became effective on September 26, 2002 and was effectively
exhausted with the April 23, 2003 transaction described below. The following securities
were issued pursuant to that registration statement.

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

4



| | securities due November 15, 2032 to Capital
Trust. The proceeds from the junior subordinated debt securities issuance were primarily
used for capital contributions to Holdings operating subsidiaries.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

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

On March 14, 2000, the Company
completed a public offering of $200 million principal amount of 8.75% senior notes due
March 15, 2010 and $250 million principal amount of 8.50% senior notes due March 15, 2005.
During 2000, the net proceeds of these offerings and additional funds were distributed by
the Company to Group. On March 14, 2005, Holdings repaid in full the $250 million
principal amount due in connection with the maturity of the 8.5% senior notes.

RatingsThe 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 a direct or indirect equity investment
in an insurance company.

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

A.M. Best states that the A+ (Superior) rating is assigned to
          those companies which, in its opinion, have a superior ability to meet their
          ongoing obligations to policyholders based on A.M. Bests comprehensive
          quantitative and qualitative evaluation of a companys balance sheet
          strength, operating performance and business profile. The 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

5



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.

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, March 15, 2010 and October 15, 2014 and Capital Trust and
Capital Trust IIs trust preferred securities due November 15, 2032 and March 29,
2034, respectively, all of which are considered investment grade. Debt ratings are a current assessment
of the credit worthiness of an obligor with respect to a specific obligation.

|                           | A.M. Best | Standard & Poor's | Moody's
|-------------------------- | --------- | ----------------- | -------
|                           |           |                   |        
|Senior Notes               |           |                   | a      
|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, have become increasingly important to its operations because they
provide the Companys customers and investors with an independent assessment of the
Companys underlying financial strength using a scale that provides for relative
comparisons.

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, ratings of the reinsurer or insurer by A.M. Best
and/or Standard & Poors, underwriting expertise, the jurisdictions where the
reinsurer or insurer is licensed or otherwise authorized, capacity and coverages offered,
premiums charged, other terms and conditions of the reinsurance and insurance business
offered, services offered, speed of claims payment and reputation and experience in lines
written. These factors operate at the individual market participant level to varying
degrees as applicable to the specific participants circumstances. They also operate

6



in aggregate across the reinsurance industry more generally contributing, in combination
with background economic conditions and variations in the reinsurance buying practices of
insurance companies, by participant and in the aggregate, to cyclical movements in
reinsurance rates, terms and conditions and ultimately reinsurance industry aggregate
financial results.

The Company competes in the U.S. and
international reinsurance and insurance markets with numerous 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.

In 2004, the favorable market
conditions, which developed during 2000 through 2003, generally began to weaken. There
were signs that pricing for most property classes declined modestly and that pricing for
most casualty classes softened. Competition increased in part due to the relative
profitability achieved by many reinsurers over 2002 and 2003 and the attendant buildup of
capital in these participants. However, this profitability and capital buildup varied
significantly by market participant, reflecting the fact that the industry generally still
remained exposed to fundamental issues that had negatively impacted its aggregate capacity
in 2002 and 2003, including weak investment market conditions and adverse loss emergence.
Both of these had tended to depress the industrys aggregate financial performance
and perceptions of financial strength of industry participants over this period albeit
with significant variation by individual market participant. The industry experienced a
record level of catastrophe losses during 2004, particularly in the second half of the
year, and it remains unclear whether the aggregate catastrophe losses experienced by the
industry will reverse, stop or even moderate the trends toward market softening,
particularly as respects property classes.

Through 2003, reinsurance and
insurance markets had generally continued to firm, reflecting the continuing, although
diminishing, implications of losses arising from the terrorist attacks of September 11,
2001, and more broadly, the impact of 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 became 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 depressed 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 legacy reserve issues 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, reinforced the trend
established in 2000 through 2003 toward 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 2004 trends discussed above.

The Company has been somewhat
disappointed by industry developments in 2004, which have generally operated to modestly
weaken pricing. The Company can not predict with any reasonable certainty whether and to
what extent these trends or conditions will persist and in particular whether the property
catastrophe losses experienced by the industry in 2004 will lessen competitive pressures,
particularly for the property classes of business. Notwithstanding these catastrophe
losses, the continued growth of reinsurance capacity, changes in

7



the Lloyds market,
and the potential reemergence of a market share orientation among some industry
participants, combined with improving and in some cases strong financial results,
continues to contribute to uncertainty about the prospective level of competitive
pressures.

EmployeesAs of March 1, 2005, the Company
employed 382 persons. Management believes that its employee relations are good. None of
the Companys employees are subject to collective bargaining agreements, and the
Company is not aware of any current efforts to implement such agreements.

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

ITEM 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
71,000 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, reinsurance and other contractual agreements. In some
disputes, the Company seeks to enforce its rights under an agreement or to collect funds
owing to it. In other matters, the Company is resisting attempts by others to collect
funds or enforce alleged rights. 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 assurance 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.

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.

8



PART II

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

Market Information and
Holder of Common StockAs of December 31, 2004, all of the
Companys common stock was owned by Group and was not publicly traded.

Dividend History and
RestrictionsIn conjunction with the sale of the
UK branch of Everest Re to an affiliate, the Company paid a dividend in 2004 of $26.3
million. The Company did not pay any dividends during 2003 and 2002. The declaration and
payment of future dividends, if any, by the Company will be at the discretion of the Board
of Directors and will depend upon many factors, including the Companys earnings,
financial condition, business needs and growth objectives, capital and surplus
requirements of operating subsidiaries, regulatory restrictions, rating agency
considerations and other factors. As an insurance holding company, the Company is
dependent on dividends and other permitted payments from its subsidiaries to pay cash
dividends to its stockholder. The payment of dividends to Holdings by Everest Re is
subject to limitations imposed by Delaware law. Generally, Everest Re may only pay
dividends out of its statutory earned surplus, which was $1.4 billion at December 31,
2004, 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 2005 without
triggering the requirement for prior approval of regulatory authorities in connection with
a dividend is $209.3 million.

Recent Sales of
Unregistered SecuritiesNone.

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 Operation

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.); Everest Re
means Everest Reinsurance Company and its subsidiaries (unless the context otherwise
requires); and the Company means Everest Reinsurance Holdings, Inc. and its
subsidiaries.

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

9



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

INDUSTRY CONDITIONSThe 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, ratings of the reinsurer or insurer by A.M. Best
and/or Standard & Poors, underwriting expertise, the jurisdictions where the
reinsurer or insurer is licensed or otherwise authorized, capacity and coverages offered,
premiums charged, other terms and conditions of the reinsurance and insurance business
offered, services offered, speed of claims payment and reputation and experience in lines
written. These factors operate at the individual market participant level to varying
degrees as applicable to the specific participants circumstances. They also operate
in aggregate across the reinsurance industry more generally contributing, in combination
with background, economic conditions and variations in the reinsurance buying practices of
insurance companies, by participant and in the aggregate, to cyclical movements in
reinsurance rates, terms and conditions and ultimately reinsurance industry aggregate
financial results.

The Company competes in the U.S. and
international reinsurance and insurance markets with numerous 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.

In 2004, the favorable market
conditions, which had developed during 2000 through 2003, generally began to weaken. There
were signs that pricing for most property classes declined modestly and that pricing for
most casualty classes softened. Competition increased, in part due to the relative
profitability achieved by many reinsurers over 2002 and 2003 and the attendant buildup of
capital in these participants. However, this profitability and capital buildup varied
significantly by market participant, reflecting the fact that the industry generally still
remained exposed to fundamental issues that had negatively impacted its aggregate capacity
in 2002 and 2003, including weak investment market conditions and adverse loss emergence.
Both of these had tended to depress the industrys aggregate financial performance
and perceptions of financial strength of industry participants over this period albeit
with significant variation by individual market participant. The industry experienced a
record level of catastrophe losses during 2004, particularly in the second half of the
year, and it remains unclear whether the aggregate catastrophe losses experienced by the
industry will reverse, stop or even moderate the trends toward market softening,
particularly as respects property classes.

Through 2003, reinsurance and
insurance markets had generally continued to firm, reflecting the continuing, although
diminishing, implications of losses arising from the terrorist attacks of September 11,
2001, and more broadly, the impact of 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 became apparent through excessive loss
emergence, varied widely by company depending on product offerings, markets accessed,
underwriting and

10



operating practices, competitive strategies and business volumes. Across
all market participants, however, the aggregate general effect was depressed 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, reinforced the trend established in
2000 through 2003 toward 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 2004 trends discussed above.

The Company has been somewhat
disappointed by industry developments in 2004, which have generally operated to modestly
weaken pricing. The Company can not predict with any reasonable certainty whether and to
what extent these trends or conditions will persist and in particular whether the property
catastrophe losses experienced by the industry in 2004 will lessen competitive pressures,
particularly for the property classes of business. Notwithstanding these catastrophe
losses, the continued growth of reinsurance capacity, particularly in Bermuda, changes in
the Lloyds market, and the potential reemergence of a market share orientation among
some industry participants, combined with improving and in some cases strong financial
results, continue to contribute to uncertainty about the prospective level of competitive
pressures.

11



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

|                                             | Years Ended December 31,
|-------------------------------------------- | ------------------------
|                                             |                         
|(Dollars in thousands)                       | 2004                    
|                                             |                         
|Gross written premiums                       |                         
|Net written premiums                         |                         
|REVENUES:                                    |                         
|Premiums earned                              |                         
|Net investment income                        |                         
|Net realized capital gains (losses)          |                         
|Net derivative expense                       |                         
|Other expense                                |                         
|                                             |                         
|Total revenues                               |                         
|                                             |                         
|CLAIMS AND EXPENSES:                         |                         
|Incurred losses and loss adjustment expenses |                         
|Commission, brokerage, taxes and fees        |                         
|Other underwriting expenses                  |                         
|Interest expense                             |                         
|                                             |                         
|Total claims and expenses                    |                         
|                                             |                         
|INCOME BEFORE TAXES                          |                         
|Income tax expense                           |                         
|                                             |                         
|NET INCOME                                   |                         
|                                             |                         

Effective January 1, 2004, Everest Re
sold its UK branch to Bermuda Re and in conjunction with the sale, Everest Re provided a
reserve indemnity agreement for adverse development on loss and loss adjustment expenses (LAE)
reserve balances as of
December 31, 2002, as well as made sale related adjustments for the 2003 and 2002 quota
share cessions. In order to provide comparability of the financial results between the
years, the 2003 and 2002 results need to be adjusted to exclude the UK branch activity.
For the year ended December 31, 2003, gross written premiums, net written premiums,
premiums earned, incurred losses and LAE and other
operating expenses would decrease by $443.5 million, $325.9 million, $290.3 million,
$202.7 million and $68.3 million, respectively. For the year ended December 31, 2002,
gross written premiums, net written premiums, premiums earned, incurred losses and LAE and
underwriting expenses would decrease by $186.5 million, $155.8 million, $133.6 million,
$97.4 million and $28.3 million, respectively. Effectively, these adjustments remove the
UK branch from the operating results for the years ended December 31, 2003 and 2002.

12



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

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

|                                             | Year Ended December 31, 2002
|-------------------------------------------- | ----------------------------
|(Dollars in thousands)                       | As Reported                 
|Gross written premiums                       |                             
|Net written premiums                         |                             
|REVENUES:                                    |                             
|Premiums earned                              |                             
|Net investment income                        |                             
|Net realized capital losses                  |                             
|Net derivative expense                       |                             
|Other expense                                |                             
|                                             |                             
|Total revenues                               |                             
|                                             |                             
|CLAIMS AND EXPENSES:                         |                             
|Incurred losses and loss adjustment expenses |                             
|Commission, brokerage, taxes and fees        |                             
|Other underwriting expense                   |                             
|Interest expense                             |                             
|                                             |                             
|Total claims and expenses                    |                             
|                                             |                             
|INCOME BEFORE TAXES                          |                             
|                                             |                             

13



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

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

|                                             | Year Ended December 31, 2004
|-------------------------------------------- | ----------------------------
|(Dollars in thousands)                       | As Reported                 
|Gross written premiums                       |                             
|Net written premiums                         |                             
|REVENUES:                                    |                             
|Premiums earned                              |                             
|Net investment income                        |                             
|Net realized capital losses                  |                             
|Other expense                                |                             
|                                             |                             
|Total revenues                               |                             
|                                             |                             
|CLAIMS AND EXPENSES:                         |                             
|Incurred losses and loss adjustment expenses |                             
|Commission, brokerage, taxes and fees        |                             
|Other underwriting expense                   |                             
|Interest expense                             |                             
|                                             |                             
|Total claims and expenses                    |                             
|                                             |                             
|INCOME BEFORE TAXES                          |                             
|                                             |                             

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

As indicated in the preceding
Industry Conditions section, the reinsurance and insurance industry generally
experienced favorable market conditions from 2001 through 2003. These favorable market
conditions, coupled with the Companys financial strength, strategic positioning and
market and underwriting expertise, enabled the Company to increase its volume of business
significantly over this period. With the change in competitive trend throughout 2004 and
with little clarity regarding the impact of property catastrophe losses on prospective
market conditions, the Company continued to adapt its operations to slow its rate of
growth and even decrease writings for some classes of business and reemphasize its focus
on profitability as opposed to volume.

Gross written premiums were $3.8
billion for the year ended December 31, 2004, a decrease of 0.8% as compared with $3.9
billion for the year ended December 31, 2003, which had increased 49.9% compared with the
year ended December 31, 2002. Gross written premiums were $2.6 billion for the year ended
December 31, 2002, an increase of 46.2% compared with the year ended December 31, 2001.

14



Due to the nature of its businesses,
the Company is unable to precisely differentiate between the effects of price changes as
compared to the effects of 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, the Companys growth has been reasonably balanced
between growth in exposures underwritten and increased pricing and/or improved terms and
conditions. Management believes further that market conditions, although changing, remain
generally more favorable for casualty business classes than for property business classes;
however, management notes that it continues to see business opportunities in most product
classes and markets. Although premium volumes on a year to date basis have decreased only
slightly, the Company continues to decline business that does not meet its objectives
regarding underwriting profitability, a discipline which became more apparent over the
second half of 2004 with quarterly volumes for the third and fourth quarters which
reflected year over year declines in gross premiums written.

In June 2004, the Company received
notification of termination with respect to its contract with American All-Risk Insurance
Services, LLC, its single largest producer of California workers compensation
insurance. In 2004, American All-Risk Insurance Services, LLC accounted for approximately
9.6% of the Company's total gross written premiums. Under the terms of the contract, the agency
continued to produce business exclusively for the Company through October 15, 2004. The
business produced under this relationship will continue in force through the policy
expiration dates or cancellation. The Company does not believe that the termination of
this contract will have a material adverse effect on future Company operations and
believes the termination was not entirely inconsistent with its plan to moderate its
writings in this market.

Net written premiums, comprised of
gross written premiums less ceded premiums, were $2.8 billion for the years ended December
31, 2004 and 2003. The year ended December 31, 2003 had increased 35.8% compared with the
year ended December 31, 2002. Net written premiums for the year ended December 31, 2002
were $2.0 billion, an increase of 52.9% compared with the year ended December 31, 2001.
The majority of cessions in both periods continue to relate to the quota share reinsurance
between Everest Re and Bermuda Re and Everest International Reinsurance, Ltd.
(Everest International).

Premiums earned were $2.7 billion for
the year ended December 31, 2004, an increase of 9.8% compared with $2.5 billion for the
year ended December 31, 2003, which had increased 35.3% compared with the year ended
December 31, 2002. Premiums earned for the year ended December 31, 2002 were $1.8 billion,
an increase of 46.1% compared with the year ended December 31, 2001. These increases
reflect period to period changes in net written premiums and business mix together with
normal variability in earning 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.
Changes in estimates related to unreported reinsurance activity may also affect premiums earned.

Incurred losses and LAE for the year
ended December 31, 2004 were $2.1 billion, an increase of 14.3% compared with $1.8 billion
for the year ended December 31, 2003, which had increased 38.1% compared with the year
ended December 31, 2002. Incurred losses and LAE for the year ended December 31, 2002 were
$1.3 billion, an increase of 32.6% compared with the year ended December 31, 2001. The
major contributing factor for the increases in 2004 was the increase in incurred losses
and LAE due to property catastrophe net event losses of $257.5 million, arising
principally from hurricanes Charley, Frances, Ivan and Jeanne, Pacific typhoons, Edmonton
hailstorms and the Asian tsunami. Other factors, including the level of incurred losses
and LAE related to changes in volume as measured by earned premium, changes in rates, and
terms and the effect of changes in prior period loss reserve estimates, also contributed.
The increase in incurred losses and LAE

15



relating to net adverse prior period reserve
strengthening of $184.8 million, $201.5 million and $82.7 million for years ended December
31, 2004, 2003 and 2002, respectively, principally related to the Companys treaty casualty business,
particularly professional liability classes, and workers compensation business,
partially offset in 2004 by a $32.7 million reduction in reserves related to the World
Trade Center events.

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

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
for the years ended December 31, 2004, 2003 and 2002 were $546.5 million, $534.3 million
and $464.1 million, respectively, increasing principally as a result of premium volume
changes, as these expenses generally vary in direct proportion to premiums earned.
However, the percentage increase in expenses primarily reflected the impact of changes in
the Companys business mix.

Net investment income was $329.2
million for the year ended December 31, 2004, an increase of 15.6% compared with $284.8
million for the year ended December 31, 2003, which had increased 10.4% compared with the
year ended December 31, 2002. Net investment income for the year ended December 31, 2002
was $258.0 million, a decrease of 3.0% compared with the year ended December 31, 2001. The
year ended December 31, 2004 included a $32.7 million increase arising from an atypical
increase in the value of one of the Companys limited partnership investments.
Excluding this increase, the net investment income increase generally reflected growth in
the Companys cash and invested assets. Premiums are generally collected over the
first 12 to 15 months of the Companys reinsurance and insurance contract, while
related losses are typically paid out over several years. This tends to increase cash flow
from operations when premiums are increasing. The Companys cash flow from operations
was $921.6 million, $1,051.0 million and $431.8 million for the years ended December 31,
2004, 2003 and 2002, respectively. Cash flow from operations was impacted in particular by
increased loss payments relating to catastrophe losses and net asbestos claim settlements
in 2004. Coupled with the issuance of junior subordinated debt securities, this
contributed to the growth in the Companys total investments and cash to $7,496.3
million.

Net realized capital gains of $56.7
million for the year ended December 31, 2004 were primarily the result of gains on the
sale of the Companys interest only strips investment portfolio. Net realized capital
losses of $22.9

16



million and $53.1 million for the years ended
December 31, 2003 and 2002, respectively, were primarily the result of valuation adjustments on
the interest only
strip portfolio in accordance with Emerging Issues Task Force No. 99-20, Recognition
of Interest Income and Impairment on Purchased and Retained Beneficial Interests in
Securitized Financial Assets (EITF 99-20) and write-downs in the value
of securities deemed to be impaired on an other than temporary basis, partially offset by
realized gains.

The Companys income tax expense
is primarily a function of the U.S. statutory tax rate and the impact from tax preferenced
investment income. Additionally, in conjunction with the transfer of the Companys UK
Branch to Bermuda Re, there were various tax issues giving rise to incremental net tax
expenses in 2004. The Company incurred income tax expenses of $56.1 million, $61.0 million
and $24.8 million for the years ended December 31, 2004, 2003 and 2002, respectively. The
slight decrease in tax expense primarily reflected the impact of the catastrophe losses on
2004 operating results, which were partially offset by additional taxable net investment
income, taxable realized capital gains and the expense associated with the transfer of the
UK branch.

Other expense was $73.4 million,
$14.0 million and $21.8 million in 2004, 2003 and 2002, respectively. This change was
primarily due to increased deferrals of the retroactive reinsurance agreements with
affiliates for asbestos reserve strengthening.

Net income for the years ended
December 31, 2004, 2003 and 2002 was $175.5 million, $206.5 million and $115.1 million,
respectively, generally reflecting a decrease in operating results due to the catastrophe
losses, partially offset by improved investment results and realized capital gains.

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

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

Effective January 1, 2004, Everest Re
sold its United Kingdom branch to Bermuda Re, a Bermuda insurance company and a direct
subsidiary of Group. Business for this branch was previously included in the International
segment and is now included in the Bermuda segment. Due to the sale and in accordance with
FAS 131, the Company restated the International segment for the years ended December 31,
2003 and 2002 to conform to December 31, 2004 segment reporting. For the year ended
December 31, 2003 the International segment was adjusted to exclude the UK branch activity.
As a  result of that adjustment, gross written premiums, net written premiums, premiums earned,
incurred losses and LAE and other expenses decreased by

17



$443.5 million, $325.9 million, $290.3 million $202.7
million, and $68.3 million, respectively. As a result of a similar adjustment for the year ended December 31, 2002, gross
written premiums, net written premiums, premiums earned, incurred losses and LAE and other
expenses decreased by $186.5 million, $155.8 million, $133.6 million $97.4 million, and
$28.3 million, respectively. Effectively, these adjustments remove the UK branch from the
2003 and 2002 International segment making period over period results comparable.

The following tables reflect
reconciliations from reported to proforma for the International segment for the periods
indicated:

|                                             | Year Ended December 31, 2003
|-------------------------------------------- | ----------------------------
|(Dollars in thousands)                       | As Reported                 
|Gross written premiums                       |                             
|Net written premiums                         |                             
|Premiums earned                              |                             
|Claims and expenses:                         |                             
|Incurred losses and loss adjustment expenses |                             
|Commission, brokerage, taxes and fees        |                             
|Other underwriting expense                   |                             
|                                             |                             
|Total claims and expenses                    |                             
|                                             |                             
|Income before taxes                          |                             
|                                             |                             

|                                             | Year Ended December 31, 2002
|-------------------------------------------- | ----------------------------
|(Dollars in thousands)                       | As Reported                 
|Gross written premiums                       |                             
|Net written premiums                         |                             
|Premiums earned                              |                             
|Claims and expenses:                         |                             
|Incurred losses and loss adjustment expenses |                             
|Commission, brokerage, taxes and fees        |                             
|Other underwriting expense                   |                             
|                                             |                             
|Total claims and expenses                    |                             
|                                             |                             
|Income before taxes                          |                             
|                                             |                             

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

18



The following tables present the
relevant operating results for the operating segments for the three years ended December
31, 2004, 2003 and 2002:

|                                             | U.S. Reinsurance
|-------------------------------------------- | ----------------
|(Dollars in thousands)                       | 2004            
|                                             |                 
|Gross written premiums                       |                 
|Net written premiums                         |                 
|Premiums earned                              |                 
|Incurred losses and loss adjustment expenses |                 
|Commission and brokerage                     |                 
|Other underwriting expenses                  |                 
|                                             |                 
|Underwriting (loss) gain                     |                 
|                                             |                 

|                                             | U.S. Insurance
|-------------------------------------------- | --------------
|(Dollars in thousands)                       | 2004          
|                                             |               
|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)                       | 2004                  
|                                             |                       
|Gross written premiums                       |                       
|Net written premiums                         |                       
|Premiums earned                              |                       
|Incurred losses and loss adjustment expenses |                       
|Commission and brokerage                     |                       
|Other underwriting expenses                  |                       
|                                             |                       
|Underwriting gain                            |                       
|                                             |                       

19



|                                             | International
|-------------------------------------------- | -------------
|(Dollars in thousands)                       | 2004         
|                                             |              
|Gross written premiums                       |              
|Net written premiums                         |              
|Premiums earned                              |              
|Incurred losses and loss adjustment expenses |              
|Commission and brokerage                     |              
|Other underwriting expenses                  |              
|                                             |              
|Underwriting gain                            |              
|                                             |              

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

|(Dollars in thousands)                  | 2004 |  | 2003 |         | 2002 |  
|--------------------------------------- | ---- |  | ---- | ------- | ---- | -
|                                        |      |  |     
|Underwriting gain                       |      |  | $    | 23,404  |      | $
|UK branch sale and related transactions |      |  |      | (30,714 | )    |  
|                                        |      |  |     
|Underwriting (loss) gain                |      |  |      | (7,310  | )    |  
|Net investment income                   |      |  |      | 329,184 |      |  
|Realized gain (loss)                    |      |  |      | 56,710  |      |  
|Net derivative expense                  |      |  |      | -       |      |  
|Corporate income (expense)              |      |  |      | 1,968   |      |  
|Interest expense                        |      |  |      | (75,539 | )    |  
|Other expense                           |      |  |      | (73,403 | )    |  
|                                        |      |  |     
|Income before taxes                     |      |  | $    | 231,610 |      | $
|                                        |      |  |     

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

CONSOLIDATED RESULTS OF
OPERATIONS

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

20



$193.8 million
          increase in program business other than workers compensation, partially
          offset by a $95.5 million decrease in workers compensation business.

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

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

Premium Revenues.     Net premiums
earned increased by 9.8% to $2,710.3 million in 2004 from $2,467.4 million in 2003.
Contributing to this increase was a 45.7% ($148.1 million) increase in the International
operation, a 9.0% ($95.0 million) increase in the U.S. Reinsurance operation and a 6.2%
($42.4 million) increase in the U.S. Insurance operation, partially offset by a 10.6%
($42.5 million) decrease in the Specialty Underwriting operation. 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/or terms different from those of expiring contracts. As
premium reporting, earnings, loss and commission characteristics derive from the
provisions of individual contracts, the continuous turnover of individual contracts,
arising from both strategic shifts and day to day underwriting, can and does introduce
appreciable background variability in various underwriting line items. Changes in
estimates related to unreported reinsurance activity may also affect premiums earned.

Expenses.Incurred loss and LAE increased by 14.3% to $2,053.8 million in 2004 from
          $1,796.9 million in 2003. The increase in incurred losses and LAE was
          principally attributable to the provision for estimated catastrophe losses from
          hurricanes Charley, Frances, Ivan and Jeanne, the Pacific typhoons, the Asian
          tsunami and the net reserve adjustments for prior period losses, together with
          the mitigating effects of the impact of favorable changes in the Companys
          underlying business mix and aggregate rates, terms and conditions.

The Companys loss and LAE
reserves reflect estimates of ultimate claim liability. Such estimates are reevaluated on
an ongoing basis, including re-estimates of prior period reserves, taking into
consideration all available information and, in particular, newly reported loss and claim
experience. The effect of such reevaluations impacts incurred losses for the current
period. The Company notes that its analytical methods and processes operate at multiple
levels, including individual contracts, groupings of like contracts, classes and lines of
business, internal business units, segments, legal entities, and in the aggregate. The
complexities of the Companys business and operations require analyses and
adjustments, both qualitative and quantitative, at these various levels. Additionally, the
attribution of reserves, changes in reserves and incurred losses between accident year and
underwriting year requires adjustments and allocations, both qualitative and quantitative,
at these various levels. All of these processes, methods and practices appropriately
balance actuarial science, business expertise and management judgment in a manner intended
to assure the accuracy, precision and consistency of the Companys reserving
practices, which are fundamental to the Companys operation. The

21



Company notes,
however, that the underlying reserves remain estimates, which are subject to variation,
and that the relative degree of variability is generally least when reserves are
considered in the aggregate and generally increases as the focus shifts to more granular
data levels.

Incurred losses and LAE in 2004
reflected ceded losses and LAE of $789.6 million compared to ceded losses and LAE in 2003
of $688.8 million. Ceded losses and LAE in 2004 included $480.2 of ceded losses relating
to the quota share reinsurance transactions noted earlier between Everest Re and Bermuda
Re and Everest International as compared with ceded losses of $422.9 million for 2003. The
ceded losses and LAE for 2003 included $85.0 million of losses ceded under the 2000
accident year aggregate excess of loss component of the Companys corporate
retrocessional program and $81.1 million under an aggregate excess of loss reinsurance
agreement provided by Prudential Property and Casualty Insurance Company of Indiana
(Prupac), a wholly-owned subsidiary of The Prudential. On October 31, 2003, LM
Property & Casualty Insurance Company (LM) completed its purchase of
Prupac and its obligations from The Prudential. The Prudential continues to guarantee
LMs obligation under this agreement. Cessions under this reinsurance agreement
exhausted the limit available under the contract at December 31, 2003.

Incurred losses and LAE include
catastrophe losses, which include the impact of both current period events and favorable
and adverse development on prior period events and are net of reinsurance. Individual
catastrophe losses are reported net of specific reinsurance, but before recoveries under
corporate level reinsurance and potential incurred by not reported (IBNR)
reserve offsets. The Company defines a catastrophe as a property event with expected
reported losses of at least $5.0 million before corporate level reinsurance and taxes.
Catastrophe losses, net of contract specific cessions and the inter-affiliate quota share
reinsurance described above, were $257.5 million in 2004, relating principally to
aggregate estimated losses of $290.9 million from hurricanes Charley, Frances, Ivan and
Jeanne, Pacific typhoons, Edmonton hailstorms and the Asian tsunami, which were partially
offset by $32.7 million of reserve reductions related to the World Trade Center events.
Catastrophe losses, net of contract specific cessions and the inter-affiliate quota share
reinsurance described above, were $22.3 million in 2003, relating principally to the May
2003 tornado and hailstorm events and hurricanes Fabian and Isabel.

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

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

Net adverse prior period reserve
adjustments for the year ended December 31, 2004 were $184.9 million compared to $201.5
million in 2003. For the year ended December 31, 2004, the adverse reserve adjustments
included net adverse asbestos and environmental (A&E) adjustments of $10.3
million and net adverse non-A&E adjustments of approximately $207.3 million relating
primarily to casualty reinsurance, in particular, workers compensation, partially
offset by favorable development of $32.7 million relating to the reduction of reserves for
the World Trade Center events. For the year ended December 31, 2003, net adverse prior
period reserve adjustments for A&E exposures were $16.8 million and net adverse
non-A&E adjustments were $184.7 million, which were net of a cession of $85 million
under the 2000 accident year aggregate excess of loss component of the Companys
corporate retrocessional program. It is important to note that adverse non-A&E
accident year reserve development arises from the reevaluation of accident year results,
that such reevaluations

22



also impact premiums and commissions attributed by accident
year, generally mitigating, in part, the impact of loss development and that such impacts
are recorded as part of the overall reserve evaluation.

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

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

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

The International segment had $10.0
million and $15.8 million of net adverse prior period reserve adjustments for the years
ended December 31, 2004 and 2003, respectively. The adverse prior period reserve
adjustments in 2004 related primarily to 2003 Canadian property catastrophe, international
and Asia business. The prior period reserve development for 2003 related primarily to
general casualty business written on both a quota share and excess basis for accident
years 1996 through 2002.

Aggregate reserve development related
to A&E exposures was $10.3 million and $16.8 million for the years ended December 31,
2004 and 2003, respectively. The Company has A&E exposure related to contracts written
by the Company prior to 1986 and to claim obligations acquired as part of the Mt. McKinley
acquisition in September 2000. The reserve strengthening on business written by the
Company, net of reinsurance, was $10.3 million in 2004. Substantially all of the
Companys A&E exposures relate to insurance and reinsurance contracts with
coverage periods prior to 1986. Given the uncertainties surrounding the settlement of
A&E losses, management is unable to establish a meaningful range for these
obligations.

23



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

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

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

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

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

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

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

Segment underwriting expenses
increased by 3.7% to $633.1 million in 2004 from $610.8 million in 2003. Commission,
brokerage, taxes and fees increased by $12.2 million, principally reflecting increases in
premium volume and changes in the mix of business. Segment other underwriting expenses
increased by $10.1 million as the Company continues to expand operations to support its
increased business volume. Contributing to the segment underwriting expense increases were
a 53.4% ($41.0 million) increase in the International operation and a 4.8% ($13.7 million)
increase in the U.S. Reinsurance operation, which were all partially offset by a 18.9%
($27.0 million) decrease in the U.S. Insurance operation and a 5.1% ($5.4 million)
decrease in the Specialty Underwriting operation. The changes for each operations
expenses principally resulted from changes in commission expenses related to changes in
premium volume and business mix by class and type and, in some cases, changes in the use
of specific reinsurance, as well as the underwriting performance of the

24



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

The following table shows the expense
ratios for each of the Companys operating segments in 2004 and 2003.

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

The Companys combined ratio,
which is the sum of the loss and expense ratios, increased by 1.4 percentage points to
99.1% in 2004 compared to 97.7% in 2003.

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

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

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

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, 2004 and 2003                                    
|Imbedded after-tax yield of cash and invested assets at December 31, 2004 and 2003                                  
|Annualized pre-tax yield on average cash and invested assets for the twelve monthsended December 31, 2004 and 2003  
|Annualized after-tax yield on average cash and invested assets for the twelve monthsended December 31, 2004 and 2003

Net realized capital gains were $56.7
million in 2004, reflecting realized capital gains on the Companys investments of
$107.4 million, including $77.6 million on the sale of interest only strip investments.
This was partially offset by $50.7 million of realized capital losses, which included
$43.9 million related to the write-downs in the value of interest only strips deemed to be
impaired on an other than temporary basis in accordance

25



with EITF 99-20. Net realized
capital losses of $22.9 million in 2003 reflected realized capital losses on the
Companys investments of $51.5 million, which included $16.4 million relating to
write-downs in the value of securities deemed to be impaired on an other than temporary
basis and $25.2 million related to the impairment on interest only strips, partially
offset by $28.6 million of realized capital gains, which included $12.5 million of
realized capital gains on sales of the interest only strips.

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

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

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

Income Taxes.     The
Companys income tax expense is primarily a function of the U.S. statutory tax rate
and the impact from tax preferenced investment income. Additionally, in conjunction with
the transfer of the Companys UK Branch to Bermuda Re, there were various tax issues
giving rise to net tax expenses. The Company recognized income tax expense of $56.1
million in 2004 compared to $61.0 million in 2003.

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

YEAR ENDED DECEMBER 31,
2003 COMPARED TO YEAR ENDED DECEMBER 31, 2002 Premiums.    
          Gross written premiums increased 49.9% to $3,850.1 million in 2003 from $2,568.9
          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 44.2% ($161.1
          million) primarily due to 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 $1,088.4
million in 2003 from $535.2 million in 2002. This increase was principally attributable to
$867.4 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

26



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 premiums 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
35.8% to $2,761.7 million in 2003 from $2,033.7 million in 2002, reflecting the increase
in gross written premiums, combined with the growth in ceded premiums.

Premium Revenues.     Net premiums
earned increased by 35.3% to $2,467.4 million in 2003 from $1,823.8 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 17.7% ($48.7 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 38.1% to $1,796.9 million in 2003 from
          $1,301.5 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.

Incurred losses and LAE for 2003
reflected ceded losses and LAE of $688.8 million compared to ceded losses and LAE in 2002
of $457.0 million. Ceded losses and LAE in 2003 include $422.9 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 $149.5 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.

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 with expected reported losses of at least $5.0 million before
corporate level reinsurance and taxes. Catastrophe losses, net of contract specific
cessions and the inter-affiliate quota share reinsurance described above, were $22.3
million in 2003, relating principally to May 2003 tornado and hailstorm events and
hurricanes Fabian and Isabel, compared to $21.0 million in 2002.

27



The following table shows the net
catastrophe losses for each of the Companys operating segments for 2003 and 2002.

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

Net adverse 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 adverse development on business
written by the Company, net of reinsurance, was $16.8 million and the net adverse 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.

Net prior period reserve adjustments
for non-A&E exposures for the year ended December 31, 2003 were $184.7 million, which
amount is net of a 2000 accident year cession of $85.0 million, and were comprised of an
$134.1 million increase relating principally to the casualty exposures (including D&O
liability exposures) in the U.S. Reinsurance operation, a $23.9 million decrease relating
to the surety exposures in the Specialty Underwriting operation, a $15.8 million increase
relating mainly to the casualty exposures of the 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.

The following table shows the net
prior period reserve adjustments for each of the Companys operating segments for
2003 and 2002.

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

The segment components of the
increase in incurred losses and LAE in 2003 from 2002 were a 36.2% ($59.1 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.

28



The Companys loss ratio, which
is calculated by dividing incurred losses and LAE by net premiums earned, increased by 1.4
percentage points to 72.8% in 2003 from 71.4% 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 16.5% to $610.8 million in 2003 from $524.4 million in 2002. Commission,
brokerage, taxes and fees increased by $70.2 million principally reflecting increases in
premium volume and changes in the mix of business. Other underwriting expenses increased
by $16.2 million. Contributing to the $86.4 million increase in expenses were a 55.5%
($101.3 million) increase in the U.S. Reinsurance 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 and a 0.9% ($1.0 million) decrease in the
International 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 24.8% for 2003 compared to 28.8% for 2002.

The following table shows the expense
ratios for each of the Companys operating segments in 2003 and 2002.

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

The Companys combined ratio,
which is the sum of the loss and expense ratios, decreased by 2.5 percentage points to
97.7% in 2003 compared to 100.2% 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          

29



Investment.    
          Net investment income increased 10.4% to $284.8 million in 2003 from $258.0
          million in 2002, principally reflecting the effects of investing the $1,051.0
          million of cash flow from operations in 2003 and $209.9 million of net proceeds
          from Holdings issuance of junior subordinated debt securities in November
          2002, all partially offset by the effect of the lower interest rate environment.

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 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 1N 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, a type of contract which it no longer writes.
This contract meets the definition of a derivative under 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 was primarily due
to less deferrals of the retroactive reinsurance agreements with affiliates.

Interest expense was $57.3 million in
2003 compared to $44.6 million for 2002. Interest expense in 2003 reflected $38.9 million
relating to the senior notes, $17.0 million relating to the junior subordinated debt
securities 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, $2.2
million relating to the junior subordinated debt securities and $3.5 million relating to
borrowings under the revolving credit facility.

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.

30



SAFE HARBOR DISCLOSUREThis report contains forward-looking
statements within the meaning of the U.S. federal securities laws. The Company intends
these forward-looking statements to be covered by the safe harbor provisions for
forward-looking statements in the federal securities laws. In some cases, these statements
can be identified by the use of forward-looking words such as may,
will, should, could, anticipate,
estimate, expect, plan, believe,
predict, potential and intend. Forward-looking
statements contained in this report include information regarding the Companys
reserves for losses and LAE, the adequacy of the Companys provision for
uncollectible balances, estimates of the Companys catastrophe exposure, the effects
of catastrophic events on the Companys financial statements, the ability of Everest
Re, Holdings and Bermuda Re to pay dividends and the settlement costs of the
Companys specialized equity put options. Forward-looking statements only reflect the
Companys expectations and are not guarantees of performance. These statements
involve risks, uncertainties and assumptions. Actual events or results may differ
materially from the Companys expectations. Important factors that could cause the
Companys actual events or results to be materially different from the Companys
expectations include those discussed below under the caption 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 FACTORSThe 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 and the trading price of the Companys
common shares could decline significantly.

RISKS RELATING TO THE
COMPANYS BUSINESS

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 before reinsurance of at least $5.0 million, before
corporate level reinsurance and taxes. By way of illustration, during the past five
calendar years, pre-tax catastrophe losses, net of contract specific reinsurance but
before cessions under corporate reinsurance programs, were as follows:

|Calendar year | Pre-tax catastrophe losses
|------------- | --------------------------
|              |                           
|2004          |                           
|2003          |                           
|2002          |                           
|2001          |                           
|2000          |                           

If the Companys 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 loss adjustment expenses
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

31



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 | Effect on pre-tax net income
|------------- | ----------------------------
|             
|2004          | $                           
|2003          | $                           
|2002          | $                           
|2001          | $                           
|2000          | $                           

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 generate a net loss.

The Companys success depends on
its ability to accurately assess the risks associated with the businesses 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 a net 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 terrorist attacks on September 11, 2001. Neither the magnitude
of loss on a single line of business nor the combined impact on several lines of business
from an act of terrorism on such a large scale was contemplated when 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. An
example of this is the ongoing expansion of the scope of insurers legal liability
for A&E exposures discussed above.

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.

In 2004, the favorable market
conditions, which had developed during 2000 through 2003, generally began to weaken. There
were signs that pricing for most property classes declined modestly and that pricing for
most casualty classes softened. Competition increased in part due to the relative
profitability achieved by many

32



reinsurers over 2002 and 2003 and the attendant buildup of
capital in these market participants. However, this profitability and capital buildup
varied significantly by participant reflecting the fact that the industry generally still
remained exposed to fundamental issues that had negatively impacted its aggregate capacity
in 2002 and 2003, including weak investment market conditions and adverse loss emergence.
Both of these had tended to depress the industrys aggregate financial performance
and perceptions of financial strength of industry participants over this period albeit
with significant variation by individual market participant. The industry experienced a
record level of catastrophe losses during 2004, particularly in the second half of the
year, and it remains unclear whether the aggregate catastrophe losses experienced by the
industry will reverse, stop or even moderate the trends toward market softening,
particularly as respects property classes. Further discussion of competitive 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, which is in runoff, 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 financial strength rating downgrade. However, the Company cannot assure that a
downgrade will not occur in the future. Consistent with market practice, many 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.

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 is generally less reliant
on the purchase of third party reinsurance than many of its competitors, in part because
of its strategic emphasis on underwriting discipline and management of the cycles inherent
in its business. The Company tries to separate its risk taking process from its risk
mitigation process in order to avoid developing too great a reliance on reinsurance. Thus,
the Company generally evaluates, underwrites, selects and prices its products prior to
consideration of reinsurance. However, the Companys underwriters generally consider
purchasing reinsurance with respect to specific insurance contracts or programs, and its
senior management generally considers purchasing reinsurance with respect to its overall
operations, where

33



reinsurance is deemed prudent from a risk mitigation perspective or is
expected to have a positive cost/benefit relationship. Since the Company generally
purchases reinsurance only when it expects a net benefit, the percentage of business that
it reinsures, as indicated in the chart below, varies considerably from year to year,
depending on its view of the relationship between cost and expected benefit for the
contract period.

|Percentage of ceded written premiums to gross written premiums | 2004  |  | 2003 |       | 2002 |  | 2001  |  | 2000
|-------------------------------------------------------------- | ----- |  | ---- | ----- | ---- |  | ----- |  | ----
|                                                               |       |  |      |       |     
|Unaffiliated                                                   | 4.6%  |  |      | 5.2%  |      |  | 6.7%  |  |     
|Affiliated                                                     | 18.7% |  |      | 22.9% |      |  | 13.8% |  |     

Changes in the availability and cost
of reinsurance, which are subject to market conditions that are outside of the
Companys control, have thus reduced to some extent its ability to use reinsurance to
tailor the risks it assumes on a contract or program basis or to mitigate or balance
exposures across its reinsurance operations. Because the Company has reduced its level of
reinsurance purchases, its net income could be reduced in the event of a large unreinsured
event or adverse overall experience.

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 subject to pricing cycles that can be particularly pronounced. The ease of
entry for well-capitalized competitors further exacerbates this market cycle. The Company
competes on a global basis in the U.S. and international markets. According to Standard
& Poors, the Company ranks among the top ten global reinsurance groups where 80%
of the market share is concentrated. The top twenty groups in the Companys industry
represent 95% of the markets revenues. The leaders in this market are Munich Re,
Swiss Re, Berkshire Hathaway, Hannover Re and Employers Re. Relative to Group, some of
these competitors may have greater financial resources, longer operating histories, and
extensive business relationships that transcend the industry, any of which can be a
significant competitive advantage. Forces outside the industry can also impact the
Companys market, including such factors as economic, regulatory, legal, and
geophysical. The Company may not be able to compete successfully in the future should
there be a significant change to the competitive landscape of its market.

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 56),
President and Chief Operating Officer, Thomas J. Gallagher (age 56), and Executive Vice
President and Chief Financial Officer, Stephen L. Limauro (age 53). 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.

34



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 smaller
portions consist of equity securities and other investments. 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.

|(Dollars in thousands)Type of Security |  | As ofDecember 31, 2004 |   | % ofTotal
|-------------------------------------- |  | ---------------------- | - | ---------
|                                       |  |                       
|Fixed income:                          |  |                        |   |          
|Mortgage-backed securities             |  |                        | $ | 490,253  
|Other asset-backed                     |  |                        |   | 37,470   
|                                       | 
|Total asset-backed                     |  |                        |   | 527,723  
|Other fixed income                     |  |                        |   | 5,631,816
|                                       | 
|Total fixed income                     |  |                        |   | 6,159,539
|Equity securities                      |  |                        |   | 650,871  
|Other invested assets                  |  |                        |   | 114,187  
|Cash and short-term investments        |  |                        |   | 571,711  
|                                       | 
|Total Investments and Cash             |  |                        | $ | 7,496,308
|                                       | 

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 functional
currency is the U.S. dollar. However, the Company writes a portion of its business in
currencies other than U.S. dollars. During the year ended December 31, 2004, the Company
wrote approximately 13.5% of its reinsurance coverages in currencies other than U.S.
dollars. The Company also maintains a portion of its investment portfolio in investments
denominated in currencies other than U.S. dollars. As of December 31, 2004, the Company
maintained approximately 6.4% of its investment portfolio in investments denominated in
currencies other than U.S. dollars. Consequently, quarterly exchange rate fluctuations may
have a material impact on the Companys quarterly net income. During 2004, 2003,
2002, the impact on the Companys quarterly pre-tax net income from exchange rate
fluctuations ranged from a loss of

35



$4.3 million to a gain of $5.4 million. Further
discussion of foreign currency rate risk can be found in ITEM 7, Managements
Discussion and Analysis of Financial Condition and Results of Operations  Market
Sensitive Instruments.

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
and increasing 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, accounting and internal control 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.

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

36



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.

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

The Companys $7.5 billion
investment portfolio at December 31, 2004 is principally comprised of fixed maturity
securities, which are subject to interest rate risk and foreign currency rate risk, and
equity securities, which are subject to equity price risk. The impact of these risks on
the investment portfolio is generally mitigated by changes in the value of operating
assets and liabilities and their associated income statement impact.

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 $490.3 million of mortgage-backed securities in the $6,159.5
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.

37



The tables below display the
potential impact of market value fluctuations and after-tax unrealized appreciation on the
Companys fixed maturity portfolio as of December 31, 2004 and 2003 based on parallel
200 basis point shifts in interest rates up and down in 100 basis point increments. For
legal entities with a U.S. dollar functional currency, this modeling was performed on each
security individually. To generate appropriate price estimates on mortgage-backed
securities, changes in prepayment expectations under different interest rate environments
were taken into account. For legal entities with a non-U.S. dollar functional currency,
the effective duration of the involved portfolio of securities was used as a proxy for the
market value change under the various interest rate change scenarios. All amounts are in
U.S. dollars and are presented in millions. In general, for 2003, the lower volatility was
attributable to the Companys investments in interest only strips, the effect of
which was to reduce overall portfolio duration and therefore sensitivity to interest rate
moves.

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

|2003Interest Rate Shift in Basis Points
|---------------------------------------
|                                       
|                                       
|                                       
|Total Market Value                     
|Market Value Change from Base (%)      
|Change in Unrealized Appreciation      
|After-tax from Base ($)                

The Company had $6,846.9 million and
$6,227.1 million of reserves for losses and LAE as of December 31, 2004 and December 31,
2003. These amounts are recorded at their nominal or estimated ultimate payment amount, as
opposed to fair value, which would reflect a discount adjustment to reflect the time value
of money. Since losses are paid out over a period of time, the fair value of the reserves
is less than the nominal value. As interest rates rise, the fair value of the reserves
decreases and conversely, if interest rates decline, the fair value will increase. These
movements are the opposite of the interest rate impacts on the fair value of investments
since reserves are future obligations. While the difference between fair value and nominal
value is not reflected in the Companys financial statements, the Companys
financial results will include investment income over time from the investment portfolio
until the claims are paid. The Companys loss and loss reserve obligations have an
expected duration that is reasonably consistent with the Companys fixed income
portfolio. The existence of such obligations, and the variable differential between
ultimate and fair value, which in theory applies equally to invested assets and insurance
liability, provides substantial mitigation of the economic effects of interest rate
variability even though such mitigation is not reflected in the Companys financial
statements.

Foreign currency rate risk is the
potential change in value, income and cash flow arising from adverse changes in foreign
currency exchange rates. Each of the Companys non-U.S. (foreign)
operations maintains capital in the currency of the country of its geographic location
consistent with local regulatory guidelines. Generally, 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

38



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. As of December 31, 2004,
there has been no material change in exposure to foreign exchange rates as compared to
December 31, 2003.

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, 2004 and 2003. 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.

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

|2003Change in Foreign Exchange Rates in Percent
|-----------------------------------------------
|                                               
|                                               
|                                               
|Total After-tax Foreign Exchange Exposure      

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

The tables below display the impact
on market value and after-tax unrealized appreciation of a 20% change in equity prices up
and down in 10% increments as of December 31, 2004 and 2003. The growth in exposure is
primarily due to the growth in the equity portfolio. All amounts are in U.S. dollars and
are presented in millions.

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

|2003Change in Equity Values in Percent     
|-------------------------------------------
|                                           
|                                           
|                                           
|Market Value of the Equity Portfolio       
|After-tax Change in Unrealized Appreciation

39



ITEM 8. Financial
Statements and Supplementary Data

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

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

None.

ITEM 9A. Controls and
Procedures

Disclosure Controls and
Procedures

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

Managements Report
on Internal Control Over Financial Reporting

Not required for fiscal year ended
December 31, 2004.

Changes in Internal
Control over Financial Reporting

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

ITEM 9B.Other Information

None.

PART III

ITEM 10.Directors and Executive Officers of the Registrant

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

ITEM 11. Executive
Compensation

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

40



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:

|   | 2004 |                    | 2003 |          
|-- | ---- | ------------------ | ---- | ---------
|   |      |                   
|(1 | )    | Audit Fees         | $    | 1,474,413
|(2 | )    | Audit-Related Fees | $    | 69,300   
|(3 | )    | Tax Fees           | $    | 8,060    
|(4 | )    | All Other Fees     | $    | -        

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

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

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

All other fees represent an accounting
research subscription and software.

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

Under its Charter and the Audit
and Non-Audit Services Pre-Approval Policy (the Policy), Groups
Audit Committee or its delegate (one or more of its members) is required to pre-approve
the audit and non-audit services performed by the independent auditor. The Policy requires
that any service that has not received a general pre-approval or that exceeds pre-approved
cost levels or budgeted amounts requires specific approval

41



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

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

PART IV

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

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

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

Reports on Form 8-KA report on Form 8-K was furnished on
October 6, 2004, under Item 7.01, relating to the Companys October 6, 2004 news
release announcing its estimated losses from Florida hurricanes.

A report on Form 8-K was furnished on
October 12, 2004, under Item 9.01, attaching as exhibits certain agreements, legal
opinions and consents relating to the issuance of senior notes, which exhibits were filed
with reference to and thereby incorporated by reference into the Registration Statement on
Form S-3 filed, inter alia, by the Company.

42



# SIGNATURES

Pursuant to the requirements of
Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused
this report to be signed on its behalf by the undersigned, thereunto duly authorized on
March 31, 2005.

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

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

|/s/ JOSEPH V. TARANTO
       Joseph V. Taranto     | Chairman and Chief Executive Officer and Director
(Principal Executive Officer)                  | March 31, 2005
|-------------------------------------------------- | ------------------------------------------------------------------------------------------------ | --------------
|/s/ THOMAS J. GALLAGHER
       Thomas J. Gallagher | President and Chief Operating Officer and Director                                               | March 31, 2005
|/s/ STEPHEN L. LIMAURO
       Stephen L. Limauro   | Executive Vice President and Chief Financial 
Officer and Director (Principal Financial Officer) | March 31, 2005
|/s/ KEITH T. SHOEMAKER
       Keith T. Shoemaker   | Vice President and Comptroller (Principal Accounting Officer)                                    | March 31, 2005

43



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

E-4



|INDEX TO FINANCIAL STATEMENTS AND
SCHEDULES                                                                         
|--------------------------------------------------------------------------------------------------------------------
|Everest Reinsurance Holdings, Inc.                                                                                  
|                                                                                                                    
|Report of Independent Registered Public Accounting Firm                                                             
|Consolidated Balance Sheets at December 31, 2004 and 2003                                                           
|Consolidated Statements of Operations and Comprehensive Income for the Years Ended                                  
|December 31, 2004, 2003 and 2002                                                                                    
|Consolidated Statements of Changes in Shareholders Equity for the Years Ended                                      
|December 31, 2004, 2003 and 2002                                                                                    
|Consolidated Statements of Cash Flows for the Years Ended                                                           
|December 31, 2004, 2003 and 2002                                                                                    
|Notes to Consolidated Financial Statements                                                                          
|                                                                                                                    
|Schedules                                                                                                           
|I       Summary of Investments Other Than Investments in Related Parties at                                         
|December 31, 2004                                                                                                   
|II     Condensed Financial Information of Registrant:                Balance Sheets as of December 31, 2004 and 2003
|Statements of Operations for the Years Ended December 31, 2004, 2003 and 2002                                       
|Statements of Cash Flows for the Years Ended December 31, 2004, 2003 and 2002                                       
|III    Supplementary Insurance Information as of December 31, 2004 and 2003                                         
|and for the Years Ended December 31, 2004, 2003 and 2002                                                            
|IV    Reinsurance for the Years Ended December 31, 2004, 2003 and 2002                                              

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

F-1



REPORT OF INDEPENDENT
REGISTERED PUBLIC ACCOUNTING FIRM

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

In our opinion, the accompanying
consolidated balance sheets and the related consolidated statements of operations and
comprehensive income, of stockholders equity and of cash flows present fairly, in
all material respects, the financial position of Everest Reinsurance Holdings, Inc. and
its subsidiaries (collectively referred to as the Company) as of December 31,
2004 and 2003, and the results of their operations and their cash flows for each of the
three years in the period ended December 31, 2004, in conformity with accounting
principles generally accepted in the United States of America. These financial statements
are the responsibility of the Companys management; our responsibility is to express
an opinion on these financial statements based on our audits. We conducted our audits of
these statements in accordance with the standards of the Public Company Accounting
Oversight Board (United States). Those standards require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the accounting
principles used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a reasonable basis
for our opinion.

PricewaterhouseCoopers LLP
New York, New YorkMarch 29, 2005

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: 2004, $5,887,529; 2003, $5,649,269)                                 
|Equity securities, at market value (cost: 2004, $571,717; 2003, $146,407)            
|Short-term investments                                                               
|Other invested assets (cost: 2004, $113,050; 2003, $59,183)                          
|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 loss 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                                                     
|5.4% Senior notes due 10/15/2014                                                     
|Junior subordinated debt securities payable                                          
|Revolving credit agreement borrowings                                                
|Accrued interest on debt and borrowings                                              
|Other liabilities                                                                    
|                                                                                     
|Total liabilities                                                                    
|                                                                                     
|Commitments and Contingencies (Note 14)STOCKHOLDERS' EQUITY:                         
|Common stock, par value: $0.01; 3,000 shares authorized;                             
|1,000 shares issued (2004 and 2003)                                                  
|Additional paid-in capital                                                           
|Treasury shares, at cost; 0.5 million shares (2004 and 2003)                         
|Accumulated other comprehensive income, net of deferred income                       
|taxes of  $133.4 million at 2004 and $112.2 million at 2003                          
|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                       
|                                                                                     
|(Dollars in thousands)                                                               
|                                                                                     
|REVENUES:                                                                            
|Premiums earned                                                                      
|Net investment income                                                                
|Net realized capital gains (losses)                                                  
|Net derivative expense                                                               
|Other expense                                                                        
|                                                                                     
|Total revenues                                                                       
|                                                                                     
|CLAIMS AND EXPENSES:                                                                 
|Incurred losses and loss adjustment expenses                                         
|Commission, brokerage, taxes and fees                                                
|Other underwriting expenses                                                          
|Interest expense on senior notes                                                     
|Interest expense on junior subordinated debt                                         
|Interest expense on credit facility                                                  
|                                                                                     
|Total claims and expenses                                                            
|                                                                                     
|INCOME BEFORE TAXES                                                                  
|Income tax expense                                                                   
|                                                                                     
|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 SHAREHOLDERS' EQUITY                           
|                                                                                     
|(Dollars in thousands, except stock amounts)                                         
|                                                                                     
|COMMON STOCK (stock outstanding):                                                    
|Balance, beginning of period                                                         
|Issued during the period                                                             
|                                                                                     
|Balance, end of period                                                               
|                                                                                     
|ADDITIONAL PAID IN CAPITAL:                                                          
|Balance, beginning of period                                                         
|Tax benefit from stock options exercised                                             
|Dividend from parent                                                                 
|                                                                                     
|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                                                                           
|Dividends paid                                                                       
|                                                                                     
|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                                                
|                                                                                     
|(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 (increase) in net funds held                                                
|Increase in reinsurance receivables                                                  
|Increase in deferred tax asset                                                       
|Increase in reserve for losses and loss adjustment expenses                          
|Increase in unearned premiums                                                        
|Increase (decrease) in other assets and liabilities                                  
|Amortization of bond premium/(accrual of bond discount)                              
|Amortization of underwriting discount on senior notes                                
|Realized capital (gains) losses                                                      
|                                                                                     
|Net cash provided by operating activities                                            
|                                                                                     
|CASH FLOWS FROM INVESTING ACTIVITIES :                                               
|Proceeds from fixed maturities matured/called - available for sale                   
|Proceeds from fixed maturities sold - available for sale                             
|Proceeds from equity securities sold                                                 
|Proceeds from other invested assets sold                                             
|Cost of fixed maturities acquired - available for sale                               
|Cost of equity securities acquired                                                   
|Cost of other invested assets acquired                                               
|Net (purchases) sales of short-term securities                                       
|Net (decrease) increase in unsettled securities transactions                         
|Proceeds from sale of subsidiary, net of cash disposed                               
|                                                                                     
|Net cash used in investing activities                                                
|                                                                                     
|CASH FLOWS FROM FINANCING ACTIVITIES:                                                
|Tax benefit from stock options exercised                                             
|Dividend from parent                                                                 
|Purchase of treasury shares                                                          
|Net Proceeds from issuance of senior notes                                           
|Net proceeds from issuance of junior subordinated notes                              
|Borrowing on revolving credit agreement                                              
|Repayments on revolving credit agreement                                             
|                                                                                     
|Net cash provided by financing activities                                            
|                                                                                     
|EFFECT OF EXCHANGE RATE CHANGES ON CASH                                              
|                                                                                     
|Net (decrease) increase in cash                                                      
|Cash, beginning of period                                                            
|                                                                                     
|Cash, end of period                                                                  
|                                                                                     
|SUPPLEMENTAL CASH FLOW INFORMATION                                                   
|Cash transactions:                                                                   
|Income taxes paid, net                                                               
|Interest paid                                                                        
|Non-cash financing transaction:                                                      
|Non-cash dividend to parent                                                          
|Non-cash tax benefit from stock options exercised                                    
|The accompanying notes are an integral part of the consolidated financial statements.

F-6



EVEREST REINSURANCE HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Years Ended December
31, 2004, 2003 and 2002

1. SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES

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

The accompanying consolidated
financial statements have been prepared in conformity with 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 Reinsurance Company
(Everest Re), Everest National Insurance Company (Everest
National), Everest Indemnity Insurance Company (Everest Indemnity),
Everest Re Holdings, Ltd. (Everest Ltd.), Everest Security Insurance Company
(Everest Security), formerly Southeastern Security Insurance Company, Everest
Insurance Company of Canada (Everest Canada), Mt. McKinley Managers, L.L.C.
(Managers), Workcare Southeast, Inc. (Workcare Southeast),
Workcare Southeast of Georgia, Inc. (Workcare Georgia) and Mt. McKinley
Insurance Company (Mt. McKinley). All amounts are reported in U.S. dollars.

The preparation of financial
statements in conformity with 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.

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

F-7



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

C.  Uncollectible Receivable
BalancesThe Company provides reserves for uncollectible reinsurance balances based
on managements assessment of the collectibility of the outstanding balances. Such
reserves were $36.7 million at December 31, 2004 and $33.3 million at December 31, 2003.
See also Note 10.

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 $577.5 million, $595.5 million and
$488.4 million in 2004, 2003 and 2002, respectively.

E.  Reserve for Losses and Loss
Adjustment ExpensesThe reserve for losses and loss
adjustment expenses (LAE) is based on individual case estimates and reports
received from ceding companies. A provision is included for losses and LAE incurred but
not reported (IBNR) based on past experience. A provision is also included
for certain potential liabilities relating to asbestos and environmental (A&E)
exposures, which liabilities cannot be estimated with traditional reserving techniques.
See also Note 3. The reserves are reviewed continually and any changes in estimates are
reflected in earnings in the period the adjustment is made. Management believes that
adequate provision has been made for the Companys losses and LAE. Loss and LAE
reserves are presented gross of reinsurance receivables and incurred losses and LAE are
presented net of ceded reinsurance.

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

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

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

F-8



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

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

J.  DerivativesThe Company has remaining in its
product portfolio one credit default swap, a type of contract which it no longer offers.
This product meets the definition of a derivative under Statement of Financial Accounting
Standards 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 consolidated balance sheets and changes in fair value are recorded in the consolidated
statements of operations and comprehensive income.

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

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

M.  Application of New Accounting
StandardsIn January 2003, the Financial
Accounting Standards Board (FASB) issued Financial Interpretation No. 46,
Consolidation of Variable Interest Entities (FIN 46). FIN 46
addresses whether certain types of entities, referred to as variable interest entities
(VIEs), should be consolidated or deconsolidated in a companys financial
statements. During 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, replacing 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 on or after March 15, 2004. The
Company adopted FIN 46R in the first quarter of 2004, resulting in the deconsolidation of
Everest Re Capital Trust (Capital Trust) and Everest Re Capital Trust II
(Capital Trust II). For 2003 and 2002, where applicable, the financial
statements have been restated to reflect the deconsolidation.

In March 2004, the Emerging Issue
Task Force (EITF) reached a final consensus on Issue 03-1, The Meaning
of Other-Than-Temporary Impairment and Its Application to Certain Investments. This
issue establishes guidance for determining whether to record impairment losses associated
with investments in certain

F-9



equity and debt securities. The
application of this issue was required for reporting periods beginning after June 15,
2004. On September 30, 2004, the FASB issued a final FASB Staff Position EITF Issue
03-1-1, which delayed the effective date for the measurement and recognition guidance
included in paragraphs 10 through 20 of EITF Issue 03-1. The Company is unable to predict
the impact on other-than-temporary impairments until the guidance is finalized.
Currently, the Company continues to apply Statement of Financial Accounting Standards No.
115, Accounting for Certain Investments in Debt and Equity Securities (FAS
115) and the Securities and Exchange Commission (SEC)s Staff
Accounting Bulletin Topic 5:M, Other Than Temporary Impairment Of Certain
Investments In Debt And Equity Securities, and believes that unrealized losses in
its investment portfolio are temporary in nature.

N.  Investments Interest Only
StripsCommencing with the second quarter of
2003 and through the second quarter of 2004, the Company had investments 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 tends to increase as general interest rates rise and
decline as general interest rates fall. These movements are generally counter to the
impact of interest rate movements on the Companys other fixed income investments. As
interest rates rose during the second quarter of 2004, the Company fully liquidated its
interest only strip investment portfolio.

The Company accounted for its
investment in interest only strips in accordance with EITF No. 99-20, Recognition of
Interest Income and Impairment on Purchased and Retained Beneficial Interests in
Securitized Financial Assets(EITF 99-20). EITF 99-20 sets forth the
rules for recognizing interest income on all credit-sensitive mortgage and asset-backed
securities and certain prepayment-sensitive securities, including agency interest only
strips, whether purchased or retained in securitization, as well as the rules for
determining when these securities must be written down to fair value because of
impairment. EITF 99-20 requires decreases in the valuation of residual interests in
securitizations to be recorded as a reduction to the carrying value of the residual
interests through a charge to earnings, rather than an unrealized loss in
stockholders equity, when any portion of the decline in fair value is attributable
to, as defined by EITF 99-20, an impairment loss. This portfolio was liquidated during the
second quarter of 2004. The Company recorded realized capital losses due to impairments of
$28.5 million, net of income tax benefit of $15.4 million for the year ended December 31,
2004 and realized capital losses due to impairments of $16.4 million, net of income tax
benefit of $8.8 million for the year ended December 31, 2003. As a result of liquidating
the interest only strip investment portfolio during the second quarter of 2004, the
Company recognized net realized capital gains of $50.4 million, net of income taxes of
$27.2 million.

F-10



2.  INVESTMENTS

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

|                                       | Amortized |  | Unrealized   |           | Unrealized   |   | Market  | 
|-------------------------------------- | --------- |  | ------------ | --------- | ------------ | - | ------- | 
|(Dollars in thousands)                 | Cost      |  | Appreciation |           | Depreciation |   | Value   | 
|                                       |           |  |              |          
|As of December 31, 2004                |           |  |              |           |              |   |         | 
|Fixed maturities  - available for sale |           | 
|U.S. Treasury securities and           |           | 
|obligations of U.S. government         |           | 
|agencies and corporations              |           |  | $            | 67,006    |              | $ | 710     | 
|Obligations of U.S. states             |           | 
|and political subdivisions             |           |  |              | 3,281,442 |              |   | 160,185 | 
|Corporate securities                   |           |  |              | 1,294,255 |              |   | 73,182  | 
|Mortgage-backed securities             |           |  |              | 486,178   |              |   | 6,910   | 
|Foreign government securities          |           |  |              | 310,081   |              |   | 22,779  | 
|Foreign corporate securities           |           |  |              | 448,567   |              |   | 20,327  | 
|                                       |           |  |              |          
|Total fixed maturities                 |           |  | $            | 5,887,529 |              | $ | 284,093 | 
|                                       |           |  |              |          
|Equity securities                      |           |  | $            | 571,717   |              | $ | 79,154  | 
|                                       |           |  |              |          
|As of December 31, 2003                |           | 
|Fixed maturities - available for sale  |           | 
|U.S. Treasury securities and           |           | 
|obligations of U.S. government         |           | 
|agencies and corporations              |           |  | $            | 136,801   |              | $ | 5,578   | 
|Obligations of U.S. states             |           | 
|and political subdivisions             |           |  |              | 2,798,386 |              |   | 156,390 | 
|Corporate securities                   |           |  |              | 1,232,519 |              |   | 91,733  | 
|Mortgage-backed securities             |           |  |              | 494,164   |              |   | 14,784  | 
|Foreign government securities          |           |  |              | 646,347   |              |   | 22,278  | 
|Foreign corporate securities           |           |  |              | 341,052   |              |   | 24,196  | 
|                                       |           |  |              |          
|Total fixed maturities                 |           |  | $            | 5,649,269 |              | $ | 314,959 | 
|                                       |           |  |              |          
|Equity securities                      |           |  | $            | 146,407   |              | $ | 7,975   | 
|                                       |           |  |              |          

F-11



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

|                                       | December 31, 2004
|-------------------------------------- | -----------------
|                                       |                  
|(Dollars in thousands)                 | AmortizedCost    
|                                       |                  
|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 2004, 2003 and 2002 were $787.0 million, $599.9 million and $1,087.0
million, respectively. Gross gains of $107.0 million, $27.8 million and $54.9 million and
gross losses of $5.4 million, $9.8 million and $28.9 million were realized on those fixed
maturity sales during 2004, 2003 and 2002, respectively. Proceeds from sales of equity
security investments during 2004, 2003 and 2002 were $18.0 million, $8.1 million and $42.9
million, respectively. Gross gains of $0.5 million, $0.8 million and $0.9 million and
gross losses of $0.9 million, $0.0 million and $0.3 million were realized on those equity
sales during 2004, 2003 and 2002, 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)                               | 2004                    
|                                                     |                         
|Increase (decrease) during the period between the    |                         
|market value and cost of investments carried         |                         
|at market value, and deferred taxes thereon:         |                         
|Fixed maturities                                     |                         
|Equity securities                                    |                         
|Other invested assets                                |                         
|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

F-12



the Companys consolidated
statements of operations and comprehensive income. The Companys assessments are
based on the issuers current financial position and timeliness with respect to
interest and/or principal payments, and speed of repayments on asset-backed securities,
as well as relevant information provided by rating agencies, investment advisors and
analysts.

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, 2004:

|                           | Duration of unrealized loss |                       
|-------------------------- | --------------------------- | ----------------------
|                           | Less than 12 months         | Greater than 12 months
|(Dollars in thousands)     | Fair Value                  |                       
|                           |                             |                       
|Fixed maturity securities  |                             |                       
|U.S. government            |                             |                       
|agencies and authorities   |                             |                       
|States, municipalities     |                             |                       
|and political subdivisions |                             |                       
|Foreign governments        |                             |                       
|All other corporate        |                             |                       
|                           |                             |                       
|Total fixed maturities     |                             |                       
|                           |                             |                       
|Equity securities          |                             |                       
|                           |                             |                       
|Total                      |                             |                       
|                           |                             |                       

The aggregate fair value and gross
unrealized losses related to investments in an unrealized loss position as of December 31,
2004 is $905.1 million and $12.1 million, respectively. The $7.8 million of unrealized
losses related to securities that have been in an unrealized loss position for one year or
less are primarily comprised of highly rated government, municipal and corporate bonds and
are primarily related to the general movements in interest rates throughout the year. Of
these unrealized losses, $6.0 million are related to securities that are rated investment
grade or better by a Nationally Recognized Statistical Rating Organization.

The $4.3 million of unrealized losses
related to securities that have been in an unrealized loss position for one year or more
are also primarily comprised of highly rated government, municipal and corporate bonds and
generally relate to the general movements in interest rates throughout the year. Of these
unrealized losses, $2.9 million are related to securities that are rated investment grade
or better by a Nationally Recognized Statistical Rating Organization.

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

F-13



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

|                                | Years Ended December 31,
|------------------------------- | ------------------------
|                                |                         
|(Dollars in thousands)          | 2004                    
|                                |                         
|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     |                         
|                                |                         

Other income for 2004, 2003 and 2002
primarily includes income on limited partnership investments of $36.3 million, $12.1
million and $0.6 million, respectively.

The Company has contractual
commitments to invest up to an additional $127.9 million related to its limited
partnership investments at December 31, 2004. These commitments will be funded as required
by the partnership agreements, which have investment periods that expire no later than
2011.

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

|                       | Years Ended December 31,
|---------------------- | ------------------------
|                       |                         
|(Dollars in thousands) | 2004                    
|                       |                         
|Fixed maturities       |                         
|Equity securities      |                         
|Short-term investments |                         
|                       |                         
|Total                  |                         
|                       |                         

The net realized capital losses for
2004 and 2003 include $0.5 million and $16.4 million, respectively, relating to
write-downs in the value of securities deemed to be impaired on an other than temporary
basis and $43.9 million and $25.2 million, respectively, related to the impairment on
interest only strips in accordance with EITF 99-20. Net realized capital losses for 2002
included $79.7 million relating to write-downs in the value of securities deemed to be
impaired on an other than temporary basis.

Securities with a carrying value
amount of $1,088.6 million at December 31, 2004 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. The Company recorded net after-tax losses from this contract of
$0.0 million, $0.0 million and $2.3 million in 2004, 2003 and 2002, respectively, to
reflect fair value. As of December 31, 2002, there was no remaining net loss exposure
under this contract.

F-14



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 consolidated statements of operations and comprehensive income.

3.  RESERVES FOR LOSSES AND LAE

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

|                                        | Years Ended December 31,
|--------------------------------------- | ------------------------
|                                        |                         
|(Dollars in thousands)                  | 2004                    
|                                        |                         
|Reserves at January 1                   |                         
|Less reinsurance recoverables           |                         
|                                        |                         
|Net balance at January 1                |                         
|                                        |                         
|Incurred related to:                    |                         
|Current year                            |                         
|Prior years                             |                         
|                                        |                         
|Total incurred losses and LAE           |                         
|                                        |                         
|Paid related to:                        |                         
|Current year                            |                         
|Prior years                             |                         
|                                        |                         
|Total paid losses and LAE               |                         
|                                        |                         
|Sale of UK branch                       |                         
|Foreign Exchange/Translation Adjustment |                         
|Net balance at December 31              |                         
|Plus reinsurance recoverables           |                         
|                                        |                         
|Balance at December 31                  |                         
|                                        |                         

Gross loss and LAE reserves totaled
$6,846.9 million at December 31, 2004, $6,227.1 million at December 31, 2003, and $4,875.2
million at December 31, 2002. The increase in 2004 is primarily attributable to net prior
period reserve adjustments in select areas, an increase in catastrophe losses, increased
premiums earned and normal variability in claim settlements. The increase in 2003 was
primarily attributable to increased premiums earned, net prior period reserve adjustments
in select areas and normal variability in claim settlement.

Reinsurance receivables for both
paid and unpaid losses totaled $2,560.4 million at December 31, 2004, $2,402.5 million at
December 31, 2003, and $1,840.1 million at December 31, 2002. At December 31, 2004,
$1,394.5 million, or 54.5% was receivable from Bermuda Re, $405.0 million, or 15.8% was
receivable from subsidiaries of London Reinsurance Group (London Life). These
receivables are effectively secured by a combination of letters of credit, trust accounts
and funds held arrangements. Under the funds held arrangements, 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 6.3% was receivable from the Prudential Property and Casualty
Insurance Company of Indiana (Prupac), which in late 2003 was purchased by LM
Property and Casualty Insurance Company (LM) and whose obligations continue
to be guaranteed by The Prudential Insurance Company of America (The Prudential),
and $132.5 million, or 5.2% was receivable from Transatlantic Reinsurance Company

F-15



(Transatlantic), 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 $184.9 million in 2004 and $229.0 million in 2003. The increase was the result of
modest reserve strengthening in select areas, most notably in directors and officers,
surety and workers compensation lines.

The Company continues to receive
claims under expired contracts, both insurance and reinsurance, asserting alleged injuries
and/or damages relating to or resulting from environmental pollution and hazardous
substances, including asbestos. 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. This estimate is
made based on a judgmental assessment of the underlying exposures as the result of (1)
long and variable reporting delays, both from insureds to insurance companies and from
ceding companies to reinsurers; (2) historical data, which is more limited and variable on
A&E losses than historical information on other types of casualty claims; and (3)
unique aspects of A&E exposures for which ultimate value cannot be estimated using
traditional reserving techniques. There are significant uncertainties in estimating the
amount of the Companys potential losses from A&E claims. Among the uncertainties
are: (a) potentially long waiting periods between exposure and manifestation of any bodily
injury or property damage; (b) difficulty in identifying sources of asbestos or
environmental contamination; (c) difficulty in properly allocating responsibility and/or
liability for asbestos or environmental damage; (d) changes in underlying laws and
judicial interpretation of those laws; (e) the potential for an asbestos or environmental
claim to involve many insurance providers over many policy periods; (f) questions
concerning interpretation and application of insurance and reinsurance coverage; and (g)
uncertainty regarding the number and identity of insureds with potential asbestos or
environmental exposure.

With respect to asbestos claims in
particular, several additional factors have emerged in recent years that further compound
the difficulty in estimating the Companys liability. These developments include: (a)
continued growth in the number of claims filed, in part reflecting a much more aggressive
plaintiffs bar and including claims against defendants formerly regarded as
peripheral; (b) a disproportionate percentage of claims filed by individuals
with no functional injury, which should have little to no financial value but that have
increasingly been considered in jury verdicts and settlements; (c) the growth in the
number and significance of bankruptcy filings by companies as a result of asbestos claims
(including, more recently, bankruptcy filings in which companies attempt to resolve their
asbestos liabilities in a manner that is prejudicial to insurers and forecloses insurers
from the negotiation of bankruptcy plans); (d) the concentration of claims in a small
number of states that favor plaintiffs; (e) the growth in the number of claims that might
impact the general liability portion of insurance policies rather than the product
liability portion; (f) measures adopted by specific courts to ameliorate the worst
procedural abuses; (g) an increase in settlement values being paid to asbestos claimants,
especially those with cancer or functional impairment; (h) legislation in some states to
address asbestos litigation issues; and (i) the potential that other states or the U.S.
Congress may adopt legislation on asbestos litigation.

Management believes that these
uncertainties and factors continue to render reserves for A&E and particularly
asbestos losses significantly less subject to traditional actuarial analysis than reserves
for other types of losses. Given these uncertainties; management believes that no
meaningful range for such ultimate losses can be established. The Company establishes
reserves to the extent that, in the judgment of management, the facts and prevailing law
reflect an exposure for the Company or its ceding companies.

F-16



In connection with the Companys
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. In late 2003, Prupac was purchased by LM and all obligations of Prupac
continue to be guaranteed by The Prudential. Cessions under this reinsurance agreement
exhausted the limit available under the contract at December 31, 2003.

With respect to Mt. McKinley, where
the Company has a direct relationship with policyholders, the Companys aggressive
litigation posture and the uncertainties inherent in the asbestos coverage and bankruptcy
litigation have provided an opportunity to actively engage in settlement negotiations with
a number of those policyholders who have potentially significant asbestos liabilities.
Those discussions are oriented towards achieving reasonable negotiated settlements that
limit Mt. McKinleys liability to a given policyholder to a sum certain. In 2004, the
Company has concluded such settlements or reached agreement in principle with several of
its high profile policyholders. The Company has currently identified 15 policyholders
based on their past claim activity and/or potential future liabilities as High
Profile Policyholders and its settlement efforts are generally directed at such
policyholders, in part because their exposures have developed to the point where both the
policyholder and the Company have sufficient information to be motivated to settle. The
Company believes that this active approach will ultimately result in a more cost-effective
liquidation of Mt. McKinleys liabilities than a passive approach, although it may
also introduce additional variability in Mt. McKinleys losses and cash flows.

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

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

|(Dollars in thousands) | 2004 |  | 2003 |          | 2002 |  
|---------------------- | ---- |  | ---- | -------- | ---- | -
|                       |      |  |     
|Gross basis            |      |  |      |          |      |  
|Beginning of reserves  |      |  | $    | 765,257  |      | $
|Incurred losses        |      |  |      | 171,729  |      |  
|Paid losses            |      |  |      | (208,661 | )    |  
|                       |      |  |     
|End of period reserves |      |  | $    | 728,325  |      | $
|                       |      |  |     
|Net basis              |      | 
|Beginning of reserves  |      |  | $    | 262,990  |      | $
|Incurred losses        |      |  |      | 10,310   |      |  
|Paid losses            |      |  |      | 30,035   |      |  
|                       |      |  |     
|End of period reserves |      |  | $    | 303,335  |      | $
|                       |      |  |     

At December 31, 2004, the gross
reserves for A&E losses were comprised of $148.5 million representing case reserves
reported by ceding companies, $151.3 million representing additional case reserves
established by the Company on assumed reinsurance claims, $272.1 million representing case
reserves established by the Company on direct excess insurance claims, including Mt.
McKinley, and $156.4 million representing IBNR reserves.

F-17



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 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 $31.4   remains available (the
Stop Loss Agreement). The Stop Loss Agreement           and other reinsurance
contracts between Mt. McKinley and Everest Re remain in           effect following the
Companys acquisition of Mt. McKinley. However, these           contracts became
transactions with affiliates effective on the date of the Mt.           McKinley
acquisition. Effective September 19, 2000, Mt. McKinley and Bermuda Re           entered
into a loss portfolio transfer reinsurance agreement, whereby Mt.           McKinley
transferred, for what management believes to be arms-length
          consideration, all of its net reinsurance exposures and reserves to Bermuda Re.

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.

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
Holdings Credit Facility. Wachovia Bank is the administrative agent for the
Holdings Credit Facility. The Holdings Credit Facility is used for liquidity and general
corporate purposes. The Holdings Credit Facility provides for the borrowing of up to
$150.0 million with interest at a rate selected by Holdings equal to either (1) the Base
Rate (as defined below) or (2) an adjusted London InterBank Offered Rate
(LIBOR) plus a margin. The Base Rate is the higher of the rate of interest
established by Wachovia Bank from time to time as its prime rate or the Federal Funds
rate, in each case plus 0.5% per annum. The amount of margin and the fees payable for the
Holdings Credit Facility depend upon the Companys senior unsecured debt rating.

The Holdings Credit Facility requires
the Company to maintain a debt to capital ratio of not greater than 0.35 to 1 and a
minimum interest coverage ratio of 2.5 to 1 and requires 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, 2004, the Company was in
compliance with these covenants.

During the year ended December 31,
2004, there were payments made of $70.0 million and there were no incremental borrowings
made under the Holdings Credit Facility. During the year ended December 31, 2003, there
were no payments made and no incremental borrowings under the Holdings Credit Facility.
During the year ended December 31, 2002, there were payments made of $80 million and new
Holdings Credit Facility borrowings of $45 million. As of December 31, 2004 and 2003,
there were outstanding Holdings Credit Facility borrowings of $0.0 million and $70.0
million, respectively. Interest expense incurred in connection with these borrowings was
$1.2 million, $1.4 million and $3.5 million for the years ended December 31, 2004, 2003
and 2002, respectively.

5.  SENIOR NOTES

On October 12, 2004, the Company
completed a public offering of $250.0 million principal amount of 5.40% senior notes due
October 15, 2014. 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 8.50% senior notes due March 15, 2005. Interest expense incurred in
connection with these senior notes was $42.0 million, $38.9 million and $38.9 million for
the years ended December 31, 2004, 2003 and 2002,

F-18



respectively. Market value, which is
based on quoted market price at December 31, 2004 was $250.3 million for the 5.4% senior
notes, $236.7 million for the 8.75% senior notes and $252.7 million for the 8.5% senior
notes.

6.  
          JUNIOR SUBORDINATED DEBT SECURITIES PAYABLE

On March 29, 2004, the Company issued
$329.9 million of 6.20% junior subordinated debt securities due March 29, 2034 to Everest
Re Capital Trust II (Capital Trust II). The Company can redeem the junior
subordinated debt securities before their maturity at 100% of their principal amount plus
accrued interest as of the date of redemption, in whole or in part, on one or more
occasions at any time on or after March 30, 2009; or at any time, in whole, but not in
part, within 90 days of the occurrence and continuation of specific events.

On November 14, 2002, the Company
issued $216.5 million of 7.85% junior subordinated debt securities due November 15, 2032
to Everest Re Capital Trust (Capital Trust). The Company can redeem the junior
subordinated debt securities before their maturity at 100% of their principal amount plus
accrued interest as of the date of redemption, in whole or in part, on one or more
occasions at any time on or after November 14, 2007; or at any time, in whole, but not in
part, within 90 days of the occurrence and continuation of specific events.

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

Interest expense incurred in
connection with these junior subordinated notes was $32.4 million, $17.0 million and $2.2
million for the years ended December 31, 2004, 2003 and 2002, respectively.

Capital Trust and Capital Trust II
are wholly owned finance subsidiaries 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 and Capital
Trust IIs payment obligations with respect to their respective trust preferred
securities.

There are certain regulatory and
contractual restrictions on the ability of the Companys operating subsidiaries to
transfer funds to the Company in the form of cash dividends, loans or advances. The
insurance laws of the State of Delaware, where the Companys direct insurance
subsidiaries are domiciled, require regulatory approval before those subsidiaries can pay
dividends or make loans or advances to the Company that exceed certain statutory
thresholds. In addition, the terms of the Holdings Credit Facility require Everest Re, the
Companys principal insurance subsidiary, to maintain a certain statutory surplus
level as measured at the end of each fiscal year. At December 31, 2004, $1,901.0 million
of the $2,565.0 million in net assets of the Companys consolidated subsidiaries were
subject to the foregoing regulatory restrictions.

7.  TRUST AGREEMENTS

A subsidiary of the Company, Everest
Re, has established a trust agreement as security for assumed losses payable for a
non-affiliated ceding company, which effectively uses Everest Res investments as
collateral. At December 31, 2004, the total amount on deposit in the trust account was
$18.9 million.

F-19



8.  OPERATING LEASE
AGREEMENTS

The future minimum rental
commitments, exclusive of cost escalation clauses, at December 31, 2004 for all of the
Companys operating leases with remaining non-cancelable terms in excess of one year
are as follows:

|(Dollars in thousands) | 
|---------------------- | 
|2005                   | 
|2006                   | 
|2007                   | 
|2008                   | 
|2009                   | 
|Thereafter             | 
|                       | 
|Net commitments        | 
|                       | 

All of these leases, the expiration
terms of which range from 2005 to 2013, are for the rental of office space. Rental
expense, net of sublease rental income, was $6.7 million, $6.5 million and $6.5 million
for 2004, 2003 and 2002, respectively.

9.  INCOME TAXES

All the income of the U.S.
subsidiaries is subject to the applicable federal, foreign, state and local taxes on
corporations. Additionally, the income of foreign branches of the Companys insurance
operating companies is subject to various income taxes. The provision for income taxes
in the consolidated 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)                    | 2004                    
|                                          |                         
|Current tax:                              |                         
|U.S                                       |                         
|Foreign                                   |                         
|                                          |                         
|Total current tax                         |                         
|Total deferred U.S. tax (benefit) expense |                         
|                                          |                         
|Total income tax expense                  |                         
|                                          |                         

F-20



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

|                                              | Years Ended December 31,
|--------------------------------------------- | ------------------------
|                                              |                         
|(Dollars in thousands)                        | 2004                    
|                                              |                         
|Federal income tax rate                       |                         
|Increase (reduction) in taxes resulting from: |                         
|Tax exempt income                             |                         
|UK Branch Sale                                |                         
|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. tax laws and
regulations. The principal items making up the net deferred income tax asset are as
follows:

|                                                        | Years Ended December 31,
|------------------------------------------------------- | ------------------------
|                                                        |                         
|(Dollars in thousands)                                  | 2004                    
|                                                        |                         
|Deferred tax assets:                                    |                         
|Reserve for losses and LAE                              |                         
|Unearned premium reserve                                |                         
|Impairments                                             |                         
|Deferred compensation                                   |                         
|Deferred reinsurance                                    |                         
|Capital loss carryforward                               |                         
|Sale of UK Branch                                       |                         
|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 $6.4 million expiring in 2011 and $11.3
million expiring in 2012. 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 $8.2 million and
$3.5 million  related to  compensation  expense  deductions  for stock  options
 exercised in 2004 and 2003, respectively, are reflected in the change in stockholders'
equity in "additional paid in capital".

F-21



10.  REINSURANCE

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

The Company engages in reinsurance
transactions with Bermuda Re and Everest International Reinsurance, Ltd. (Everest
International) under which business is ceded for what management believes to be
arms length consideration. These transactions include:

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

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

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

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

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

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

|o | Effective
January 1, 2004, Everest Re and Bermuda Re amended the whole account quota share through
which Everest Re previously ceded 25% of its business to Bermuda Re so that effective
January 1, 2004 Everest Re will cede 22.5% to Bermuda Re and 2.5% to Everest
International of the net retained liability on all new and renewal covered business
written during the term of this agreement.
|- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F-22



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

|                         | Bermuda Re              
|------------------------ | ------------------------
|                         | Years Ended December 31,
|                         |                         
|(Dollars in thousands)   | 2004                    
|                         |                         
|Ceded written premiums   |                         
|Ceded earned premiums    |                         
|Ceded losses and LAE (a) |                         
|                         | Everest International   
|                         | Years Ended December 31,
|                         |                         
|(Dollars in thousands)   | 2004                    
|                         |                         
|Ceded written premiums   |                         
|Ceded earned premiums    |                         
|Ceded losses and LAE     |                         

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

Effective January 1, 2004, Everest Re
sold the net assets of its UK branch to Bermuda Re. In connection with the sale, Everest
Re provided Bermuda Re with a reserve indemnity agreement allowing for indemnity payments
of up to 90% of £25.0 million in the event December 31, 2002 losses and LAE reserves
develop adversely. The amount included in incurred losses and LAE for the year ended
December 31, 2004 was $41.7 million, reducing the limit available under this agreement to
$0.0 million.

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

In addition, the Company had
coverage under an aggregate excess of loss reinsurance agreement provided by Prupac, a
wholly-owned subsidiary of The Prudential, in connection with the Companys
acquisition of Mt. McKinley in September 2000. This agreement covers 80% or $160 million
of the first $200 million of any adverse loss reserve development on the carried reserves
of Mt. McKinley at the date of acquisition and reimburses the Company as such losses are
paid by the Company. There were $160.0 million of cessions under

F-23



this reinsurance at December 31,
2003, reducing the limit available under this contract to $0.0 million. On October 31,
2003 LM completed its purchase of Prupac and its obligations from The Prudential. The
Prudential continues to guarantee LMs obligation under this agreement.

Mt. McKinley
is a reinsurer of Everest Re. Under a series of transactions dating to           1986,
Mt. McKinley reinsured several components of Everest Res business.           In
particular, Mt. McKinley provided stop loss reinsurance protection, in
          connection with the Companys October 5, 1995 initial public offering, for
          any adverse loss development on Everest Res June 30, 1995 (December 31,
          1994 for catastrophe losses) reserves, with $375.0 million in limits, of which
          $31.4 million remains available (the Stop Loss Agreement). The Stop
          Loss Agreement and other reinsurance contracts between Mt. McKinley and Everest
          Re remain in effect following the acquisition. However, these contracts became
          transactions with affiliates effective on the date of the Mt. McKinley
          acquisition, and their financial impact is thereafter eliminated in
          consolidation. Effective September 19, 2000, Mt. McKinley and Bermuda Re
entered           into a loss portfolio transfer reinsurance agreement, whereby Mt.
McKinley           transferred, for what management believes to be arms-length
consideration,           all of its net insurance exposures and reserves to Bermuda Re.

Premiums written and earned are
comprised of the following:

|                       | Years Ended December 31,
|---------------------- | ------------------------
|                       |                         
|(Dollars in thousands) | 2004                    
|                       |                         
|Written premiums:      |                         
|Direct                 |                         
|Assumed                |                         
|Ceded                  |                         
|                       |                         
|Net written premiums   |                         
|                       |                         
|Premiums earned:       |                         
|Direct                 |                         
|Assumed                |                         
|Ceded                  |                         
|                       |                         
|Net premiums earned    |                         
|                       |                         

The amounts deducted from losses and
LAE incurred for net reinsurance recoveries were $712.7 million, $760.4 million and $486.1
million for the years ended December 31, 2004, 2003 and 2002, respectively.

As of December 31, 2004, the Company
carried as an asset $2,560.4 million in reinsurance receivables with respect to losses
ceded. Of this amount, $1,394.5 million, or 54.5%, was receivable from Bermuda Re, $405.0
million, or 15.8%, was receivable from subsidiaries of London Life, $160.0 million, or 6.3%,
was receivable from LM and $132.5 million, or 5.2%, was receivable from Transatlantic. 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 Life, $160.0 million, or 6.7%, was receivable from LM and $145.0 million, or 6.0%,
was receivable from Continental Insurance Company (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 at a stated

F-24



contractual rate and reduces the
liability account as payments become due. As of December 31, 2004, such funds had reduced
the Companys net exposure to London Life to $184.1 million, effectively 100% of
which has been secured by letters of credit, and its exposure to Continental to $43.7
million. 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 had been secured by
letters of credit, and its exposure to Continental to $53.3 million. LMs
obligations are guaranteed by The Prudential.

11.  COMPREHENSIVE INCOME

The components of comprehensive
income for the periods ended December 31, 2004, 2003 and 2002 are shown in the following
table:

|(Dollars in thousands)                          | 2004 |  | 2003 |         | 2002 |  
|----------------------------------------------- | ---- |  | ---- | ------- | ---- | -
|                                                |      |  |     
|Net income                                      |      |  | $    | 175,473 |      | $
|                                                |      |  |     
|Other comprehensive income, before tax:         |      | 
|Foreign currency translation adjustments        |      |  |      | 10,472  |      |  
|Unrealized gains on securities                  |      | 
|arising during the period                       |      |  |      | 106,789 |      |  
|Less:  reclassification adjustment for          |      | 
|realized (gains) losses  included in net income |      |  |      | (56,710 | )    |  
|                                                |      |  |     
|Other comprehensive income, before tax          |      |  |      | 60,551  |      |  
|                                                |      |  |     
|Income tax expense related to                   |      | 
|items of other comprehensive income:            |      | 
|Tax expense                                     |      | 
|from foreign currency translation               |      |  |      | 3,665   |      |  
|Tax expense from unrealized                     |      | 
|gains arising during the period                 |      |  |      | 37,380  |      |  
|Tax benefit from realized                       |      | 
|losses included in net income                   |      |  |      | 19,849  |      |  
|                                                |      |  |     
|Income tax expense related to                   |      | 
|items of other comprehensive income:            |      |  |      | 21,196  |      |  
|Other comprehensive income, net of tax          |      |  |      | 39,355  |      |  
|                                                |      |  |     
|Comprehensive income                            |      |  | $    | 214,828 |      | $
|                                                |      |  |     

F-25



The following table shows the
components of the change in accumulated other comprehensive income for the years ended
December 31, 2004 and 2003.

|(Dollars in thousands)               | 2004 | 2003
|------------------------------------ | ---- | ----
|                                     |      |     
|Beginning balance of accumulated     |      |     
|other comprehensive income           |      |     
|                                     |      |     
|Beginning balance of foreign         |      |     
|currency translation adjustments     |      |     
|Current period change in foreign     |      |     
|currency translation adjustments     |      |     
|                                     |      |     
|Ending balance of foreign            |      |     
|currency  translation adjustments    |      |     
|                                     |      |     
|Beginning balance of                 |      |     
|unrealized gains on  securities      |      |     
|Current period change                |      |     
|in unrealized gains on securities    |      |     
|                                     |      |     
|Ending balance of unrealized         |      |     
|gains on securities                  |      |     
|                                     |      |     
|Current period change in accumulated |      |     
|other comprehensive income           |      |     
|                                     |      |     
|Ending balance of accumulated        |      |     
|other comprehensive income           |      |     
|                                     |      |     

12.  EMPLOYEE BENEFIT PLANS

A.  Defined Benefit Pension PlansThe Company maintains both qualified
and non-qualified defined benefit pension plans for its U.S. employees. Generally, the
Company computes the benefits based on average earnings over a period prescribed by the
plans and credited length of service. The Companys non-qualified defined benefit
pension plan, 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 $3.3
million and $1.5 million to the qualified and non-qualified plans, respectively, in 2004
and $7.7 million and $1.2 million to the qualified and non-qualified plans, respectively,
in 2003. Pension expense for the Companys plans for the years ended December 31,
2004, 2003 and 2002 were $4.8 million, $3.7 million and $3.6 million, respectively.

F-26



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

|                                               | Years Ended December 31,
|---------------------------------------------- | ------------------------
|                                               |                         
|(Dollars in thousands)                         | 2004                    
|                                               |                         
|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                          |                         
|                                               |                         
|Net amount recognized                          |                         
|                                               |                         

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

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

|                                                | Years Ended December 31,
|----------------------------------------------- | ------------------------
|                                                |                         
|(Dollars in thousands)                          | 2004                    
|                                                |                         
|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
2004, 2003 and 2002 were 5.75%, 6.0% and 6.75%, respectively. The rate of compensation
increase used to determine the actuarial present value of the projected benefit obligation
for 2004, 2003 and 2002 was 4.50%. The expected long-term rate of return on plan assets
for 2004, 2003 and 2002 was 9.0%.

F-27



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

|                                       | Pension Benefits
|-------------------------------------- | ----------------
|                                       |                 
|(Dollars in thousands)                 | 2004            
|                                       |                 
|Prepaid benefit cost                   |                 
|Accrued benefit cost                   |                 
|Intangible assets                      |                 
|Accumulated other comprehensive income |                 
|                                       |                 
|Net amount recognized                  |                 
|                                       |                 

The Company also maintains both
qualified and non-qualified defined contribution plans (Savings Plan and
Non-Qualified Savings Plan, respectively) covering U.S. employees. Under the
plans, the Company contributes up to a maximum 3% of the participants compensation
based on the contribution percentage of the employee. The Non-Qualified Savings Plan
provides compensating savings plan benefits for participants whose benefits have been
curtailed under the Savings Plan due to Internal Revenue Code limitations. The
Companys incurred expenses related to these plans were $1.0 million, $0.8 million
and $0.7 million for 2004, 2003 and 2002, respectively.

In addition, the Company maintains
several defined contribution pension plans covering non-U.S. employees. Each non-U.S.
office maintains a separate plan for the non-U.S. employees working in that location. The
Company contributes various amounts based on salary, age, and/or years of service. The
contributions as a percentage of salary for the branch offices range from 6% to 10%. The
contributions are generally used to purchase pension benefits from local insurance
providers. The Companys incurred expenses related to these plans were $0.2 million, $0.4 million
and $0.4 million for 2004, 2003 and 2002, respectively.

The following table summarizes the
Accumulated Benefit Obligation for years ended December 31, 2004, and 2003, respectively.

|(Dollars in thousands)               | Pension Plan | Supplemental Plan | Total  
|------------------------------------ | ------------ | ----------------- | -------
|                                     |              |                   |        
|Accumulated Benefit Obligation- 2004 | $39,248      | $ 9,652           | $48,900
|Accumulated Benefit Obligation- 2003 | $30,762      | $ 6,311           | $37,073

The asset allocation percentages for
the qualified and non-qualified benefit plans at December 31, 2004 and 2003, by asset
category are as follows:

|                  | Qualified Benefit Plan |     | Non-Qualified Benefit Plan
|----------------- | ---------------------- | --- | --------------------------
|                  |                        |     |                           
|Asset Category:   | 2                      | 004 | 2                         
|                  |                        |     |                           
|Equity securities |                        |     |                           
|Debt securities   |                        |     |                           
|Other             |                        |     |                           
|                  |                        |     |                           
|Total             |                        |     |                           

The Company engages a third party
investment administrator to manage the qualified and non-qualified plan for its U.S.
employees. The assets in both plans consist of debt and equity mutual funds. Due to the
long term nature of the plans, the target asset allocation for each plan consists of 68%
equities and 32% bonds.

F-28



The Company expects to contribute
approximately $3.5 million and $1.3 million in 2005 to the qualified and non-qualified
plan, respectively.

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

A health care inflation rate for
pre-medicare claims of 11% in 2004 was assumed to change to 10% in 2005; 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 7% in 2004 was assumed to change to 6% in 2005; 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)                                   | PercentagePoint Increase($ Impact) |  | PercentagePoint Decrease($ Impact) |      
|-------------------------------------------------------- | ---------------------------------- |  | ---------------------------------- | -----
|                                                         |                                    | 
|a.  Effect on total service and interest cost components |                                    |  | $                                  | 193  
|b.  Effect on accumulated postretirement                 |                                    |  | $                                  | 1,479

Benefit expense for this plan for the
year ended December 31, 2004, 2003 and 2002 was $0.8 million, $0.7 million and $0.6
million, respectively.

The following table summarizes the
status of these plans:

|                                        | Years Ended December 31,
|--------------------------------------- | ------------------------
|                                        |                         
|(Dollars in thousands)                  | 2004                    
|                                        |                         
|Change in projected benefit obligation: |                         
|Benefit obligation at beginning of year |                         
|Service cost                            |                         
|Interest cost                           |                         
|Assumption change                       |                         
|Liability (gain) loss                   |                         
|Actuarial (gain) loss                   |                         
|Benefits paid                           |                         
|                                        |                         
|Benefit obligation at end of year       |                         
|                                        |                         
|Funded status                           |                         
|Unrecognized net loss                   |                         
|                                        |                         
|(Accrued) postretirement benefit cost   |                         
|                                        |                         

F-29



Net periodic cost included the
following components:

|                       | Years Ended December 31,
|---------------------- | ------------------------
|                       |                         
|(Dollars in thousands) | 2004                    
|                       |                         
|Service cost           |                         
|Interest cost          |                         
|Net loss recognition   |                         
|                       |                         
|Net periodic cost      |                         
|                       |                         

The following table summarizes the
Accumulated Benefit Obligation for the years ended December 31, 2004 and 2003,
respectively.

|(Dollars in thousands)               | Post Retirement Plan
|------------------------------------ | --------------------
|                                     |                     
|Accumulated Benefit Obligation- 2004 |                     
|Accumulated Benefit Obligation- 2003 |                     

13.  DIVIDEND RESTRICTIONS
AND STATUTORY FINANCIAL INFORMATION

A.  Dividend RestrictionsDelaware law provides that an
insurance company which is a member of an insurance holding company system and is
domiciled in the state shall not pay dividends without giving prior notice to the
Insurance Commissioner of Delaware and may not pay dividends without the approval of the
Insurance Commissioner if the value of the proposed dividend, together with all other
dividends and distributions made in the preceding twelve months, exceeds the greater of
(1) 10% of statutory surplus or (2) net income, not including realized capital gains, each
as reported in the prior years statutory annual statement. In addition, no dividend
may be paid in excess of unassigned earned surplus. At December 31, 2004, Everest Re had
$209.3 million available for payment of dividends in 2005 without prior regulatory
approval.

B.  Statutory Financial InformationEverest Re prepares its statutory
financial statements in accordance with accounting practices prescribed or permitted by
the National Association of Insurance Commissioners (NAIC) and the Delaware
Insurance Department. Prescribed statutory accounting practices are set forth in the NAIC
Accounting Practices and Procedures Manual. The capital and statutory surplus of Everest
Re was $2,093.2 million (unaudited) and $1,715.5 million at December 31, 2004 and 2003,
respectively. The statutory net income of Everest Re was $175.8 million (unaudited),
$164.6 million and $77.6 million for the years ended December 31, 2004, 2003 and 2002,
respectively.

14.  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, reinsurance and other contractual agreements. In some
disputes, the Company seeks to enforce its rights under an agreement or to collect funds
owing to it. In other matters, the Company is resisting attempts by others to collect
funds or enforce alleged rights. Such disputes are resolved through formal and informal
means, including litigation and arbitration. In all such matters, the Company believes
that its

F-30



positions are legally and
commercially reasonable. 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.

In 1993 and prior, the Company had a
business arrangement with The Prudential wherein, for a fee, the Company accepted settled
claim payment obligations of certain property and casualty insurers, and, concurrently,
became the owner of the annuity or assignee of the annuity proceeds funded by the property
and casualty insurers specifically to fulfill these fully settled obligations. In these
circumstances, the Company would be liable if The Prudential, which has an A+ (Superior)
financial strength rating from A.M. Best Company (A.M. Best), were unable to
make the annuity payments. The estimated cost to replace all such annuities for which the
Company was contingently liable at December 31, 2004 and 2003 was $156.0 million and
$153.8 million, respectively.

Prior to its 1995 initial public
offering, the Company had purchased annuities from an unaffiliated life insurance company
with an A+ (Superior) financial strength rating from A.M. Best to settle certain claim
liabilities of the Company. Should the life insurance company become unable to make the
annuity payments, the Company would be liable for those claim liabilities. The estimated
cost to replace such annuities at December 31, 2004 and 2003 was $17.4 million and $16.0
million, respectively.

15.  RELATED-PARTY
TRANSACTIONS

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

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

16.  SEGMENT REPORTING

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

These segments are managed in a
carefully coordinated fashion with strong elements of central control, 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 (loss) or underwriting results. Underwriting results include earned
premium less losses and LAE incurred, commission and brokerage expenses and other
underwriting expenses.

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.

F-31



Effective January 1, 2004, Everest Re
sold the net assets of its United Kingdom branch to Bermuda Re, a Bermuda insurance
company and direct subsidiary of Group, for $77.0 million. In connection with the sale,
Everest Re provided Bermuda Re with a reserve indemnity agreement providing for indemnity
payments of up to 90% of £25 million in the event December 31, 2002 loss and LAE
reserves develop adversely. The impact on the financial statements for the year ended
December 31, 2004 was a dividend to Group of $26.3 million as net assets sold exceeded the
purchase price, an underwriting gain of $10.9 million due to the sale related transactions
of the 2003 and 2002 whole account quota shares with Bermuda Re (discussed in Note 10) and
an increase in the current period incurred losses of $41.7 million relating to liability
under the reserve indemnity agreement with Bermuda Re, reducing the limit available under
this agreement to $0.0 million at December 31, 2004. Business for the UK branch was
previously reported as part of the Companys International segment.

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

|                                             | U.S. Reinsurance
|-------------------------------------------- | ----------------
|(Dollars in thousands)                       | 2004            
|                                             |                 
|Gross written premiums                       |                 
|Net written premiums                         |                 
|Premiums earned                              |                 
|Incurred losses and loss adjustment expenses |                 
|Commission and brokerage                     |                 
|Other underwriting expenses                  |                 
|                                             |                 
|Underwriting (loss) gain                     |                 
|                                             |                 

|                                             | U.S. Insurance
|-------------------------------------------- | --------------
|(Dollars in thousands)                       | 2004          
|                                             |               
|Gross written premiums                       |               
|Net written premiums                         |               
|Premiums earned                              |               
|Incurred losses and loss adjustment expenses |               
|Commission and brokerage                     |               
|Other underwriting expenses                  |               
|                                             |               
|Underwriting gain (loss)                     |               
|                                             |               

F-32



|                                             | Specialty Underwriting
|-------------------------------------------- | ----------------------
|(Dollars in thousands)                       | 2004                  
|                                             |                       
|Gross written premiums                       |                       
|Net written premiums                         |                       
|Premiums earned                              |                       
|Incurred losses and loss adjustment expenses |                       
|Commission and brokerage                     |                       
|Other underwriting expenses                  |                       
|                                             |                       
|Underwriting gain                            |                       
|                                             |                       

|                                             | International
|-------------------------------------------- | -------------
|(Dollars in thousands)                       | 2004         
|                                             |              
|Gross written premiums                       |              
|Net written premiums                         |              
|Premiums earned                              |              
|Incurred losses and loss adjustment expenses |              
|Commission and brokerage                     |              
|Other underwriting expenses                  |              
|                                             |              
|Underwriting gain                            |              
|                                             |              

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

|(Dollars in thousands)                  | 2004 |  | 2003 |         | 2002 |  
|--------------------------------------- | ---- |  | ---- | ------- | ---- | -
|                                        |      |  |     
|Underwriting gain                       |      |  | $    | 23,404  |      | $
|UK branch sale and related transactions |      |  |      | (30,714 | )    |  
|                                        |      |  |     
|Underwriting (loss) gain                |      |  |      | (7,310  | )    |  
|Net investment income                   |      |  |      | 329,184 |      |  
|Realized gain (loss)                    |      |  |      | 56,710  |      |  
|Net derivative expense                  |      |  |      | -       |      |  
|Corporate income (expense)              |      |  |      | 1,968   |      |  
|Interest expense                        |      |  |      | (75,539 | )    |  
|Other expense                           |      |  |      | (73,403 | )    |  
|                                        |      |  |     
|Income before taxes                     |      |  | $    | 231,610 |      | $
|                                        |      |  |     

The comparability of the
International segment underwriting results has been impacted by the sale of the UK branch
from Everest Re to Bermuda Re. In order to provide comparability, the 2003 and 2002
results for the International segment need to be adjusted to exclude the UK branch
activity. Effectively, these adjustments remove the UK branch from 2003 and 2002 in the
International segment underwriting results, allowing for the comparability of the results
period over period.

F-33



The following table reflects the
underwriting results for the International segment as reported for the year ended December
31, 2004 and proforma for the years ended December 31, 2003 and 2002:

|                                             | Years Ended December 31,
|-------------------------------------------- | ------------------------
|                                             |                         
|                                             | International Segment   
|(Dollars in thousands)                       | 2004  As Reported       
|Gross written premiums                       |                         
|Ceded written premiums                       |                         
|                                             |                         
|Net written premiums                         |                         
|Premiums earned                              |                         
|Incurred losses and loss adjustment expenses |                         
|Commission, brokerage, taxes and fees        |                         
|Other underwriting expenses                  |                         
|                                             |                         
|Underwriting gain                            |                         
|                                             |                         

The Company produces business in its
U.S. and international operations. The net income and assets of the individual foreign
countries in which the Company writes business are not identifiable in the Companys
financial records. Other than the U.S., no other country represented more than 5% of the
Companys revenues.

Approximately 17.5%, 15.7% and 16.5%
of the Companys gross written premiums in 2004, 2003 and 2002, respectively, were
sourced through the Companys largest intermediary.

17.  UNAUDITED QUARTERLY
FINANCIAL DATA

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

|(Dollars in thousands)                 | 1st Quarter |  | 2nd Quarter |         | 3rd Quarter |   | 4th Quarter |  
|-------------------------------------- | ----------- |  | ----------- | ------- | ----------- | - | ----------- | -
|                                       |             |  |             |        
|2004 Operating data:                   |             |  |             |         |             |   |             |  
|Gross written premiums                 |             |  | $           | 992,166 |             | $ | 892,652     |  
|Net written premiums                   |             |  |             | 915,013 |             |   | 629,598     |  
|Premiums earned                        |             |  |             | 800,719 |             |   | 607,905     |  
|Net investment income                  |             |  |             | 65,823  |             |   | 95,331      |  
|Net realized capital (loss) gain       |             |  |             | (27,046 | )           |   | 77,504      |  
|Total claims and underwriting expenses |             |  |             | 781,159 |             |   | 524,828     |  
|Net income                             |             |  |             | 7,340   |             |   | 159,791     |  
|2003 Operating data:                   |             | 
|Gross written premiums                 |             |  | $           | 961,326 |             | $ | 990,233     |  
|Net written premiums                   |             |  |             | 684,707 |             |   | 722,692     |  
|Premiums earned                        |             |  |             | 531,691 |             |   | 665,601     |  
|Net investment income                  |             |  |             | 67,714  |             |   | 72,677      |  
|Net realized capital loss              |             |  |             | (10,075 | )           |   | (2,003      | )
|Total claims and underwriting expenses |             |  |             | 499,114 |             |   | 647,545     |  
|Net income                             |             |  |             | 59,588  |             |   | 55,931      |  

F-34



|EVEREST REINSURANCE HOLDINGS, INC.                                                              
|------------------------------------------------------------------------------------------------
|SCHEDULE I  SUMMARY OF INVESTMENTS 
OTHER THAN INVESTMENTS IN RELATED PARTIESDECEMBER 31, 2004
|Column A                                                                                        
|                                                                                                
|(Dollars in thousands)                                                                          
|                                                                                                
|Fixed maturities-available for sale                                                             
|Bonds:                                                                                          
|U.S. government and government agencies                                                         
|State, municipalities and political subdivisions                                                
|Foreign government securities                                                                   
|Foreign corporate securities                                                                    
|Public utilities                                                                                
|All other corporate bonds                                                                       
|Mortgage pass-through securities                                                                
|Redeemable preferred stock                                                                      
|                                                                                                
|Total fixed maturities-available for sale                                                       
|Equity securities                                                                               
|Short-term investments                                                                          
|Other invested assets                                                                           
|Cash                                                                                            
|                                                                                                
|Total investments and cash                                                                      
|                                                                                                

S-1



|EVEREST REINSURANCE HOLDINGS, INC.                                                      
|----------------------------------------------------------------------------------------
|SCHEDULE II  CONDENSED FINANCIAL INFORMATION
OF THE REGISTRANT CONDENSED BALANCE SHEETS
|                                                                                        
|                                                                                        
|(Dollars in thousands, except par value per share)                                      
|                                                                                        
|ASSETS:                                                                                 
|Equity securities                                                                       
|Short-term investments                                                                  
|Cash                                                                                    
|Investment in subsidiaries, at equity in the underlying net assets                      
|Accrued investment income                                                               
|Deferred tax asset                                                                      
|Other assets                                                                            
|                                                                                        
|Total assets                                                                            
|                                                                                        
|LIABILITIES:                                                                            
|8.5% Senior notes due 3/15/2005                                                         
|8.75% Senor notes due 3/15/2010                                                         
|5.4% Senior notes due 10/15/2014                                                        
|Junior subordinated debt securities                                                     
|Revolving credit agreement borrowings                                                   
|Current federal income taxes                                                            
|Accrued interest on debt and borrowings                                                 
|Due to affiliates                                                                       
|Other liabilities                                                                       
|                                                                                        
|Total liabilities                                                                       
|                                                                                        
|STOCKHOLDERS' EQUITY:                                                                   
|Common stock, par value:  $0.01; 3,000 shares authorized;                               
|1,000 shares issued (2004 and 2003)                                                     
|Additional paid-in capital                                                              
|Accumulated other comprehensive income, net of deferred income                          
|taxes of $133.4 million at 2004 and $112.2 million at 2003                              
|Retained earnings                                                                       
|Treasury shares, at cost; 0.5 million shares (2004 and 2003)                            
|                                                                                        
|Total stockholders' equity                                                              
|                                                                                        
|Total liabilities and stockholders' equity                                              
|                                                                                        
|See notes to consolidated financial statements                                          

S-2



|EVEREST REINSURANCE HOLDINGS, INC.                                                                
|--------------------------------------------------------------------------------------------------
|SCHEDULE II  CONDENSED FINANCIAL INFORMATION OF THE
REGISTRANT CONDENSED STATEMENTS OF OPERATIONS
|                                                                                                  
|                                                                                                  
|(Dollars in thousands)                                                                            
|                                                                                                  
|REVENUES:                                                                                         
|Net investment income                                                                             
|Net realized capital gains                                                                        
|Other expense                                                                                     
|Equity in undistributed change in retained earnings of subsidiaries                               
|                                                                                                  
|Total revenues                                                                                    
|                                                                                                  
|EXPENSES:                                                                                         
|Interest expense                                                                                  
|Other expense                                                                                     
|                                                                                                  
|Total expenses                                                                                    
|                                                                                                  
|INCOME BEFORE TAXES                                                                               
|Income benefit                                                                                    
|                                                                                                  
|NET INCOME                                                                                        
|                                                                                                  
|See notes to consolidated financial statements                                                    

S-3



|EVEREST REINSURANCE HOLDINGS, INC.                                                                  
|----------------------------------------------------------------------------------------------------
|SCHEDULE II  CONDENSED FINANCIAL INFORMATION OF THE   
REGISTRANT CONDENSED STATEMENTS OF CASHFLOWS
|                                                                                                    
|                                                                                                    
|(Dollars in thousands)                                                                              
|                                                                                                    
|CASH FLOWS FROM OPERATING ACTIVITIES                                                                
|Net income                                                                                          
|Adjustments to reconcile net income to net cash provided                                            
|by operating activities:                                                                            
|Equity in undistributed change in retained earnings of subsidiaries                                 
|Increase (decrease) in other liabilities                                                            
|Decrease (increase) in other assets                                                                 
|Increase in accrued interest on debt and borrowings                                                 
|(Increase) decrease in deferred tax asset                                                           
|Decrease (increase) in receivable from affiliates                                                   
|Accrual of bond discount                                                                            
|Amortization of underwriting discount on senior notes                                               
|                                                                                                    
|Net cash used in operating activities                                                               
|                                                                                                    
|CASH FLOWS FROM INVESTING ACTIVITIES                                                                
|Additional investment in subsidiaries, net of cash acquired                                         
|(Cost) proceeds from equity securities (acquired) sold                                              
|Net (purchases) sales of short-term securities                                                      
|UK branch sale                                                                                      
|                                                                                                    
|Net cash (used in) provided by investing activities                                                 
|                                                                                                    
|CASH FLOWS FROM FINANCING ACTIVITIES                                                                
|Dividend from parent                                                                                
|Acquisition of treasury stock                                                                       
|Borrowing on revolving credit agreement                                                             
|Repayments on revolving credit agreement                                                            
|Proceeds from issuance of senior notes                                                              
|Net proceeds from issuance of junior subordinated debt securities                                   
|Tax benefit from stock options exercised                                                            
|Dividend from subsidiaries                                                                          
|                                                                                                    
|Net cash provided by financing activities                                                           
|                                                                                                    
|Net increase in cash                                                                                
|Cash, beginning of period                                                                           
|                                                                                                    
|Cash, end of period                                                                                 
|                                                                                                    
|See notes to consolidated financial statements                                                      

S-4



|EVEREST REINSURANCE HOLDINGS, INC.                
|--------------------------------------------------
|SCHEDULE III  SUPPLEMENTARY INSURANCE INFORMATION
|Column A                                          
|                                                  
|Geographic Area(Dollars in thousands)             
|                                                  
|December 31, 2004                                 
|Domestic                                          
|International                                     
|                                                  
|Total                                             
|                                                  
|December 31, 2003                                 
|Domestic                                          
|International                                     
|                                                  
|Total                                             
|                                                  
|December 31, 2002                                 
|Domestic                                          
|International                                     
|                                                  
|Total                                             
|                                                  

S-5



|EVEREST REINSURANCE HOLDINGS, INC.
|----------------------------------
|SCHEDULE IV  REINSURANCE         
|Column A                          
|                                  
|(Dollars in thousands)            
|                                  
|December 31, 2004                 
|Total property and liability      
|insurance premiums earned         
|December 31, 2003                 
|Total property and liability      
|insurance premiums earned         
|December 31, 2002                 
|Total property and liability      
|insurance premiums earned         

S-6