| UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C 20549

**FORM 10-K**

                                                                                                                                                                                        |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| Annual Report Pursuant to Section 13 or 15(d) of the                        Securities Exchange Act of 1934

For the fiscal year ended December 31, 2007

                                                                                                                       |
| Commission file number 1-14527

**EVEREST REINSURANCE HOLDINGS, INC.**

(Exact name of registrant as specified in its                        charter)

                                                                                                                          |
| Delaware

(State or other jurisdiction

of incorporation or organization)                                                                                                                                                                                                             |   | 22-3263609

(I.R.S Employer

Identification No.)

                          |
| 477 Martinsville Road

Post Office Box 830

Liberty Corner, New Jersey 07938-0830

(908) 604-3000

(Address, including zip code, and telephone number,                        including area code,

of registrant’s principal executive office)

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

                                                                                                                                                                                             |
| Title of Each Class                                                                                                                                                                                                                                                                   |   | Name of Each Exchange

on Which Registered |
| 8.75% Senior Notes Due 2010                                                                                                                                                                                                                                                           |   | NYSE |
| 5.40% Senior Notes Due 2014                                                                                                                                                                                                                                                           |   | NYSE |
| 6.60% Long Term Notes Due 2067                                                                                                                                                                                                                                                        |   | NYSE |
| 6.20% Trust Preferred Securities of Everest Re                                                                                                                                                                                                                                        |   |   |
|    Capital Trust II guaranteed by Everest                        Reinsurance                                                                                                                                                                                                |   |
|    Holdings, Inc.                                                                                                                                                                                                                                                           |   | NYSE |
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|                                                                                                                                                                                                                                                                                  |   |   |   |   |   |   |
| Securities registered pursuant to Section 12(g) of the Act:                        None

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| Indicate by check mark if the registrant is a well-known                        seasoned issuer, as defined in Rule 405 of the                                                                                                                                                        |
| Securities Act.                                                                                                                                                                                                                                                                       |
|                                                                                                                                                                                                                                                                                  | Yes | X |   | No |   |   |
|  

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

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|                                                                                                                                                                                                                                                                                  | Yes |   |   | No | X |   |
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| 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.

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|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 | Yes | X |   | No |   |   |
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| Indicate by check mark if disclosure of delinquent filers                        pursuant to Item 405 of Regulation S-K is not contained herein, and will                        not be contained, to the best of the registrant’s knowledge, in                        definitive proxy or information statements incorporated by reference in                        Part III of this Form 10-K or any amendment to this Form 10-K. [                        ]               |
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| Indicate by check mark whether the registrant is a large                        accelerated filer, an accelerated filer, or a non-accelerated filer. See                        the definitions of “large accelerated filer”,                        “accelerated filer” and “smaller reporting company”                        in Rule 12b-2 of the Exchange Act. (Check one):

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|                                                      Large accelerated filer                                                                                                                                                                                                                                                             |   |                                                   Accelerated filer |   |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
|                                                     Non-accelerated filer                                                                                                                                                                                                                                                                          | X |                                                  Smaller reporting company |   |   |
|                                                     (Do not check if a smaller reporting company)                                                                                                                                                                                                                                             |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
| Indicate by check mark whether the registrant is a shell                        company (as defined in Rule 12b-2 of the Exchange Act.)                                                                                                                                                                                                                                                                                                                                              |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 | Yes |   |   | No | X |   |
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| The aggregate market value on June 30, 2007 (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, 2008, the number of common shares of the                        registrant outstanding shares was 1,000, all of which are owned by Everest                        Re Group, Ltd.                                                                                                                                                                                                                                                                                        |
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| The Registrant meets the conditions set forth in General                        Instruction I(1)(a) and (b) of Form 10-K and is therefore filing this form                        with the reduced disclosure format permitted by General Instruction I of                        Form 10-K.                                                                                                                                                                                         |
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TABLE OF        CONTENTS

 

| Item     | Page                                                                                                                                       |
|----------|--------------------------------------------------------------------------------------------------------------------------------------------|
|     |
| PART I   |
|     |                                                                                                                                       |   |
| 1.       | Business                                                                                                                                   | 1 |
| 1A.      | Risk Factors                                                                                                                               | 7 |
| 1B.      | Unresolved Staff Comments                                                                                                                  | 13 |
| 2.       | Properties                                                                                                                                 | 14 |
| 3.       | Legal Proceedings                                                                                                                          | 14 |
| 4.       | Submission of Matters to a Vote of Security                        Holders                                                                 | 14 |
|     |                                                                                                                                       |   |
|     |                                                                                                                                       |   |
| PART II  |
|     |                                                                                                                                       |   |
| 5.       | Market for Registrant’s Common Equity, Related                        Shareholder Matters and Issuer Purchases of

Equity Securities |  

14 |
| 6.       | Selected Financial Data                                                                                                                    | 15 |
| 7.       | Management’s Discussion and Analysis of Financial                        Condition and Results of Operations                         | 15 |
| 7A.      | Quantitative and Qualitative Disclosures About Market                        Risk                                                          | 32 |
| 8.       | Financial Statements and Supplementary Data                                                                                                | 34 |
| 9.       | Changes in and Disagreements with Accountants on Accounting                        and Financial Disclosure                                | 35 |
| 9A.      | Controls and Procedures                                                                                                                    | 35 |
| 9B.      | Other Information                                                                                                                          | 35 |
|     |                                                                                                                                       |   |
| PART III |
|     |                                                                                                                                       |   |
| 10.      | Directors and Executive Officers of the                        Registrant                                                                  | 35 |
| 11.      | Executive Compensation                                                                                                                     | 35 |
| 12.      | Security Ownership of Certain Beneficial Owners and                        Management and Related Shareholder

Matters                     |  

35 |
| 13.      | Certain Relationships and Related Transactions                                                                                             | 35 |
| 14.      | Principal Accountant Fees and Services                                                                                                     | 36 |
|     |
|     |
| PART IV  |
|     |
| 15.      | Exhibits and Financial Statement Schedules                                                                                                 | 37 |

 

 

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**PART        I**

 

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

 

**ITEM        1. BUSINESS**

 

**The        Company.**

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

 

The        Company’s principal business, conducted through its operating segments, is the        underwriting of reinsurance and insurance in the U.S. and international markets. The        Company had gross written premiums in 2007 of $3.2 billion, with approximately 73%        representing reinsurance and 27% representing U.S. insurance. Stockholder’s equity at        December 31, 2007 was $2.6 billion. The Company underwrites reinsurance both through        brokers and directly with ceding companies, giving it the flexibility to pursue business        based on the ceding company’s preferred reinsurance purchasing method. The Company        underwrites insurance principally through general agent relationships and surplus lines        brokers. Holdings’ active operating subsidiaries, excluding Mt. McKinley Insurance        Company (“Mt. McKinley”), which is in runoff, are each rated A+        (“Superior”) by A.M. Best Company (“A.M. Best”), a leading provider        of insurer ratings that assigns financial strength ratings to insurance companies based on        their ability to meet their obligations to policyholders.

 

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

 

| **•** | Everest Re, a Delaware insurance company and a direct                        subsidiary of Holdings, is a licensed property and casualty insurer and/or                        reinsurer in all states (except Nevada and Wyoming), the District of                        Columbia and Puerto Rico and is authorized to conduct reinsurance business                        in Canada and Singapore. Everest Re underwrites property and casualty                        reinsurance for insurance and reinsurance companies in the U.S. and                        international markets. At December 31, 2007 Everest Re had statutory                        surplus of $2.9 billion. |
|------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

 

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

 

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

 

1

 

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| **•** | Everest Security Insurance Company (“Everest                    Security”), a Georgia insurance company and a direct subsidiary of                    Everest Re, writes property and casualty insurance on an admitted basis in                    Georgia and Alabama. The majority of Everest Security’s business is                    reinsured by its parent, Everest Re. |
|------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

         

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

 

**Reinsurance Industry Overview.**

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

 

There        are two basic types of reinsurance arrangements: treaty and facultative reinsurance. In        treaty reinsurance, the ceding company is obligated to cede and the reinsurer is obligated        to assume a specified portion of a type or category of risks insured by the ceding company.        Treaty reinsurers do not separately evaluate each of the individual risks assumed under        their treaties: instead, the reinsurer relies upon the pricing and 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, when purchased by ceding companies, usually is intended to cover        individual risks not covered by their reinsurance treaties because of the dollar limits        involved or because the risk is unusual.

 

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

 

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

 

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

 

2

 

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

 

**Business Strategy.**

The        Company’s business strategy is to sustain its leadership position within its target        reinsurance and insurance markets, provide effective management throughout the property and        casualty underwriting cycle and achieve an attractive return for its stockholder. The        Company’s underwriting strategies seek to capitalize on its i) financial strength and        capacity, ii) stable and experienced management team, iii) diversified product and        distribution offering, iv) underwriting expertise and disciplined approach, v) efficient        and low-cost operating structure and vi) prudent enterprise risk management        practices.

 

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

 

The        Company’s underwriting strategy emphasizes underwriting profitability over premium        volume. Key elements of this strategy include careful risk selection, appropriate pricing        through strict underwriting discipline and adjustment of the Company’s business mix        to respond to changing market conditions. The Company focuses on reinsuring companies that        effectively manage the underwriting cycle through proper analysis and pricing of underlying        risks and whose underwriting guidelines and performance are compatible with its        objectives.

 

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

 

**Capital Transactions.**

The        Company’s business operations are in part dependent on its financial strength, and        the market’s perception of its strength as measured by stockholder’s equity,        which was $2,567.5 million and $2,218.4 million at December 31, 2007 and 2006,        respectively. The Company possesses significant financial flexibility with access to the        debt markets and through its parent, equity markets, as a result of its perceived financial        strength, as evidenced by the financial strength ratings as assigned by independent rating        agencies. The Company continuously monitors its capital and financial position, as well as        investment and security market conditions and responds accordingly.

 

3

 

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

 

| **•** | On April 26, 2007, Holdings completed a public offering of                        $400.0 million principal amount of 6.6% fixed to floating rate long term                        subordinated notes with a scheduled maturity date of May 15, 2037 and a                        final maturity date of May 1, 2067. The net proceeds were used to redeem                        the 7.85% junior subordinated debt securities of Holdings on November 15,                        2007, and for general corporate purposes. |
|------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

 

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

 

**Financial Strength Ratings.**

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

 

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

 

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

 

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

 

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

 

4

 

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

 

**Debt        Ratings.**

The        following table shows the debt ratings by A.M. Best, Standard & Poor’s and        Moody’s of the Company’s senior notes due March 15, 2010 and October 15, 2014;        long term notes due May 1, 2067 and Everest Re Capital Trust II’s (“Capital        Trust II”) trust preferred securities due March 29, 2034, 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-               | (Excellent)  |                  | A-              | (Strong security)         |   | A3 | (Good security) |
| Trust Preferred                        Securities          | bbb              | (Good)            |                  | BBB   | (Adequate security)  |   | Baa1 | (Adequate security) |
| Long Term Notes                                                                                         | bbb+   | (Good)            |                  | BBB             | (Adequate security)       |   | Baa1  | (Adequate security)  |

 

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

 

**Competition.**

The        worldwide reinsurance and insurance businesses are highly competitive, as well as cyclical        by product and market. As a result, financial results tend to fluctuate with periods of        constrained availability, high rates and strong profits followed by periods of abundant        capacity, low rates and constrained profitability. Competition in the types of reinsurance        and insurance business that the Company underwrites is based on many factors, including the        perceived overall financial strength of the reinsurer or insurer, ratings of the reinsurer        or insurer by A.M. Best and/or Standard & Poor’s, underwriting expertise, the        jurisdictions where the reinsurer or insurer is licensed or otherwise authorized, capacity        and coverages offered, premiums charged, other terms and conditions of the reinsurance and        insurance business offered, services offered, speed of claims payment and reputation and        experience in lines written. Furthermore, the market impact from these competitive factors        related to reinsurance and insurance is generally not consistent across lines of business,        domestic and international geographical areas and distribution channels.

 

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

 

5

 

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In 2007,        the Company observed increased competition with slightly reduced rates, higher commissions        and demands by cedants for improved terms and conditions. The extent of the increased        competition and its effect on rates, terms and conditions varied widely by market and        coverage types. One of the lesser impacted markets was property catastrophe retrocessional        coverage in regions that were most affected by the catastrophe events of 2005, principally        Hurricanes Katrina, Rita and Wilma. Reinsurance capacity in areas including southeastern        U.S. exposures and energy lines continued to be constrained. In January 2007, the state of        Florida passed legislation that increased coverage provided by the Florida Hurricane        Catastrophe Fund, thus potentially reducing the amount of reinsurance that Florida        companies will purchase from the private reinsurance market. In addition, the legislature        broadened the mandate of the state sponsored homeowners’ insurance company to render        it a fully competitive market participant. Although the Company is unable to predict the        impact on future market conditions from the increased competition and legislative        developments, the Company believes that its clients continue to write profitable business        in Florida and will continue to purchase both quota share and catastrophe coverage,        although at likely lower volumes. The balance of the U.S. and international property lines        experienced mostly modest price declines but the Company believes they are still adequately        priced.

 

The        Company’s U.S. and international casualty lines experienced weaker market conditions        led by the medical stop loss and D&O reinsurance classes, as well as the California        workers’ compensation insurance line. The Company believes that U.S. casualty        reinsurance generally remains adequately priced. The Company also believes that increased        primary price competition and cedants’ increased appetite for retaining more        profitable business net, following several highly profitable years, have resulted in        modestly softer, but still profitable, reinsurance pricing. The Company’s U.S.        insurance operation was also affected by these primary casualty insurance market        conditions; however, given the specialty nature of the Company’s business, it        believes the impact on the Company to be less severe than on the market        generally.

 

The        Company is unable to predict the impact on future market conditions from increased        competition and legislative initiatives. In addition to these market forces, reinsurers        continue to reassess their risk appetites and rebalance their property portfolios to obtain        a greater spread of risk against the backdrop of: (i) recent revisions to the        industry’s catastrophe loss projection models, which are indicating significantly        higher loss potentials and consequently higher pricing requirements, and (ii) elevated        rating agency scrutiny and capital requirements for many catastrophe exposed        companies.

 

In light        of the Company’s 2005 catastrophe experience, it has re-examined its risk management        practices and concluded that the control framework operated generally as intended. The        Company rebalanced its property portfolio, particularly within peak catastrophe zones,        including the Southeast U.S., Mexico and Gulf of Mexico. This effort has enabled the        Company to benefit from market dislocations by carefully shifting the mix of its writings        toward the most profitable classes, lines, customers and territories and by enhancing its        portfolio balance and diversification.

 

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

 

**Employees.**

As of        February 1, 2008, the Company employed 489 persons. Management believes that employee        relations are good. None of the Company’s employees are subject to collective        bargaining agreements, and the Company is not aware of any current efforts to implement        such agreements.

 

6

 

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**Available Information.**

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

 

**ITEM        1A. RISK FACTORS**

 

In        addition to the other information provided in this report, the following risk factors        should be considered when evaluating the Company. If the circumstances contemplated by the        individual risk factors materialize, our business, financial condition and results of        operations could be materially and adversely affected and our ability to service our debt,        our debt ratings and our ability to issue new debt could decline significantly.

 

**RISKS        RELATING TO OUR BUSINESS**

 

*Our        results could be adversely affected by catastrophic events.*

 

We are        exposed to unpredictable catastrophic events, including weather-related and other natural        catastrophes, as well as acts of terrorism. Any material reduction in our operating results        caused by the occurrence of one or more catastrophes could inhibit our ability to pay        dividends or to meet our interest and principal payment obligations. We define a        catastrophe as an event that causes a pre-tax loss on property exposures before reinsurance        of at least $5.0 million, before corporate level reinsurance and taxes. 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 |
|-----------------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|----------------------------|
| (Dollars in millions) |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |                       |
| 2007                  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |                       | $         73.3 |
| 2006                  |                                                                                                                     |                       | 209.6 |
| 2005                  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |                       | 833.0 |
| 2004                  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |                       | 256.3 |
| 2003                  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |                       | 20.1 |

 

*Our        losses from future catastrophic events could exceed our projections.*

 

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

 

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

 

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

 

| Calendar year:        |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       | Effect on pre-tax net income |
|-----------------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------------------------|
| (Dollars in millions) |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |                         |   |   |
| 2007                  |                                                                                                                         |          | $ | 243.1 | decrease |
| 2006                  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |                         |   | 67.4 | decrease |
| 2005                  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |                         |   | 67.3 | increase |
| 2004                  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |                         |   | 174.2 | decrease |
| 2003                  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |                         |   | 168.3 | decrease |

 

The        difficulty in estimating our reserves is significantly more challenging as it relates to        reserving for potential asbestos and environmental (“A&E”) liabilities. At        year-end 2007, approximately 12% of our gross reserves were comprised of A&E reserves.        A&E liabilities are especially hard to estimate for many reasons, including the long        delays between exposure and manifestation of any bodily injury or property damage,        difficulty in identifying the source of the asbestos or environmental contamination, long        reporting delays and difficulty in properly allocating liability for the asbestos or        environmental damage. Legal tactics and judicial and legislative developments affecting the        scope of insurers’ liability, which can be difficult to predict, also contribute to        uncertainties in estimating reserves for A&E liabilities.

 

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

 

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

 

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

 

8

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

9

 

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

 

We are        generally less reliant on the purchase of reinsurance than many of our competitors, in part        because of our strategic emphasis on underwriting discipline and management of the cycles        inherent in our business. We try to separate our risk taking process from our risk        mitigation process in order to avoid becoming reliant upon reinsurance. Because we        generally limit our purchases of reinsurance, the percentage of business that we reinsure,        as indicated below, varies from year to year, depending on our view of the relationship        between cost and the level of risk mitigation obtained for the contract period.

 

We have        entered into affiliated whole account quota share reinsurance agreements for 2002 through        2007 and renewed the quota share agreement for 2008 with Bermuda Re and Everest        International Reinsurance, Ltd. (“Everest International”). We believe that the        terms, conditions and pricing of the quota share agreements reflect arm’s length        market conditions. These affiliated reinsurance arrangements allow us to more effectively        leverage our capital, expertise, distribution platform and market presence than our stand        alone capital position would otherwise allow.

 

| Percentage of ceded written premiums to gross written                        premiums |   | 2007   | 2006   | 2005   | 2004   | 2003   |
|---------------------------------------------------------------------------------------|--------|--------|--------|--------|--------|--------|
|                                                                                  |   |   |   |   |   |   |
| Unaffiliated                                                                          |   | 5.0%   | 3.9%   | 4.0%   | 4.6%   | 5.2%   |
| Affiliated                                                                            |   | 29.4%  | 24.2%  | 24.2%  | 18.7%  | 22.9%  |

 

Because        we have purchased limited amounts of reinsurance, our net income could be reduced following        a large unreinsured event or adverse overall claims experience.

 

Our        affiliated quota share agreements reflect general reinsurance market terms and conditions        and are negotiated on an arms’ length basis. As a result, there can be no assurance        that these arrangements will continue beyond 2008. If the quota shares are not renewed, we        may have to reduce our premium volume and we may be more exposed to reductions in net        income from large losses.

 

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

 

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

 

According to Standard & Poor’s, Group and its subsidiaries rank        among the top ten global reinsurance groups, in which 60% of the market share is        concentrated. The worldwide premium available to the reinsurance market, for both life and        non-life business was estimated to be $170 billion in 2006 according to data compiled by        the International Association of Insurance Supervisors. The top twenty groups in our        industry represent approximately 70% of these revenues. The leaders in this market are        Munich Re, Swiss Re, Berkshire Hathaway, Hannover Re and syndicates at Lloyd’s. Some        of these competitors have greater financial resources than we do and have established long        term and continuing business relationships throughout the industry, which can be a        significant competitive advantage. In addition, the lack of strong barriers to entry into        the reinsurance business and the potential for securitization of reinsurance and insurance        risks through capital markets provide additional sources of potential reinsurance and        insurance capacity and competition. We may not be able to compete successfully in the        future should there be a significant change to the competitive landscape of our        market.

 

10

 

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*We        are dependent on our key personnel.*

 

Our        success has been, and will continue to be, dependent on the ability to retain the services        of existing key executive officers and to attract and retain additional qualified personnel        in the future. The loss of the services of any key executive officer or the inability to        hire and retain other highly qualified personnel in the future could adversely affect our        ability to conduct business. Generally, we consider key executive officers to be those        individuals who have the greatest influence in setting overall policy and controlling        operations: Chairman and Chief Executive Officer, Joseph V. Taranto (age 59), President and        Chief Operating Officer, Thomas J. Gallagher (age 59), and Executive Vice President and        Chief Financial Officer, Craig Eisenacher (age 60). Of those three officers, we have        employment contracts with Mr. Taranto and Mr. Eisenacher. Mr. Taranto’s contract had        been previously filed with the SEC and was most recently amended on April 5, 2007 to extend        Mr. Taranto’s term of employment from March 31, 2008 until December 31, 2009. Mr.        Eisenacher’s contract had been previously filed with SEC on December 5, 2006 for a        term of employment from December 18, 2006 until December 19, 2008. We are not aware that        any of the above three officers are planning to leave or retire in the near future. We do        not maintain any key employee insurance on any of our employees.

 

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

 

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

 

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

 

Because        all of our fixed income securities are classified as available for sale, temporary changes        in the market value of these investments are reflected as changes to our        stockholder’s equity. Our actively managed equity security portfolio is fair valued        and any changes in fair value are reflected as net realized capital gains or losses. As a        result, a decline in the value of the securities in our portfolio reduces our capital or        could cause us to incur a loss.

 

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

 

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

 

|                                                                                                                                                                                      | At                                                                                                                                                           |   |       |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|------------|
| (Dollars in millions)                                                                                                                                                                     | December 31, 2007                                                                                                                                            |   | % of Total |
| Fixed income:                                                                                                                                                                             |                                                                                                                                                         |   |       |
|    Mortgage-backed securities                                                                                                                                                   | $                         565.0 |   | 6.3%       |
|    Other asset-backed                                                                                                                                                           | 90.3                                                                                                                                                         |   | 1.0%       |
|       Total asset-backed                                                                                                                                              | 655.3                                                                                                                                                        |   | 7.3%       |
|    Other fixed income                                                                                                                                                           | 5,342.9                                                                                                                                                      |   | 59.4%      |
| Total fixed income                                                                                                                                                                        | 5,998.2                                                                                                                                                      |   | 66.7%      |
|                                                                                                                                                                                      |                                                                                                                                                         |   |       |
| Equity securities:                                                                                                                                                                        |                                                                                                                                                         |   |       |
|    Available for sale, at market                        value                    | 9.9                                                                                                                                                          |   | 0.1%       |
|    Available for sale, at fair value                                                                                                                                            | 815.4                                                                                                                                                        |   | 9.1%       |
| Total equity securities                                                                                                                                                                   | 825.3                                                                                                                                                        |   | 9.2%       |
|                                                                                                                                                                                      |                                                                                                                                                         |   |       |
| Other invested assets:                                                                                                                                                                    |                                                                                                                                                         |   |       |
|    Available for sale, at market value                                                                                                                                          | 441.7                                                                                                                                                        |   | 4.9%       |
|    Available for sale, at fair value                                                                                                                                            | 253.8                                                                                                                                                        |   | 2.8%       |
| Total other invested assets                                                                                                                                                               | 695.5                                                                                                                                                        |   | 7.7%       |
|                                                                                                                                                                                      |                                                                                                                                                         |   |       |
| Cash and short-term investments                                                                                                                                                           | 1,473.8                                                                                                                                                      |   | 16.4%      |
| Total investments and cash                                                                                                                                                                | $                     8,992.8                       |   | 100.0%     |

 

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

 

Through        our international operations, we conduct business in a variety of foreign (non-U.S.)        currencies, principally the Euro, the British pound, the Canadian dollar and the Singapore        dollar. Assets, liabilities, revenues and expenses denominated in foreign currencies are        exposed to changes in currency exchange rates. Our functional currency is the U.S. dollar,        and exchange rate fluctuations relative to the U.S. dollar may materially impact our        results and financial position. In 2007, we wrote approximately 18.7% of our reinsurance        coverages in non-U.S. currencies; as of December 31, 2007, we maintained approximately 9.1%        of our investment portfolio in investments denominated in non-U.S. currencies. During 2007,        2006 and 2005, the impact on our quarterly pre-tax net income from exchange rate        fluctuations ranged from a loss of $14.6 million to a gain of $4.4 million.

 

In        addition to net income impacts, changes in foreign exchange rates resulted in pre-tax        translation adjustments through other comprehensive income of $46.3 million and $13.6        million for the years ended December 31, 2007 and 2006, respectively. On a cumulative        after-tax basis, translation had increased equity by $59.4 million and $29.2 million as of        December 31, 2007 and 2006, respectively.

 

**RISKS        RELATING TO REGULATION**

 

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

 

We are        subject to extensive and increasing regulation under U.S., state and foreign insurance        laws. These laws limit the amount of dividends that can be paid to us by our operating        subsidiaries, impose restrictions on the amount and type of investments that we can hold,        prescribe solvency, accounting and internal control standards that must be met and        maintained and require us to maintain reserves. These laws also require disclosure of        material inter-affiliate transactions and require prior approval of        “extraordinary” transactions. Such

 

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“extraordinary” transactions include declaring dividends from        operating subsidiaries that exceed statutory thresholds. These laws also generally require        approval of changes of control of insurance companies. The application of these laws could        affect our liquidity and ability to pay dividends, interest and other payments on        securities, as applicable, and could restrict our ability to expand business operations        through acquisitions of new insurance subsidiaries. We may not have or maintain all        required licenses and approvals or fully comply with the wide variety of applicable laws        and regulations or the relevant authority’s interpretation of the laws and        regulations. If we do not have the requisite licenses and approvals or do not comply with        applicable regulatory requirements, the insurance regulatory authorities could preclude or        temporarily suspend us from carrying on some or all activities or monetarily penalize us.        These types of actions could have a material adverse effect on our business. To date, no        material fine, penalty or restriction has been imposed on us for failure to comply with any        insurance law or regulation.

 

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

 

The        insurance industry has experienced uncertainty and negative publicity as a result of        current litigation, investigations and regulatory activity by various insurance,        governmental and enforcement authorities, including the SEC, with regard to certain        practices within the insurance industry. These practices include the payment of contingent        commissions by insurance companies to insurance brokers and agents, the solicitation and        provision of fictitious or inflated quotes and the accounting treatment for finite        reinsurance or other non-traditional loss mitigation insurance and reinsurance products. In        May 2005, the Company received and responded to a subpoena from the SEC seeking information        for certain loss mitigation products. The Company has cooperated with the SEC on this        matter. The future impact, if any, on our operation, net income or financial condition        cannot be determined at this time.

 

**RISK        RELATING TO OUR SECURITIES**

 

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

 

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

 

**ITEM        1B. UNRESOLVED STAFF COMMENTS**

 

None.

 

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**ITEM        2. PROPERTIES**

 

Everest        Re’s corporate offices are located in approximately 172,500 square feet of leased        office space in Liberty Corner, New Jersey. The Company’s other thirteen locations        occupy a total of approximately 72,000 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**

 

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

 

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

 

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

 

**ITEM        4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS**

 

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

 

**PART        II**

 

**ITEM 5.        MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER        PURCHASES OF EQUITY SECURITIES**

 

**Market Information and Holder of Common Stock.**

As of        December 31, 2007, all of the Company’s common stock was owned by Group and was not        publicly traded.

 

**Dividend History and Restrictions.**

The        Company did not pay any dividends in 2007, 2006 and 2005. The declaration and payment of        future dividends, if any, by the Company will be at the discretion of the Board of        Directors and will depend upon many factors, including the Company’s earnings,        financial condition, business needs and growth objectives, capital and surplus requirements        of its operating subsidiaries, regulatory restrictions, rating agency considerations and        other factors. As an insurance holding company, the Company is dependent on dividends and        other permitted

 

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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 $1.9        billion at December 31, 2007, 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.        The maximum amount that is available for the payment of dividends by Everest Re in 2008        without prior regulatory approval is $288.4 million.

 

**Recent Sales of Unregistered Securities.**

 

None.

 

**ITEM        6. SELECTED FINANCIAL DATA**

 

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

 

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

 

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

 

**Industry Conditions.**

The        worldwide reinsurance and insurance businesses are highly competitive, as well as cyclical        by product and market. As a result, financial results tend to fluctuate with periods of        constrained availability, high rates and strong profits followed by periods of abundant        capacity, low rates and constrained profitability. Competition in the types of reinsurance        and insurance business that we underwrite 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. Furthermore, the market impact from these competitive factors related to        reinsurance and insurance is generally not consistent across lines of business, domestic        and international geographical areas and distribution channels.

         

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

 

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In 2007,        we observed increased competition with generally lower rates, higher commissions and        demands by cedants for improved terms and conditions. The extent of the increased        competition and its effect on rates, terms and conditions varied widely by market and        coverage types. One of the lesser impacted markets was worldwide property catastrophe        retrocessional coverage. Reinsurance capacity in certain areas including southeastern U.S.        exposures and energy lines continued to be constrained. In January 2007, the state of        Florida passed legislation that increased coverage provided by the Florida Hurricane        Catastrophe Fund, thus potentially reducing the amount of reinsurance that Florida        companies needed to purchase from the private reinsurance market. In addition, the        legislature broadened the mandate of the state sponsored homeowners’ insurance        company to render it a fully competitive market participant. Although we are unable to        predict the impact on future market conditions from the increased competition and        legislative developments, we believe that our clients wrote profitable business in Florida        during 2007 and will continue to purchase both quota share and catastrophe coverage,        although at likely lower volumes. The balance of the U.S. and international property lines        experienced mostly modest price declines but we believe they were adequately priced during        the year.

 

Our U.S.        and international casualty lines experienced weaker market conditions led by the medical        stop loss and D&O reinsurance classes, as well as the California workers’        compensation insurance line. Increased primary price competition and cedants’        increased appetite for retaining more profitable business net, following several highly        profitable years, resulted in modestly softer, but still profitable, reinsurance pricing        during the year. Our U.S. insurance operation was also affected by these primary casualty        insurance market conditions; however, given the specialty nature of our business, we        believe the impact on us to be less severe than on the market generally.

 

We are        unable to predict the impact on future market conditions from increased competition and        legislative initiatives. In addition to these market forces, reinsurers continue to        reassess their risk appetites and rebalance their property portfolios to obtain a greater        spread of risk against the backdrop of: (i) recent revisions to the industry’s        catastrophe loss projection models, which are indicating significantly higher loss        potentials and consequently higher pricing requirements and (ii) elevated rating agency        scrutiny and capital requirements for many catastrophe exposed companies.

 

In light        of our 2005 catastrophe experience, we have re-examined our risk management practices and        concluded that our control framework operated generally as intended. We rebalanced our        property portfolio, particularly within peak catastrophe zones, including the Southeast        U.S., Mexico and Gulf of Mexico. This effort has enabled us to benefit from market        dislocations by carefully shifting the mix of our writings toward the most profitable        classes, lines, customers and territories and by enhancing our portfolio balance and        diversification.

 

Overall,        we believe that current marketplace conditions offer solid opportunities for us given our        strong ratings, distribution system, reputation and expertise. We continue to employ our        strategy of targeting business that offers the greatest profit potential, while maintaining        balance and diversification in our overall portfolio.

 

16

 

----

 

**Financial Summary.**

We        monitor and evaluate our overall performance based upon financial results. The following        table displays a summary of the consolidated net income, ratios and stockholder’s        equity for the periods indicated:

 

|                                                                          | Years Ended December 31,                               |   | Percentage Increase/(Decrease)                               |
|-------------------------------------------------------------------------------|--------------------------------------------------------|--------|--------------------------------------------------------------|
| (Dollars in millions)                                                         | 2007                                                   |   | 2006                                                         |   | 2005 |   | 2007/2006 |   | 2006/2005 |
|                                                                          |                                                   |   |                                                         |   |   |   |   |   |   |
| Gross written premiums                                                        | $     3,155.1                 |   | $     3,186.0                       |   | $     3,339.9 |   | -1.0% |   | -4.6% |
| Net written premiums                                                          | 2,072.9                                                |   | 2,290.3                                                      |   | 2,395.7 |   | -9.5% |   | -4.4% |
|                                                                          |                                                   |   |                                                         |   |   |   |   |   |   |
| REVENUES:                                                                     |                                                   |   |                                                         |   |   |   |   |   |   |
| Premiums earned                                                               | $     2,178.9                 |   | $     2,247.2                       |   | $     2,426.1 |   | -3.0% |   | -7.4% |
| Net investment income                                                         | 406.6                                                  |   | 372.4                                                        |   | 325.2 |   | 9.2% |   | 14.5% |
| Net realized capital gains                                                    | 80.9                                                   |   | 35.0                                                         |   | 64.6 |   | 131.4% |   | -45.9% |
| Other (expense) income                                                        | (73.6)                                                 |   | (40.5)                                                       |   | 10.3 |   | 81.6% |   | NM |
| Total revenues                                                                | 2,592.7                                                |   | 2,614.0                                                      |   | 2,826.2 |   | -0.8% |   | -7.5% |
|                                                                          |                                                   |   |                                                         |   |   |   |   |   |   |
| CLAIMS AND EXPENSES:                                                          |                                                   |   |                                                         |   |   |   |   |   |   |
| Incurred losses and loss adjustment expenses                                  | 1,507.6                                                |   | 1,557.1                                                      |   | 2,202.8 |   | -3.2% |   | -29.3% |
| Commission, brokerage, taxes and fees                                         | 465.9                                                  |   | 438.5                                                        |   | 513.4 |   | 6.3% |   | -14.6% |
| Other underwriting expenses                                                   | 123.8                                                  |   | 98.7                                                         |   | 101.3 |   | 25.5% |   | -2.6% |
| Interest, fee and bond issue                                                  |                                                   |   |                                                         |   |   |   |   |   |   |
|    cost amortization expense                                        | 91.1                                                   |   | 69.7                                                         |   | 74.2 |   | 30.7% |   | -6.1% |
| Total claims and expenses                                                     | 2,188.4                                                |   | 2,164.0                                                      |   | 2,891.7 |   | 1.1% |   | -25.2% |
|                                                                          |                                                   |   |                                                         |   |   |   |   |   |   |
| INCOME (LOSS) BEFORE TAXES                                                    | 404.3                                                  |   | 450.0                                                        |   | (65.5) |   | -10.2% |   | NM |
| Income tax expense (benefit)                                                  | 100.1                                                  |   | 117.1                                                        |   | (70.2) |   | -14.5% |   | NM |
| NET INCOME                                                                    | $        304.2 |   | $         332.9 |   | $             4.7 |   | -8.6% |   | NM |
|                                                                          |                                                   |   |                                                         |   |   |   |   |   |   |
| RATIOS:                                                                       |                                                   |   |                                                         |   |   |   | Point Change |
| Loss ratio                                                                    | 69.2%                                                  |   | 69.3%                                                        |   | 90.8% |   | (0.1) |   | (21.5) |
| Commission and brokerage ratio                                                | 21.4%                                                  |   | 19.5%                                                        |   | 21.2% |   | 1.9 |   | (1.7) |
| Other underwriting expense ratio                                              | 5.7%                                                   |   | 4.4%                                                         |   | 4.1% |   | 1.3 |   | 0.3 |
| Combined ratio                                                                | 96.3%                                                  |   | 93.2%                                                        |   | 116.1% |   | 3.1 |   | (22.9) |
|                                                                          |                                                   |   |                                                         |   |   |   |   |   |   |
|                                                                          |                                                   |   |                                                         |   |   |   |   |   |   |
|                                                                          | At December 31,                                        |   | Percentage Increase/(Decrease)                               |
| (Dollars in millions)                                                         | 2007                                                   |   | 2006                                                         |   | 2005 |   | 2007/2006 |   | 2006/2005 |
| Balance sheet data:                                                           |                                                   |   |                                                         |   |   |   |   |   |   |
|    Total investments and cash                                       | $     8,992.8                 |   | $     8,451.8                       |   | $     7,857.4 |   | 6.4% |   | 7.6% |
|    Total assets                                                     | 13,543.5                                               |   | 12,888.3                                                     |   | 12,700.5 |   | 5.1% |   | 1.5% |
|    Loss and loss adjustment expense                        reserves | 7,538.7                                                |   | 7,397.3                                                      |   | 7,729.2 |   | 1.9% |   | -4.3% |
|    Total debt                                                       | 1,178.9                                                |   | 995.6                                                        |   | 995.5 |   | 18.4% |   | 0.0% |
|    Total liabilites                                                 | 10,976.0                                               |   | 10,669.9                                                     |   | 10,909.8 |   | 2.9% |   | -2.2% |
|    Stockholder's equity                                             | 2,567.5                                                |   | 2,218.4                                                      |   | 1,790.7 |   | 15.7% |   | 23.9% |
|                                                                          |                                                   |   |                                                         |   |   |   |   |   |   |
| (NM, not meaningful)                                                          |                                                   |   |                                                         |   |   |   |   |   |   |
| (Some amounts may not reconcile due to rounding)                              |                                                   |   |                                                         |   |   |   |   |   |   |

 

 

17

 

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**Revenues.**

Premiums.Gross written premiums decreased by        $30.9 million, or 1.0%, in 2007 compared to 2006, reflecting a decline of $50.2 million in        the worldwide reinsurance business, partially offset by an increase of $19.3 million in the        U.S. insurance business. Net written premiums decreased by $217.4 million, or 9.5%, in 2007        compared to 2006, due to the change in the mix of our program business and the resulting        change in reinsurance. Net premiums earned decreased by $68.3 million, or 3.0%, in 2007        compared to 2006. The 3.0% decrease in net premiums earned relative to the 9.5% decrease in        net written premiums is the result of timing; premiums are earned ratably over the coverage        period whereas net written premiums are reflected at the initiation of the coverage        period.

 

Gross        and net written premiums declined by 4.6% ($153.9 million) and 4.4% ($105.4 million),        respectively, for 2006 compared to 2005, while net premiums earned declined by 7.4% ($178.9        million) in 2006 compared to 2005. The decrease in full year net premiums earned was        primarily due to the decline in the U.S. Insurance segment of 9.8%, reflective of the        reduction in credit business from an auto loan insurance program in run-off and continued        reductions in the California workers’ compensation writings due to competitive market        conditions. In addition, net premiums earned for the worldwide reinsurance segments in the        aggregate decreased by 6.5% for 2006, reflecting a significant return premium for a Florida        property quota share contract cancelled in 2006, the absence of sizable reinstatement        premiums triggered in 2005 from severe catastrophic events, as well as the exercise of        continued underwriting discipline which emphasizes potential profitability over        volume.

 

Net        Investment Income.Net investment income increased by 9.2% in        2007 compared to 2006, primarily due to the growth in invested assets. The growth in        invested assets was principally driven by the $400.0 million of long term note issuance and        $151.9 million of operating cash flows, partially offset by the redemption of $216.5        million of junior subordinated debt securities. The average pre-tax investment portfolio        yield for 2007 was 4.9% compared to 4.8% for 2006.

 

Net        investment income increased by 14.5% in 2006 compared to 2005, reflecting continued        year-over-year growth in invested assets from the $356.8 million cash flow from operations        and a $31.1 million increase in income from limited partnership investments. The average        pre-tax investment portfolio yield for 2006 was 4.8% compared to the average investment        portfolio yield of 4.4% for 2005.

 

Net        Realized Capital Gains.Net realized capital gains were $80.9        million, $35.0 million and $64.6 million for 2007, 2006 and 2005, respectively. The        increase in 2007 is primarily attributable to our adoption on January 1, 2007 of FAS No.        159 “The Fair Value Option for Financial Assets and Financial Liabilities - including        an amendment to FASB Statement No. 115” (“FAS 159”) for our actively        managed equity security investment portfolio and equity shares of our parent. In 2007 we        recorded $96.6 million of net realized capital gains due to fair value re-measurements.        Other than fair value adjustments, realized capital gains and losses are mainly the result        of normal portfolio management activities.

 

Other        (Expense) Income. For 2007 and 2006 we recorded other expense of        $73.6 million and $40.5 million, respectively, and for 2005 other income of $10.3 million.        The fluctuations in net other (expense) income in 2007 and 2006 were primarily due to        increased deferrals on retroactive reinsurance agreements with affiliates.

 

18

 

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**Claims and Expenses.**

Incurred Losses and Loss Adjustment Expenses.The following table presents our incurred losses and loss and loss        adjustment expenses (“LAE”) for the periods indicated.

|                                                                                  |
|---------------------------------------------------------------------------------------|
|                                                                                  | Years Ended December 31, |   |   |   |   |   |   |   |   |
|                                                                                  | 2007 |   | 2006 |   | 2005 |   | 2007/2006 Variance |   | 2006/2005 Variance |
|                                                                                  | Current | Prior | Total |   | Current | Prior | Total |   | Current | Prior | Total |   | Current | Prior | Total |   | Current | Prior | Total |
| (Dollars in millions)                                                                 | Year | Years | Incurred |   | Year | Years | Incurred |   | Year | Years | Incurred |   | Year | Years | Incurred |   | Year | Years | Incurred |
| **All Segments**                                                                      |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
|    Attritional(a)                                                           | $     1,174.9 | $      (6.9) | $     1,168.0 |   | $     1,477.2 | $   (157.1) | $     1,320.1 |   | $   1,514.7 | $   (156.3) | $ 1,358.4 |   | $     (302.3) | $     150.2 | $     (152.1) |   | $     (37.5) | $      (0.8) | $      (38.3) |
|    Catastrophes                                                             | 56.9 | 16.3 | 73.3 |   | 12.4 | 197.2 | 209.6 |   | 755.4 | 77.6 | 833.0 |   | 44.5 | (180.9) | (136.3) |   | (743.0) | 119.6 | (623.4) |
|    A&E                                                                  | - | 266.4 | 266.4 |   | - | 27.4 | 27.4 |   | - | 11.5 | 11.5 |   | - | 239.0 | 239.0 |   | - | 15.9 | 15.9 |
|    Total segment                                                            | $     1,231.8 | $     275.7 | $     1,507.6 |   | $     1,489.7 | $       67.4 | $     1,557.1 |   | $   2,270.1 | $     (67.3) | $ 2,202.8 |   | $     (257.9) | $     208.3 | $      (49.5) |   | $    (780.4) | $     134.7 | $     (645.7) |
|    Loss ratio                                                               | 56.5% | 12.7% | 69.2% |   | 66.3% | 3.0% | 69.3% |   | 93.6% | -2.8% | 90.8% |   | (9.8) | 9.7 | (0.1) |   | (27.3) | 5.8 | (21.5) |
|                                                                                  |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| (a) Attritional losses exclude catastrophe and A&E                        losses. |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| (Some amounts may not reconcile due to rounding.)                                     |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |

 

Incurred        losses and LAE decreased by $49.5 million, or 3.2% in 2007 compared to the same period in        2006, primarily due to a $152.1 million decrease in attritional losses and a $136.3 million        decrease in catastrophe losses, which were partially offset by a $239.0 million increase in        A&E loss reserve strengthening. The decrease in catastrophe losses reflects the        non-recurrence in 2007 of significant prior years’ development experienced in 2006 on        catastrophe loss reserves. The increase in A&E reserves emanated from actions taken in        response to an extensive in-house study of our asbestos exposures by our actuarial and        claim units.

 

Incurred        losses and LAE decreased by $645.7 million, or 29.3% in 2006 compared to 2005, due to        significantly reduced current year catastrophe losses and a reduction in current year        attritional losses, partially offset by increased prior years reserve development on        catastrophe and A&E losses. Catastrophe losses were $833.0 million in 2005, related        principally to aggregate estimated losses from Hurricanes Katrina, Rita and        Wilma.

 

Our        current year attritional loss ratios for 2007, 2006 and 2005 were 53.9%, 65.7% and 62.4%,        respectively, reflective of generally favorable market conditions and our business        production and risk selection practices.

 

We have        recorded favorable development on our attritional loss reserves aggregating $320.3 million        over the past three years. The $197.2 million of adverse development on catastrophe loss        reserves experienced in 2006 largely emanated from Hurricanes Katrina, Rita and Wilma. The        unprecedented size and widespread damage from these events, particularly Katrina, made it        extremely difficult to estimate ultimate losses at year end 2005.

 

Commission, Brokerage, Taxes and Fees.Commission, brokerage and tax expenses increased by $27.4 million, or 6.3%        in 2007 compared to 2006. An increase in ceding commissions due to market conditions and        higher commissions on new insurance programs were the principal drivers in this directly        variable expense.

 

Commission, brokerage and tax expenses decreased by $74.9 million, or 14.6%        in 2006 compared to 2005. The 7.4% decline in earned premiums in 2006 compared to 2005 was        the principal driver of the decrease.

 

19

 

----

 

Other        Underwriting Expenses.Other underwriting expenses for 2007        increased by $25.1 million, or 25.5%, compared to 2006, primarily due to higher        compensation and benefits expense and an increased staff count, primarily in the U.S.        Insurance segment. Included in other underwriting expenses were corporate expenses, which        are expenses that are not allocated to segments, of $5.3 million for 2007 and $4.5 million        for 2006.

 

Other        underwriting expenses for 2006 decreased by $2.6 million, or 2.6%, compared to 2005,        primarily due to a decrease in corporate non-allocated expenses.

 

Interest Expense.Interest expense was $91.1        million and $69.7 million for 2007 and 2006, respectively. The increase was due to the new        long term notes we issued in April, 2007 and the acceleration of the bond amortization        costs associated with the November 15, 2007 early retirement of the 7.85% junior        subordinated debt securities.

 

Interest        expense was $69.7 million and $74.2 million for 2006 and 2005, respectively. The decrease        is primarily due to the retirement on March 15, 2005 of the 8.5% senior notes issued on        March 14, 2000.

 

Income Tax Expense (Benefit).Our income tax        expense was $100.1 million, which represented a 24.8% effective tax rate for 2007 compared        to $117.1 million, which represented a 26.0% effective tax rate for 2006. The decrease in        the effective tax rate is principally due to the decrease in pre-tax income with comparable        tax-preferenced income. The Internal Revenue Service has challenged our foreign exchange        treatment, and although we believe we have a strong chance of prevailing on this issue, we        have provided for the potential additional tax for all years still open for examination.        Aside from such discrete items, our income tax expense is primarily a function of the        statutory tax rate, coupled with the impact from tax-preferenced investment        income.

 

Our        income tax expense was $117.1 million, which represented a 26.0% effective tax rate for        2006 compared to an income tax benefit of $70.2 million, which represented a 107.2%        effective tax rate for 2005. The increased tax expense was primarily due to the significant        change in pre-tax income in 2006 compared to the 2005 pre-tax loss as a result of the large        catastrophe losses.

 

**Net        Income.**

Net        income was $304.2 million for 2007 compared to $332.9 million for 2006, principally the        result of the changes in the various statement lines discussed above.

 

Net        income increased significantly to $332.9 million in 2006 compared to $4.7 million for 2005.        This improvement reflected the favorable effect of a benign U.S. hurricane season relative        to unprecedented Company and industry hurricane losses experienced in 2005, as well as        favorable underlying underwriting fundamentals.

 

**Ratios.**

Our        combined ratio increased by 3.1 points to 96.3% in 2007 compared to 93.2% in 2006,        principally driven by the 1.9 point increase in the commission and brokerage ratio and the        1.3 point increase in the other underwriting expense ratio.

 

Our        combined ratio decreased by 22.9 points to 93.2% in 2006 compared to 116.1% in 2005,        reflective of the lower catastrophe and attritional losses.

 

20

 

----

 

**Stockholder's Equity.**

Stockholder's equity increased by $349.1 million to $2,567.5 million in 2007        from $2,218.4 million in 2006, principally as a result of the $304.2 million of net income        generated for the period.

 

Stockholder's equity increased by $427.7 million to $2,218.4 million in 2006        from $1,790.7 million in 2005, principally as a result of the $332.9 million of net income        generated for the period and an increase in unrealized gains on investments during        2006.

 

**Consolidated Investment Results**

 

**Net        Investment Income.**

Net        investment income increased by 9.2% to $406.6 million in 2007 from $372.4 million in 2006,        principally reflecting a growth in invested assets to $9.0 billion at December 31, 2007        from $8.5 billion at December 31, 2006. The asset growth emanated largely from positive        cash flow from operations and the net proceeds from debt issuance and        redemption.

 

Net        investment income increased by 14.5% to $372.4 million in 2006 from $325.2 million in 2005,        primarily reflecting the growth in invested assets to $8.5 billion at December 31, 2006        from $7.9 billion at December 31, 2005. In addition, growth in limited partnership income        of $31.1 million contributed to the increase in net investment income period over        period.

 

The        following table shows the components of net investment income for the periods        indicated:

 

|                                                                                                                                                       | Years Ended December 31,                                     |
|------------------------------------------------------------------------------------------------------------------------------------------------------------|--------------------------------------------------------------|
| (Dollars in millions)                                                                                                                                      | 2007                                                         |   | 2006 |   | 2005 |
| Fixed maturities                                                                                                                                           | $         294.7 |   | $         299.6 |   | $         308.3 |
| Equity securities                                                                                                                                          | 16.8                                                         |   | 19.7 |   | 16.4 |
| Short-term investments                                                                                                                                     | 58.5                                                         |   | 26.8 |   | 12.3 |
| Other investment income                                                                                                                                    | 44.9                                                         |   | 41.9 |   | 9.0 |
| Total gross investment income                                                                                                                              | 414.9                                                        |   | 388.0 |   | 346.0 |
| Interest credited and other                        expense                 | (8.3)                                                        |   | (15.7) |   | (20.7) |
| Total net investment income                                                                                                                                | $         406.6 |   | $         372.4 |   | $         325.2 |
| (Some amounts may not reconcile due to rounding)                                                                                                           |                                                         |   |   |   |   |

 

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

 

|                                                                                       | 2007   | 2006   | 2005   |
|--------------------------------------------------------------------------------------------|--------|--------|--------|
| Imbedded pre-tax yield of cash and invested assets at                        December 31   | 4.6%   | 4.6%   | 4.5%   |
| Imbedded after-tax yield of cash and invested assets at                        December 31 | 3.6%   | 3.7%   | 3.6%   |
|                                                                                       |   |   |   |
| Annualized pre-tax yield on average cash and invested                        assets        | 4.9%   | 4.8%   | 4.4%   |
| Annualized after-tax yield on average cash and invested                        assets      | 3.9%   | 3.8%   | 3.6%   |

 

 

21

 

----

 

**Net        Realized Capital Gains.**

The        following table presents the composition of our net realized capital gains (losses) for the        periods indicated:

 

|                                                                                 | Years Ended December 31,                                   | 2007/2006 |                                           | 2006/2005 |
|--------------------------------------------------------------------------------------|------------------------------------------------------------|-----------|------------------------------------------------|-----------|
| (Dollars in millions)                                                                | 2007                                                       |      | 2006                                           |      | 2005 |   | Variance | % Change |   | Variance | % Change |
| Gains (losses) from sales:                                                           |                                                       |      |                                           |      |   |   |   |   |   |   |   |
|    Fixed maturities                                                        |                                                       |      |                                           |      |   |   |   |   |   |   |   |
|       Gains                                                 | $         1.0 |      | $       8.4 |      | $    59.8 |   | $      (7.4) | -88.1% |   | $    (51.4) | -86.0% |
|       Losses                                                | (6.0)                                                      |      | (0.0)                                          |      | (8.6) |   | (6.0) | NM |   | 8.6 | -100.0% |
|    Total                                                                   | (5.0)                                                      |      | 8.4                                            |      | 51.2 |   | (13.4) | -159.5% |   | (42.8) | -83.6% |
|                                                                                 |                                                       |      |                                           |      |   |   |   |   |   |   |   |
|    Equity securities, market value                                         |                                                       |      |                                           |      |   |   |   |   |   |   |   |
|       Gains                                                 | -                                                          |      | 31.2                                           |      | 16.1 |   | (31.2) | -100.0% |   | 15.1 | 93.8% |
|       Losses                                                | -                                                          |      | (4.6)                                          |      | (2.7) |   | 4.6 | -100.0% |   | (1.9) | 70.0% |
|    Total                                                                   | -                                                          |      | 26.6                                           |      | 13.4 |   | (26.6) | -100.0% |   | 13.2 | 98.6% |
|                                                                                 |                                                       |      |                                           |      |   |   |   |   |   |   |   |
|    Equity securities, fair value                                           |                                                       |      |                                           |      |   |   |   |   |   |   |   |
|       Gains                                                 | 3.0                                                        |      | -                                              |      | - |   | 3.0 | NM |   | - | NM |
|       Losses                                                | (13.7)                                                     |      | -                                              |      | - |   | (13.7) | NM |   | - | NM |
|    Total                                                                   | (10.7)                                                     |      | -                                              |      | - |   | (10.7) | NM |   | - | NM |
|                                                                                 |                                                       |      |                                           |      |   |   |   |   |   |   |   |
|    Short-term investments                                                  |                                                       |      |                                           |      |   |   |   |   |   |   |   |
|       Gains                                                 | -                                                          |      | -                                              |      | - |   | - | NM |   | - | NM |
|       Losses                                                | -                                                          |      | -                                              |      | - |   | - | NM |   | - | NM |
|    Total                                                                   | -                                                          |      | -                                              |      | - |   | - | NM |   | - | NM |
|                                                                                 |                                                       |      |                                           |      |   |   |   |   |   |   |   |
| Total net realized gains (losses) from sales                                         |                                                       |      |                                           |      |   |   |   |   |   |   |   |
|       Gains                                                 | 4.0                                                        |      | 39.6                                           |      | 75.9 |   | (35.6) | -89.9% |   | (36.3) | -47.8% |
|       Losses                                                | (19.8)                                                     |      | (4.6)                                          |      | (11.3) |   | (15.1) | NM |   | 6.7 | -59.3% |
| Total                                                                                | (15.7)                                                     |      | 35.0                                           |      | 64.6 |   | (50.7) | -144.9% |   | (29.6) | -45.9% |
|                                                                                 |                                                       |      |                                           |      |   |   |   |   |   |   |   |
| Gains (losses) from fair value                        adjustments:    |                                                       |      |                                           |      |   |   |   |   |   |   |   |
|    Equity securities, fair value                                           | 84.4                                                       |      | -                                              |      | - |   | 84.4 | NM |   | - | NM |
|    Other invested assets, fair value                                       | 12.2                                                       |      | -                                              |      | - |   | 12.2 | NM |   | - | NM |
| Total                                                                                | 96.6                                                       |      | -                                              |      | - |   | 96.6 | NM |   | - | NM |
|                                                                                 |                                                       |      |                                           |      |   |   |   |   |   |   |   |
| Total net realized gains (losses)                                                    | $       80.9            |      | $     35.0            |      | $    64.6 |   | $       45.9 | 131.4% |   | $    (29.6) | -45.9% |
|                                                                                 |                                                       |      |                                           |      |   |   |   |   |   |   |   |
| (NM, not meaningful)                                                                 |                                                       |      |                                           |      |   |   |   |   |   |   |   |
| (Some amounts may not reconcile due to rounding)                                     |                                                       |      |                                           |      |   |   |   |   |   |   |

 

Effective January 1, 2007, we adopted and implemented FAS 159 for our        actively managed equity securities and equity shares of our parent. Accordingly, we        recorded $96.6 million of net realized gains from fair value re-measurements in our        consolidated statements of operations and comprehensive income for 2007.

 

22

 

----

 

**Segment Results.**

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

 

These        segments are managed in a coordinated fashion with respect to pricing, risk management,        control of aggregate catastrophe exposures, capital, investments and support operations.        Management generally monitors and evaluates the financial performance of these operating        segments based upon their underwriting results.

 

Underwriting results include earned premium less losses and LAE incurred,        commission and brokerage expenses and other underwriting expenses. We measure our        underwriting results 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 premiums earned.

 

Our loss        and LAE reserves are our best estimate of our ultimate liability for unpaid claims. We        re-evaluate our estimates on an ongoing basis, including all prior period reserves, taking        into consideration all available information and, in particular, recently reported claim        experience and trends related to prior periods. Such re-evaluations are recorded in        incurred losses in the period in which the re-evaluation is made.

 

23

 

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The        following discusses the underwriting results for each of our segments for the periods        indicated:

 

**U.S.        Reinsurance.**

The        following table presents the underwriting results and ratios for the U.S. Reinsurance        segment for the periods indicated.

 

|                                             | Years Ended December 31,                                                      |   | 2007/2006                                                         |   | 2006/2005                              |
|--------------------------------------------------|-------------------------------------------------------------------------------|--------|-------------------------------------------------------------------|--------|----------------------------------------|
| (Dollars in millions)                            | 2007                                                                          |   | 2006                                                              |   | 2005                                   |   | Variance | % Change |   | Variance | % Change |
| Gross written premiums                           | $       1,193.5                            |   | $     1,336.7                                 |   | $    1,386.2       |   | $     (143.2) | -10.7% |   | $       (49.5) | -3.6% |
| Net written premiums                             | 854.8                                                                         |   | 992.8                                                             |   | 1,055.8                                |   | (138.0) | -13.9% |   | (63.0) | -6.0% |
|                                             |                                                                          |   |                                                              |   |                                   |   |   |   |   |   |   |
| Premiums earned                                  | $          939.7            |   | $        978.1            |   | $    1,080.5       |   | $       (38.4) | -3.9% |   | $     (102.4) | -9.5% |
| Incurred losses and LAE                          | 636.9                                                                         |   | 721.2                                                             |   | 1,152.4                                |   | (84.3) | -11.7% |   | (431.2) | -37.4% |
| Commission and brokerage                         | 230.5                                                                         |   | 202.8                                                             |   | 259.8                                  |   | 27.7 | 13.7% |   | (57.0) | -21.9% |
| Other underwriting expenses                      | 33.3                                                                          |   | 24.9                                                              |   | 24.0                                   |   | 8.4 | 33.7% |   | 0.9 | 3.8% |
| Underwriting gain (loss)                         | $            39.0 |   | $          29.2 |   | $     (355.7) |   | $            9.8 | 33.6% |   | $        384.9 | -108.2% |
|                                             |                                                                          |   |                                                              |   |                                   |   |   |   |   |   |   |
|                                             |                                                                          |   |                                                              |   |                                   |   |   | Point Chg |   |   | Point Chg |
| Loss ratio                                       | 67.8%                                                                         |   | 73.7%                                                             |   | 106.7%                                 |   |   | (5.9) |   |   | (33.0) |
| Commission and brokerage ratio                   | 24.5%                                                                         |   | 20.7%                                                             |   | 24.0%                                  |   |   | 3.8 |   |   | (3.3) |
| Other underwriting expense ratio                 | 3.6%                                                                          |   | 2.6%                                                              |   | 2.2%                                   |   |   | 1.0 |   |   | 0.4 |
| Combined ratio                                   | 95.9%                                                                         |   | 97.0%                                                             |   | 132.9%                                 |   |   | (1.1) |   |   | (35.9) |
|                                             |                                                                          |   |                                                              |   |                                   |   |   |   |   |   |   |
| (Some amounts may not reconcile due to rounding) |                                                                          |   |                                                              |   |                                   |   |   |   |   |   |

 

Premiums.Gross written premiums decreased by        10.7% to $1,193.5 million in 2007 from $1,336.7 million in 2006, primarily due to a $202.6        million (37.9%) decrease in treaty casualty volume and a $70.5 million (32.7%) decrease in        facultative volume, partially offset by a $126.8 million (21.6%) increase in treaty        property volume. The increase in treaty property writings emanated principally from new        quota share treaties. The more competitive environment for the U.S. casualty business        resulted in reduced opportunities to write this business profitably. Net written premiums        decreased by 13.9% to $854.8 million in 2007 compared to $992.8 million in 2006, primarily        due to the decrease in gross written premiums. Net premiums earned decreased by 3.9% to        $939.7 million for 2007 compared to $978.1 million for 2006. The change in net premiums        earned relative to net written premiums is the result of timing; premiums are earned        ratably over the coverage period whereas written premiums are recorded at the initiation of        the coverage period.

 

Gross        written premiums decreased by 3.6% to $1,336.7 million in 2006 from $1,386.2 million in        2005, primarily due to a $72.7 million (12.0%) decrease in treaty casualty volume,        partially offset by a $16.4 million (2.9%) increase in treaty property volume and an $11.6        million (5.7%) increase in facultative volume. Net written premiums decreased by 6.0% to        $992.8 million in 2006 compared to $1,055.8 million in 2005, primarily due to the decrease        in gross written premiums.Net premiums earned decreased by 9.5% to $978.1 million for 2006        compared to $1,080.5 million for 2005. The change in net premiums earned relative to net        written premiums is the result of timing; premiums are earned ratably over the coverage        period whereas written premiums are recorded at the initiation of the coverage        period.

 

24

 

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Incurred Losses and LAE.The following table        presents the incurred losses and LAE for the U.S. Reinsurance segment for the periods        indicated.

 

|                                                   |
|---------------------------------------------------|
|                                              | Years Ended December 31, |   |   |   |   |   |   |   |   |
|                                              | 2007 |   | 2006 |   | 2005 |   | 2007/2006 Variance |   | 2006/2005 Variance |
|                                              | Current | Prior | Total |   | Current | Prior | Total |   | Current | Prior | Total |   | Current | Prior | Total |   | Current | Prior | Total |
| (Dollars in millions)                             | Year | Years | Incurred |   | Year | Years | Incurred |   | Year | Years | Incurred |   | Year | Years | Incurred |   | Year | Years | Incurred |
|                                              |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Attritional                                       | $      423.4 | $     (49.5) | $       373.9 |   | $      597.3 | $     (46.9) | $       550.4 |   | $      651.8 | $     (41.0) | $       610.8 |   | $     (173.9) | $      (2.6) | $     (176.5) |   | $     (54.5) | $      (5.9) | $      (60.4) |
| Catastrophes                                      | 0.1 | (3.5) | (3.4) |   | 7.1 | 136.3 | 143.3 |   | 475.9 | 54.3 | 530.2 |   | (7.0) | (139.8) | (146.7) |   | (468.8) | 82.0 | (386.9) |
| A&E                                           | - | 266.4 | 266.4 |   | - | 27.4 | 27.4 |   | - | 11.5 | 11.5 |   | - | 239.0 | 239.0 |   | - | 15.9 | 15.9 |
| Total segment                                     | $      423.5 | $     213.4 | $       636.9 |   | $      604.4 | $     116.8 | $       721.2 |   | $    1,127.7 | $      24.7 | $     1,152.4 |   | $     (180.9) | $       96.6 | $      (84.3) |   | $    (523.3) | $      92.1 | $     (431.2) |
| Loss ratio                                        | 45.1% | 22.7% | 67.8% |   | 61.8% | 11.9% | 73.7% |   | 104.4% | 2.3% | 106.7% |   | (16.7) | 10.8 | (5.9) |   | (42.6) | 9.6 | (33.0) |
| (Some amounts may not reconcile due to rounding.) |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |

 

The        current year’s attritional loss ratio improved by 16.0 points due to positive results        from increased property quota share business. We experienced $136.3 million of catastrophe        loss development in 2006 which did not recur in 2007 that improved the loss ratio by 14.3        points. These favorable factors were partially mitigated by a 25.6 point increase in the        loss ratio driven by asbestos reserve strengthening.

 

Incurred        losses and LAE decreased by 37.4% to $721.2 million for 2006 compared to $1,152.4 million        for 2005, primarily due to significantly reduced catastrophe losses, principally within the        treaty property unit. The segment loss ratio improved by 33.0 points for 2006 compared to        2005 primarily driven by a favorable 34.4 point decrease in catastrophe losses.

 

Segment Expenses.Commission and brokerage        expenses increased by 13.7% to $230.5 million for 2007 from $202.8 million in 2006,        principally driven by an increase in ceding commissions due to market conditions. Segment        other underwriting expenses for 2007 increased to $33.3 million from $24.9 million for        2006, principally due to the allocation of certain corporate charges to segments that had        been previously retained in corporate expenses.

 

Commission and brokerage expenses decreased by 21.9% to $202.8 million in        2006 from $259.8 million in 2005, principally due to decreased earned premium volume and        the mix of business. Segment other underwriting expenses for 2006 increased nominally to        $24.9 million from $24.0 million for 2005.

 

25

 

----

 

**U.S.        Insurance.**

The        following table presents the underwriting results and ratios for the U.S. Insurance segment        for the periods indicated.

 

|                                             | Years Ended December 31,                                           |   | 2007/2006                                                         |   | 2006/2005                                                         |
|--------------------------------------------------|--------------------------------------------------------------------|--------|-------------------------------------------------------------------|--------|-------------------------------------------------------------------|
| (Dollars in millions)                            | 2007                                                               |   | 2006                                                              |   | 2005                                                              |   | Variance | % Change |   | Variance | % Change |
| Gross written premiums                           | $          885.6 |   | $        866.3            |   | $        932.5            |   | $          19.3 | 2.2% |   | $       (66.2) | -7.1% |
| Net written premiums                             | 479.8                                                              |   | 591.2                                                             |   | 618.8                                                             |   | (111.4) | -18.8% |   | (27.6) | -4.5% |
|                                             |                                                               |   |                                                              |   |                                                              |   |   |   |   |   |   |
| Premiums earned                                  | $          496.2 |   | $        574.0            |   | $        636.7            |   | $       (77.8) | -13.6% |   | $       (62.7) | -9.8% |
| Incurred losses and LAE                          | 412.7                                                              |   | 432.2                                                             |   | 415.4                                                             |   | (19.5) | -4.5% |   | 16.8 | 4.0% |
| Commission and brokerage                         | 64.3                                                               |   | 72.7                                                              |   | 93.6                                                              |   | (8.4) | -11.6% |   | (20.9) | -22.3% |
| Other underwriting expenses                      | 58.2                                                               |   | 48.9                                                              |   | 51.7                                                              |   | 9.3 | 19.0% |   | (2.8) | -5.4% |
| Underwriting gain                                | $         (39.1)      |   | $          20.1 |   | $          75.9 |   | $       (59.2) | NM |   | $       (55.8) | -73.5% |
|                                             |                                                               |   |                                                              |   |                                                              |   |   |   |   |   |   |
|                                             |                                                               |   |                                                              |   |                                                              |   |   | Point Chg |   |   | Point Chg |
| Loss ratio                                       | 83.2%                                                              |   | 75.3%                                                             |   | 65.2%                                                             |   |   | 7.9 |   |   | 10.1 |
| Commission and brokerage ratio                   | 13.0%                                                              |   | 12.7%                                                             |   | 14.7%                                                             |   |   | 0.3 |   |   | (2.0) |
| Other underwriting expense ratio                 | 11.7%                                                              |   | 8.5%                                                              |   | 8.2%                                                              |   |   | 3.2 |   |   | 0.3 |
| Combined ratio                                   | 107.9%                                                             |   | 96.5%                                                             |   | 88.1%                                                             |   |   | 11.4 |   |   | 8.4 |
|                                             |                                                               |   |                                                              |   |                                                              |   |   |   |   |   |   |
| (NM, not meaningful)                             |                                                               |   |                                                              |   |                                                              |   |   |   |   |   |   |
| (Some amounts may not reconcile due to rounding) |                                                               |   |                                                              |   |                                                              |   |   |   |   |   |

 

Premiums.Gross written premiums increased by        2.2% to $885.6 million for 2007 from $866.3 million for 2006. The increase was primarily        the result of a new program we assumed late in 2007 for approximately $76 million in gross        written premium. Absent this new program gross written premiums would have decreased due to        the further decline in our workers’ compensation and contractors liability writings        in response to increased competition. Net written premiums decreased by 18.8% to $479.8        million for 2007 compared to $591.2 million for 2006, as our retention level decreased. Net        premiums earned decreased 13.6% to $496.2 million for 2007 from $574.0 million for 2006.        The change in net premiums earned relative to net written premiums is the result of timing;        premiums are earned ratably over the coverage period whereas written premiums are reflected        at the initiation of the coverage period.

 

Gross        written premiums decreased by 7.1% to $866.3 million for 2006 from $932.5 million for 2005.        The decrease was primarily the result of declines in our workers’ compensation and        run-off of an auto loan credit insurance program. Net written premiums decreased by 4.5% to        $591.2 million for 2006 compared to $618.8 million for 2005, primarily due to the decrease        in gross written premiums. Net premiums earned decreased by 9.8% to $574.0 million for 2006        from $636.7 million for 2005. The change in net premiums earned relative to net written        premiums is the result of timing; premiums are earned ratably over the coverage period        whereas written premiums are reflected at the initiation of the coverage period.

 

26

 

----

 

Incurred Losses and LAE.The following table        presents the incurred losses and LAE for the U.S. Insurance segment for the periods        indicated.

 

|                                              | Years Ended December 31,                                                                  |                                      |                                             |   |                                       |                      |                                             |   |                                       |
|---------------------------------------------------|-------------------------------------------------------------------------------------------|-------------------------------------------|--------------------------------------------------|--------|--------------------------------------------|---------------------------|--------------------------------------------------|--------|--------------------------------------------|
|                                              | 2007                                                                                      |                                      | 2006                                             |   | 2005                                       |                      | 2007/2006 Variance                               |   | 2006/2005 Variance                         |
|                                              | Current                                                                                   | Prior                                     | Total                                            |   | Current                                    | Prior                     | Total                                            |   | Current                                    | Prior | Total |   | Current | Prior | Total |   | Current | Prior | Total |
| (Dollars in millions)                             | Year                                                                                      | Years                                     | Incurred                                         |   | Year                                       | Years                     | Incurred                                         |   | Year                                       | Years | Incurred |   | Year | Years | Incurred |   | Year | Years | Incurred |
|                                              |                                                                                      |                                      |                                             |   |                                       |                      |                                             |   |                                       |   |   |   |   |   |   |   |   |   |   |
| Attritional                                       | $      360.6                                           | $      52.4 | $       413.0 |   | $      480.4 | $   (48.5) | $       431.9 |   | $      433.8 | $   (19.5) | $       414.3 |   | $    (119.8) | $    100.9 | $      (18.9) |   | $       46.6 | $   (29.0) | $        17.6 |
| Catastrophes                                      | -                                                                                    | (0.3)                                     | (0.3)                                            |   | -                                          | 0.3                       | 0.3                                              |   | 1.0                                        | - | 1.0 |   | - | (0.6) | (0.6) |   | (1.0) | 0.3 | (0.7) |
| Total segment                                     | $      360.6                                           | $      52.1 | $       412.7 |   | $      480.4 | $   (48.2) | $       432.2 |   | $      434.8 | $   (19.5) | $       415.4 |   | $    (119.8) | $    100.3 | $      (19.5) |   | $       45.6 | $   (28.7) | $        16.8 |
| Loss ratio                                        |                                   72.7% | 10.5%                                     | 83.2%                                            |   | 83.7%                                      | -8.4%                     | 75.3%                                            |   | 68.3%                                      | -3.1% | 65.2% |   | (11.0) | 18.9 | 7.9 |   | 15.4 | (5.3) | 10.1 |
| (Some amounts may not reconcile due to rounding.) |                                                                                      |                                      |                                             |   |                                       |                      |                                             |   |                                       |   |   |   |   |   |   |   |   |

 

Incurred        losses and LAE decreased by 4.5% to $412.7 million for 2007 from $432.2 million for 2006 as        the segment loss ratio increased by 7.9 points to 83.2%. From a ratio perspective, the        swing in prior years’ development from favorable in 2006 to adverse in 2007 resulted        in 18.9 points of increase.

 

The        adverse development in 2007 was the result of $60 million of adverse reserve run-off on a        canceled auto loan credit insurance program, partially offset by favorable development on        the remainder of the reserves. The 2007 accident year loss ratio was 72.7%, which was 11.0        points lower than in 2006. The 2006 accident year ratio was negatively impacted by 14.7        points due to the auto loan credit insurance program referenced above.

 

Incurred        losses and LAE increased 4.0% to $432.2 million for 2006 from $415.4 million for 2005,        primarily due to higher losses on the auto loan credit insurance program.

 

Segment Expenses.Commission and brokerage        expenses decreased by 11.6% to $64.3 million for 2007 from $72.7 million in 2006, which was        in line with the decrease in earned premiums. Segment other underwriting expenses for 2007        increased to $58.2 million as compared to $48.9 million for 2006, primarily due to        increased compensation costs associated with increased staff and the allocation of certain        corporate charges to segments, which had been previously retained in corporate        expenses.

 

Commission and brokerage expenses decreased 22.3% to $72.7 million for 2006        from $93.6 million in 2005, principally due to a decrease in written and earned premiums.        Segment other underwriting expenses for 2006 decreased to $48.9 million as compared to        $51.7 million for 2005.

 

27

 

----

 

**Specialty Underwriting.**

The        following table presents the underwriting results and ratios for the Specialty Underwriting        segment for the periods indicated.

 

|                                             | Years Ended December 31,                                                      |   | 2007/2006                                                          |   | 2006/2005                                              |
|--------------------------------------------------|-------------------------------------------------------------------------------|--------|--------------------------------------------------------------------|--------|--------------------------------------------------------|
| (Dollars in millions)                            | 2007                                                                          |   | 2006                                                               |   | 2005                                                   |   | Variance | % Change |   | Variance | % Change |
| Gross written premiums                           | $          270.1            |   | $        251.2             |   | $        314.6 |   | $          18.9 | 7.5% |   | $       (63.4) | -20.2% |
| Net written premiums                             | 185.4                                                                         |   | 174.4                                                              |   | 222.5                                                  |   | 11.0 | 6.3% |   | (48.1) | -21.6% |
|                                             |                                                                          |   |                                                               |   |                                                   |   |   |   |   |   |   |
| Premiums earned                                  | $          184.9            |   | $        176.3             |   | $        224.6 |   | $            8.6 | 4.9% |   | $       (48.3) | -21.5% |
| Incurred losses and LAE                          | 118.3                                                                         |   | 125.2                                                              |   | 225.7                                                  |   | (6.9) | -5.5% |   | (100.5) | -44.6% |
| Commission and brokerage                         | 44.3                                                                          |   | 44.9                                                               |   | 55.6                                                   |   | (0.6) | -1.3% |   | (10.7) | -19.2% |
| Other underwriting expenses                      | 8.5                                                                           |   | 6.6                                                                |   | 6.8                                                    |   | 1.9 | 28.8% |   | (0.2) | -2.9% |
| Underwriting gain (loss)                         | $            13.8 |   | $          (0.2) |   | $       (63.5)      |   | $          14.0 | NM |   | $          63.3 | -99.7% |
|                                             |                                                                          |   |                                                               |   |                                                   |   |   |   |   |   |   |
|                                             |                                                                          |   |                                                               |   |                                                   |   |   | Point Chg |   |   | Point Chg |
| Loss ratio                                       | 64.0%                                                                         |   | 71.0%                                                              |   | 100.5%                                                 |   |   | (7.0) |   |   | (29.5) |
| Commission and brokerage ratio                   | 23.9%                                                                         |   | 25.4%                                                              |   | 24.8%                                                  |   |   | (1.5) |   |   | 0.6 |
| Other underwriting expense ratio                 | 4.6%                                                                          |   | 3.7%                                                               |   | 3.0%                                                   |   |   | 0.9 |   |   | 0.7 |
| Combined ratio                                   | 92.5%                                                                         |   | 100.1%                                                             |   | 128.3%                                                 |   |   | (7.6) |   |   | (28.2) |
|                                             |                                                                          |   |                                                               |   |                                                   |   |   |   |   |   |   |
| (NM, not meaningful)                             |                                                                          |   |                                                               |   |                                                   |   |   |   |   |   |   |
| (Some amounts may not reconcile due to rounding) |                                                                          |   |                                                               |   |                                                   |   |   |   |   |   |

 

Premiums.Gross written premiums increased by        7.5% to $270.1 million for 2007 from $251.2 million for 2006. This decrease was the result        of a $36.9 million (58.7%) increase in marine writings and a $12.2 million (14.7%) increase        in A&H writings, partially offset by a $24.6 million (34.9%) decrease in surety        writings and a $5.7 million (16.5%) decrease in aviation writings. The increased marine        premium growth emanated from growth in existing quota share business as well as new quota        share contracts. We continued to decrease our aviation and surety writings in response to        more competitive market conditions. Net written premiums increased by 6.3% to $185.4        million for 2007 compared to $174.4 million for 2006, as a result of the increase in gross        written premiums. Net premiums earned increased by 4.9% to $184.9 million for 2007 compared        to $176.3 million for 2006, generally in line with the growth in net written premiums. The        change in net premiums earned relative to net written premiums is the result of timing;        premiums are earned ratably over the coverage period whereas written premiums are reflected        at the initiation of the coverage period.

 

Gross        written premiums decreased by 20.2% to $251.2 million for 2006 from $314.6 million for        2005. This decrease was the result of a $53.2 million (39.0%) decrease in A&H writings,        a $14.8 million (19.0%) decrease in marine writings and an $8.9 million (20.5%) decrease in        aviation writings, partially offset by a $13.4 million (23.5%) increase in surety writings.        Net written premiums decreased by 21.6% to $174.4 million for 2006 compared to $222.5        million for 2005, due to the decrease in gross written premiums. Net premiums earned        decreased by 21.5% to $176.3 million for 2006 compared to $224.6 million for 2005,        generally in line with the decline in net written premiums.

 

28

 

----

 

Incurred Losses and LAE.The following table        presents the incurred losses and LAE for the Specialty Underwriting segment for the periods        indicated.

 

|                                                   |
|---------------------------------------------------|
|                                              | Years Ended December 31, |   |   |   |   |   |   |   |   |
|                                              | 2007 |   | 2006 |   | 2005 |   | 2007/2006 Variance |   | 2006/2005 Variance |
|                                              | Current | Prior | Total |   | Current | Prior | Total |   | Current | Prior | Total |   | Current | Prior | Total |   | Current | Prior | Total |
| (Dollars in millions)                             | Year | Years | Incurred |   | Year | Years | Incurred |   | Year | Years | Incurred |   | Year | Years | Incurred |   | Year | Years | Incurred |
|                                              |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Attritional                                       | $      105.3 | $      (4.7) | $        100.6 |   | $      109.4 | $     (30.1) | $        79.4 |   | $      140.4 | $     (38.6) | $       101.8 |   | $       (4.1) | $      25.4 | $        21.2 |   | $     (31.0) | $        8.5 | $      (22.4) |
| Catastrophes                                      | 0.3 | 17.4 | 17.7 |   | - | 45.8 | 45.8 |   | 110.7 | 13.2 | 123.9 |   | 0.3 | (28.4) | (28.1) |   | (110.7) | 32.6 | (78.1) |
| Total segment                                     | $      105.6 | $      12.7 | $        118.3 |   | $      109.4 | $       15.7 | $       125.2 |   | $      251.1 | $     (25.4) | $       225.7 |   | $       (3.8) | $      (3.0) | $        (6.9) |   | $    (141.7) | $      41.1 | $     (100.5) |
| Loss ratio                                        | 57.1% | 6.9% | 64.0% |   | 62.1% | 8.9% | 71.0% |   | 111.8% | -11.3% | 100.5% |   | (5.0) | (2.0) | (7.0) |   | (49.7) | 20.2 | (29.5) |
| (Some amounts may not reconcile due to rounding.) |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |

 

Incurred        losses and LAE decreased by 5.5% to $118.3 million for 2007 compared to $125.2 million for        2006. The loss ratio for the current accident year was lower by 5.0 points in 2007 compared        to 2006. We experienced 6.9 points of adverse development in 2007 compared to 8.9 points in        2006. Catastrophe loss development, principally within the marine business related to the        2005 hurricanes, was the driver of the overall development in both 2007 and        2006.

 

Incurred        losses and LAE decreased by 44.6% to $125.2 million for 2006 compared to $225.7 million for        2005. The segment loss ratio was 29.5 points lower for 2006 than in 2005, principally due        to the absence of current year catastrophe losses in 2006.

 

Segment Expenses.Commission and brokerage        decreased by 1.3% to $44.3 million in 2007 from $44.9 million in 2006, primarily due to the        mix of business earned. Segment other underwriting expenses increased by 28.8% to $8.5        million for 2007 from $6.6 million for 2006, primarily due to the allocation of certain        corporate charges to segments, which had been previously retained in corporate        expenses.

 

Commission and brokerage decreased by 19.2% to $44.9 million in 2006 from        $55.6 million in 2005 primarily due to the reduction in premiums earned. Segment other        underwriting expenses decreased by 2.9% to $6.6 million for 2006 from $6.8 million for        2005.

 

29

 

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**International.**

The        following table presents the underwriting results and ratios for the International segment        for the periods indicated.

 

|                                             | Years Ended December 31,                                                      |   | 2007/2006                                              |   | 2006/2005                                              |
|--------------------------------------------------|-------------------------------------------------------------------------------|--------|--------------------------------------------------------|--------|--------------------------------------------------------|
| (Dollars in millions)                            | 2007                                                                          |   | 2006                                                   |   | 2005                                                   |   | Variance | % Change |   | Variance | % Change |
| Gross written premiums                           | $          805.9            |   | $        731.7 |   | $        706.6 |   | $          74.2 | 10.1% |   | $          25.1 | 3.6% |
| Net written premiums                             | 553.0                                                                         |   | 531.8                                                  |   | 498.6                                                  |   | 21.2 | 4.0% |   | 33.2 | 6.7% |
|                                             |                                                                          |   |                                                   |   |                                                   |   |   |   |   |   |   |
| Premiums earned                                  | $          558.2            |   | $        518.8 |   | $        484.4 |   | $          39.4 | 7.6% |   | $          34.4 | 7.1% |
| Incurred losses and LAE                          | 339.7                                                                         |   | 278.5                                                  |   | 409.3                                                  |   | 61.2 | 22.0% |   | (130.8) | -32.0% |
| Commission and brokerage                         | 126.7                                                                         |   | 118.1                                                  |   | 104.5                                                  |   | 8.6 | 7.3% |   | 13.6 | 13.0% |
| Other underwriting expenses                      | 18.6                                                                          |   | 13.8                                                   |   | 12.6                                                   |   | 4.8 | 34.8% |   | 1.2 | 9.5% |
| Underwriting gain (loss)                         | $            73.1 |   | $        108.4 |   | $       (41.9)      |   | $       (35.3) | -32.6% |   | $        150.3 | NM |
|                                             |                                                                          |   |                                                   |   |                                                   |   |   |   |   |   |   |
|                                             |                                                                          |   |                                                   |   |                                                   |   |   | Point Chg |   |   | Point Chg |
| Loss ratio                                       | 60.9%                                                                         |   | 53.7%                                                  |   | 84.5%                                                  |   |   | 7.2 |   |   | (30.8) |
| Commission and brokerage ratio                   | 22.7%                                                                         |   | 22.7%                                                  |   | 21.6%                                                  |   |   | 0.0 |   |   | 1.1 |
| Other underwriting expense ratio                 | 3.3%                                                                          |   | 2.7%                                                   |   | 2.6%                                                   |   |   | 0.6 |   |   | 0.1 |
| Combined ratio                                   | 86.9%                                                                         |   | 79.1%                                                  |   | 108.7%                                                 |   |   | 7.8 |   |   | (29.6) |
|                                             |                                                                          |   |                                                   |   |                                                   |   |   |   |   |   |   |
| (NM, not meaningful)                             |                                                                          |   |                                                   |   |                                                   |   |   |   |   |   |   |
| (Some amounts may not reconcile due to rounding) |                                                                          |   |                                                   |   |                                                   |   |   |   |   |   |

 

Premiums.Gross written premiums increased by        10.1% to $805.9 million for 2007 from $731.7 million for 2006. Approximately half of this        increase was attributable to the impact of other currencies strengthening against the U.S.        dollar. We wrote reinsurance contracts in multiple currencies and as these currencies        strengthened and were converted to U.S. dollars for financial reporting, they converted to        higher dollar values. Business written through the Miami and New Jersey offices increased        by $35.0 million (8.0%), business written through the Asian branch increased by $22.3        million (15.6%) and business written through the Canadian branch increased by $17.9 million        (11.8%). We have experienced strong fundamental growth in geographic areas where economic        growth and demand for reinsurance is strong. Net written premiums increased by 4.0% to        $553.0 million for 2007 compared to $531.8 million for 2006, primarily as a result of the        increase in gross written premiums. Net premiums earned increased by 7.6% to $558.2 million        for 2007 compared to $518.8 million for 2006. The change in net premiums earned relative to        net written premiums is the result of timing; premiums are earned ratably over the coverage        period whereas written premiums are reflected at the initiation of the coverage        period.

 

Gross        written premiums increased by 3.6% to $731.7 million for 2006 from $706.6 million for 2005.        Business written through the Miami and New Jersey offices increased by $47.1 million        (12.1%) and business written through the Canadian branch increased by $22.8 million        (17.7%). These increases were partially offset by a decrease of $44.1 million (23.5%) in        premiums written through the Asian branch. Net written premiums increased by 6.7% to $531.8        million for 2006 compared to $498.6 million for 2005, mainly driven by the increase in        gross written premiums. Net premiums earned increased by 7.1% to $518.8 million for 2006        compared to $484.4 million for 2005, consistent with the increase in net written        premiums.

 

30

 

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Incurred Losses and LAE.The following table        presents the incurred losses and LAE for the International segment for the periods        indicated.

 

|                                              | Years Ended December 31,                   |                                 |                                             |   |                                       |                      |                                             |   |                                       |
|---------------------------------------------------|--------------------------------------------|--------------------------------------|--------------------------------------------------|--------|--------------------------------------------|---------------------------|--------------------------------------------------|--------|--------------------------------------------|
|                                              | 2007                                       |                                 | 2006                                             |   | 2005                                       |                      | 2007/2006 Variance                               |   | 2006/2005 Variance                         |
|                                              | Current                                    | Prior                                | Total                                            |   | Current                                    | Prior                     | Total                                            |   | Current                                    | Prior | Total |   | Current | Prior | Total |   | Current | Prior | Total |
| (Dollars in millions)                             | Year                                       | Years                                | Incurred                                         |   | Year                                       | Years                     | Incurred                                         |   | Year                                       | Years | Incurred |   | Year | Years | Incurred |   | Year | Years | Incurred |
|                                              |                                       |                                 |                                             |   |                                       |                      |                                             |   |                                       |   |   |   |   |   |   |   |   |   |   |
| Attritional                                       | $      285.5 | $     (5.1) | $       280.4 |   | $      290.0 | $   (31.6) | $       258.4 |   | $      288.7 | $   (57.3) | $       231.4 |   | $       (4.5) | $     26.5 | $        22.0 |   | $                                1.3 | $     25.7 | $        27.0 |
| Catastrophes                                      | 56.6                                       | 2.7                                  | 59.3                                             |   | 5.4                                        | 14.8                      | 20.2                                             |   | 167.7                                      | 10.1 | 177.8 |   | 51.2 | (12.1) | 39.1 |   | (162.3) | 4.7 | (157.6) |
| Total segment                                     | $      342.1 | $     (2.4) | $       339.7 |   | $      295.4 | $   (16.8) | $       278.5 |   | $      456.4 | $   (47.2) | $       409.3 |   | $       46.7 | $     14.4 | $        61.2 |   | $    (161.0) | $     30.4 | $     (130.8) |
| Loss ratio                                        | 61.3%                                      | -0.4%                                | 60.9%                                            |   | 56.9%                                      | -3.2%                     | 53.7%                                            |   | 94.2%                                      | -9.7% | 84.5% |   | 4.4 | 2.8 | 7.2 |   | (37.3) | 6.5 | (30.8) |
| (Some amounts may not reconcile due to rounding.) |                                       |                                 |                                             |   |                                       |                      |                                             |   |                                       |   |   |   |   |   |   |   |   |

 

Incurred        losses and LAE increased by 22.0% to $339.7 million for 2007 compared to $278.5 million for        2006. The segment loss ratio increased by 7.2 points year over year, principally due to a        9.1 point increase in the current year catastrophe losses. In 2007, catastrophe losses        included Tabasco, Mexico floods, $16.5 million; New South Wales storm, $15.8 million;        Peruvian earthquake, $7.5 million; Hurricane Dean, $6.8 million; Jakarta flood, $5.1        million and Sydney hailstorm, $4.9 million.

 

Incurred        losses and LAE decreased by 32.0% to $278.5 million for 2006 compared to $409.3 million for        2005. The segment loss ratio decreased by 30.8 points, principally due to reduced current        year catastrophe losses in Canada, Asia and International. The catastrophe losses for 2005        included the impact from Hurricanes Katrina, Rita and Wilma.

 

Segment Expenses.Commission and brokerage        expense increased by 7.3% to $126.7 million for 2007 from $118.1 million in 2006, which was        in line with the increase in premiums earned. Segment other underwriting expenses for 2007        increased to $18.6 million compared to $13.8 million for 2006, primarily due to the        allocation of certain corporate charges to segments, which had been previously retained in        corporate expenses.

 

Commission and brokerage expense increased by 13.0% to $118.1 million for        2006 from $104.5 million in 2005 primarily driven by the increase in premiums earned.        Segment other underwriting expenses increased by 9.5% to $13.8 million for 2006 compared to        $12.6 million for 2005.

 

**SAFE        HARBOR DISCLOSURE**

This        report contains forward-looking statements within the meaning of the U.S. federal        securities laws. We intend 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 our reserves for losses and LAE, the adequacy of our provision for        uncollectible balances, estimates of our catastrophe exposure, the effects of catastrophic        events on our financial statements and the ability of our subsidiaries to pay dividends.        Forward-looking statements only reflect our expectations and are not guarantees of        performance. These statements involve risks, uncertainties and assumptions. Actual events        or results may differ materially from our expectations. Important factors that could cause        our actual events or results to be materially different from our expectations include those        discussed under the caption ITEM 1A, “Risk Factors”. We undertake no obligation        to update or revise publicly any forward-looking statements, whether as a result of new        information, future events or otherwise.

 

31

 

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**ITEM        7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK**

 

**Market        Sensitive Instruments.**

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

 

Our        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. Our mix of taxable and tax-preferenced investments is adjusted        continuously, consistent with our current and projected operating results, market        conditions and our tax position. The fixed maturities in the investment portfolio are        comprised of non-trading available for sale securities. Additionally, we invest in equity        securities, which we believe will enhance the risk-adjusted total return of the investment        portfolio.

 

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

 

Interest Rate Risk.Our $9.0 billion investment        portfolio at December 31, 2007 is principally comprised of fixed maturity securities, which        are generally subject to interest rate risk and of which 12.6% are exposed to foreign        currency movements, and equity securities, which are subject to price fluctuations. The        impact of the foreign exchange movements on the investment portfolio is partially mitigated        by changes in the dollar value of foreign currency denominated liabilities and their        associated income statement impact.

 

Interest        rate risk is the potential change in value of the fixed maturity portfolio, including        short-term investments, from a change in market interest rates. In a declining interest        rate environment, it includes prepayment risk on the $565.0 million of mortgage-backed        securities in the $5,998.2 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.

 

32

 

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The        tables below display the potential impact of market value fluctuations and after-tax        unrealized appreciation on our fixed maturity portfolio (including $1,327.4 million of        short-term investments as of December 31, 2007) for the periods indicated based on upward        and downward parallel and immediate 100 and 200 basis point shifts in interest rates. For        legal entities with a U.S. dollar functional currency, this modeling was performed on each        security individually. To generate appropriate price estimates on mortgage-backed        securities, changes in prepayment expectations under different interest rate environments        were taken into account. For operations 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.

 

|                                                                                                                                         | Interest Rate Shift in Basis Points                                |
|----------------------------------------------------------------------------------------------------------------------------------------------|--------------------------------------------------------------------|
|                                                                                                                                         | At December 31, 2007                                               |
| (Dollars in millions)                                                                                                                        | -200                                                               |   | -100 |   | 0 |   | 100 |   | 200 |   |
| Total Market Value                                                                                                                           | $       7,953.6                 |   | $    7,649.8 |   | $    7,325.5 |   | $    6,944.8 |   | $   6,552.6 |   |
| Market Value Change from Base (%)                                                                                                            | 8.6                                                                | % | 4.4 | % | 0.0 | % | -5.2 | % | -10.6 | % |
| Change in Unrealized Appreciation                                                                                                            |                                                               |   |   |   |   |   |   |   |   |   |
|    After-tax from Base ($)                                                                                                         | $          408.3 |   | $       210.8 |   | $                                      - |   | $     (247.5) |   | $    (502.4) |   |
|                                                                                                                                         |                                                               |   |   |   |   |   |   |   |   |   |
|                                                                                                                                         | Interest Rate Shift in Basis Points                                |
|                                                                                                                                         | At December 31, 2006                                               |
| (Dollars in millions)                                                                                                                        | -200                                                               |   | -100 |   | 0 |   | 100 |   | 200 |   |
| Total Market Value                                                                                                                           | $       7,432.4                 |   | $    7,113.9 |   | $    6,795.1 |   | $    6,436.3 |   | $   6,050.6 |   |
| Market Value Change from Base                        (%)               | 9.4                                                                | % | 4.7 | % | 0.0 | % | -5.3 | % | -11.0 | % |
| Change in Unrealized Appreciation                                                                                                            |                                                               |   |   |   |       |   |   |   |   |   |
|    After-tax from Base ($)                                                                                                         | $          414.3 |   | $       207.2 |   | $                                      - |   | $     (233.2) |   | $    (483.9) |   |

 

We had        $7,538.7 million and $7,397.3 million of reserves for losses and LAE as of December 31,        2007 and 2006, respectively. These amounts are recorded at their nominal value, as opposed        to fair value, which would reflect a discount adjustment to reflect the time value of        money. Since losses are paid out over a period of time, the fair value of the reserves is        less than the nominal value. As interest rates rise, the fair value of the reserves        decreases and, conversely, as interest rates decline, the fair value increases. These        movements are the opposite of the interest rate impacts on the fair value of investments.        While the difference between fair value and nominal value is not reflected in our financial        statements, our financial results will include investment income over time from the        investment portfolio until the claims are paid. Our loss and loss reserve obligations have        an expected duration that is reasonably consistent with our fixed income        portfolio.

 

Equity Risk.Equity risk is the potential        change in market value of the common stock and preferred stock portfolios arising from        changing equity prices. Our equity investments consist of a diversified portfolio of        individual securities and exchange traded and mutual fund, which invest principally in high        quality common and preferred stocks that are traded on the major exchanges. The primary        objective of the equity portfolio is to obtain greater total return relative to bonds over        time through market appreciation and income.

 

33

 

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The        tables below display the impact on market/fair value and after-tax        appreciation/(depreciation) of a 10% and 20% change in equity prices up and down for the        periods indicated.

 

|                                                                                                                                                                                           | Change in Equity Values in Percent                                              |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|---------------------------------------------------------------------------------|
|                                                                                                                                                                                           | At December 31, 2007                                                            |
| (Dollars in millions)                                                                                                                                                                          | -20%                                                                            | -10% | 0% | 10% | 20% |
| Market/Fair Value of the Equity Portfolio                                                                                                                                                      | $       660.2                                | $       742.7 | $      825.3 | $      907.8 | $    990.3 |
| After-tax Change in                        Appreciation/(Depreciation)                     | $     (106.0)                                          | $      (53.0) | $                                    - | $        53.0 | $    106.0 |
|                                                                                                                                                                                           |                                                                            |   |   |   |   |
|                                                                                                                                                                                           | Change in Equity Values in Percent                                              |
|                                                                                                                                                                                           | At December 31, 2006                                                            |
| (Dollars in millions)                                                                                                                                                                          | -20%                                                                            | -10% | 0% | 10% | 20% |
| Market Value of the Equity Portfolio                                                                                                                                                           | $                                 951.5 | $      1,070.4  | $   1,189.3 | $   1,308.3 | $ 1,427.2 |
| After-tax Change in Unrealized Appreciation                                                                                                                                                    | $       (154.6)                                   | $                                (77.3) | $                                                            - | $        77.3 | $    154.6 |

 

Foreign Exchange Risk.Foreign currency risk is        the potential change in value, income and cash flow arising from adverse changes in foreign        currency exchange rates. Each of our non-U.S. (“foreign”) operations maintains        capital in the currency of the country of its geographic location at least consistent with        local regulatory guidelines. Generally, we prefer to maintain the capital of our 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        Singapore Dollar, the British Pound Sterling and the Euro. We mitigate foreign exchange        exposure by generally matching the currency and duration of our assets to our corresponding        operating liabilities. In accordance with Financial Accounting Standards Board Statement        No. 52, “Foreign Currency Translation”, we translate the assets, liabilities        and income of non-U.S. dollar functional currency legal entities to the U.S. dollar. This        translation amount is reported as a component of other comprehensive income (loss). As of        December 31, 2007, there had been no material change in exposure to foreign exchange rates        as compared to December 31, 2006.

 

The        tables below display the potential impact of a parallel 10% and 20% increase and decrease        in foreign exchange rates on the valuation of invested assets subject to foreign currency        exposure for the periods indicated. 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.

 

|                                                                                                                                                                                                                                                 | Change in Foreign Exchange Rates in Percent       |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|---------------------------------------------------|
|                                                                                                                                                                                                                                                 | At December 31, 2007                              |
| (Dollars in millions)                                                                                                                                                                                                                                | -20%                                              | -10% | 0% | 10% | 20% |
| Total After-tax Foreign Exchange                        Exposure                               | $       (61.8) | $       (34.1) | $                                   - | $          38.8 | $          81.0 |
|                                                                                                                                                                                                                                                 |                                              |   |   |   |   |
|                                                                                                                                                                                                                                                 | Change in Foreign Exchange Rates in Percent       |
|                                                                                                                                                                                                                                                 | At December 31, 2006                              |
| (Dollars in millions)                                                                                                                                                                                                                                | -20%                                              | -10% | 0% | 10% | 20% |
| Total After-tax Foreign Exchange Exposure                                                                                                                                                                                                            | $       (48.1) | $       (26.6) | $                                    - | $          30.4 | $          63.5 |

 

**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.

 

34

 

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**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, 2007.

 

**Changes in Internal Control over Financial Reporting**

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

 

**ITEM        9B. OTHER INFORMATION**

 

None.

 

**PART        III**

 

**ITEM        10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT**

 

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

 

**ITEM        11. EXECUTIVE COMPENSATION**

 

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

 

**ITEM        12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER        MATTERS**

 

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

 

**ITEM        13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS**

 

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

 

35

 

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**ITEM        14. PRINCIPAL ACCOUNTANT FEES AND SERVICES**

 

The        PricewaterhouseCoopers LLP (and its worldwide affiliates) fees incurred for the years ended        December 31, 2007 and 2006 are as follows:

 

| (Dollars in millions) | 2007                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      | 2006                                                                                                      |
|-----------------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|-----------------------------------------------------------------------------------------------------------|
| (1)                   | Audit Fees                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                | $     1,841.5                                                                         | $    1,829.5 |
| (2)                   | Audit-Related                        Fees                                                                                                                 |           102.5                                         |          69.0 |
| (3)                   | Tax Fees                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |                                    25.7            |        137.3 |
| (4)                   | All Other Fees                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |                                      5.0 |            4.6 |

 

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 our 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        our subsidiaries or affiliates 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 our financial statements,        including due diligence services pertaining to potential business        acquisitions/dispositions, accounting consultations related to accounting, financial        reporting or disclosure matters not classified as “audit services”; assistance        with understanding and implementing new accounting and financial reporting guidance from        rule making authorities; financial audits of employee benefit plans; agreed-upon or        expanded audit procedures related to accounting and/or billing records required to respond        to or comply with financial, accounting or regulatory reporting matters and assistance with        internal control reporting requirements.

 

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

 

All        other fees represent an accounting research subscription and software.

 

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

 

Under        its Charter and the “Audit and Non-Audit Services Pre-Approval Policy” (the        “Policy”), Group’s Audit Committee or its delegate (one or more of its        members) is required to pre-approve the audit and non-audit services performed by the        independent auditor. The Policy requires that any service that has not received a general        pre-approval or that exceeds pre-approved cost levels or budgeted amounts requires specific        approval by Group’s Audit Committee or its delegate. For both specific and general        pre-approval, Group’s Audit Committee will consider whether such services are        consistent with the SEC’s rules on auditor independence. Group’s Audit        Committee will also consider whether the independent auditor is best positioned to provide        the most effective and efficient service and whether the service might enhance our 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.

 

36

 

----

 

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

 

**PART        IV**

 

**ITEM        15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES**

 

**Exhibits**

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

 

**Financial Statements and Schedules.**

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

 

37

 

----

 

**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, 2008.

 

 

|   | EVEREST REINSURANCE HOLDINGS, INC. |                                                      |
|--------|------------------------------------|-----------------------------------------------------------|
|   |                               |                                                      |   |
|   |                               |                                                      |   |
|   | By:                                | /s/ JOSEPH V. TARANTO                                     |   |
|   |                               | Joseph V. Taranto

(Chairman and Chief Executive Officer) |   |

 

 

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

 

 

| Signature                                                                                     |                                                            Title | Date           |
|-----------------------------------------------------------------------------------------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|----------------|
|                                                                                          |                                                                                                                                                                                                                                            |           |
| /s/JOSEPHV.                        TARANTO

Joseph V. Taranto

                          | Chairman and Chief Executive Officer and

Director (Principal Executive Officer)                                                                                                                                                                | March 31, 2008 |
| /s/THOMASJ.GALLAGHER

Thomas J. Gallagher

                                              | President and Chief Operating Officer and

Director                                                                                                                                                                                             | March 31, 2008 |
| /s/CRAIGEISENACHER

Craig Eisenacher

                                                   | Executive Vice President and Chief Financial

Officer and Director (Principal Financial                        Officer)                                                                                                                         | March 31, 2008 |
| /s/KEITHT.SHOEMAKER

Keith T. Shoemaker

                                                | Vice President and Comptroller

(Principal Accounting Officer)                                                                                                                                                                                  | March 31, 2008 |

 

 

 

38

 

----

 

 

| INDEX TO EXHIBITS |
|-------------------|
|              |   |   |   |
| Exhibit No.       |
|              |   |   |   |
|              | 2. | 1 | Agreement and Plan of Merger among Everest Reinsurance                        Holdings, Inc., Everest Re Group, Ltd. and Everest Re Merger Corporation,                        incorporated herein by reference to Exhibit 2.1 to the Registration                        Statement on Form S-4 (No. 333-87361) |
|              |   |   |   |
|              | 3. | 1 | Certificate of Incorporation of Everest Reinsurance                        Holdings, Inc., incorporated herein by reference to Exhibit 4.1 to the                        Registration Statement on Form S-8 (No. 333-05771) |
|              |   |   |   |
|              | 3. | 2 | By-Laws of Everest Reinsurance Holdings, Inc., incorporated                        herein by reference to Exhibit 3.2 to the Everest Reinsurance Holdings,                        Inc. Quarterly Report on Form 10-Q for the quarter ended March 31,                        2000 |
|              |   |   |   |
|              | 4. | 1 | Indenture, dated March 14, 2000, between Everest Reinsurance                        Holdings, Inc. and The Chase Manhattan Bank, as Trustee, incorporated                        herein by reference to Exhibit 4.1 to Everest Reinsurance Holdings, Inc.                        Form 8-K filed on March 15, 2000 |
|              |   |   |   |
|              | 4. | 2 | First Supplemental Indenture relating to the 8.5% Senior                        Notes due March 15, 2005, dated March 14, 2000, between Everest Reinsurance                        Holdings, Inc. and The Chase Manhattan Bank, as Trustee, incorporated                        herein by reference to Exhibit 4.2 to Everest Reinsurance Holdings, Inc.                        Form 8-K filed on March 15, 2000 |
|              |   |   |   |
|              | 4. | 3 | Second Supplemental Indenture relating to the 8.75% Senior                        Notes due March 15, 2010, dated March 14, 2000, between Everest Reinsurance                        Holdings, Inc. and The Chase Manhattan Bank, as Trustee, incorporated                        herein by reference to Exhibit 4.3 to the Everest Reinsurance Holdings,                        Inc. Form 8-K filed on March 15, 2000 |
|              |   |   |   |
|              | 4. | 4 | Junior Subordinated Indenture, dated November 14, 2002,                        between Everest Reinsurance Holdings, Inc. and JPMorgan Chase Bank as                        Trustee, incorporated herein by reference to Exhibit 4.5 to the                        Registration Statement on Form S-3 (No. 333-106595) |
|              |   |   |   |
|              | 4. | 5 | First Supplemental Indenture relating to Holdings 7.85%                        Junior Subordinated Debt Securities due November 15, 2032, dated as of                        November 14, 2002, among Holdings, Group and JPMorgan Chase Bank, as                        Trustee, incorporated herein by reference to Exhibit 10.2 to Everest Re                        Group, Ltd. Quarterly Report on Form 10-Q for the quarter ended June 30,                        2003 (the “second quarter 2003 10-Q”) |
|              |   |   |   |
|              | 4. | 6 | Amended and Restated Trust Agreement of Everest Re Capital                        Trust, dated as of November 14, 2002, incorporated herein by reference to                        Exhibit 10.1 to the second quarter 2003 10-Q |
|              |   |   |   |
|              | 4. | 7 | Guarantee Agreement, dated as of November 14, 2002, between                        Holdings and JPMorgan Chase Bank, incorporated herein by reference to                        Exhibit 10.3 to the second quarter 2003 10-Q |
|              |   |   |   |
|              | 4. | 8 | Expense Agreement, dated as of November 14, 2002, between                        Holdings and Everest Re Capital Trust, incorporated herein by reference to                        Exhibit 10.4 to the second quarter 2003 10-Q |
|              |   |   |   |

 

E-1

 

----

 

 

|   | 4.     | 9      | Second Supplemental Indenture relating to Holdings 6.20%                        Junior Subordinated Debt Securities due March 29, 2034, dated as of March                        29, 2004, among Holdings, Group and JPMorgan Chase Bank, as Trustee,                        incorporated herein by reference to Exhibit 4.1 to Everest Reinsurance                        Holdings, Inc. Form 8-K filed on March 30, 2004 (the “March 30, 2004                        8-K”)    |
|--------|--------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
|   | 4.     | 10     | Amended and Restated Trust Agreement of Everest Re Capital                        Trust II, dated as of March 29, 2004, incorporated herein by reference to                        Exhibit 4.2 to the March 30, 2004 8-K                                                                                                                                                                                                                                                                    |
|   |   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
|   | 4.     | 11     | Guarantee Agreement, dated as of March 29, 2004, between                        Holdings and JPMorgan Chase Bank, incorporated herein by reference to                        Exhibit 4.3 to the March 30, 2004 8-K                                                                                                                                                                                                                                                                          |
|   |   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
|   | 4.     | 12     | Expense Agreement, dated as of March 29, 2004, between                        Holdings and Everest Re Capital Trust II, incorporated herein by reference                        to Exhibit 4.4 to the March 30, 2004 8-K                                                                                                                                                                                                                                                                    |
|   |   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
|   | 4.     | 13     | Third Supplemental Indenture relating to Holdings 5.40%                        Senior Notes due October 15, 2014, dated as of October 12, 2004, among                        Holdings and JPMorgan Chase Bank, as Trustee, incorporated herein by                        reference to Exhibit 4.1 to Everest Reinsurance Holdings, Inc. Form 8-K                        filed on October 12, 2004                                                                                           |
|   |   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
|   | *10.   | 1      | Employment Agreement with Joseph V. Taranto executed on July                        15, 1998, incorporated herein by reference to Exhibit 10.21 to Everest                        Reinsurance Holdings, Inc. Quarterly Report on Form 10-Q for the quarter                        ended June 30, 1998 (the “second quarter 1998 10-Q”)                                                                                                                                          |
|   |   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
|   | *10.   | 2      | Amendment of Employment Agreement by and among Everest                        Reinsurance Company, Everest Reinsurance Holdings, Inc., Everest Re Group,                        Ltd. and Joseph V. Taranto dated February 15, 2000, incorporated herein by                        reference to Exhibit 10.29 to Everest Re Group, Ltd. Annual Report on Form                        10-K for the year ended December 31, 1999 (the “1999                        10-K”)          |
|   |   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
|   | *10.   | 3      | Change of Control Agreement with Joseph V. Taranto effective                        July 15, 1998, incorporated herein by reference to Exhibit 10.22 to the                        second quarter 1998 10-Q                                                                                                                                                                                                                                                                                 |
|   |   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
|   | *10.   | 4      | Amendment of Change of Control Agreement by and among                        Everest Reinsurance Company, Everest Reinsurance Holdings, Inc., Everest Re                        Group, Ltd. and Joseph V. Taranto dated February 15, 2000, incorporated                        herein by reference to Exhibit 10.30 to the 1999 10-K                                                                                                                                                        |
|   |   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
|   | 10.    | 5      | Stock Purchase Agreement between The Prudential Insurance                        Company of America and Everest Reinsurance Holdings, Inc. for the sale of                        common stock of Gibraltar Casualty Company dated February 24, 2000,                        incorporated herein by reference to Exhibit 10.32 to the 1999                        10-K                                                                                                                      |
|   |   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
|   | 10.    | 6      | Amendment No. 1 to Stock Purchase Agreement between The                        Prudential Insurance Company of America and Everest Reinsurance Holdings,                        Inc. for the sale of common stock of Gibraltar Casualty Company dated                        August 8, 2000, incorporated herein by reference to Exhibit 10.1 to the                        Everest Re Group, Ltd. Quarterly Report on Form 10-Q for the quarter ended                        June 30, 2000 |
|   |   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
|   | 10.    | 7      | Proportional Excess of Loss Reinsurance Agreement entered                        into between Gibraltar Casualty Company and Prudential Property and                        Casualty Insurance Company, incorporated herein by reference to Exhibit                        10.24 to the 2000 10-K                                                                                                                                                                                           |
|   |   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
|   | 10.    | 8      | Guarantee Agreement made by The Prudential Insurance Company                        of America in favor of Gibraltar Casualty Company, incorporated herein by                        reference to Exhibit 10.25 to the 2000 10-K                                                                                                                                                                                                                                                            |

 

E-2

 

----

 

 

|   | 10.    | 9      | Lease, effective December 26, 2000 between OTR, an Ohio                        general partnership, and Everest Reinsurance Company, incorporated herein                        by reference to Exhibit 10.26 to the 2000 10-K                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
|--------|--------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
|   | *10.   | 10     | Amendment of Employment Agreement by and among Everest                        Reinsurance Company, Everest Reinsurance Holdings, Inc., Everest Re Group,                        Ltd., Everest Global Services, Inc. and Joseph V. Taranto, dated March 30,                        2001, incorporated herein by reference to Exhibit 10.1 to Everest Re Group,                        Ltd. Report on Form 10-Q for the quarter ended March 31, 2001 (the                        “first quarter 2001 10-Q”)                                                                                                                                                                  |
|   |   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
|   | *10.   | 11     | Amendment of Employment Agreement by and among Everest                        Reinsurance Company, Everest Reinsurance Holdings, Inc., Everest Re Group,                        Ltd., Everest Global Services, Inc. and Joseph V. Taranto, dated April 20,                        2001, incorporated herein by reference to Exhibit 10.2 to the first quarter                        2001 10-Q                                                                                                                                                                                                                                                                                         |
|   |   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
|   | *10.   | 12     | Amendment of Change of Control Agreement by and among                        Everest Reinsurance Company, Everest Reinsurance Holdings, Inc., Everest Re                        Group, Ltd., Everest Global Services, Inc. and Joseph V. Taranto, dated                        March 30, 2001, incorporated herein by reference to Exhibit 10.3 to the                        first quarter 2001 10-Q                                                                                                                                                                                                                                                                                  |
|   |   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
|   | *10.   | 13     | Amendment of Employment Agreement by and among Everest                        Reinsurance Company, Everest Reinsurance Holdings, Inc., Everest Re Group                        Ltd., Everest Global Services Inc. and Joseph V. Taranto, dated April 18,                        2003, incorporated herein by reference to Exhibit 10.1 to Everest Re Group,                        Ltd. Form 8-K filed on April 21, 2003                                                                                                                                                                                                                                                               |
|   |   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
|   | *10.   | 14     | Amendment of Employment Agreement by and among Everest                        Reinsurance Company, Everest Reinsurance Holdings, Inc., Everest Re Group,                        Ltd., Everest Global Services, Inc. and Joseph V. Taranto, dated August 31,                        2005, incorporated by reference to Exhibit 10.1 to Everest Re Group, Ltd.                        From 8-K filed on August 31, 2005                                                                                                                                                                                                                                                                  |
|   |   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
|   | 10.    | 15     | Credit Agreement, dated August 23, 2006, between Everest                        Reinsurance Holdings, Inc., the lenders named therein and Citibank N.A., as                        administrative agent, providing for $150.0 million five year senior                        revolving credit facility, incorporated herein by reference to Exhibit 10.1                        to Everest Re Group, Ltd. Quarterly Report on Form 10-Q for the quarter                        ended September 30, 2006. This new agreement replaces the October 10, 2003                        three year senior revolving credit facility which expired on October 10,                        2006 |
|   |   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
|   | *10.   | 16     | Employment Agreement by and among Everest Reinsurance                        Company, Everest Reinsurance Holdings, Inc., Everest Re Group, Ltd.,                        Everest Global Services, Inc. and Craig E. Eisenacher, dated December 18,                        2006, incorporated by reference to Exhibit 10.1 to Everest Re Group, Ltd.                        Form 8-K filed on December 5, 2006                                                                                                                                                                                                                                                                          |
|   |   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
|   | *10.   | 17     | Amendment to Employment Agreement by and among Everest                        Reinsurance Company, Everest Reinsurance Holdings, Inc. and Joseph V.                        Taranto, dated April 5, 2007, incorporated herein by reference to Exhibit                        10.1 to Everest Re Group, Ltd. Form 8-K filed on April 5, 2007                                                                                                                                                                                                                                                                                                                                             |
|   |   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
|   | *10.   | 18     | Amendment to Change of Control Agreement by and among                        Everest Reinsurance Company, Everest Reinsurance Holdings, Inc., Everest Re                        Group, Ltd., Everest Global Services and Joseph V. Taranto, dated April 5,                        2007, incorporated herein by reference to Exhibit 10.2 to Everest Re Group,                        Ltd. Form 8-K filed on April 5, 2007                                                                                                                                                                                                                                                              |

 

E-3

 

----

 

 

|                                                                              |   |   |                                                                                                           |
|-----------------------------------------------------------------------------------|--------|--------|----------------------------------------------------------------------------------------------------------------|
|                                                                              | 23.    | 1      | Consent of PricewaterhouseCoopers LLP, filed                        herewith                                   |
|                                                                              |   |   |                                                                                                           |
|                                                                              | 31.    | 1      | Section 302 Certification of Joseph V. Taranto, filed                        herewith                          |
|                                                                              |   |   |                                                                                                           |
|                                                                              | 31.    | 2      | Section 302 Certification of Craig Eisenacher, filed                        herewith                           |
|                                                                              |   |   |                                                                                                           |
|                                                                              | 32.    | 1      | Section 906 Certification of Joseph V. Taranto and Craig                        Eisenacher, furnished herewith |
|                                                                              |   |   |                                                                                                           |
|                                                                              |
| * Management contract or compensatory plan or                        arrangement. |

 

 

E-4

 

----

 

**INDEX        TO FINANCIAL STATEMENTS AND SCHEDULES**

 

 

| Everest Reinsurance Holdings, Inc.                                                                                                            | Pages

                                                                                                            |
|-----------------------------------------------------------------------------------------------------------------------------------------------|-------------------------------------------------------------------------------------------------------------------------|
| Report of Independent Registered Public Accounting                        Firm                                                                | F-2                                                                                                                     |
|                                                                                                                                          |                                                                                                                    |   |
| Consolidated Balance Sheets at December 31, 2007 and                        2006                                                              | F-3                                                                                                                     |
|                                                                                                                                          |                                                                                                                    |   |
| Consolidated Statements of Operations and Comprehensive                        Income for the Years Ended

December 31, 2007, 2006 and 2005   |  

F-4                                                                                                             |
|                                                                                                                                          |                                                                                                                    |   |
| Consolidated Statements of Changes in Stockholder’s                        Equity for the Years Ended

December 31, 2007, 2006 and 2005 |  

F-5                                                                                                             |
|                                                                                                                                          |                                                                                                                    |   |
| Consolidated Statements of Cash Flows for the Years                        Ended

December 31, 2007, 2006 and 2005                            |  

F-6                                                                                                             |
|                                                                                                                                          |                                                                                                                    |   |
| Notes to Consolidated Financial Statements                                                                                                    | F-7                                                                                                                     |
|                                                                                                                                          |                                                                                                                    |   |
| Schedules                                                                                                                                     |
|                                                                                                                                          |                                                                                                                    |   |
| I                                                                                                                                             | Summary of Investments Other Than Investments in Related                        Parties at

December 31, 2007           |  

S-1 |
|                                                                                                                                          |                                                                                                                    |   |
| II                                                                                                                                            | Condensed Financial Information of Registrant:                                                                          |   |
|                                                                                                                                          |                                                                                                                    |   |
|                                                                                                                                          |     Balance Sheets as of December 31, 2007                        and 2006                               | S-2 |
|                                                                                                                                          |                                                                                                                    |   |
|                                                                                                                                          |     Statements of Operations for the Years                        Ended December 31, 2007, 2006 and 2005 | S-3 |
|                                                                                                                                          |                                                                                                                    |   |
|                                                                                                                                          |     Statements of Cash Flows for the Years                        Ended December 31, 2007, 2006 and 2005 | S-4 |
|                                                                                                                                          |                                                                                                                    |   |
| III                                                                                                                                           | Supplementary Insurance Information for the Years Ended                        December 31, 2007, 2006 and 2005         | S-5 |
|                                                                                                                                          |                                                                                                                    |   |
| IV                                                                                                                                            | Reinsurance for the Years Ended December 31, 2007, 2006 and                        2005                                 | S-6 |

 

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

 

 

F-1

----

 

****Report Of Independent Registered Public Accounting        Firm****

** **

To the        Board of Directors and Stockholder

of        Everest Reinsurance Holdings, Inc.:

 

In        our opinion, the consolidated financial statements listed in the accompanying index present        fairly, in all material respects, the financial position of Everest Reinsurance Holdings,        Inc. and its subsidiaries (the “Company”) at December 31, 2007 and 2006, and        the results of their operations and their cash flows for each of the three years in the        period ended December 31, 2007 in conformity with accounting principles generally accepted        in the United States of America. In addition, in our opinion, the financial statement        schedules listed in the accompanying index present fairly, in all material respects, the        information set forth therein when read in conjunction with the related consolidated        financial statements. These financial statements and financial statement schedules are the        responsibility of the Company’s management. Our responsibility is to express an        opinion on these financial statements 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.

As        discussed in Note 1 to the consolidated financial statements, the Company has adopted SFAS        No. 157, “Fair Value Measurements” and SFAS No. 159, “The Fair Value        Option for Financial Assets and Financial Liabilities” in 2007.

PricewaterhouseCoopers LLP

New York,        New York

March 28,        2008

 

 

 

F-2

----

 

| EVEREST REINSURANCE HOLDINGS, INC.                                                                                   |                                                                         |   |                                                                         |
|----------------------------------------------------------------------------------------------------------------------|------------------------------------------------------------------------------|--------|------------------------------------------------------------------------------|
| CONSOLIDATED BALANCE SHEETS                                                                                          |                                                                         |   |                                                                         |
|                                                                                                                 |                                                                         |   |                                                                         |
|                                                                                                                 |                                                                         |   |                                                                         |
|                                                                                                                 |                                                                         |   |                                                                         |
|                                                                                                                 | December 31,                                                                 |
| (Dollars in thousands, except par value per                        share)                                            | 2007                                                                         |   | 2006                                                                         |
|                                                                                                                 |                                                                         |   |                                                                         |
| ASSETS:                                                                                                              |                                                                         |   |                                                                         |
| Fixed maturities - available for sale, at market                        value                                        |                                                                         |   |                                                                         |
|   (amortized cost: 2007, $5,830,676 ; 2006,                        $5,959,228)                                  | $                               5,998,157 |   | $                               6,137,410 |
| Equity securities - available for sale, at market value                        (cost: 2007, $9,897 ; 2006, $874,289) | 9,897                                                                        |   | 1,189,341                                                                    |
| Equity securities - available for sale, at fair                        value                                         | 815,372                                                                      |   | -                                                                            |
| Short-term investments                                                                                               | 1,327,391                                                                    |   | 657,674                                                                      |
| Other invested assets (cost: 2007, $439,285 ; 2006,                        $329,914)                                 | 441,742                                                                      |   | 330,875                                                                      |
| Other invested assets, at fair value                                                                                 | 253,791                                                                      |   | -                                                                            |
| Cash                                                                                                                 | 146,447                                                                      |   | 136,535                                                                      |
|       Total investments and                        cash                                     | 8,992,797                                                                    |   | 8,451,835                                                                    |
| Accrued investment income                                                                                            | 86,129                                                                       |   | 85,447                                                                       |
| Premiums receivable                                                                                                  | 800,211                                                                      |   | 939,625                                                                      |
| Reinsurance receivables - unaffiliated                                                                               | 644,693                                                                      |   | 751,121                                                                      |
| Reinsurance receivables - affiliated                                                                                 | 1,698,454                                                                    |   | 1,511,856                                                                    |
| Funds held by reinsureds                                                                                             | 132,443                                                                      |   | 133,965                                                                      |
| Deferred acquisition costs                                                                                           | 234,719                                                                      |   | 240,346                                                                      |
| Prepaid reinsurance premiums                                                                                         | 433,271                                                                      |   | 391,336                                                                      |
| Deferred tax asset                                                                                                   | 279,302                                                                      |   | 248,214                                                                      |
| Federal income tax recoverable                                                                                       | 88,330                                                                       |   | -                                                                            |
| Other assets                                                                                                         | 153,180                                                                      |   | 134,550                                                                      |
| TOTAL ASSETS                                                                                                         | $      13,543,529                              |   | $      12,888,295                              |
|                                                                                                                 |                                                                         |   |                                                                         |
| LIABILITIES:                                                                                                         |                                                                         |   |                                                                         |
| Reserve for losses and adjustment expenses                                                                           | $        7,538,704                   |   | $        7,397,270                   |
| Unearned premium reserve                                                                                             | 1,368,096                                                                    |   | 1,423,677                                                                    |
| Funds held under reinsurance treaties                                                                                | 117,404                                                                      |   | 112,658                                                                      |
| Losses in the course of payment                                                                                      | 50,047                                                                       |   | 62,943                                                                       |
| Commission reserves                                                                                                  | 47,953                                                                       |   | 22,483                                                                       |
| Other net payable to reinsurers                                                                                      | 374,929                                                                      |   | 385,926                                                                      |
| Current federal income taxes payable                                                                                 | -                                                                            |   | 32,010                                                                       |
| 8.75% Senior notes due 3/15/2010                                                                                     | 199,685                                                                      |   | 199,560                                                                      |
| 5.4% Senior notes due 10/15/2014                                                                                     | 249,689                                                                      |   | 249,652                                                                      |
| 6.6% Long term notes due 05/01/2067                                                                                  | 399,639                                                                      |   | -                                                                            |
| Junior subordinated debt securities payable                                                                          | 329,897                                                                      |   | 546,393                                                                      |
| Accrued interest on debt and borrowings                                                                              | 11,217                                                                       |   | 10,041                                                                       |
| Other liabilities                                                                                                    | 288,770                                                                      |   | 227,298                                                                      |
|      Total liabilities                                                                           | 10,976,030                                                                   |   | 10,669,911                                                                   |
|                                                                                                                 |                                                                         |   |                                                                         |
| Commitments and Contingencies (Note 16)                                                                              |                                                                         |   |                                                                         |
|                                                                                                                 |                                                                         |   |                                                                         |
| STOCKHOLDER'S EQUITY:                                                                                                |                                                                         |   |                                                                         |
| Common stock, par value: $0.01; 3,000 shares                        authorized;                                      |                                                                         |   |                                                                         |
|    1,000 shares issued and outstanding (2007 and                        2006)                              | -                                                                            |   | -                                                                            |
| Additional paid-in capital                                                                                           | 310,206                                                                      |   | 300,764                                                                      |
| Accumulated other comprehensive income, net of deferred                        income taxes of                       |                                                                         |   |                                                                         |
|    $87.9 million at 2007 and $179.1 million at                        2006                                 | 163,276                                                                      |   | 332,578                                                                      |
| Retained earnings                                                                                                    | 2,094,017                                                                    |   | 1,585,042                                                                    |
|      Total stockholder's                        equity                                           | 2,567,499                                                                    |   | 2,218,384                                                                    |
| TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY                                                                           | $      13,543,529                              |   | $      12,888,295                              |
|                                                                                                                 |                                                                         |   |                                                                         |
|                                                                                                                 |                                                                         |   |                                                                         |
| The accompanying notes are an integral part of the                        consolidated financial statements.         |                                                                         |   |                                                                         |

 

F-3

----

 

| EVEREST REINSURANCE HOLDINGS, INC.                                                                           |                                                           |   |                                                           |   |                                                                                 |
|--------------------------------------------------------------------------------------------------------------|----------------------------------------------------------------|--------|----------------------------------------------------------------|--------|--------------------------------------------------------------------------------------|
| CONSOLIDATED STATEMENTS OF OPERATIONS                                                                        |                                                           |   |                                                           |   |                                                                                 |
| AND COMPREHENSIVE INCOME                                                                                     |                                                           |   |                                                           |   |                                                                                 |
|                                                                                                         |                                                           |   |                                                           |   |                                                                                 |
|                                                                                                         |                                                           |   |                                                           |   |                                                                                 |
|                                                                                                         | Years Ended December 31,                                       |
| (Dollars in thousands)                                                                                       | 2007                                                           |   | 2006                                                           |   | 2005                                                                                 |
| REVENUES:                                                                                                    |                                                           |   |                                                           |   |                                                                                 |
| Premiums earned                                                                                              | $      2,178,900                 |   | $      2,247,200                 |   | $      2,426,076                                       |
| Net investment income                                                                                        | 406,592                                                        |   | 372,352                                                        |   | 325,217                                                                              |
| Net realized capital gains                                                                                   | 80,887                                                         |   | 34,957                                                         |   | 64,568                                                                               |
| Other (expense) income                                                                                       | (73,641)                                                       |   | (40,542)                                                       |   | 10,344                                                                               |
| Total revenues                                                                                               | 2,592,738                                                      |   | 2,613,967                                                      |   | 2,826,205                                                                            |
|                                                                                                         |                                                           |   |                                                           |   |                                                                                 |
| CLAIMS AND EXPENSES:                                                                                         |                                                           |   |                                                           |   |                                                                                 |
| Incurred losses and loss adjustment expenses                                                                 | 1,507,574                                                      |   | 1,557,079                                                      |   | 2,202,820                                                                            |
| Commission, brokerage, taxes and fees                                                                        | 465,912                                                        |   | 438,505                                                        |   | 513,394                                                                              |
| Other underwriting expenses                                                                                  | 123,916                                                        |   | 98,729                                                         |   | 101,324                                                                              |
| Interest expense on senior notes                                                                             | 31,162                                                         |   | 31,149                                                         |   | 35,514                                                                               |
| Interest expense on long term notes                                                                          | 17,383                                                         |   | -                                                              |   | -                                                                                    |
| Interest expense on junior subordinated debt                                                                 | 35,324                                                         |   | 37,449                                                         |   | 37,449                                                                               |
| Amortization of bond issue costs                                                                             | 7,083                                                          |   | 938                                                            |   | 1,019                                                                                |
| Interest and fee expense on credit facility                                                                  | 107                                                            |   | 160                                                            |   | 215                                                                                  |
| Total claims and expenses                                                                                    | 2,188,461                                                      |   | 2,164,009                                                      |   | 2,891,735                                                                            |
|                                                                                                         |                                                           |   |                                                           |   |                                                                                 |
| INCOME (LOSS) BEFORE TAXES                                                                                   | 404,277                                                        |   | 449,958                                                        |   | (65,530)                                                                             |
| Income tax expense (benefit)                                                                                 | 100,086                                                        |   | 117,052                                                        |   | (70,236)                                                                             |
|                                                                                                         |                                                           |   |                                                           |   |                                                                                 |
| NET INCOME                                                                                                   | $         304,191 |   | $         332,906 |   | $             4,706 |
|                                                                                                         |                                                           |   |                                                           |   |                                                                                 |
| Other comprehensive income (loss), net of tax                                                                | 35,482                                                         |   | 101,313                                                        |   | (1,375)                                                                              |
|                                                                                                         |                                                           |   |                                                           |   |                                                                                 |
| COMPREHENSIVE INCOME                                                                                         | $         339,673 |   | $         434,219 |   | $             3,331 |
|                                                                                                         |                                                           |   |                                                           |   |                                                                                 |
| The accompanying notes are an integral part of the                        consolidated financial statements. |                                                           |   |                                                           |   |                                                                                 |

 

F-4

----

 

| EVEREST REINSURANCE HOLDINGS, INC.                                                                           |                                                                                          |   |                                                     |   |                                                                                         |
|--------------------------------------------------------------------------------------------------------------|-----------------------------------------------------------------------------------------------|--------|----------------------------------------------------------|--------|----------------------------------------------------------------------------------------------|
| CONSOLIDATED STATEMENTS OF                                                                                   |                                                                                          |   |                                                     |   |                                                                                         |
| CHANGES IN STOCKHOLDER'S EQUITY                                                                              |                                                                                          |   |                                                     |   |
|                                                                                                         |                                                                                          |   |                                                     |   |                                                                                         |
|                                                                                                         |                                                                                          |   |                                                     |   |                                                                                         |
|                                                                                                         | Years Ended December 31,                                                                      |
| (Dollars in thousands, except share amounts)                                                                 | 2007                                                                                          |   | 2006                                                     |   | 2005                                                                                         |
| COMMON STOCK (share outstanding):                                                                            |                                                                                          |   |                                                     |   |                                                                                         |
| Balance, beginning of period                                                                                 | 1,000                                                                                         |   | 1,000                                                    |   | 1,000                                                                                        |
| Balance, end of period                                                                                       | 1,000                                                                                         |   | 1,000                                                    |   | 1,000                                                                                        |
|                                                                                                         |                                                                                          |   |                                                     |   |                                                                                         |
| ADDITIONAL PAID-IN CAPITAL:                                                                                  |                                                                                          |   |                                                     |   |                                                                                         |
| Balance, beginning of period                                                                                 | $                                   300,764 |   | $        292,281 |   | $                                  271,652 |
| Sale of treasury shares, net of tax                                                                          | -                                                                                             |   | -                                                        |   | 15,312                                                                                       |
| Share-based compensation plans                                                                               | 9,442                                                                                         |   | 8,483                                                    |   | 5,118                                                                                        |
| Other                                                                                                        | -                                                                                             |   | -                                                        |   | 199                                                                                          |
| Balance, end of period                                                                                       | 310,206                                                                                       |   | 300,764                                                  |   | 292,281                                                                                      |
|                                                                                                         |                                                                                          |   |                                                     |   |                                                                                         |
| ACCUMULATED OTHER COMPREHENSIVE INCOME,                                                                      |                                                                                          |   |                                                     |   |                                                                                         |
| NET OF DEFERRED INCOME TAXES:                                                                                |                                                                                          |   |                                                     |   |                                                                                         |
| Balance, beginning of period                                                                                 | 332,578                                                                                       |   | 246,285                                                  |   | 247,660                                                                                      |
| Cumulative effect to adopt FAS No. 159, net of                        tax                                    | (204,784)                                                                                     |   | -                                                        |   | -                                                                                            |
| Net increase (decrease) during the period                                                                    | 35,482                                                                                        |   | 101,313                                                  |   | (1,375)                                                                                      |
| Adjustment to initially apply FAS No. 158, net of                        tax                                 | -                                                                                             |   | (15,020)                                                 |   | -                                                                                            |
| Balance, end of period                                                                                       | 163,276                                                                                       |   | 332,578                                                  |   | 246,285                                                                                      |
|                                                                                                         |                                                                                          |   |                                                     |   |                                                                                         |
| RETAINED EARNINGS:                                                                                           |                                                                                          |   |                                                     |   |                                                                                         |
| Balance, beginning of period                                                                                 | 1,585,042                                                                                     |   | 1,252,136                                                |   | 1,247,430                                                                                    |
| Cumulative effect to adopt FAS No. 159, net of                        tax                                    | 204,784                                                                                       |   | -                                                        |   | -                                                                                            |
| Net income                                                                                                   | 304,191                                                                                       |   | 332,906                                                  |   | 4,706                                                                                        |
| Balance, end of period                                                                                       | 2,094,017                                                                                     |   | 1,585,042                                                |   | 1,252,136                                                                                    |
|                                                                                                         |                                                                                          |   |                                                     |   |                                                                                         |
| TREASURY SHARES AT COST:                                                                                     |                                                                                          |   |                                                     |   |                                                                                         |
| Balance, beginning of period                                                                                 | -                                                                                             |   | -                                                        |   | (22,950)                                                                                     |
| Sale of treasury shares                                                                                      | -                                                                                             |   | -                                                        |   | 22,950                                                                                       |
| Balance, end of period                                                                                       | -                                                                                             |   | -                                                        |   | -                                                                                            |
|                                                                                                         |                                                                                          |   |                                                     |   |                                                                                         |
| TOTAL STOCKHOLDER'S EQUITY, END OF PERIOD                                                                    | $                                2,567,499            |   | $     2,218,384                 |   | $        1,790,702                                             |
|                                                                                                         |                                                                                          |   |                                                     |   |                                                                                         |
| The accompanying notes are an integral part of the                        consolidated financial statements. |                                                                                          |   |                                                     |   |

 

F-5

----

 

| EVEREST REINSURANCE HOLDINGS, INC.                                                                                |                                                                            |   |                                                                            |   |                                                                                       |
|-------------------------------------------------------------------------------------------------------------------|---------------------------------------------------------------------------------|--------|---------------------------------------------------------------------------------|--------|--------------------------------------------------------------------------------------------|
| CONSOLIDATED STATEMENTS OF CASH FLOWS                                                                             |                                                                            |   |                                                                            |   |                                                                                       |
|                                                                                                              |                                                                            |   |                                                                            |   |                                                                                       |
|                                                                                                              |                                                                            |   |                                                                            |   |                                                                                       |
|                                                                                                              |                                                                            |   |                                                                            |   |                                                                                       |
|                                                                                                              | Years Ended December 31,                                                        |
| (Dollars in thousands)                                                                                            | 2007                                                                            |   | 2006                                                                            |   | 2005                                                                                       |
|                                                                                                              |                                                                            |   |                                                                            |   |                                                                                       |
| CASH FLOWS FROM OPERATING ACTIVITIES:                                                                             |                                                                            |   |                                                                            |   |                                                                                       |
| Net income                                                                                                        | $         304,191                  |   | $          332,906            |   | $              4,706 |
|   Adjustments to reconcile net income to net cash                        provided by                         |                                                                            |   |                                                                            |   |                                                                                       |
|   operating activities:                                                                                      |                                                                            |   |                                                                            |   |                                                                                       |
|      Decrease in premiums                        receivable                                   | 145,022                                                                         |   | 117,936                                                                         |   | 10,898                                                                                     |
|      Decrease (increase) in funds held                        by reinsured, net               | 6,808                                                                           |   | (155,669)                                                                       |   | (92,470)                                                                                   |
|      (Increase) decrease in reinsurance                        receivables                         | (63,541)                                                                        |   | 274,443                                                                         |   | 20,170                                                                                     |
|      Increase in deferred tax                        asset                                         | (50,191)                                                                        |   | (33,460)                                                                        |   | (79,838)                                                                                   |
|      Increase (decrease) in reserve for                        losses and loss adjustment expenses | 66,119                                                                          |   | (353,176)                                                                       |   | 888,552                                                                                    |
|      (Decrease) increase in unearned                        premiums                               | (66,483)                                                                        |   | 32,986                                                                          |   | (706)                                                                                      |
|      Change in other assets and liabilities,                        net                            | (106,186)                                                                       |   | 165,796                                                                         |   | (188,364)                                                                                  |
|      Non-cash compensation expense                                                                 | 4,832                                                                           |   | -                                                                               |   | -                                                                                          |
|      Amortization of bond premium                                                                  | (7,969)                                                                         |   | 9,873                                                                           |   | 3,304                                                                                      |
|      Amortization of underwriting                        discount on senior notes             | 164                                                                             |   | 149                                                                             |   | 162                                                                                        |
|      Realized capital gains                                                                   | (80,887)                                                                        |   | (34,957)                                                                        |   | (64,568)                                                                                   |
| Net cash provided by operating activities                                                                         | 151,879                                                                         |   | 356,827                                                                         |   | 501,846                                                                                    |
|                                                                                                              |                                                                            |   |                                                                            |   |                                                                                       |
| CASH FLOWS FROM INVESTING ACTIVITIES :                                                                            |                                                                            |   |                                                                            |   |                                                                                       |
| Proceeds from fixed maturities matured/called - available                        for sale, at market value        | 736,297                                                                         |   | 461,341                                                                         |   | 337,516                                                                                    |
| Proceeds from fixed maturities sold - available for sale, at                        market value                  | 38,504                                                                          |   | 45,051                                                                          |   | 879,097                                                                                    |
| Proceeds from equity securities sold - available for sale,                        at market value                 | 6,497                                                                           |   | 206,522                                                                         |   | 205,895                                                                                    |
| Proceeds from equity securities sold - available for sale,                        at fair value                   | 760,729                                                                         |   | -                                                                               |   | -                                                                                          |
| Proceeds from other invested assets sold                                                                          | 48,712                                                                          |   | 54,195                                                                          |   | 43,739                                                                                     |
| Cost of fixed maturities acquired - available for sale, at                        market value                    | (585,910)                                                                       |   | (599,175)                                                                       |   | (1,134,116)                                                                                |
| Cost of equity securities acquired - available for sale, at                        fair value                     | (329,486)                                                                       |   | (176,678)                                                                       |   | (480,242)                                                                                  |
| Cost of other invested assets acquired                                                                            | (135,357)                                                                       |   | (148,342)                                                                       |   | (144,409)                                                                                  |
| Cost of other invested assets acquired, at fair                        value                                      | (241,584)                                                                       |   | -                                                                               |   | -                                                                                          |
| Net (purchases) sales of short-term securities                                                                    | (628,453)                                                                       |   | (143,637)                                                                       |   | 5,708                                                                                      |
| Net (increase) decrease in unsettled securities                        transactions                               | (5,609)                                                                         |   | (10,706)                                                                        |   | 426                                                                                        |
| Net cash used in investing activities                                                                             | (335,660)                                                                       |   | (311,429)                                                                       |   | (286,386)                                                                                  |
|                                                                                                              |                                                                            |   |                                                                            |   |                                                                                       |
| CASH FLOWS FROM FINANCING ACTIVITIES:                                                                             |                                                                            |   |                                                                            |   |                                                                                       |
| Tax benefit from share-based compensation                                                                         | 4,610                                                                           |   | 8,483                                                                           |   | 5,118                                                                                      |
| Net proceeds from issuance of long term notes                                                                     | 395,637                                                                         |   | -                                                                               |   | -                                                                                          |
| Redemption of junior subordinated debt securities                                                                 | (216,496)                                                                       |   | -                                                                               |   | -                                                                                          |
| Dividends from treasury shares                                                                                    | -                                                                               |   | -                                                                               |   | 199                                                                                        |
| Sale of treasury shares, net of tax                                                                               | -                                                                               |   | -                                                                               |   | 38,261                                                                                     |
| Repayment of 8.5% senior notes                                                                                    | -                                                                               |   | -                                                                               |   | (250,000)                                                                                  |
| Net cash provided by (used in) financing                        activities                                        | 183,751                                                                         |   | 8,483                                                                           |   | (206,422)                                                                                  |
|                                                                                                              |                                                                            |   |                                                                            |   |                                                                                       |
| EFFECT OF EXCHANGE RATE CHANGES ON CASH                                                                           | 9,942                                                                           |   | 16,460                                                                          |   | 3,269                                                                                      |
|                                                                                                              |                                                                            |   |                                                                            |   |                                                                                       |
| Net increase in cash                                                                                              | 9,912                                                                           |   | 70,341                                                                          |   | 12,307                                                                                     |
| Cash, beginning of period                                                                                         | 136,535                                                                         |   | 66,194                                                                          |   | 53,887                                                                                     |
| Cash, end of period                                                                                               | $         146,447                  |   | $          136,535            |   | $            66,194            |
|                                                                                                              |                                                                            |   |                                                                            |   |                                                                                       |
| SUPPLEMENTAL CASH FLOW INFORMATION                                                                                |                                                                            |   |                                                                            |   |                                                                                       |
| Cash transactions:                                                                                                |                                                                            |   |                                                                            |   |                                                                                       |
|    Income taxes paid, net                                                                               | $          250,909            |   | $            35,460 |   | $          107,040                       |
|    Interest paid                                                                                        | $            82,635 |   | $            68,608 |   | $            79,401            |
|                                                                                                              |                                                                            |   |                                                                            |   |                                                                                       |
| 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, 2007, 2006 and 2005**

 

**1.        SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES**

 

**A.        Business and Basis of Presentation.**

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

 

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

 

The        preparation of financial statements in conformity with GAAP requires management to make        estimates and assumptions that affect the reported amounts of assets and liabilities (and        disclosure of contingent assets and liabilities) at the date of the financial statements        and the reported amounts of revenues and expenses during the reporting period. All        intercompany accounts and transactions have been eliminated. Ultimate actual results could        differ, possibly materially, from those estimates.

 

**B.        Investments.**

Fixed        maturity and market value equity security 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”. Actively managed equity securities        and other invested assets, at fair value, are carried at fair value with fair value        re-measurement reflected as net realized capital gains or losses in the consolidated        statements of operations and comprehensive income. Unrealized losses on fixed maturities,        which are deemed other than temporary, are charged to net income as net 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 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 effect the calculation of projected        and prepayments for pass-through security types. Other invested assets include limited        partnerships and rabbi trusts. Limited partnerships are accounted for under the equity        method of accounting, which can be recorded on a monthly or quarterly lag.

 

 

F-7

 

----

 

**C.        Uncollectible Receivable Balances.**

The        Company provides reserves for uncollectible premium receivables and reinsurance recoverable        balances based on management’s assessment of the collectibility of the outstanding        balances. Such reserves were $187.8 million and $99.6 million at December 31, 2007 and        2006, respectively.

 

**D.        Deferred Acquisition Costs.**

Acquisition costs, consisting principally of commissions and brokerage        expenses and certain premium taxes and fees incurred at the time a contract or policy is        issued and that vary with and are directly related to the Company’s reinsurance and        insurance business, are deferred and amortized over the period in which the related        premiums are earned, generally one year. Deferred acquisition costs are limited to their        estimated realizable value by line of business based on the related unearned premiums,        anticipated claims and claim expenses and anticipated investment income. Deferred        acquisition costs amortized to income were $465.9 million, $438.5 million and $513.4        million in 2007, 2006 and 2005, respectively.

 

**E.        Reserve for Losses and Loss Adjustment Expenses.**

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

 

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

 

**F.        Premium Revenues.**

Written        premiums are earned ratably over the periods of the related insurance and reinsurance        contracts. Unearned premium reserves are established relative to the unexpired contract        period. Such reserves are established based upon reports received from ceding companies or        estimated using pro rata methods based on statistical data. Reinstatement premiums        represent additional premium received on reinsurance coverages, most prevalently        catastrophe related, when limits have been depleted under the original reinsurance contract        and additional coverage is granted. Written and earned premiums and the related costs,        which have not yet been reported to the Company are estimated and accrued. Premiums are net        of ceded reinsurance.

 

**G.        Income Taxes.**

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

 

**H.        Foreign Currency.**

Assets        and liabilities relating to foreign operations are translated into U.S. dollars at the        exchange rates in effect at the balance sheet date; revenues and expenses are translated        into U.S. dollars using average exchange rates in effect during the reporting period. 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 consolidated statements of operations and comprehensive income (loss) in other income        (expense).

 

F-8

 

----

 

**I.        Segmentation.**

The        Company, through its subsidiaries, operates in four segments: U.S. Reinsurance, U.S.        Insurance, Specialty Underwriting and International. See also Note 18.

 

**J.        Retroactive Reinsurance.**

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

 

**K.        Policyholder Dividends.**

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

 

**L.        Application of New Accounting Standards.**

In        November 2005, the Financial Accounting Standards Board (“FASB”) issued FASB        Staff Position (“FSP”) FAS 115-1, “The Meaning of Other-Than-Temporary        Impairment and Its Application to Certain Investments” (“FAS 115-1”),        which was effective for reporting periods beginning after December 15, 2005. FAS 115-1        addresses the determination of when an investment is considered impaired, whether the        impairment is other than temporary and the measurement of an impairment loss. An other than        temporary impairment loss is recorded as a net realized capital loss in the consolidated        statements of operations and comprehensive income (loss) in the period in which it is        impaired. FAS 115-1 also includes accounting considerations subsequent to the recognition        of an other-than-temporary impairment and requires certain disclosures about unrealized        losses not recognized as other-than-temporary impairments. The Company adopted FAS 115-1        prospectively effective January 1, 2006. The Company believes that all unrealized losses in        its investment portfolio are temporary in nature as of December 31, 2007.

 

In July        2006, the FASB released FASB Interpretation No. 48, “Accounting for Uncertainty in        Income Taxes – an interpretation of FASB Statement No. 109” (“FIN        48”), which is effective for fiscal years beginning after December 15, 2006. FIN 48        clarifies the accounting for uncertainty in income taxes recognized in an        enterprise’s financial statements in accordance with FASB Statement No. 109,        “Accounting for Income Taxes” (“FAS 109”). FIN 48 prescribes the        financial statement recognition and measurement criteria for tax positions taken or        expected to be taken in a tax return. Further, FIN 48 expands the required disclosures        associated with uncertain tax positions. As a result of the implementation of FIN 48, the        Company recorded no adjustment in the liability for unrecognized income tax benefits and no        adjustment to beginning retained earnings.

 

In        September 2006, the FASB issued Statement of Financial Accounting Standards        (“FAS”) No. 157 “Fair Value Measurements” (“FAS 157”).        FAS 157 defines fair value, establishes a framework for measuring fair value consistently        in GAAP and expands disclosures about fair value measurements. The Company adopted FAS 157        as of January 1, 2007.

 

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

 

F-9

 

----

 

In        February 2007, the FASB issued FAS No. 159 “The Fair Value Option for Financial        Assets and Financial Liabilities - including an amendment to FASB Statement No. 115”        (“FAS 159”). FAS 159 permits entities to choose to measure many financial        instruments and certain other items at fair value. The objective is to improve financial        reporting by providing entities with the opportunity to mitigate volatility in reported        earnings caused by measuring related assets and liabilities differently without having to        apply complex hedge accounting provisions. The Company adopted FAS 159 as of January 1,        2007.

 

**M.        Investments – Interest Only Strips.**

During        2005, the Company invested in interest only strips of mortgage-backed securities        (“interest only strips”), which were fully liquidated in November,        2005.

 

The        Company accounted for its investment in interest only strips in accordance with Emerging        Issues Task Force Issue No. 99-20, “Recognition of Interest Income and Impairment on        Purchased and Retained Beneficial Interests in Securitized Financial Assets”        (“EITF 99-20”). EITF 99-20 sets forth the rules for recognizing interest income        on all credit-sensitive mortgage and asset-backed securities and certain        prepayment-sensitive securities, including agency interest only strips, whether purchased        or retained in securitization, as well as the rules for determining when these securities        must be written down to fair value because of impairment. EITF 99-20 requires decreases in        the valuation of residual interests in securitizations to be recorded as a reduction to the        carrying value of the residual interests through a charge to earnings, rather than an        unrealized loss in stockholders’ equity, when any portion of the decline in fair        value is attributable to an impairment loss, as defined by EITF 99-20. The Company        recognized pre-tax and after-tax net realized capital gains of $21.2 million and $13.7        million, respectively, for the year ended December 31, 2005, related to the impairment loss        and subsequent sale of the interest only strips.

 

F-10

 

----

 

**2.        INVESTMENTS**

 

The        amortized cost, market value, and gross unrealized appreciation and depreciation of        available for sale, market value fixed maturity and equity security investments for the        periods indicated are as follows:

 

|                                                                                            | At December 31, 2007                                                                                   |
|-------------------------------------------------------------------------------------------------|--------------------------------------------------------------------------------------------------------|
|                                                                                            | Amortized                                                                                              |   | Unrealized |   | Unrealized |   | Market |
| (Dollars in thousands)                                                                          | Cost                                                                                                   |   | Appreciation |   | Depreciation |   | Value |
| Fixed maturities - available for sale                                                           |                                                                                                   |   |   |   |   |   |   |
|    U.S. Treasury securities and obligations                        of                 |                                                                                                   |   |   |   |   |   |   |
|       U.S. government agencies and                        corporations | $                                 92,932                  |   | $              3,571 |   | $                  (3)  |   | $                                  96,500 |
|    Obligations of U.S. states and political                        subdivisions       | 3,512,695                                                                                              |   | 138,374 |   | (2,540)  |   | 3,648,529 |
|    Corporate securities                                                               | 741,380                                                                                                |   | 12,819 |   | (10,909)  |   | 743,290 |
|    Mortgage-backed securities                                                         | 566,041                                                                                                |   | 4,100 |   | (5,119)  |   | 565,022 |
|    Foreign government securities                                                      | 416,715                                                                                                |   | 20,678 |   | (876)  |   | 436,517 |
|    Foreign corporate securities                                                       | 500,913                                                                                                |   | 11,614 |   | (4,228)  |   | 508,299 |
| Total fixed maturities                                                                          | $      5,830,676                                                                   |   | $          191,156 |   | $                                 (23,675)  |   | $      5,998,157 |
| Equity securities                                                                               | $                                    9,897 |   | $                      - |   | $                                            -   |   | $                                   9,897  |
|                                                                                            |                                                                                                   |   |   |   |   |   |   |
|                                                                                            | At December 31, 2006                                                                                   |
|                                                                                            | Amortized                                                                                              |   | Unrealized |   | Unrealized |   | Market |
| (Dollars in thousands)                                                                          | Cost                                                                                                   |   | Appreciation |   | Depreciation |   | Value |
| Fixed maturities - available for sale                                                           |                                                                                                   |   |   |   |   |   |   |
|    U.S. Treasury securities and obligations                        of                 |                                                                                                   |   |   |   |   |   |   |
|      U.S. government agencies and                        corporations       | $                                  85,563            |   | $                   467 |   | $              (972)  |   | $                                  85,058 |
|    Obligations of U.S. states and political                        subdivisions       | 3,633,188                                                                                              |   | 164,402 |   | (5,219)  |   | 3,792,371 |
|    Corporate securities                                                               | 961,679                                                                                                |   | 17,061 |   | (9,733)  |   | 969,007 |
|    Mortgage-backed securities                                                         | 475,140                                                                                                |   | 1,605 |   | (10,246)  |   | 466,499 |
|    Foreign government securities                                                      | 354,153                                                                                                |   | 17,441 |   | (1,447)  |   | 370,147 |
|    Foreign corporate securities                                                       | 449,505                                                                                                |   | 10,098 |   | (5,275)  |   | 454,328 |
| Total fixed maturities                                                                          | $     5,959,228                                                               |   | $                                   211,074 |   | $         (32,892)  |   | $      6,137,410 |
| Equity securities                                                                               | $                               874,289                        |   | $                                   315,052 |   | $                                            -   |   | $      1,189,341 |

 

 

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.

 

|                                                                                                           | At December 31, 2007                                                                         |
|----------------------------------------------------------------------------------------------------------------|----------------------------------------------------------------------------------------------|
|                                                                                                           | Amortized                                                                                    |   | Market |
| (Dollars in thousands)                                                                                         | Cost                                                                                         |   | Value |
| Fixed maturities – available for sale                                                                    |                                                                                         |   |   |
|    Due in one year or less                                                                           | $              314,118 |   | $              314,043 |
|    Due after one year through five                        years                                      | 1,142,672                                                                                    |   | 1,158,332 |
|    Due after five years through ten                        years       | 1,116,315                                                                                    |   | 1,130,104 |
|    Due after ten years                                                                               | 2,691,530                                                                                    |   | 2,830,656 |
|    Mortgage-backed securities                                                                        | 566,041                                                                                      |   | 565,022 |
| Total                                                                                                          | $           5,830,676                 |   | $           5,998,157 |

 

The        changes in net unrealized (losses) gains for the Company’s investments are derived        from the following source for the periods indicated:

 

|                                                                                                                                                                                                                                                                                         | Years Ended December 31,                                                         |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|----------------------------------------------------------------------------------|
| (Dollars in thousands)                                                                                                                                                                                                                                                                       | 2007                                                                             |   | 2006 |
| (Decrease) increase during the period between the market                        value and                                                                                                                                                                                                    |                                                                             |   |   |
|   cost of investments carried at market value, and                        deferred taxes thereon:                                                                                                                                                                                       |                                                                             |   |   |
|     Fixed maturities                                                                                                                                                                                                                                                          | $         (10,699)                  |   | $            (7,970) |
|     Equity securities                                                                                                                                                                                                                                                         | -                                                                                |   | 150,693 |
|     Other invested assets                                                                                                                                                                                                                                                     | 1,496                                                                            |   | (466) |
|     Change in unrealized (depreciation)                        appreciation,                        pre-tax                            | (9,203)                                                                          |   | 142,257 |
|     Deferred taxes                                                                                                                                                                                                                                                            | 3,221                                                                            |   | (49,790) |
|   Change in unrealized (depreciation) appreciation, net                        of deferred                                                                                                                                                                                              |                                                                             |   |   |
|     taxes, included in stockholder's                        equity                                                                                                                                                                                                            | $            (5,982) |   | $             92,467 |

 

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

 

F-12

 

----

 

The        tables below display the aggregate market value and gross unrealized depreciation of fixed        maturity securities, by investment category and maturity category by length of time that        individual securities had been in a continuous unrealized loss position for the periods        indicated:

|                                                                                                                                                                             |                                                                                                                              |                   |                                                                                                                       |   |                                                                     |   |                                                                                                       |   |                                                                     |   |                                                                                                       |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|-----------------------------------------------------------------------------------------------------------------------------------|------------------------|----------------------------------------------------------------------------------------------------------------------------|--------|--------------------------------------------------------------------------|--------|------------------------------------------------------------------------------------------------------------|--------|--------------------------------------------------------------------------|--------|------------------------------------------------------------------------------------------------------------|
|                                                                                                                                                                             | Duration by security type of unrealized loss at December 31,                        2007                                          |
|                                                                                                                                                                             | Less than 12 months                                                                                                               | Greater than 12 months | Total                                                                                                                      |
|                                                                                                                                                                             |                                                                                                                              |                   | Gross                                                                                                                      |   |                                                                     |   | Gross                                                                                                      |   |                                                                     |   | Gross                                                                                                      |
|                                                                                                                                                                             |                                                                                                                              |                   | Unrealized                                                                                                                 |   |                                                                     |   | Unrealized                                                                                                 |   |                                                                     |   | Unrealized                                                                                                 |
| (Dollars in thousands)                                                                                                                                                           | Market Value                                                                                                                      |                   | Depreciation                                                                                                               |   | Market Value                                                             |   | Depreciation                                                                                               |   | Market Value                                                             |   | Depreciation                                                                                               |
| Fixed maturity securities                                                                                                                                                        |                                                                                                                              |                   |                                                                                                                       |   |                                                                     |   |                                                                                                       |   |                                                                     |   |                                                                                                       |
|    U.S. government                                                                                                                                                     |                                                                                                                              |                   |                                                                                                                       |   |                                                                     |   |                                                                                                       |   |                                                                     |   |                                                                                                       |
|      agencies and authorities                                                                                                                                | $                                          - |                   | $                   -  |   | $           3,130 |   | $                 (3) |   | $           3,130 |   | $                 (3) |
|    States, municipalities                                                                                                                                              |                                                                                                                              |                   |                                                                                                                       |   |                                                                     |   |                                                                                                       |   |                                                                     |   |                                                                                                       |
|      and political                        subdivisions                  | 161,999                                                                                                                           |                   | (1,704)                                                                                                                    |   | 96,266                                                                   |   | (836)                                                                                                      |   | 258,265                                                                  |   | (2,540)                                                                                                    |
|    Foreign governments                                                                                                                                                 | 20,000                                                                                                                            |                   | (537)                                                                                                                      |   | 73,612                                                                   |   | (339)                                                                                                      |   | 93,612                                                                   |   | (876)                                                                                                      |
|    All other corporate                                                                                                                                                 | 184,824                                                                                                                           |                   | (3,784)                                                                                                                    |   | 827,661                                                                  |   | (16,472)                                                                                                   |   | 1,012,485                                                                |   | (20,256)                                                                                                   |
| Total fixed maturities                                                                                                                                                           | $                               366,823                                                        |                   | $          (6,025)                                                       |   | $    1,000,669                                       |   | $        (17,650)                                                  |   | $    1,367,492                                       |   | $        (23,675)                                                  |

 

|                                                                       | Duration by maturity type of unrealized loss at December 31,                        2007 |
|----------------------------------------------------------------------------|------------------------------------------------------------------------------------------|
|                                                                       | Less than 12 months                                                                      | Greater than 12 months | Total |
|                                                                       |                                                                                     |   | Gross |   |   |   | Gross |   |   |   | Gross |
|                                                                       |                                                                                     |   | Unrealized |   |   |   | Unrealized |   |   |   | Unrealized |
| (Dollars in thousands)                                                     | Market Value                                                                             |   | Depreciation |   | Market Value |   | Depreciation |   | Market Value |   | Depreciation |
| Fixed maturity securities                                                  |                                                                                     |   |   |   |   |   |   |   |   |   |   |
|    Due in 1 year or less                                         | $           22,635                |   | $             (144) |   | $         173,595 |   | $             (677) |   | $         196,230 |   | $             (821) |
|    Due after one year through five                        years  | 60,036                                                                                   |   | (1,290) |   | 249,351 |   | (4,145) |   | 309,387 |   | (5,435) |
|    Due after five years through ten                        years | 75,133                                                                                   |   | (1,308) |   | 157,960 |   | (4,990) |   | 233,093 |   | (6,298) |
|    Due after ten years                                           | 209,006                                                                                  |   | (3,282) |   | 65,202 |   | (2,720) |   | 274,208 |   | (6,002) |
|    Mortgage-backed securities                                    | 13                                                                                       |   | (1) |   | 354,561 |   | (5,118) |   | 354,574 |   | (5,119) |
| Total                                                                      | $         366,823                           |   | $          (6,025) |   | $      1,000,669 |   | $        (17,650) |   | $      1,367,492 |   | $        (23,675) |

 

The        aggregate market value and gross unrealized losses related to investments in an unrealized        loss position as of December 31, 2007 were $1,367.5 million and $23.7 million,        respectively. There were no material concentrations of unrealized losses by issuer,        security type or industry within the fixed maturity portfolio. The $6.0 million of        unrealized losses related to fixed income securities that have been in an unrealized loss        position for less than one year are generally comprised of highly rated municipal and        corporate bonds and the losses were primarily the result of widening credit spreads during        the latter part of the year. Of these unrealized losses, $4.7 million were related to        securities that were rated investment grade or better by at least one nationally recognized        statistical rating organization. The $17.7 million of unrealized losses related to        securities in an unrealized loss position for more than one year also related primarily to        highly rated municipal and corporate bonds and were the result of widening credit spreads        during the latter part of the year. Of these unrealized losses, $16.7 million related to        securities that were rated investment grade or better by at least one nationally recognized        statistical rating organization.

 

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

 

F-13

 

----

 

The        tables below display the aggregate market value and gross unrealized depreciation of fixed        maturity securities, by investment category and maturity category by length of time that        individual securities had been in a continuous unrealized loss position for the periods        indicated:

 

|                                                                                                                                                                                   | Duration by security type of unrealized loss at December 31,                        2006 |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------------------------------------------------------------------------------------|
|                                                                                                                                                                                   | Less than 12 months                                                                      | Greater than 12 months | Total |
|                                                                                                                                                                                   |                                                                                     |   | Gross |   |   |   | Gross |   |   |   | Gross |
|                                                                                                                                                                                   |                                                                                     |   | Unrealized |   |   |   | Unrealized |   |   |   | Unrealized |
| (Dollars in thousands)                                                                                                                                                                 | Market Value                                                                             |   | Depreciation |   | Market Value |   | Depreciation |   | Market Value |   | Depreciation |
| Fixed maturity securities                                                                                                                                                              |                                                                                     |   |   |   |   |   |   |   |   |   |   |
|    U.S. government                                                                                                                                                           |                                                                                     |   |   |   |   |   |   |   |   |   |   |
|      agencies and authorities                                                                                                                                      | $             9,533     |   | $               (26) |   | $           57,477 |   | $             (946) |   | $           67,010 |   | $             (972) |
|    States, municipalities                                                                                                                                                    |                                                                                     |   |   |   |   |   |   |   |   |   |   |
|      and political                        subdivisions                   | 94,242                                                                                   |   | (363) |   | 500,006 |   | (4,856) |   | 594,248 |   | (5,219) |
|    Foreign governments                                                                                                                                                       | 115,190                                                                                  |   | (899) |   | 51,261 |   | (548) |   | 166,451 |   | (1,447) |
|    All other corporate                                                                                                                                                       | 325,825                                                                                  |   | (2,314) |   | 931,976 |   | (22,940) |   | 1,257,801 |   | (25,254) |
| Total fixed maturities                                                                                                                                                                 | $         544,790                           |   | $          (3,602) |   | $      1,540,720 |   | $        (29,290) |   | $      2,085,510 |   | $        (32,892) |

 

|                                                                       | Duration by maturity type of unrealized loss at December 31,                        2006 |
|----------------------------------------------------------------------------|------------------------------------------------------------------------------------------|
|                                                                       | Less than 12 months                                                                      | Greater than 12 months | Total |
|                                                                       |                                                                                     |   | Gross |   |   |   | Gross |   |   |   | Gross |
|                                                                       |                                                                                     |   | Unrealized |   |   |   | Unrealized |   |   |   | Unrealized |
| (Dollars in thousands)                                                     | Market Value                                                                             |   | Depreciation |   | Market Value |   | Depreciation |   | Market Value |   | Depreciation |
| Fixed maturity securities                                                  |                                                                                     |   |   |   |   |   |   |   |   |   |   |
|    Due in 1 year or less                                         | $           18,648                |   | $               (48) |   | $         214,774 |   | $          (1,521) |   | $         233,422 |   | $          (1,569) |
|    Due after one year through five                        years  | 291,163                                                                                  |   | (967) |   | 487,638 |   | (8,727) |   | 778,801 |   | (9,694) |
|    Due after five years through ten                        years | 101,991                                                                                  |   | (1,250) |   | 404,681 |   | (7,800) |   | 506,672 |   | (9,050) |
|    Due after ten years                                           | 73,919                                                                                   |   | (1,215) |   | 64,619 |   | (1,118) |   | 138,538 |   | (2,333) |
|    Mortgage-backed securities                                    | 59,069                                                                                   |   | (122) |   | 369,008 |   | (10,124) |   | 428,077 |   | (10,246) |
| Total                                                                      | $         544,790                           |   | $          (3,602) |   | $      1,540,720 |   | $        (29,290) |   | $      2,085,510 |   | $        (32,892) |

 

The        aggregate market value and gross unrealized losses related to investments in an unrealized        loss position as of December 31, 2006 were $2,085.5 million and $32.9 million,        respectively. There were no material concentrations of unrealized losses by issuer,        security type or industry within the fixed maturity portfolio. The $3.6 million of        unrealized losses related to fixed maturity securities that had been in an unrealized loss        position for less than one year were generally comprised of highly rated municipal and        corporate bonds and the losses were primarily the result of interest rates being higher        than when the securities were purchased. All of these unrealized losses were related to        securities that were rated investment grade or better by at least one nationally recognized        statistical rating organization. The $29.3 million of unrealized losses relating to        securities in an unrealized loss position for more than one year also related primarily to        highly rated municipal and corporate bonds and the losses were the result of interest rates        being higher than when the securities were purchased. Of these unrealized losses, $26.9        million were related to securities that were rated investment grade or better by at least        one nationally recognized statistical rating organization.

 

F-14

 

----

 

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

 

|                                                                                                 | Years Ended December 31,                                       |
|------------------------------------------------------------------------------------------------------|----------------------------------------------------------------|
| (Dollars in thousands)                                                                               | 2007                                                           |   | 2006 |   | 2005 |
| Fixed maturities                                                                                     | $         294,707 |   | $         299,570 |   | $         308,254 |
| Equity securities                                                                                    | 16,786                                                         |   | 19,713 |   | 16,356 |
| Short-term investments                                                                               | 58,543                                                         |   | 26,828 |   | 12,325 |
| Other investment income                                                                              | 44,862                                                         |   | 41,934 |   | 9,019 |
| Total gross investment income                                                                        | 414,898                                                        |   | 388,045 |   | 345,954 |
| Interest credited and other                        expense        | (8,306)                                                        |   | (15,693) |   | (20,737) |
| Total net investment income                                                                          | $         406,592 |   | $         372,352 |   | $         325,217 |

 

Other        investment income for 2007, 2006 and 2005 primarily consists of income earned on limited        partnership investments of $35.5 million, $38.5 million and $7.5 million,        respectively.

 

The        Company had contractual commitments to invest up to an additional $221.4 million in limited        partnerships at December 31, 2007. These commitments will be funded when called in        accordance with the partnership agreements, which have investment periods that expire,        unless extended, through 2014.

 

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

 

|                                                                                                            | Years Ended December 31,                                                              |
|-----------------------------------------------------------------------------------------------------------------|---------------------------------------------------------------------------------------|
| (Dollars in thousands)                                                                                          | 2007                                                                                  |   | 2006 |   | 2005 |
| Fixed maturities                                                                                                | $            (4,991)      |   | $               8,385 |   | $            51,207 |
| Equity securities                                                                                               | 73,667                                                                                |   | 26,574 |   | 13,361 |
| Other invested assets                                                                                           | 12,207                                                                                |   | - |   | - |
| Short-term                        investments            | 4                                                                                     |   | (2) |   | - |
| Total                                                                                                           | $             80,887 |   | $            34,957 |   | $            64,568 |

 

Proceeds        from sales of fixed maturity investments during 2007, 2006 and 2005 were $38.5 million,        $45.1 million and $879.1 million, respectively. Gross gains of $1.0 million, $8.4 million        and $59.8 million and gross losses of $6.0 million, $0.0 million and $4.4 million were        realized on those fixed maturity sales during 2007, 2006 and 2005, respectively. Proceeds        from sales of equity security investments during 2007, 2006 and 2005 were $760.7 million,        $206.5 million and $205.9 million, respectively. Gross gains of $3.0 million, $31.2 million        and $16.1 million and gross losses of $13.8 million, $4.6 million and $2.7 million were        realized on those equity sales during 2007, 2006 and 2005, respectively.

 

Effective January 1, 2007, the Company adopted and implemented FAS 159 for        its actively managed equity securities and equity shares of its parent. Accordingly, for        the year ended December 31, 2007, the Company recorded $96.6 million of net realized gains        from fair value adjustments in its consolidated statements of operations and comprehensive        income.

 

Included        in net realized capital gains for 2007 was a realized capital loss of $4.0 million for        write-downs in the value of securities deemed to be impaired on an other than temporary        basis.

 

No        realized capital losses due to write-downs in the value of securities deemed to be impaired        on an other than temporary basis were recorded in 2006 or 2005. In addition, net realized        capital gains included $4.1 million of realized capital losses for 2005 related to the        impairment of interest only strips in accordance with EITF 99-20.

 

F-15

 

----

 

At        December 31, 2007, securities with a carrying value of $1,468.0 million were on deposit        with various state or governmental insurance departments in compliance with insurance        laws.

 

**3.        RESERVES FOR LOSSES AND LAE**

 

**Reserves        for losses and LAE.**

Activity        in the reserve for losses and LAE is summarized for the periods indicated:

 

|                                                                                                                             | At December 31,                                                        |
|----------------------------------------------------------------------------------------------------------------------------------|------------------------------------------------------------------------|
| (Dollars in thousands)                                                                                                           | 2007                                                                   |   | 2006 |
| Gross reserves at January 1                                                                                                      | $          7,397,270 |   | $          7,729,171 |
|    Less reinsurance recoverables                                                                                       | (2,179,002)                                                            |   | (2,369,925) |
|       Net reserves at January                        1                                                  | 5,218,268                                                              |   | 5,359,246 |
|                                                                                                                             |                                                                   |   |   |
| Incurred related to:                                                                                                             |                                                                   |   |   |
|    Current year                                                                                                        | 1,231,834                                                              |   | 1,489,659 |
|    Prior years                                                                                                         | 275,740                                                                |   | 67,420 |
|       Total incurred losses and                        LAE                                              | 1,507,574                                                              |   | 1,557,079 |
|                                                                                                                             |                                                                   |   |   |
| Paid related to:                                                                                                                 |                                                                   |   |   |
|    Current year                                                                                                        | 290,474                                                                |   | 413,452 |
|    Prior years                                                                                                         | 1,242,072                                                              |   | 1,299,021 |
|       Total paid losses and                        LAE                                                  | 1,532,546                                                              |   | 1,712,473 |
|                                                                                                                             |                                                                   |   |   |
| Foreign exchange/translation                        adjustment            | 65,991                                                                 |   | 14,416 |
|                                                                                                                             |                                                                   |   |   |
| Net reserves at December 31                                                                                                      | 5,259,287                                                              |   | 5,218,268 |
|    Plus reinsurance recoverables                                                                                       | 2,279,417                                                              |   | 2,179,002 |
|       Gross reserves at December                        31                                              | $          7,538,704 |   | $          7,397,270 |

 

Gross        loss and LAE reserves were $7,538.7 million at December 31, 2007 and $7,397.3 million at        December 31, 2006. The increase in 2007 was primarily attributable to the strengthening of        asbestos reserves. The decrease in 2006 was primarily attributable to the payment of 2005        catastrophe losses, which were included in the January 1, 2006 reserve balances, and a        decrease in earned premiums.

 

Reinsurance receivables for both paid and unpaid losses totaled $2,343.1        million at December 31, 2007 and $2,263.0 million at December 31, 2006. At December 31,        2007, $1,606.0 million, or 68.5%, was receivable from Everest Reinsurance (Bermuda), Ltd.        (“Bermuda Re”) and is collateralized by a combination of letters of credit and        trust agreements. In addition, $176.1 million, or 7.5%, was receivable from Transatlantic        Reinsurance Company (“Transatlantic”) and $152.1 million, or 6.5%, was        receivable from Founders Insurance Company Limited (“Founders”), for which the        Company has established a $151.4 million provision for uncollectible reinsurance. No other        retrocessionaire accounted for more than 5% of reinsurance receivables.

 

The        Company continues to receive claims under expired insurance and reinsurance contracts        asserting injuries and/or damages relating to or resulting from environmental pollution and        hazardous substances, including asbestos. Environmental claims typically assert liability        for (a) the mitigation or remediation of environmental contamination or (b) bodily injury        or property damage caused by the release of hazardous substances into the land, air or        water. Asbestos claims typically assert liability for bodily injury from exposure to        asbestos or for property damage resulting from asbestos or products containing        asbestos.

 

F-16

 

----

 

The        Company’s reserves include an estimate of the Company’s ultimate liability for        A&E claims. The Company’s A&E liabilities emanate from Mt. McKinley’s        direct insurance business and Everest Re’s assumed reinsurance business. All of the        contracts of insurance and reinsurance under which the Company has received claims during        the past three years, expired more than 20 years ago. There are significant uncertainties        surrounding the Company’s reserves for its A&E losses.

 

The        following table summarizes incurred losses all of which represent adverse loss reserve        development with respect to A&E gross and net of reinsurance for the periods        indicated:

 

|                                                                                                                  | At December 31,                                                      |
|-----------------------------------------------------------------------------------------------------------------------|----------------------------------------------------------------------|
| (Dollars in thousands)                                                                                                | 2007                                                                 |   | 2006 |
| Gross basis:                                                                                                          |                                                                 |   |   |
| Beginning of period reserves                                                                                          | $          650,134 |   | $       649,460 |
| Incurred losses                                                                                                       | 405,000                                                              |   | 113,400 |
| Paid losses                                                                                                           | (132,291)                                                            |   | (112,726) |
| End of period reserves                                                                                                | $          922,843 |   | $       650,134 |
|                                                                                                                  |                                                                 |   |   |
| Net basis:                                                                                                            |                                                                 |   |   |
| Beginning of period                        reserves            | $          313,308 |   | $       311,552 |
| Incurred losses                                                                                                       | 266,362                                                              |   | 27,388 |
| Paid losses                                                                                                           | (42,121)                                                             |   | (25,632) |
| End of period reserves                                                                                                | $          537,549 |   | $       313,308 |

 

At        December 31, 2007, the gross reserves for A&E losses were comprised of $144.5 million        representing case reserves reported by ceding companies, $147.1 million representing        additional case reserves established by the Company on assumed reinsurance claims, $148.2        million representing case reserves established by the Company on direct excess insurance        claims, including Mt. McKinley and $483.0 million representing IBNR reserves.

 

With        respect to asbestos only, at December 31, 2007, the Company had gross asbestos loss        reserves of $858.8 million, of which $585.3 million was for assumed business and $273.5        million was for direct excess business.

 

In        response to its recent asbestos experience, and in view of industry asbestos experience,        the Company completed a detailed study of its experience and its cedants’ exposures        and also considered recent industry trends. The Company’s Claims Department undertook        a contract by contract analysis of its direct business and projected those findings to its        assumed reinsurance business. The Company’s actuaries utilized nine methodologies to        project potential ultimate liabilities including projections based on internal data and        assessments, extrapolations of non-public and publicly available data for the        Company’s cedants and benchmarking against industry data and experience. As a result        of this study, the Company increased its gross asbestos reserves by $325.0 million        effective December 31, 2007. The Company has not experienced significant claims activity        related to environmental exposures other than asbestos. Management believes that its        A&E reserves make adequate provision for the Company’s ultimate liability,        however, there can be no assurance that ultimate loss payments will not exceed such        reserves, perhaps by a significant amount.

 

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

 

 

F-17

----

 

**4.        FAIR VALUE**

 

Effective January 1, 2007, the Company adopted and implemented FAS 159 for        its actively managed equity securities and equity shares of its parent. In conjunction with        the Company implementing a more active management strategy for these securities, FAS 159        provided guidance on accounting and presentation of these investments in the        Company’s consolidated financial statements. Upon adoption of FAS 159, the Company        recognized a $204.8 million cumulative-effect adjustment to retained earnings, net of        $110.3 million of tax. The Company recorded $96.6 million net realized capital gains in the        consolidated statements of operations and comprehensive income due to fair value        re-measurement for the year ended December 31, 2007.

 

As a        result of early FAS 159 adoption and implementation, the Company also adopted and        implemented FAS 157. The following table presents the fair value measurement levels for all        assets and liabilities, which the Company has recorded at fair value as of the period        indicated:

 

|                                                                                         |    |                                     |    | Fair Value Measurement Using:                                                                                        |
|----------------------------------------------------------------------------------------------|---------|------------------------------------------|---------|----------------------------------------------------------------------------------------------------------------------|
|                                                                                         |    |                                     |    | Quoted Prices                                                                                                        |   |   |   |   |
|                                                                                         |    |                                     |    | in Active                                                                                                            |   | Significant |   |   |
|                                                                                         |    |                                     |    | Markets for                                                                                                          |   | Other |   | Significant |
|                                                                                         |    |                                     |    | Identical                                                                                                            |   | Observable |   | Unobservable |
|                                                                                         |    | December 31,                             |    | Assets                                                                                                               |   | Inputs |   | Inputs |
| (Dollars in thousands)                                                                       |    | 2007                                     |    | (Level 1)                                                                                                            |   | (Level 2) |   | (Level 3) |
| Assets:                                                                                      |    |                                     |    |                                                                                                                 |   |   |   |   |
|   Fixed maturities                                                                      |    | $     5,998,157 |    | $                                       - |   | $     5,919,448 |   | $       78,709 |
|   Equity securities, fair                        value                                  |    | 815,372                                  |    | 801,611                                                                                                              |   | 13,761 |   | - |
|   Equity securities, market                        value       |    | 9,897                                    |    | -                                                                                                                    |   | 9,897 |   | - |
|   Other invested assets, fair                        value                              | 253,791 |                                     | 253,791 |                                                                                                                 | - |   |           - |

The        following table presents the fixed maturity investments for which fair value was measured        under level 3 for the period indicated:

 

|                                                                                                          |   | Fair Value                                                                                                                                                                                                                                         |
|---------------------------------------------------------------------------------------------------------------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                                                                                                          |   | Measurements Using                                                                                                                                                                                                                                 |
|                                                                                                          |   | Significant                                                                                                                                                                                                                                        |
|                                                                                                          |   | Unobservable                                                                                                                                                                                                                                       |
|                                                                                                          |   | Inputs                                                                                                                                                                                                                                             |
| (Dollars in thousands)                                                                                        |   | (Level 3)                                                                                                                                                                                                                                          |
| Assets:                                                                                                       |   |                                                                                                                                                                                                                                               |
| Beginning balance at December 31, 2006                                                                        |   | $                           24,024                                                                          |
|   Total gains or (losses)                        (realized/unrealized)                                   |   |                                                                                                                                                                                                                                               |
|     Included in earnings (or changes in net                        assets)                     |   | (2,023)                                                                                                                                                                                                                                            |
|     Included in other comprehensive                        income                              |   | (533)                                                                                                                                                                                                                                              |
|   Purchases, issuances and settlements                                                                   |   | 57,241                                                                                                                                                                                                                                             |
|   Transfers in and/or (out) of Level 3                                                                   |   | -                                                                                                                                                                                                                                                  |
| Ending balance at December 31, 2007                                                                           |   | $                           78,709                                                                          |
|                                                                                                          |   |                                                                                                                                                                                                                                               |
| The amount of total gains or losses for the period included                        in earnings (or            |   |                                                                                                                                                                                                                                               |
|   changes in net assets) attributable to the change in                        unrealized gains or losses |   |                                                                                                                                                                                                                                               |
|   relating to assets still held at the reporting                        date                             |   | $                                                            - |

 

The fixed maturities reflected as being valued under level 3        were valued by investment brokers for which the Company believes reflects fair value, but        was unable to verify inputs to the valuation methodology.

 

F-18

 

----

 

**5.        CREDIT LINES**

 

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

 

The        Holdings Credit Facility requires Holdings to maintain a debt to capital ratio of not        greater than 0.35 to 1 and Everest Re to maintain its statutory surplus at $1.5 billion        plus 25% of future aggregate net income and 25% of future aggregate capital contributions        after December 31, 2005. As of December 31, 2007, Holdings was in compliance with all        Holdings Credit Facility covenants.

 

At        December 31, 2007, $17.2 million was used under the Holdings Credit Facility for a letter        of credit, which has an expiry date of December 31, 2008. At December 31, 2006, there were        no borrowings under the Holdings Credit Facility.

 

Interest        expense and fees incurred in connection with the Holdings Credit Facility were $0.1        million, $0.2 million and $0.2 million for the years ended December 31, 2007, 2006 and        2005, respectively.

 

**6.        SENIOR NOTES**

 

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

 

Interest        expense incurred in connection with these senior notes was $31.2 million, $31.1 million and        $35.5 million for the years ended December 31, 2007, 2006 and 2005, respectively. Market        value, which is based on quoted market price at December 31, 2007 and 2006 was $235.3        million and $248.1 million, respectively, for the 5.40% senior notes and $215.9 million and        $219.8 million, respectively, for the 8.75% senior notes.

 

**7.        LONG TERM SUBORDINATED NOTES**

 

On April        26, 2007, Holdings completed a public offering of $400.0 million principal amount of 6.6%        fixed to floating rate long term subordinated notes with a scheduled maturity date of May        15, 2037 and a final maturity date of May 1, 2067. During the fixed rate interest period        from May 3, 2007 through May 14, 2017, interest will be at the annual rate of 6.6%, payable        semi-annually in arrears on November 15 and May 15 of each year, commencing on November 15,        2007, subject to Holdings’ right to defer interest on one or more occasions for up to        ten consecutive years. During the floating rate interest period from May 15, 2017 through        maturity, interest will be based on the 3 month London Interbank Offered Rate        (“LIBOR”) plus 238.5 basis points, reset quarterly, payable quarterly in        arrears on February 15, May 15, August 15 and November 15 of each year, subject to        Holdings’ right to defer interest on one or more occasions for up to ten consecutive        years. Deferred interest will

 

F-19

 

----

 

accumulate interest at the applicable rate compounded semi-annually for        periods prior to May 15, 2017, and compounded quarterly for periods from and including May        15, 2017.

 

Holdings        can redeem the long term subordinated notes prior to May 15, 2017, in whole but not in part        at the applicable redemption price, which will equal the greater of (a) 100% of the        principal amount being redeemed and (b) the present value of the principal payment on May        15, 2017 and scheduled payments of interest that would have accrued from the redemption        date to May 15, 2017 on the long term subordinated notes being redeemed, discounted to the        redemption date on a semi-annual basis at a discount rate equal to the treasury rate plus        an applicable spread of either 0.25% or 0.50%, in each case plus accrued and unpaid        interest. Holdings may redeem the long term subordinated notes on or after May 15, 2017, in        whole or in part at 100% of the principal amount plus accrued and unpaid interest; however,        redemption on or after the scheduled maturity date and prior to May 1, 2047 are subject to        a replacement capital covenant. This covenant is for the benefit of certain senior note        holders and it mandates that Holdings receive proceeds from the sale of another        subordinated debt issue, of at least similar size, before it may redeem the subordinated        notes.

 

Interest        expense incurred in connection with these long term notes was $17.4 million for the year        ended December 31, 2007. Market value, which is based on quoted market price at December        31, 2007, was $349.8 million for the 6.6% long term subordinated notes.

 

**8.        JUNIOR SUBORDINATED DEBT SECURITIES PAYABLE**

 

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

 

On        November 14, 2002, Holdings issued $216.5 million of 7.85% junior subordinated debt        securities due November 15, 2032 to Everest Re Capital Trust (“Capital Trust”).        Holdings redeemed all of the junior subordinated debt securities at 100% of their principal        amount plus accrued interest on November 15, 2007.

 

Fair        value, which is primarily based on quoted market price of the related trust preferred        securities at December 31, 2007 and 2006, was $250.8 million and $316.3 million,        respectively, for the 6.20% junior subordinated debt securities and $221.2 million for the        7.85% junior subordinated debt securities at December 31, 2006.

 

Interest        expense incurred in connection with these junior subordinated notes was $35.3 million,        $37.4 million and $37.4 million for the years ended December 31, 2007, 2006 and 2005,        respectively.

 

Capital        Trust II is a wholly owned finance subsidiary of Holdings. Capital Trust was dissolved upon        the completion of the redemption of the trust preferred securities on November 15,        2007.

 

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

 

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

 

F-20

 

----

 

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 (discussed in        Note 5) 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, 2007, $2,595.1 million of the $3,248.5 million in net assets of the Company’s        consolidated subsidiaries were subject to the foregoing regulatory restrictions.

 

**9. TRUST        AGREEMENTS**

 

A        subsidiary of the Company, Everest Re, has established a trust agreement, which effectively        uses Everest Re’s investments as collateral, as security for assumed losses payable        to a non-affiliated ceding company. At December 31, 2007, the total amount on deposit in        the trust account was $22.8 million.

 

**10.        OPERATING LEASE AGREEMENTS**

 

The        future minimum rental commitments, exclusive of cost escalation clauses, at December 31,        2007 for all of the Company’s operating leases with remaining non-cancelable terms in        excess of one year are as follows:

 

| (Dollars in thousands)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |                                       |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------------------------------------------|
| 2008                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             | $      7,587 |
| 2009                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             | 7,463                                      |
| 2010                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             | 7,331                                      |
| 2011                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             | 1,260                                      |
| 2012                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             | 904                                        |
| Thereafter                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       | 457                                        |
| Net                        commitments                                                                                        | $    25,002            |

 

 

All of        these leases, the expiration terms of which range from 2008 to 2014, are for the rental of        office space. Rental expense was $8.9 million, $7.6 million and $6.4 million for the years        ended December 31, 2007, 2006 and 2005, respectively.

 

F-21

 

----

 

**11.        INCOME TAXES**

 

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

 

|                                                                                                                                                                                                                         | Years Ended December 31,               |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|----------------------------------------|
| (Dollars in thousands)                                                                                                                                                                                                       | 2007                                   |   | 2006 |   | 2005 |
| Current tax:                                                                                                                                                                                                                 |                                   |   |   |   |   |
|     U.S.                                                                                                                                                                                                      | $     131,021 |   | $     133,103 |   | $       (3,494) |
|     Foreign                                                                                                                                                                                                   | 19,899                                 |   | 15,348 |   | 4,837 |
|     Total current tax                                                                                                                                                                                         | 150,920                                |   | 148,451 |   | 1,343 |
| Total deferred U.S. tax benefit                                                                                                                                                                                              | (50,834)                               |   | (31,399) |   | (71,579) |
|     Total income tax expense                        (benefit)                         | $     100,086 |   | $     117,052 |   | $     (70,236) |

 

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

 

|                                                                                                                                                                                                                 | Years Ended December 31, |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------------------------|
|                                                                                                                                                                                                                 | 2007                     |   | 2006 |   | 2005 |
| Federal income tax rate                                                                                                                                                                                              | 35.0%                    |   | 35.0% |   | -35.0% |
| Increase (reduction) in taxes resulting                        from:                                             |                     |   |   |   |   |
|     Tax exempt income                                                                                                                                                                                 | -15.0%                   |   | -13.6% |   | -88.4% |
|     Dividend received deduction                                                                                                                                                                       | -1.1%                    |   | -0.7% |   | -5.3% |
|     Proration                                                                                                                                                                                         | 2.4%                     |   | 2.1% |   | 14.0% |
|     Other, net                                                                                                                                                                                        | 3.5%                     |   | 3.2% |   | 7.5% |
|     Effective tax rate                                                                                                                                                                                | 24.8%                    |   | 26.0% |   | -107.2% |

 

F-22

 

----

 

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 for the periods indicated:

 

|                                                                                                                                                               | At December 31,                                                      |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------|----------------------------------------------------------------------|
| (Dollars in thousands)                                                                                                                                             | 2007                                                                 |   | 2006 |
| Deferred tax assets:                                                                                                                                               |                                                                 |   |   |
|    Reserve for losses and LAE                                                                                                                            | $          266,623 |   | $          255,327 |
|    Unearned premium reserve                                                                                                                              | 65,235                                                               |   | 72,342 |
|    Impairments                                                                                                                                           | 1,405                                                                |   | - |
|    Deferred compensation                                                                                                                                 | 14,007                                                               |   | 14,288 |
|    Deferred reinsurance                                                                                                                                  | 57,479                                                               |   | 35,895 |
|    AMT Credits                                                                                                                                           | 28,054                                                               |   | 35,414 |
|    Foreign tax credit carryforwards                                                                                                                      | 48,510                                                               |   | 64,576 |
|    Uncollectible reinsurance                                                                                                                             | 58,658                                                               |   | 35,306 |
|    Pension                                                                                                                                               | 3,531                                                                |   | 9,635 |
|    Other assets                                                                                                                                          | 22,189                                                               |   | 13,256 |
| Total deferred tax assets                                                                                                                                          | 565,691                                                              |   | 536,039 |
|                                                                                                                                                               |                                                                 |   |   |
| Deferred tax liabilities:                                                                                                                                          |                                                                 |   |   |
|    Deferred acquisition costs                                                                                                                            | 81,325                                                               |   | 84,123 |
|    Investments                                                                                                                                           | 5,169                                                                |   | 5,122 |
|    Net unrealized appreciation of                        investments               | 60,103                                                               |   | 173,593 |
|    Fair value adjustments                                                                                                                                | 94,632                                                               |   | - |
|    Foreign currency translation                                                                                                                          | 31,345                                                               |   | 15,123 |
|    Other liabilities                                                                                                                                     | 13,815                                                               |   | 9,864 |
| Total deferred tax liabilities                                                                                                                                     | 286,389                                                              |   | 287,825 |
| Net deferred tax assets                                                                                                                                            | $          279,302 |   | $          248,214 |

 

The        Company adopted the provisions of FIN 48 on January 1, 2007. As a result of the        implementation of FIN 48, the Company did not recognize any increase in the liability for        unrecognized tax benefits, and therefore did not need to account for any such increase as a        reduction to the January 1, 2007, balance of retained earnings. A reconciliation of the        beginning and ending amount of unrecognized tax benefits is as follows:

 

| Balance at January 1, 2007                                                                                                                                                                | $              13,800 |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|---------------------------------------------------------------------------------------------|
| Additions based on tax positions related to the current                        year                  | 4,423                                                                                       |
| Additions for tax positions of prior years                                                                                                                                                | 10,909                                                                                      |
| Reductions for tax positions of prior years                                                                                                                                               | -                                                                                           |
| Settlements with taxing authorities                                                                                                                                                       | -                                                                                           |
| Lapses of applicable statutes of limitations                                                                                                                                              | -                                                                                           |
| Balance at December 31, 2007                                                                                                                                                              | $              29,132 |

 

The        entire amount of the unrecognized tax benefits would affect the effective tax rate if        recognized.

 

In 2007,        the Internal Revenue Service (“IRS”) completed its examination of the        Company’s consolidated U.S. income tax returns for 2003 and 2004 and issued an        examination report proposing various adjustments. The Company has submitted a formal        protest and believes that it has a strong chance of prevailing on the issues

 

F-23

 

----

 

involved.        With few exceptions, the Company is no longer subject to U.S. federal, state and local or        foreign income tax examinations by tax authorities for years before 2003.

 

The        Company recognizes accrued interest related to unrecognized tax benefits and penalties in        income taxes. During the year ended December 31, 2007, the Company accrued and recognized        approximately $6.0 million in interest and penalties.

 

The        Company is not aware of any positions for which it is reasonably possible that the total        amounts of unrecognized tax benefits will significantly increase or decrease within twelve        months of the reporting date.

 

For U.S.        income tax purposes the Company has foreign tax credit carry forwards of $48.5 million that        begin to expire in 2014. In addition, for U.S. income tax purposes the Company has $28.1        million of Alternative Minimum Tax credits that do not expire. Management believes that it        is more likely than not that the Company will realize the benefits of its net deferred tax        assets and accordingly, no valuation allowance has been recorded for the periods        presented.

 

Tax        benefits of $1.9 million and $1.2 million related to share-based compensation deductions        for stock options exercised in 2007 and 2006, respectively, are reflected in the change in        stockholder’s equity in “additional paid-in capital”.

 

**12.        REINSURANCE**

 

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

 

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

 

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

 

F-24

 

----

 

Premiums        written and earned and incurred losses and LAE are comprised of the following for the        periods indicated:

 

|                                                                                                                                                              | Years Ended December 31,                                             |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------|----------------------------------------------------------------------|
| (Dollars in thousands)                                                                                                                                            | 2007                                                                 |   | 2006 |   | 2005 |
| Written premiums:                                                                                                                                                 |                                                                 |   |   |   |   |
|    Direct                                                                                                                                               | $          838,406 |   | $          900,381 |   | $          955,611 |
|    Assumed                                                                                                                                              | 2,316,675                                                            |   | 2,285,594 |   | 2,384,242 |
|    Ceded                                                                                                                                                | (1,082,155)                                                          |   | (895,714) |   | (944,203) |
| Net written premiums                                                                                                                                              | $       2,072,926                 |   | $       2,290,261 |   | $       2,395,650 |
|                                                                                                                                                              |                                                                 |   |   |   |   |
| Premiums earned:                                                                                                                                                  |                                                                 |   |   |   |   |
|    Direct                                                                                                                                               | $          899,328 |   | $          961,133 |   | $       1,019,288 |
|    Assumed                                                                                                                                              | 2,322,698                                                            |   | 2,189,061 |   | 2,321,256 |
|    Ceded                                                                                                                                                | (1,043,126)                                                          |   | (902,994) |   | (914,468) |
| Net premiums earned                                                                                                                                               | $       2,178,900                 |   | $       2,247,200 |   | $       2,426,076 |
|                                                                                                                                                              |                                                                 |   |   |   |   |
| Incurred losses and                        LAE:                    |                                                                 |   |   |   |   |
|    Direct                                                                                                                                               | $          777,000 |   | $          704,864 |   | $          719,114 |
|    Assumed                                                                                                                                              | 1,427,019                                                            |   | 1,398,659 |   | 2,336,145 |
|    Ceded                                                                                                                                                | (696,445)                                                            |   | (546,444) |   | (852,439) |
| Net incurred losses and LAE                                                                                                                                       | $       1,507,574                 |   | $       1,557,079 |   | $       2,202,820 |

 

The        amounts deducted from losses and LAE incurred for net reinsurance recoveries were $696.4        million, $546.4 million and $852.4 million for the years ended December 31, 2007, 2006 and        2005, respectively. See also Note 3.

 

The        Company engages in reinsurance transactions with Bermuda Re and Everest International        Reinsurance, Ltd. (“Everest International”), affiliates, primarily driven by        enterprise risk and capital management considerations under which business is ceded at        market rates and terms. These transactions include:

 

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

 

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

 

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

 

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

 

F-25

 

----

 

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

 

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

         

| **•** | Effective January 1, 2004, Everest Re and Bermuda Re amended                        the whole account quota share through which Everest Re previously ceded 25%                        of its business to Bermuda Re so that effective January 1, 2004 Everest Re                        ceded 22.5% to Bermuda Re and 2.5% to Everest International of the net                        retained liability on all new and renewal covered business written during                        the term of this agreement. This amendment remained in effect through                        December 31, 2005. |
|------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

 

| **•** | Effective January 1, 2006, Everest Re, Bermuda Re and                        Everest International amended the whole account quota share so that for all                        new and renewal business recorded on or after January 1, 2006, Everest Re                        ceded 31.5% and 3.5% of its casualty business to Bermuda Re and Everest                        International, respectively, and Everest Re ceded 18.0% and 2.0% of its                        property business to Bermuda Re and Everest International, respectively.                        However, in no event shall the loss cessions to Bermuda Re and Everest                        International relating to any one occurrence on the property business                        exceed $125.0 million. |
|------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

 

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

 

| **•** | Effective January 1, 2007, Everest Re, Bermuda Re and                        Everest International amended the whole account quota share so that for all                        new and renewal property business recorded on or after January 1, 2007,                        Everest Re ceded 22.5% and 2.5% to Bermuda Re and Everest International,                        respectively. However, in no event shall the loss cessions to Bermuda Re                        and Everest International relating to any one occurrence on the property                        business exceed $130.0 million. |
|------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

 

| **•** | Effective January 1, 2008, Everest Re, Bermuda Re and                        Everest International amended the whole account quota share so that for all                        new and renewal casualty and property business recorded on or after January                        1, 2008, Everest Re will cede 36.0% and 4.0% to Bermuda Re and Everest                        International, respectively. However, in no event shall the loss cessions                        to Bermuda Re and Everest International relating to any one catastrophe                        occurrence on the property business exceed $130.0 million or in the                        aggregate for each underwriting year for all property                        catastrophes exceed $275.0 million. |
|------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

 

F-26

 

----

 

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)                                                        | 2007                                                                                  | 2006 | 2005 |
| Ceded written premiums                                                        | $          837,129                  | $          697,795 | $          729,482 |
| Ceded earned premiums                                                         | 820,400                                                                               | 690,677 | 709,373 |
| Ceded losses and LAE(a)          | 540,851                                                                               | 396,538 | 688,162 |
|                                                                          |                                                                                  |   |   |
| Everest International                                                         | Years Ended December 31,                                                              |
| (Dollars in thousands)                                                        | 2007                                                                                  | 2006 | 2005 |
| Ceded written premiums                                                        | $             86,980 | $             72,465 | $            79,755 |
| Ceded earned premiums                                                         | 85,162                                                                                | 69,821 | 70,281 |
| Ceded losses and LAE                                                          | 41,318                                                                                | 39,443 | 66,062 |

 

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

 

Everest        Re sold net assets of its UK branch to Bermuda Re and provided Bermuda Re with a reserve        indemnity agreement allowing for indemnity payments of up to 90% of £25.0 million of        the excess of 2002 and prior reserves, provided that any recognition of profit from the        reserves for 2002 and prior underwriting years are taken into account. The limit available        under this agreement was fully exhausted at December 31, 2004.

 

F-27

 

----

 

**13.        COMPREHENSIVE INCOME**

 

The        following table presents the components of comprehensive income for the periods        indicated:

 

|                                                                                                                    | Years Ended December 31,                                 |
|-------------------------------------------------------------------------------------------------------------------------|----------------------------------------------------------|
| (Dollars in thousands)                                                                                                  | 2007                                                     |   | 2006 |   | 2005 |
|                                                                                                                    |                                                     |   |   |   |   |
| Net income                                                                                                              | $        304,191 |   | $        332,906 |   | $            4,706 |
| Other comprehensive income (loss), before tax:                                                                          |                                                     |   |   |   |   |
|    Unrealized gains on securities arising during                        the period                            | 71,684                                                   |   | 177,213 |   | 64,205 |
|    Less: reclassification adjustment for realized                        gains                                |                                                     |   |   |   |   |
|      included in net income                                                                         | (80,887)                                                 |   | (34,957) |   | (64,568) |
|    Foreign currency translation                        adjustments                                            | 46,349                                                   |   | 13,611 |   | 2,669 |
|    Pension                                                                                                    | 17,442                                                   |   | - |   | (4,422) |
| Other comprehensive income (loss), before tax                                                                           | 54,588                                                   |   | 155,867 |   | (2,116) |
|                                                                                                                    |                                                     |   |   |   |   |
| Income tax expense related to items of other                        comprehensive                                       |                                                     |   |   |   |   |
|      income (loss):                                                                                 |                                                     |   |   |   |   |
|    Tax expense from unrealized gains arising                        during the period     | (25,090)                                                 |   | (62,025) |   | (22,471) |
|    Tax expense from realized gains included in net                        income                              | 28,311                                                   |   | 12,235 |   | 22,598 |
|    Tax expense from foreign currency                        translation                                       | (16,222)                                                 |   | (4,764) |   | (934) |
|    Tax (expense) benefit from pension                                                                         | (6,105)                                                  |   | - |   | 1,548 |
| Total income tax (expense) benefit related to items of                        other                                     |                                                     |   |   |   |   |
|      comprehensive income                        (loss)                                             | (19,106)                                                 |   | (54,554) |   | 741 |
| Other comprehensive income (loss), net of tax                                                                           | 35,482                                                   |   | 101,313 |   | (1,375) |
| Comprehensive income                                                                                                    | $        339,673 |   | $        434,219 |   | $            3,331 |

 

 

F-28

 

----

 

The        following table presents the components of the change in accumulated other comprehensive        income for the periods indicated:

 

|                                                                                                                                                                                                       | Years Ended December 31,                                 |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|----------------------------------------------------------|
| (Dollars in thousands)                                                                                                                                                                                     | 2007                                                     |   | 2006 |
|                                                                                                                                                                                                       |                                                     |   |   |
| Beginning balance of unrealized gains on                        securities                                                                                                                                 | $        321,226 |   | $    228,760 |
| Current period change in unrealized gains on                        securities                                                                                                                             | (5,982)                                                  |   | 92,466 |
| Adjustment to initially apply FASB Statement No. 159, net of                        tax                                                                                                                    | (204,784)                                                |   | - |
| Ending balance of unrealized gains on securities                                                                                                                                                           | 110,460                                                  |   | 321,226 |
|                                                                                                                                                                                                       |                                                     |   |   |
| Beginning balance of foreign currency translation                        adjustments                                                                                                                       | 29,246                                                   |   | 20,399 |
| Current period change in foreign currency translation                        adjustments                                        | 30,127                                                   |   | 8,847 |
| Ending balance of foreign currency translation                        adjustments                                                                                                                          | 59,373                                                   |   | 29,246 |
|                                                                                                                                                                                                       |                                                     |   |   |
| Beginning balance of pension                                                                                                                                                                               | (17,894)                                                 |   | (2,874) |
| Current period change in pension                                                                                                                                                                           | 11,337                                                   |   | - |
| Adjustment to initially apply FASB Statement No. 158, net of                        tax                                                                                                                    | -                                                        |   | (15,020) |
| Ending balance of pension                                                                                                                                                                                  | (6,557)                                                  |   | (17,894) |
|                                                                                                                                                                                                       |                                                     |   |   |
| Ending balance of accumulated other comprehensive                        income                                                                                                                            | $        163,276 |   | $    332,578 |

 

**14.        EMPLOYEE BENEFIT PLANS**

 

**Defined        Benefit Pension Plans.**

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

 

Although        not required to make contributions under IRS regulations, the Company contributed $3.6        million and $22.8 million to the qualified plan in 2007 and 2006, respectively. Pension        expense for the Company’s plans for the years ended December 31, 2007, 2006 and 2005        was $6.4 million, $9.2 million and $6.9 million, respectively.

 

F-29

 

----

 

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

 

|                                                                                                                         | Years Ended December 31,                                                        |
|------------------------------------------------------------------------------------------------------------------------------|---------------------------------------------------------------------------------|
| (Dollars in thousands)                                                                                                       | 2007                                                                            |   | 2006 |
| Change in projected benefit obligation:                                                                                      |                                                                            |   |   |
|     Benefit obligation at beginning of                        year                                            | $            92,443 |   | $          81,269 |
|     Service cost                                                                                              | 5,096                                                                           |   | 5,089 |
|     Interest cost                                                                                             | 5,263                                                                           |   | 4,890 |
|     Actuarial (gain) loss                                                                                     | (10,979)                                                                        |   | 1,977 |
|     Benefits paid                                                                                             | (1,178)                                                                         |   | (782) |
|     Projected benefit obligation at end of                        year                                        | 90,645                                                                          |   | 92,443 |
|                                                                                                                         |                                                                            |   |   |
| Change in plan assets:                                                                                                       |                                                                            |   |   |
|     Fair value of plan assets at beginning of                        year       | 69,796                                                                          |   | 43,609 |
|     Actual return on plan assets                                                                              | 10,550                                                                          |   | 4,510 |
|     Actual contributions during the                        year                                               | 3,914                                                                           |   | 22,859 |
|     Administrative expenses paid                                                                              | (119)                                                                           |   | (400) |
|     Benefits paid                                                                                             | (1,178)                                                                         |   | (782) |
|     Fair value of plan assets at end of                        year                                           | 82,963                                                                          |   | 69,796 |
|                                                                                                                         |                                                                            |   |   |
| Funded status at end of year                                                                                                 | $           (7,682)      |   | $       (22,647) |

 

Amounts        recognized in the consolidated balance sheets for the periods indicated:

 

|                                                                           | At December 31,                                         |
|--------------------------------------------------------------------------------|---------------------------------------------------------|
| (Dollars in thousands)                                                         | 2007                                                    |   | 2006 |
| Other assets (due beyond one year)                                             | $        14,133 |   | $          1,652 |
| Other liabilities (due within one year)                                        | (1,468)                                                 |   | (1,595) |
| Other liabilities (due beyond one year)                                        | (20,347)                                                |   | (22,704) |
| Net amount recognized in the consolidated balance                        sheet | $       (7,682)      |   | $     (22,647) |

 

Amounts        not yet reflected in net periodic benefit cost and included in accumulated other        comprehensive income for the periods indicated:

 

|                                                                                                  | At December 31,                                                                  |
|-------------------------------------------------------------------------------------------------------|----------------------------------------------------------------------------------|
| (Dollars in thousands)                                                                                | 2007                                                                             |   | 2006 |
| Prior service cost                                                                                    | $            (367)   |   | $          (493) |
| Accumulated loss                                                                                      | (8,873)                                                                          |   | (26,169) |
| Accumulated other comprehensive loss                                                                  | $                                (9,240) |   | $     (26,662) |
|                                                                                                  |                                                                             |   |   |
| Change in accumulated other comprehensive income due to                        application of FAS 158 |                                                                             |   |   |
|    Additional minimum liaibility (before FAS                        158)                    |                                                                             |   | (5,042) |
|    Intangible asset offset (before FAS                        158)                          |                                                                             |   | 620 |
|    Accumulated other comprehensive income (before                        FAS 158)           |                                                                             |   | (4,422) |
| Net decrease in accumulated other comprehensive income due                        to FAS 158          |                                                                             |   | $     (22,240) |

 

 

F-30

 

----

 

Other        changes in other comprehensive income for the year ended December 31, 2007 are as        follows:

 

| (Dollars in thousands)                                                                                                                                                                                                                                                                                                                                                                                                                      |                                                                       |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|----------------------------------------------------------------------------|
| Other comprehensive loss at December 31, 2006                                                                                                                                                                                                                                                                                                                                                                                               | $         (26,662)            |
| Net gain arising during period                                                                                                                                                                                                                                                                                                                                                                                                              | 15,871                                                                     |
|                                                                                                                                                                                                                                                                                                                                                                                                                                        |                                                                       |
| Recognition of amortizations in net period benefit                        cost:                                                                                                   |                                                                       |
|    Prior service cost                                                                                                                                                                                                                                                                                                                                                                                                             | 126                                                                        |
|    Actuarial loss                                                                                                                                                                                                                                                                                                                                                                                                                 | 1,425                                                                      |
| Other comprehensive loss at December 31, 2007                                                                                                                                                                                                                                                                                                                                                                                               | $           (9,240) |

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

 

|                                                                                              | Years Ended December 31,                                    |
|---------------------------------------------------------------------------------------------------|-----------------------------------------------------------------------|
| (Dollars in                    thousands)                                                         | 2007                                                                  |   | 2006 |   | 2005 |
| Service cost                                                                                      | $                            5,096 |   | $                          5,089 |   | $                          3,873 |
| Interest cost                                                                                     | 5,263                                                                 |   | 4,890 |   | 4,036 |
| Expected return on assets                                                                         | (5,538)                                                               |   | (3,549) |   | (3,032) |
| Amortization of actuarial loss from earlier                    periods                            | 1,425                                                                 |   | 2,633 |   | 1,923 |
| Amortization of unrecognized prior service                    cost                                | 126                                                                   |   | 127 |   | 127 |
| Net periodic benefit cost                                                                         | $                            6,372 |   | $                          9,190 |   | $                          6,927 |
|                                                                                              |                                                                  |   |   |   |   |
| Other changes recognized in other comprehensive                    income:                        |                                                                  |   |   |   |   |
|    Other comprehensive income                    attributable to change from prior year | (17,422)                                                              |   |   |   |   |
|                                                                                              |                                                                  |   |   |   |   |
| Total recognized in net periodic benefit cost and                    other                        |                                                                  |   |   |   |   |
|    comprehensive income                                                                 | $     (11,050)                               |   |   |   |   |

 

The        estimated transition obligation, actuarial loss and prior service cost that will be        amortized from accumulated other comprehensive income into net periodic benefit cost over        the next year are $0, $230 thousand and $51 thousand, respectively.

 

The        weighted average discount rates used to determine net periodic benefit cost for 2007 and        2006 were 5.94% and 5.50%, respectively. The rate of compensation increase used to        determine the net periodic benefit cost for 2007 and 2006 was 4.50%. The expected long-term        rate of return on plan assets for 2007 and 2006 was 8.0% and was based on expected        portfolio returns and allocations.

 

The        weighted average discount rates used to determine the actuarial present value of the        projected benefit obligation for year end 2007 and 2006 were 6.55% and 5.94%,        respectively.

 

The        following table summarizes the accumulated benefit obligation for the periods        indicated:

 

|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          | At December 31,                                                                             |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|---------------------------------------------------------------------------------------------|
| (Dollars in thousands)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        | 2007                                                                                        |   | 2006 |
| Qualified Plan                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                | $              53,693 |   | $              51,937 |
| Non-qualified                        Plan                                                                                       | 16,130                                                                                      |   | 15,602 |
| Total                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         | $              69,823 |   | $              67,539 |

 

 

F-31

 

----

 

The        following table displays the plans with projected benefit obligations in excess of plan        assets for the periods indicated:

 

|                                                                                                                                                                                                                                                                                                                                                                                                                                                                         | At December 31,                                                                             |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|---------------------------------------------------------------------------------------------|
| (Dollars in thousands)                                                                                                                                                                                                                                                                                                                                                                                                                                                       | 2007                                                                                        |   | 2006 |
| Qualified Plan                                                                                                                                                                                                                                                                                                                                                                                                                                                               |                                                                                        |   |   |
|     Projected benefit obligation                                                                                                                                                                                                                                                                                                                                                                                                                              | NA                                                                                          |   | NA |
|     Fair value of plan assets                                                                                                                                                                                                                                                                                                                                                                                                                                 | NA                                                                                          |   | NA |
| Non-qualified Plan                                                                                                                                                                                                                                                                                                                                                                                                                                                           |                                                                                        |   |   |
|     Projected benefit                        obligation                                                                  | $              21,815 |   | $              24,299 |
|     Fair value of plan assets                                                                                                                                                                                                                                                                                                                                                                                                                                 | -                                                                                           |   | - |

 

The        following table displays the plans with accumulated benefit obligations in excess of plan        assets for the periods indicated:

 

|                                                                                                                                                                                                                                                                                                                                                                                                                           | At December 31,                                                                             |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|---------------------------------------------------------------------------------------------|
| (Dollars in thousands)                                                                                                                                                                                                                                                                                                                                                                                                         | 2007                                                                                        |   | 2006 |
| Qualified Plan                                                                                                                                                                                                                                                                                                                                                                                                                 |                                                                                        |   |   |
|     Projected benefit obligation                                                                                                                                                                                                                                                                                                                                                                                | NA                                                                                          |   | NA |
|     Accumulated benefit obligation                                                                                                                                                                                                                                                                                                                                                                              | NA                                                                                          |   | NA |
|     Fair value of plan assets                                                                                                                                                                                                                                                                                                                                                                                   | NA                                                                                          |   | NA |
| Non-qualified Plan                                                                                                                                                                                                                                                                                                                                                                                                             |                                                                                        |   |   |
|     Projected benefit obligation                                                                                                                                                                                                                                                                                                                                                                                | $              21,815 |   | $              24,299 |
|     Accumulated benefit                        obligation                                                          | 16,130                                                                                      |   | 15,602 |
|     Fair value of plan assets                                                                                                                                                                                                                                                                                                                                                                                   | -                                                                                           |   | - |

 

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

 

| (Dollars in thousands)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |                                                               |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------------------------------------------------------------------|
| 2008                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  | $          2,723 |
| 2009                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  | 4,701                                                              |
| 2010                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  | 4,732                                                              |
| 2011                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  | 5,110                                                              |
| 2012                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  | 5,892                                                              |
| Next 5                        years                                                                                                                                            | 33,827                                                             |

 

The        asset allocation percentages for the qualified benefit plan, by asset category for the        periods indicated:

 

|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   | At December 31, |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|-----------------|
| Asset Category:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        | 2007            |   | 2006 |
| Equity securities                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      | 64.90%          |   | 59.20% |
| Debt                        securities                                                                                                         | 29.50%          |   | 11.50% |
| Other                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  | 5.60%           |   | 29.30% |
| Total                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  | 100.00%         |   | 100.00% |

 

Plan        assets consist of shares in investment trusts with approximately 65%, 30% and 5% of the        underlying assets consisting of equity securities, fixed maturities and cash, respectively.        The Company manages the qualified plan investments for U.S. employees. The assets in the        plan consist of debt and equity mutual funds. Due to the long term nature of the plan, the        target asset allocation consists of 70% equities and 30% bonds.

 

F-32

 

----

 

The        Company expects to contribute approximately $2.4 million in 2008 to the qualified        plan.

 

**Defined Contribution Plans.**

The        Company also maintains both qualified and non-qualified defined contribution plans        (“Savings Plan” and “Non-Qualified Savings Plan”, respectively)        covering U.S. employees. Under the plans, the Company contributes up to a maximum 3% of the        participants’ compensation based on the contribution percentage of the employee. The        Non-Qualified Savings Plan provides compensating savings plan benefits for participants        whose benefits have been curtailed under the Savings Plan due to Internal Revenue Code        limitations. The Company’s incurred expenses related to these plans were $1.2 million        in 2007 and $1.0 million in 2006 and 2005.

 

In        addition, the Company maintains several defined contribution pension plans covering        non-U.S. employees. Each non-U.S. office (Canada and Singapore) maintains a separate plan        for the non-U.S. employees working in that location. The Company contributes various        amounts based on salary, age and/or years of service. The contributions as a percentage of        salary for the branch offices range from 6% to 9%. The contributions are generally used to        purchase pension benefits from local insurance providers. The Company’s incurred        expenses related to these plans were $0.2 million for 2007, 2006 and 2005.

 

**Post-Retirement Plan.**

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

 

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

 

Effective December 31, 2007, the healthcare inflation rate for pre-Medicare        claims is 9% in 2008, decreasing gradually to 5% in 2015. The healthcare inflation rate for        post-Medicare claims is 7% in 2008, decreasing gradually to 5% in 2015.

 

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

 

| (Dollars in thousands)                                                                                                                                                                                                                                     | Percentage

Point Increase

($ Impact)                                                                           |   | Percentage

Point Decrease

($ Impact)                                                           |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------------------------------------------------------------------------------------------------------------|--------|--------------------------------------------------------------------------------------------------|
| a.  Effect on total service and interest cost                        components                                                                                                                                                                       | $                  272 |   | $               (211) |
| b.  Effect on accumulated post-retirement benefit                        obligation                            |  1,857                                                                                                      |   | (1,483)                                                                                          |

 

Benefit        expense for this plan for the years ended December 31, 2007, 2006 and 2005 was $1.2        million, $1.1 million and $0.9 million, respectively.

 

 

F-33

 

----

 

The        following table summarizes the status of this plan for the periods indicated:

 

|                                                                         | Years Ended December 31,                                 |
|------------------------------------------------------------------------------|----------------------------------------------------------|
| (Dollars in thousands)                                                       | 2007                                                     |   | 2006 |
| Change in projected benefit obligation:                                      |                                                     |   |   |
|   Benefit obligation at beginning of year                               | $       8,780         |   | $         8,582 |
|     Service cost                                              |       663                       |   | 631 |
|     Interest cost                                             | 536                                                      |   | 464 |
|     Actuarial gain                                            | (1)                                                      |   | (794) |
|     Benefits paid                                             | (146)                                                    |   | (103) |
|   Benefit obligation at end of year                                     | 9,832                                                    |   | 8,780 |
|                                                                         |                                                     |   |   |
| Change in plan assets:                                                       |                                                     |   |   |
|   Fair value of plan assets at beginning of                        year | -                                                        |   | - |
|     Employer contributions                                    | 146                                                      |   | 103 |
|     Benefits paid                                             | (146)                                                    |   | (103) |
|   Fair value of plan assets at end of year                              | -                                                        |   | - |
|                                                                         |                                                     |   |   |
| Funded status at end of year                                                 | $        (9,832) |   | $      (8,780) |

 

Amounts        recognized in the consolidated balance sheets for the periods indicated:

 

|                                                                            | At December 31,                                                                  |
|---------------------------------------------------------------------------------|----------------------------------------------------------------------------------|
| (Dollars in thousands)                                                          | 2007                                                                             |   | 2006 |
| Other liabilities (due within one year)                                         | $            (144)   |   | $            (117) |
| Other liabilities (due beyond one year)                                         | (9,688)                                                                          |   | (8,663) |
| Net amount recognized in the consolidated balance                        sheets | $                                (9,832) |   | $                                (8,780) |

 

Amounts        not yet reflected in net periodic benefit cost and included in accumulated other        comprehensive income for the periods indicated:

 

|                                                                                         | At December 31,                                                                |
|----------------------------------------------------------------------------------------------|--------------------------------------------------------------------------------|
| (Dollars in thousands)                                                                       | 2007                                                                           |   | 2006 |
| Accumulated other comprehensive loss                                                         | $            (848) |   | $            (867) |
| Net decrease in accumulated other comprehensive income due                        to FAS 158 |                                                                           |   | $            (867) |

 

Other        changes in other comprehensive income for the year ended December 31, 2007 are as        follows:

 

| (Dollars in thousands)                                                          |                                                                                             |
|---------------------------------------------------------------------------------|--------------------------------------------------------------------------------------------------|
| Other comprehensive loss at December 31, 2006                                   | $               (867) |
| Net gain arising during period                                                  | 1                                                                                                |
|                                                                            |                                                                                             |
| Recognition of amortizations in net period benefit                        cost: |                                                                                             |
|    Actuarial loss                                                     | 18                                                                                               |
| Other comprehensive loss at December 31, 2007                                   | $               (848) |

 

 

F-34

 

----

 

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

 

|                                                                                                | Years Ended December 31,                                                       |
|-----------------------------------------------------------------------------------------------------|--------------------------------------------------------------------------------|
| (Dollars in thousands)                                                                              | 2007                                                                           |   | 2006 |   | 2005 |
| Service cost                                                                                        | $            663   |   | $            631 |   | $                                  490 |
| Interest cost                                                                                       | 536                                                                            |   | 464 |   | 408 |
| Net loss recognition                                                                                | 18                                                                             |   | 50 |   | 29 |
| Net periodic cost                                                                                   | $                                1,217 |   | $                                1,145 |   | $                                  927 |
|                                                                                                |                                                                           |   |   |   |   |
| Other changes recognized in other comprehensive                        income:                      |                                                                           |   |   |   |   |
|    Other comprehensive gain attributable to change                        from prior year | (19)                                                                           |   |   |   |   |
|                                                                                                |                                                                           |   |   |   |   |
| Total recognized in net periodic benefit cost and                                                   |                                                                           |   |   |   |   |
|    other comprehensive income                                                             | $                                1,198 |   |   |   |   |

 

There        will be no estimated transition obligation, actuarial loss and prior service cost that will        be amortized from accumulated other comprehensive income into net periodic benefit cost        over the next fiscal year.

 

The        weighted average discount rates used to determine net periodic benefit cost for 2007 and        2006 were 5.94% and 5.50%, respectively.

 

The        weighted average discount rates used to determine the actuarial present value of the        projected benefit obligation at year end 2007 and 2006 were 6.55% and 5.94%,        respectively.

 

The        following table summarizes the benefit obligation for the post-retirement plan for the        periods indicated:

 

|                   | Years Ended December 31,                                                                         |
|------------------------|--------------------------------------------------------------------------------------------------|
| (Dollars in thousands) | 2007                                                                                             |   | 2006 |
| Post-retirement Plan   | $               9,832 |   | $               8,780 |

 

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

 

| (Dollars in thousands) |                                                                               |
|------------------------|------------------------------------------------------------------------------------|
| 2008                   | $             144 |
| 2009                   | 208                                                                                |
| 2010                   | 279                                                                                |
| 2011                   | 350                                                                                |
| 2012                   | 419                                                                                |
| Next 5 years           | 3,404                                                                              |

 

**15.        DIVIDEND RESTRICTIONS AND STATUTORY FINANCIAL INFORMATION**

 

**Dividend Restrictions.**

Delaware        law provides that an insurance company which is a member of an insurance holding company        system and is domiciled in the state shall not pay dividends without giving prior notice to        the Insurance Commissioner of Delaware and may not pay dividends without the approval of        the Insurance Commissioner if the value of the proposed dividend, together with all other        dividends and distributions made in the preceding twelve months, exceeds the greater of (1)        10% of statutory surplus or (2) net income, not including realized capital gains, each as        reported in the prior year’s statutory annual statement. In addition, no dividend may        be paid in excess of

 

F-35

 

----

 

unassigned        earned surplus. At December 31, 2007, Everest Re had $288.4 million available for payment        of dividends in 2008 without the need for prior regulatory approval.

 

**Statutory Financial Information.**

Everest        Re prepares its statutory financial statements in accordance with accounting practices        prescribed or permitted by the National Association of Insurance Commissioners        (“NAIC”) and the Delaware Insurance Department. Prescribed statutory accounting        practices are set forth in the NAIC Accounting Practices and Procedures Manual. The capital        and statutory surplus of Everest Re was $2,865.4 million and $2,704.1 million at December        31, 2007 and 2006, respectively. The statutory net income of Everest Re was $651.9 million        and $298.7 million for the years ended December 31, 2007 and 2006, respectively, and the        statutory net loss was $26.9 million for the year ended December 31, 2005.

 

**16.        CONTINGENCIES**

 

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

 

In 1993        and prior, the Company had a business arrangement with The Prudential wherein, for a fee,        the Company accepted settled claim payment obligations of certain property and casualty        insurers, and, concurrently, became the owner of the annuity or assignee of the annuity        proceeds funded by the property and casualty insurers specifically to fulfill these fully        settled obligations. In these circumstances, the Company would be liable if The Prudential,        which has an A+ (Superior) financial strength rating from A.M. Best Company (“A.M.        Best”), were unable to make the annuity payments. The estimated cost to replace all        such annuities for which the Company was contingently liable at December 31, 2007 and 2006        was $150.4 million and $150.5 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, 2007 and 2006 was        $21.7 million and $20.2 million, respectively.

 

**17.        RELATED-PARTY TRANSACTIONS**

 

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

 

The        Company engages in reinsurance transactions with Bermuda Re and Everest International under        which business is ceded for what management believes to be arm’s length        consideration. See also Note 12.

 

 

F-36

 

----

 

**18.        SEGMENT REPORTING**

 

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

 

These        segments are managed in a coordinated fashion with respect to pricing, risk management,        control of aggregate catastrophe exposures, capital, investments and support operations.        Management generally monitors and evaluates the financial performance of these operating        segments based upon their underwriting results.

 

Underwriting results include earned premium less losses and LAE incurred,        commission and brokerage expenses and other underwriting expenses. Underwriting results are        measured using ratios, in particular loss, commission and brokerage and other underwriting        expense ratios, which respectively, divide incurred losses, commission and brokerage and        other underwriting expenses by premiums earned.

 

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

 

The        following tables present the relevant underwriting results for the operating segments for        the periods indicated:

 

| U.S. Reinsurance                                                                                                                                                                                                                                                                                                                 | Years Ended December 31,                                                              |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|---------------------------------------------------------------------------------------|
| (Dollars in thousands)                                                                                                                                                                                                                                                                                                           | 2007                                                                                  |   | 2006 |   | 2005 |
| Gross written premiums                                                                                                                                                                                                                                                                                                           | $       1,193,524                                  |   | $       1,336,728 |   | $       1,386,170 |
| Net written premiums                                                                                                                                                                                                                                                                                                             | 854,801                                                                               |   | 992,819 |   | 1,055,815 |
|                                                                                                                                                                                                                                                                                                                             |                                                                                  |   |   |   |   |
| Premiums earned                                                                                                                                                                                                                                                                                                                  | $          939,684                  |   | $          978,072 |   | $       1,080,453 |
| Incurred losses and LAE                                                                                                                                                                                                                                                                                                          | 636,895                                                                               |   | 721,157 |   | 1,152,427 |
| Commission and brokerage                                                                                                                                                                                                                                                                                                         | 230,540                                                                               |   | 202,809 |   | 259,751 |
| Other underwriting                        expenses                                                                  | 33,275                                                                                |   | 24,947 |   | 23,980 |
| Underwriting gain (loss)                                                                                                                                                                                                                                                                                                         | $             38,974 |   | $             29,159 |   | $       (355,705) |

 

 

| U.S. Insurance                                                                                                                                                                                                                                                                                                                   | Years Ended December 31,                                             |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|----------------------------------------------------------------------|
| (Dollars in thousands)                                                                                                                                                                                                                                                                                                           | 2007                                                                 |   | 2006 |   | 2005 |
| Gross written premiums                                                                                                                                                                                                                                                                                                           | $          885,604 |   | $          866,294 |   | $          932,469 |
| Net written premiums                                                                                                                                                                                                                                                                                                             | 479,812                                                              |   | 591,177 |   | 618,752 |
|                                                                                                                                                                                                                                                                                                                             |                                                                 |   |   |   |   |
| Premiums earned                                                                                                                                                                                                                                                                                                                  | $          496,166 |   | $          573,965 |   | $          636,663 |
| Incurred losses and LAE                                                                                                                                                                                                                                                                                                          | 412,669                                                              |   | 432,232 |   | 415,379 |
| Commission and brokerage                                                                                                                                                                                                                                                                                                         | 64,349                                                               |   | 72,723 |   | 93,621 |
| Other underwriting                        expenses                                                                  | 58,216                                                               |   | 48,918 |   | 51,726 |
| Underwriting (loss) gain                                                                                                                                                                                                                                                                                                         | $         (39,068)      |   | $             20,092 |   | $             75,937 |

 

 

F-37

 

----

 

| Specialty Underwriting                                                                                                                                                                                                                                                                                         | Years Ended December 31,                                                              |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|---------------------------------------------------------------------------------------|
| (Dollars in thousands)                                                                                                                                                                                                                                                                                         | 2007                                                                                  |   | 2006 |   | 2005 |
| Gross written premiums                                                                                                                                                                                                                                                                                         | $          270,081                  |   | $          251,209 |   | $        314,630 |
| Net written premiums                                                                                                                                                                                                                                                                                           | 185,350                                                                               |   | 174,431 |   | 222,526 |
|                                                                                                                                                                                                                                                                                                           |                                                                                  |   |   |   |   |
| Premiums earned                                                                                                                                                                                                                                                                                                | $          184,894                  |   | $          176,326 |   | $        224,555 |
| Incurred losses and LAE                                                                                                                                                                                                                                                                                        | 118,324                                                                               |   | 125,160 |   | 225,740 |
| Commission and brokerage                                                                                                                                                                                                                                                                                       | 44,278                                                                                |   | 44,851 |   | 55,564 |
| Other underwriting                        expenses                                           | 8,464                                                                                 |   | 6,559 |   | 6,756 |
| Underwriting gain (loss)                                                                                                                                                                                                                                                                                       | $             13,828 |   | $               (244) |   | $       (63,505) |

 

| International                                                                                                                                                                                                                                                                                                  | Years Ended December 31,                                                              |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|---------------------------------------------------------------------------------------|
| (Dollars in thousands)                                                                                                                                                                                                                                                                                         | 2007                                                                                  |   | 2006 |   | 2005 |
| Gross written premiums                                                                                                                                                                                                                                                                                         | $          805,872                  |   | $          731,745 |   | $          706,584 |
| Net written premiums                                                                                                                                                                                                                                                                                           | 552,963                                                                               |   | 531,834 |   | 498,557 |
|                                                                                                                                                                                                                                                                                                           |                                                                                  |   |   |   |   |
| Premiums earned                                                                                                                                                                                                                                                                                                | $          558,156                  |   | $          518,837 |   | $          484,405 |
| Incurred losses and LAE                                                                                                                                                                                                                                                                                        | 339,686                                                                               |   | 278,530 |   | 409,274 |
| Commission and brokerage                                                                                                                                                                                                                                                                                       | 126,745                                                                               |   | 118,122 |   | 104,458 |
| Other underwriting                        expenses                                           | 18,633                                                                                |   | 13,830 |   | 12,621 |
| Underwriting gain (loss)                                                                                                                                                                                                                                                                                       | $             73,092 |   | $          108,355 |   | $         (41,948) |

 

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

 

|                                                                          | Years Ended December 31,                                                  |
|-------------------------------------------------------------------------------|---------------------------------------------------------------------------|
| (Dollars in thousands)                                                        | 2007                                                                      |   | 2006 |   | 2005 |
| Underwriting gain (loss)                                                      | $           86,826 |   | $        157,362 |   | $       (385,221) |
| Net investment income                                                         | 406,592                                                                   |   | 372,352 |   | 325,217 |
| Net realized capital gain                                                     | 80,887                                                                    |   | 34,957 |   | 64,568 |
| Corporate expense                                                             | (5,328)                                                                   |   | (4,475) |   | (6,241) |
| Interest, fee and bond issue cost amortization                        expense | (91,059)                                                                  |   | (69,696) |   | (74,197) |
| Other (expense) income                                                        | (73,641)                                                                  |   | (40,542) |   | 10,344 |
| Income (loss) before taxes                                                    | $        404,277                  |   | $        449,958 |   | $          (65,530) |

 

The        Company produces business in the U.S. and internationally. The net income deriving from and        assets residing in the individual foreign countries in which the Company writes business        are not identifiable in the Company’s financial records. Based on written premium,        other than the U.S., no other country represented more than 5% of the Company’s        revenues.

 

Approximately 16.1%, 18.1% and 18.5% of the Company’s gross written        premiums in 2007, 2006 and 2005, respectively, were sourced through the Company’s        largest intermediary.

 

F-38

 

----

 

**19.        UNAUDITED QUARTERLY FINANCIAL DATA**

 

Summarized quarterly financial data for the periods indicated:

 

|                                                                                                                                                                       | 2007                                                           |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------|----------------------------------------------------------------|
| (Dollars in thousands)                                                                                                                                                     | 1st Quarter                                                    | 2nd Quarter | 3rd Quarter | 4th Quarter |
|                                                                                                                                                                       |                                                           |   |   |   |
| Operating data:                                                                                                                                                            |                                                           |   |   |   |
|    Gross written premiums                                                                                                                                        | $         799,750 | $           712,310 | $          839,833 | $          803,188 |
|    Net written premiums                                                                                                                                          | 558,286                                                        | 495,851 | 602,753 | 416,036 |
|                                                                                                                                                                       |                                                           |   |   |   |
|    Premiums earned                                                                                                                                               | 569,838                                                        | 565,426 | 561,150 | 482,486 |
|    Net investment income                                                                                                                                         | 95,934                                                         | 106,852 | 105,023 | 98,783 |
|    Net realized capital gains (losses)                                                                                                                           | 33,874                                                         | 89,585 | 22,121 | (64,693) |
|    Total claims and underwriting                        expenses                                                                                                 | 464,737                                                        | 464,373 | 488,715 | 679,577 |
|    Net income (loss)                                                                                                                                             | 159,318                                                        | 185,191 | 110,569 | (150,887) |
|                                                                                                                                                                       |                                                           |   |   |   |
|                                                                                                                                                                       | 2006                                                           |
| (Dollars in thousands)                                                                                                                                                     | 1st Quarter                                                    | 2nd Quarter | 3rd Quarter | 4th Quarter |
|                                                                                                                                                                       |                                                           |   |   |   |
| Operating data:                                                                                                                                                            |                                                           |   |   |   |
|    Gross written premiums                                                                                                                                        | $         851,951 | $           690,330 | $          846,176 | $          797,518 |
|    Net written premiums                                                                                                                                          | 626,251                                                        | 476,222 | 621,867 | 565,921 |
|                                                                                                                                                                       |                                                           |   |   |   |
|    Premiums earned                                                                                                                                               | 603,678                                                        | 501,488 | 561,042 | 580,992 |
|    Net investment income                                                                                                                                         | 83,905                                                         | 91,922 | 84,744 | 111,781 |
|    Net realized capital gain                                                                                                                                     | 9,020                                                          | 2,204 | 9,025 | 14,708 |
|    Total claims and underwriting                        expenses                 | 610,392                                                        | 427,637 | 458,454 | 597,830 |
|    Net income                                                                                                                                                    | 43,505                                                         | 121,382 | 114,931 | 53,088 |

 

 

 

F-39

 

----

 

 

| EVEREST REINSURANCE HOLDINGS, INC.                                                                                                                                                                                                                                             |                                                                      |   |                                                                      |   |                                                                      |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|---------------------------------------------------------------------------|--------|---------------------------------------------------------------------------|--------|---------------------------------------------------------------------------|
| SCHEDULE I - SUMMARY OF INVESTMENTS -                                                                                                                                                                                                                                          |                                                                      |   |                                                                      |   |                                                                      |
| OTHER THAN INVESTMENTS IN RELATED PARTIES                                                                                                                                                                                                                                      |                                                                      |   |                                                                      |   |                                                                      |
| DECEMBER 31, 2007                                                                                                                                                                                                                                                              |                                                                      |   |                                                                      |   |                                                                      |
|                                                                                                                                                                                                                                                                           |                                                                      |   |                                                                      |   |                                                                      |
| Column A                                                                                                                                                                                                                                                                       | Column B                                                                  |   | Column C                                                                  |   | Column D                                                                  |
|                                                                                                                                                                                                                                                                           |                                                                      |   |                                                                      |   | Amount                                                                    |
|                                                                                                                                                                                                                                                                           |                                                                      |   |                                                                      |   | Shown in                                                                  |
|                                                                                                                                                                                                                                                                           |                                                                      |   | Market                                                                    |   | Balance                                                                   |
| (Dollars in thousands)                                                                                                                                                                                                                                                         | Cost                                                                      |   | Value                                                                     |   | Sheet                                                                     |
| Fixed maturities-available for sale                                                                                                                                                                                                                                            |                                                                      |   |                                                                      |   |                                                                      |
|    Bonds:                                                                                                                                                                                                                                                            |                                                                      |   |                                                                      |   |                                                                      |
|       U.S. government and government                        agencies                                                                                                                                                                                       | $           92,932 |   | $           96,500 |   | $           96,500 |
|       State, municipalities and                        political subdivisions                                                                                                                                                                              | 3,512,695                                                                 |   | 3,648,529                                                                 |   | 3,648,529                                                                 |
|       Foreign government                        securities                                                                                                                                                                                                 | 416,715                                                                   |   | 436,517                                                                   |   | 436,517                                                                   |
|       Foreign corporate                        securities                                                                                                                                                                                                  | 500,913                                                                   |   | 508,299                                                                   |   | 508,299                                                                   |
|       Public utilities                                                                                                                                                                                                                                     | 60,633                                                                    |   | 60,517                                                                    |   | 60,517                                                                    |
|       All other corporate                        bonds                                                                                                                                                                                                | 664,093                                                                   |   | 666,200                                                                   |   | 666,200                                                                   |
|    Mortgage pass-through securities                                                                                                                                                                                                                                  | 566,041                                                                   |   | 565,022                                                                   |   | 565,022                                                                   |
|    Redeemable preferred stock                                                                                                                                                                                                                                        | 16,654                                                                    |   | 16,573                                                                    |   | 16,573                                                                    |
| Total fixed maturities-available for sale                                                                                                                                                                                                                                      | 5,830,676                                                                 |   | 5,998,157                                                                 |   | 5,998,157                                                                 |
| Equity securities - available for sale, at market                        value                                                     | 9,897                                                                     |   | 9,897                                                                     |   | 9,897                                                                     |
| Equity securities - available for sale, at fair                        value                                                                                                                                                                                                   | 815,372                                                                   |   | 815,372                                                                   |   | 815,372                                                                   |
| Short-term investments                                                                                                                                                                                                                                                         | 1,327,391                                                                 |   | 1,327,391                                                                 |   | 1,327,391                                                                 |
| Other invested assets                                                                                                                                                                                                                                                          | 439,285                                                                   |   | 441,742                                                                   |   | 441,742                                                                   |
| Other invested assets, at fair value                                                                                                                                                                                                                                           | 253,791                                                                   |   | 253,791                                                                   |   | 253,791                                                                   |
| Cash                                                                                                                                                                                                                                                                           | 146,447                                                                   |   | 146,447                                                                   |   | 146,447                                                                   |
|                                                                                                                                                                                                                                                                           |                                                                      |   |                                                                      |   |                                                                      |
| Total investments and cash                                                                                                                                                                                                                                                     | $     8,822,859                                  |   | $     8,992,797                                  |   | $     8,992,797                                  |

 

 

S-1

 

 

----

 

| EVEREST REINSURANCE HOLDINGS, INC.                                                                           |                                                                                             |   |                                                                                  |
|--------------------------------------------------------------------------------------------------------------|--------------------------------------------------------------------------------------------------|--------|---------------------------------------------------------------------------------------|
| SCHEDULE II - CONDENSED FINANCIAL INFORMATION                                                                |                                                                                             |   |                                                                                  |
| OF THE REGISTRANT CONDENSED BALANCE SHEETS                                                                   |                                                                                             |   |                                                                                  |
|                                                                                                         |                                                                                             |   |                                                                                  |
|                                                                                                         |                                                                                             |   |                                                                                  |
|                                                                                                         | At December 31,                                                                                  |
| (Dollars in thousands, except par value per                        share)                                    | 2007                                                                                             |   | 2006                                                                                  |
| ASSETS:                                                                                                      |                                                                                             |   |                                                                                  |
|    Equity securities, at market value (cost: 2007,                        $9,897; 2006, $16,393)   | $               9,897 |   | $             16,393 |
|    Other invested assets, at fair value                                                            | 253,791                                                                                          |   | -                                                                                     |
|    Short-term investments                                                                          | 176,274                                                                                          |   | 74,790                                                                                |
|    Cash                                                                                            | 916                                                                                              |   | 360                                                                                   |
|    Investment in subsidiaries, at equity in the                        underlying net assets       | 3,248,507                                                                                        |   | 3,102,649                                                                             |
|    Accrued investment income                                                                       | 494                                                                                              |   | 131                                                                                   |
|    Current federal income tax                        receivable                                    | 54,240                                                                                           |   | 9,410                                                                                 |
|    Other assets                                                                                    | 19,338                                                                                           |   | 20,693                                                                                |
| TOTAL ASSETS                                                                                                 | $       3,763,457                                             |   | $       3,224,426                                  |
|                                                                                                         |                                                                                             |   |                                                                                  |
| LIABILITIES:                                                                                                 |                                                                                             |   |                                                                                  |
|    8.75% Senor notes due 3/15/2010                                                                 | $          199,685                             |   | $          199,560                  |
|    5.4% Senior notes due 10/15/2014                                                                | 249,689                                                                                          |   | 249,652                                                                               |
|    6.6% Long term notes due 5/1/2067                                                               | 399,639                                                                                          |   | -                                                                                     |
|    Junior subordinated debt securities                                                             | 329,897                                                                                          |   | 546,393                                                                               |
|    Accrued interest on debt and                        borrowings                                  | 11,217                                                                                           |   | 10,041                                                                                |
|    Due to affiliates                                                                               | 1,351                                                                                            |   | 363                                                                                   |
|    Other liabilities                                                                               | 4,480                                                                                            |   | 33                                                                                    |
|       Total liabilities                                                             | 1,195,958                                                                                        |   | 1,006,042                                                                             |
|                                                                                                         |                                                                                             |   |                                                                                  |
| STOCKHOLDER'S EQUITY:                                                                                        |                                                                                             |   |                                                                                  |
|    Common stock, par value: $0.01; 3,000 shares                        authorized;                 |                                                                                             |   |                                                                                  |
|       1,000 shares issued and                        outstanding (2007 and 2006)    | -                                                                                                |   | -                                                                                     |
|    Additional paid-in capital                                                                      | 310,206                                                                                          |   | 300,764                                                                               |
|    Accumulated other comprehensive income, net of                        deferred income           |                                                                                             |   |                                                                                  |
|       taxes of $0.0 million at 2007                        and $0.0 million at 2006 | 163,276                                                                                          |   | 332,578                                                                               |
|    Retained earnings                                                                               | 2,094,017                                                                                        |   | 1,585,042                                                                             |
|    Total stockholder's equity                                                                      | 2,567,499                                                                                        |   | 2,218,384                                                                             |
| TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY                                                                   | $       3,763,457                                             |   | $       3,224,426                                  |
|                                                                                                         |                                                                                             |   |                                                                                  |
| See notes to consolidated financial statements                                                               |                                                                                             |   |                                                                                  |

 

 

S-2

 

 

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| EVEREST REINSURANCE HOLDINGS, INC.                                                                                                                                                                                                     |                                                                            |   |                                                                                       |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|---------------------------------------------------------------------------------|--------|--------------------------------------------------------------------------------------------|
| SCHEDULE II - CONDENSED FINANCIAL INFORMATION OF                        THE                                                                                                                                                            |                                                                            |   |                                                                                       |   |
| REGISTRANT CONDENSED STATEMENTS OF                        OPERATIONS                            |                                                                            |   |                                                                                       |   |
|                                                                                                                                                                                                                                   |                                                                            |   |                                                                                       |   |   |
|                                                                                                                                                                                                                                   |                                                                            |   |                                                                                       |   |   |
|                                                                                                                                                                                                                                   | Years Ended December 31,                                                        |
| (Dollars in thousands)                                                                                                                                                                                                                 | 2007                                                                            |   | 2006                                                                                       |   | 2005 |
|                                                                                                                                                                                                                                   |                                                                            |   |                                                                                       |   |   |
| REVENUES:                                                                                                                                                                                                                              |                                                                            |   |                                                                                       |   |   |
| Net investment income                                                                                                                                                                                                                  | $            17,756 |   | $              2,793 |   | $             4,638 |
| Net realized capital gains                                                                                                                                                                                                             | 12,207                                                                          |   | -                                                                                          |   | 8,106 |
| Other expense                                                                                                                                                                                                                          | (148)                                                                           |   | (94)                                                                                       |   | (1,891) |
| Equity in retained earnings of subsidiaries                                                                                                                                                                                            | 345,936                                                                         |   | 381,135                                                                                    |   | 55,424 |
|    Total revenues                                                                                                                                                                                                            | 375,751                                                                         |   | 383,834                                                                                    |   | 66,277 |
|                                                                                                                                                                                                                                   |                                                                            |   |                                                                                       |   |   |
| EXPENSES:                                                                                                                                                                                                                              |                                                                            |   |                                                                                       |   |   |
| Interest expense                                                                                                                                                                                                                       | 91,059                                                                          |   | 69,696                                                                                     |   | 74,197 |
| Other expense                                                                                                                                                                                                                          | 3,456                                                                           |   | 1,782                                                                                      |   | 2,002 |
|    Total expenses                                                                                                                                                                                                            | 94,515                                                                          |   | 71,478                                                                                     |   | 76,199 |
|                                                                                                                                                                                                                                   |                                                                            |   |                                                                                       |   |   |
| INCOME (LOSS) BEFORE TAXES                                                                                                                                                                                                             | 281,236                                                                         |   | 312,356                                                                                    |   | (9,922) |
|                                                                                                                                                                                                                                   |                                                                            |   |                                                                                       |   |   |
| Income tax benefit                                                                                                                                                                                                                     | (22,955)                                                                        |   | (20,550)                                                                                   |   | (14,628) |
|    NET INCOME                                                                                                                                                                                                                | $         304,191                  |   | $         332,906                             |   | $             4,706 |
|                                                                                                                                                                                                                                   |                                                                            |   |                                                                                       |   |   |
| See notes to consolidated financial statements                                                                                                                                                                                         |

 

 

S-3

 

 

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| EVEREST REINSURANCE HOLDINGS,                    INC.                                                      |                                                                                            |        |                                                                              |
|------------------------------------------------------------------------------------------------------------|--------------------------------------------------------------------------------------------|--------|------------------------------------------------------------------------------|
| SCHEDULE II - CONDENSED FINANCIAL                    INFORMATION OF THE                                    |                                                                                       |   |                                                                              |  |
| REGISTRANT CONDENSED STATEMENTS OF                    CASH FLOWS                                           |                                                                                       |   |                                                                              |  |
|                                                                                                       |                                                                                            |   |                                                                              |   |  |
|                                                                                                       | Years Ended December                    31,                                                |
| (Dollars in                    thousands)                                                                  | 2007                                                                                       |   | 2006                                                                         |   | 2005 |
|                                                                                                       |                                                                                       |   |                                                                         |   |   |
| CASH FLOWS FROM OPERATING                    ACTIVITIES                                                    |                                                                                       |   |                                                                         |   |   |
| Net income                                                                                                 | $     304,191                                                     |   | $     332,906                                       |   | $     4,706 |
|    Adjustments to                    reconcile net income to net cash provided                   |                                                                                       |   |                                                                         |   |   |
|    by operating                    activities:                                                   |                                                                                       |   |                                                                         |   |   |
|      Equity                    in retained earnings of subsidiaries                    | (345,936)                                                                                  |   | (381,135)                                                                    |   | (55,424) |
|                         Dividends received from subsidiaries                           | 245,000                                                                                    |   | 100,000                                                                      |   | 75,000 |
|      Change                    in other assets and liabilities                         | 5,151                                                                                      |   | 1,836                                                                        |   | 515 |
|      Increase                    (decrease) in accrued interest on debt and borrowings | 1,176                                                                                      |   | -                                                                            |   | (6,385) |
|                         (Increase) decrease in federal income tax recoverable          | (44,830)                                                                                   |   | (7,050)                                                                      |   | 11,898 |
|      Decrease                    (increase) in deferred tax asset                      | 4,290                                                                                      |   | 4,103                                                                        |   | (1,839) |
|      Increase                    (decrease) in due to affiliates                       | 988                                                                                        |   | (722)                                                                        |   | (407) |
|      Accrual                    of bond discount                                       | (7,255)                                                                                    |   | -                                                                            |   | (974) |
|                         Amortization of underwriting discount on senior notes          | 164                                                                                        |   | 149                                                                          |   | 162 |
|      Realized                    capital gains                                         | (12,207)                                                                                   |   | -                                                                            |   | (8,106) |
| Net cash provided by operating                    activities                                               | 150,732                                                                                    |   | 50,087                                                                       |   | 19,146 |
|                                                                                                       |                                                                                       |   |                                                                         |   |   |
| CASH FLOWS FROM INVESTING                    ACTIVITIES                                                    |                                                                                       |   |                                                                         |   |   |
|    Additional                    investment in subsidiaries                                      | -                                                                                          |   | (1,925)                                                                      |   | (175,000) |
|    Proceeds from equity                    securities sold-available for sale, market value      | 6,496                                                                                      |   | -                                                                            |   | 47,821 |
|    Net (sales)                    purchases of short-term securities                             | (94,229)                                                                                   |   | (48,137)                                                                     |   | 318,735 |
|    Cost to aquire other                    invested assets                                       | (241,584)                                                                                  |   | -                                                                            |   | - |
| Net cash (used in) provided by                    investing activities                                     | (329,317)                                                                                  |   | (50,062)                                                                     |   | 191,556 |
|                                                                                                       |                                                                                       |   |                                                                         |   |   |
| CASH FLOWS FROM FINANCING                    ACTIVITIES                                                    |                                                                                       |   |                                                                         |
|    Redemption of junior                    subordinated debt securities                          | (216,496)                                                                                  |   | -                                                                            |   | - |
|    Net proceeds from                    issuance of long term subordinated notes                 | 395,637                                                                                    |   | -                                                                            |   | - |
|    Dividends from                    treasury shares                                             | -                                                                                          |   | -                                                                            |   | 199 |
|    Sale of treasury                    shares, net of tax                                        | -                                                                                          |   | -                                                                            |   | 38,261 |
|    Repayment of 8.5%                    senior notes                                             | -                                                                                          |   | -                                                                            |   | (250,000) |
|    Tax benefit from                    share-based compensation                                  | -                                                                                |   | 113                                                                |   |                           211   |
| Net cash provided by (used in)                    financing activities                                     | 179,141                                                                                    |   | 113                                                                          |   | (211,329) |
|                                                                                                       |                                                                                       |   |                                                                         |   |   |
| Net increase (decrease) in                    cash                                                         | 556                                                                                        |   | 138                                                                          |   | (627) |
| Cash, beginning of                    period                                                               | 360                                                                                        |   | 222                                                                          |   | 849 |
| Cash, end of period                                                                                        | $                               916 |   | $            360 |   | $                              222 |
|                                                                                                       |                                                                                       |   |                                                                         |   |   |
| Non-cash financing                    transaction:                                                         |                                                                                       |   |                                                                         |   |   |
|     Non-cash                    contribution from parent                                    | $                             9,442                |   | $                            8,370        |   | $        4,907 |
|     Non-cash                    contribution to subsidiaries                                | $                          (9,442)                           |   | $                         (8,370)                   |   | $     (4,907) |
|                                                                                                       |                                                                                       |   |                                                                         |   |   |
| See notes to consolidated                    financial statements                                          |                                                                                       |   |                                                                         |   |   |

 

S-4

 

 

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| EVEREST REINSURANCE HOLDINGS, INC.                                        |                                                     |                                           |                               |                         |                                         |                                     |
|---------------------------------------------------------------------------|----------------------------------------------------------|------------------------------------------------|------------------------------------|------------------------------|----------------------------------------------|------------------------------------------|
| SCHEDULE III - SUPPLEMENTARY INSURANCE                        INFORMATION |                                                     |                                           |                               |                         |
|                                                                      |                                                     |                                           |                               |                         |                                         |                                     |   |   |   |
|                                                                      |                                                     |                                           |                               |                         |                                         |                                     |   |   |   |
| Column A                                                                  | Column B                                                 | Column C                                       | Column D                           | Column E                     | Column F                                     | Column G                                 | Column H | Column I | Column J |
|                                                                      |                                                     | Reserve                                        |                               |                         |                                         | Incurred                                 |   |   |   |
| Geographic Area                                                           |                                                     | for Losses                                     |                               |                         |                                         | Loss and                                 | Amortization |   |   |
|                                                                      | Deferred                                                 | and Loss                                       | Unearned                           |                         | Net                                          | Loss                                     | of Deferred | Other | Net |
|                                                                      | Acquisition                                              | Adjustment                                     | Premium                            | Premiums                     | Investment                                   | Adjustment                               | Acquisition | Operating | Written |
| (Dollars in thousands)                                                    | Costs                                                    | Expenses                                       | Reserves                           | Earned                       | Income                                       | Expenses                                 | Costs | Expenses | Premium |
| December 31, 2007                                                         |                                                     |                                           |                               |                         |                                         |                                     |   |   |   |
|    Domestic                                                     | $        182,501 | $      6,383,401 | $    1,159,409 | $   1,620,744 | $      367,646 | $     1,167,888 | $         339,167 | $     105,283 | $   1,519,963 |
|    International                                                | 52,218                                                   | 1,155,303                                      | 208,687                            | 558,156                      | 38,946                                       | 339,686                                  | 126,745 | 18,633 | 552,963 |
|       Total                                      | $        234,719 | $      7,538,704 | $    1,368,096 | $   2,178,900 | $      406,592 | $     1,507,574 | $         465,912 | $     123,916 | $   2,072,926 |
|                                                                      |                                                     |                                           |                               |                         |                                         |                                     |   |   |   |
| December 31, 2006                                                         |                                                     |                                           |                               |                         |                                         |                                     |   |   |   |
|    Domestic                                                     | $        189,060 | $      6,430,793 | $    1,228,509 | $   1,728,363 | $      339,388 | $     1,278,549 | $         320,383 | $      84,899 | $   1,758,427 |
|    International                                                | 51,286                                                   | 966,477                                        | 195,168                            | 518,837                      | 32,964                                       | 278,530                                  | 118,122 | 13,830 | 531,834 |
|       Total                                      | $        240,346 | $      7,397,270 | $    1,423,677 | $   2,247,200 | $      372,352 | $     1,557,079 | $         438,505 | $      98,729 | $   2,290,261 |
|                                                                      |                                                     |                                           |                               |                         |                                         |                                     |   |   |   |
| December 31, 2005                                                         |                                                     |                                           |                               |                         |                                         |                                     |   |   |   |
|    Domestic                                                     | $        153,603 | $      6,657,546 | $    1,203,970 | $   1,941,671 | $      296,796 | $     1,793,546 | $         408,936 | $       88,703 | $   1,897,093 |
|    International                                                | 48,623                                                   | 1,071,625                                      | 183,906                            | 484,405                      | 28,421                                       | 409,274                                  | 104,458 | 12,621 | 498,557 |
|       Total                                      | $        202,226 | $      7,729,171 | $    1,387,876 | $   2,426,076 | $      325,217 | $     2,202,820 | $         513,394 | $     101,324 | $   2,395,650 |

 

 

S-5

 

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| EVEREST REINSURANCE HOLDINGS, INC.                                              |                                               |                                                           |                                           |                                           |
|---------------------------------------------------------------------------------|----------------------------------------------------|----------------------------------------------------------------|------------------------------------------------|------------------------------------------------|
| SCHEDULE IV - REINSURANCE                                                       |                                               |                                                           |                                           |                                           |   |
|                                                                            |                                               |                                                           |                                           |                                           |   |
|                                                                            |                                               |                                                           |                                           |                                           |   |
| Column A                                                                        | Column B                                           | Column C                                                       | Column D                                       | Column E                                       | Column F |
|                                                                            |                                               | Ceded to                                                       | Assumed                                        |                                           |   |
|                                                                            | Gross                                              | Other                                                          | from Other                                     | Net                                            | Assumed |
| (Dollars in thousands)                                                          | Amount                                             | Companies                                                      | Companies                                      | Amount                                         | to Net |
|                                                                            |                                               |                                                           |                                           |                                           |   |
| December 31, 2007                                                               |                                               |                                                           |                                           |                                           |   |
|    Total property and liability                                       |                                               |                                                           |                                           |                                           |   |
|       insurance premiums                        earned | $       899,328 | $      1,043,126                 | $      2,322,698 | $      2,178,900 | 106.6% |
|                                                                            |                                               |                                                           |                                           |                                           |   |
| December 31, 2006                                                               |                                               |                                                           |                                           |                                           |   |
|    Total property and liability                                       |                                               |                                                           |                                           |                                           |   |
|       insurance premiums                        earned | $       961,133 | $         902,994 | $      2,189,061 | $      2,247,200 | 97.4% |
|                                                                            |                                               |                                                           |                                           |                                           |   |
| December 31, 2005                                                               |                                               |                                                           |                                           |                                           |   |
|    Total property and liability                                       |                                               |                                                           |                                           |                                           |   |
|       insurance premiums                        earned | $    1,019,288                 | $         914,468 | $      2,321,256 | $      2,426,076 | 95.8% |

 

 

S-6

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