UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q

QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934

FOR THE QUARTERLY PERIOD ENDED:		 Commission file number: 
                September 30, 2005March 31, 2006                                    1-14527                
    
EVEREST REINSURANCE HOLDINGS, INC. 
(Exact name of registrant as specified in its charter) 
    
                Delaware                                     22-3263609     
(State or other jurisdiction of (I.R.S. Employer 
incorporation or organization) Identification No.) 
    
477 Martinsville Road   
Post OfficePO Box 830HM 845   
Liberty Corner, New Jersey 07938-083007938   
(908) 604-3000   
(Address, including zip code, and telephone number, including area code,   
of registrant's principal executive office)   
    


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 tosuch the filing requirements for the past 90 days.

 YES      X     NO               



Indicate by check mark whether the registrant is large accelerated filer, an accelerated filer or a non-accelerated filer. See definition of "accelerated filer and large accelerated filer" in Rule 12b-2 of the Exchange Act.

               Large accelerated filer___ Accelerated filer___ Non-accelerated filer  X  

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

 YES            NO      X        



Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date:

   Number of Shares Outstanding 
                           Class  at November 1, 2005May 01, 2006
Common Stock, $.01 par value  1,000 






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


EVEREST REINSURANCE HOLDINGS, INC.

Index To Form 10-Q

PART I

FINANCIAL INFORMATION

Item 1.Financial Statements

PART I

Page

FINANCIAL INFORMATION

Page

Item 1.

Financial Statements

Consolidated Balance Sheets at September 30, 2005March 31, 2006 (unaudited)

and December 31, 2004

2005

3

Consolidated Statements of Operations and Comprehensive (Loss) Income

for the three and nine months ended September 30,March 31, 2006 and 2005 and 2004 (unaudited)

4

Consolidated Statements of Changes in Stockholders’Shareholder’s Equity for the
                     three and nine months ended September 30,March 31, 2006 and 2005 and 2004 (unaudited)

5

Consolidated Statements of Cash Flows for the three and nine months ended September 30, 2005 and 2004 (unaudited)

6

                     March 31, 2006 and 2005 (unaudited)

6

Notes to Consolidated Interim Financial Statements (unaudited)

7

Item 2.

Management’s Discussion and Analysis of Financial Condition

and Results of OperationsOperation

23

19

Item 3.

Quantitative and Qualitative Disclosures aboutAbout Market Risk

48

33

Item 4.

Controls and Procedures

49

34

PART II

PART II

OTHER INFORMATION

OTHER INFORMATION

Item 1.

Legal Proceedings

50

Item 1.Legal Proceedings

35

Item 1A.Risk Factors35
Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

50

35

Item 3.

Defaults Upon Senior Securities

50

35

Item 4.

Submission of Matters to a Vote of Security Holders

50

35

Item 5.

Other Information

50

35

Item 6.Exhibits

Exhibits

51

36

EVEREST REINSURANCE HOLDINGS, INC.
CONSOLIDATED BALANCE SHEETS		EVEREST REINSURANCE HOLDINGS, INC.
CONSOLIDATED BALANCE SHEETS
EVEREST REINSURANCE HOLDINGS, INC.
CONSOLIDATED BALANCE SHEETS

(Dollars in thousands, except par value per share)
(Dollars in thousands, except par value per share)
September 30,
2005		 December 31,
2004		 
(Dollars in thousands, except par value per share)
March 31,
2006		 December 31,
2005		 
(unaudited)(unaudited) 
ASSETS:          
Fixed maturities - available for sale, at market value  
(amortized cost: 2005, $5,800,296; 2004, $5,887,529) $6,017,787 $6,159,539 
Equity securities, at market value (cost: 2005, $946,524; 2004, $571,717)  1,096,177  650,871 
(amortized cost: 2006, $6,041,705; 2005, $5,850,541) $6,158,276 $6,036,693 
Equity securities, at market value (cost: 2006, $862,271; 2005, $859,425)  1,101,733  1,023,784 
Short-term investments  398,552  517,824   391,294  513,913 
Other invested assets (cost: 2005, $185,355; 2004, $113,050)  186,849  114,187 
Other invested assets (cost: 2006, $246,877; 2005, $215,364)  248,211  216,791 
Cash  60,610  53,887   61,825  66,194 
Total investments and cash  7,759,975  7,496,308   7,961,339  7,857,375 
Accrued investment income  81,692  82,351   84,346  82,561 
Premiums receivable  1,097,938  1,063,879   1,059,638  1,053,994 
Reinsurance receivables - unaffiliated  1,026,252  1,164,851   948,321  988,725 
Reinsurance receivables - affiliated  1,596,598  1,395,555   1,579,003  1,537,355 
Funds held by reinsureds  127,931  133,797   134,668  130,041 
Deferred acquisition costs  215,694  204,124   209,982  202,226 
Prepaid reinsurance premiums  361,552  368,450   387,350  398,583 
Deferred tax asset  223,276  184,801   264,801  261,216 
Taxes recoverable  26,608  - 
Current federal income tax receivable  6,327  73,256 
Other assets  156,083  115,788   124,673  115,193 
TOTAL ASSETS $12,673,599 $12,209,904  $12,760,448 $12,700,525 
LIABILITIES:  
Reserve for losses and adjustment expenses $7,628,165 $6,846,904  $7,747,766 $7,729,171 
Unearned premium reserve  1,430,103  1,387,172   1,399,517  1,387,876 
Funds held under reinsurance treaties  282,933  363,842   200,671  263,165 
Contingent commissions  15,208  20,158 
Other net payable to reinsurers  343,471  394,568   350,937  315,676 
Current federal income taxes  -  37,580 
8.5% Senior notes due 3/15/2005  -  249,976 
8.75% Senior notes due 3/15/2010  199,419  199,341   199,473  199,446 
5.4% Senior notes due 10/15/2014  249,609  249,584   249,626  249,617 
Junior subordinated debt securities payable  546,393  546,393   546,393  546,393 
Accrued interest on debt and borrowings  9,041  16,426   9,041  10,041 
Other liabilities  194,528  174,326   196,891  188,280 
Total liabilities  10,883,662  10,466,112   10,915,523  10,909,823 
Commitments and Contingencies (Note 4) 

STOCKHOLDERS' EQUITY:		 
Commitments & Contingencies (Note 4) 

STOCKHOLDER'S EQUITY:		 
Common stock, par value: $0.01; 3,000 shares authorized;  
1,000 shares issued (2005 and 2004)  -  - 
1,000 shares issued (2006 and 2005)  -  - 
Additional paid-in capital  276,536  271,652   296,199  292,281 
Treasury shares, at cost; 0.5 million shares (2005 and 2004)  (22,950) (22,950)
Accumulated other comprehensive income, net of deferred income  
taxes of $138.2 million at 2005 and $133.4 million at 2004  256,635  247,660 
taxes of $136.3 million at 2006 and $132.6 million at 2005  253,085  246,285 
Retained earnings  1,279,716  1,247,430   1,295,641  1,252,136 
Total stockholders' equity  1,789,937  1,743,792 
Total stockholder's equity  1,844,925  1,790,702 
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $12,673,599 $12,209,904 
TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY $12,760,448 $12,700,525 
The accompanying notes are an integral part of the consolidated financial statements 
The accompanying notes are an integral part of the consolidated financial statements. 

3

EVEREST REINSURANCE HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
AND COMPREHENSIVE (LOSS) INCOME

EVEREST REINSURANCE HOLDINGS, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
AND COMPREHENSIVE INCOME (LOSS)
EVEREST REINSURANCE HOLDINGS, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
AND COMPREHENSIVE INCOME (LOSS)

Three Months Ended
September 30,		Nine Months Ended
September 30,
Three Months Ended
March 31,
(Dollars in thousands)(Dollars in thousands)2005 2004 2005 2004 (Dollars in thousands)2006 2005 
(unaudited)(unaudited)(unaudited)
REVENUES:              
Premiums earned $617,750 $688,087 $1,905,081 $2,096,711  $603,678 $619,006 
Net investment income  67,585  81,227  242,577  242,381   83,905  85,922 
Net realized capital gains  18,633  9,388  38,321  59,846   9,020  1,485
Other expense  (15,240) (30,378) (14,528) (74,313)  (13,047) (3,667)
Total revenues  688,728  748,324  2,171,451  2,324,625   683,556  702,746 
CLAIMS AND EXPENSES:  
Incurred losses and loss adjustment expenses  748,550  569,889  1,612,002  1,551,095   465,511  434,129 
Commission, brokerage, taxes and fees  122,092  142,792  393,276  425,996   124,479  117,150 
Other underwriting expenses  24,997  20,171  74,190  61,749   20,402  24,925 
Interest expense on senior notes  7,785  9,737  27,729  29,209   7,786  12,235 
Interest expense on junior subordinated debt  9,362  9,363  28,086  23,030   9,362  9,362 
Amortization of bond issue costs  235  315 
Interest and fee expense on credit facility  73  339  167  997   47  47 
Total claims and expenses  912,859  752,291  2,135,450  2,092,076   627,822  598,163 
(LOSS) INCOME BEFORE TAXES  (224,131) (3,967) 36,001  232,549 
Income tax (benefit) expense  (50,579) (11,666) 3,715  57,719 
INCOME BEFORE TAXES  55,734  104,583 
Income tax expense  12,229  17,670 
NET (LOSS) INCOME $(173,552)$7,699 $32,286 $174,830 
NET INCOME $43,505 $86,913 
Other comprehensive (loss) income, net of tax  (3,135) 96,197  8,975  (25,232)
Other comprehensive income (loss), net of tax  6,800 (67,842) 
COMPREHENSIVE (LOSS) INCOME $(176,687)$103,896 $41,261 $149,598 
COMPREHENSIVE INCOME $50,305 $19,071 
The accompanying notes are an integral part of the consolidated financial statements 
The accompanying notes are an integral part of the consolidated financial statements. 

4

EVEREST REINSURANCE HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF
CHANGES IN STOCKHOLDERS' EQUITY

EVEREST REINSURANCE HOLDINGS, INC.
CONSOLIDATED STATEMENT OF
CHANGES IN STOCKHOLDER'S EQUITY
EVEREST REINSURANCE HOLDINGS, INC.
CONSOLIDATED STATEMENT OF
CHANGES IN STOCKHOLDER'S EQUITY

Three Months Ended
September 30,		Nine Months Ended
September 30,
Three Months Ended
March 31,
 
((Dollars in thousands, except share amounts)2005 2004 2005 2004 
 
(Dollars in thousands, except share amounts)(Dollars in thousands, except share amounts)2006 2005 
(unaudited)(unaudited)
(unaudited)
COMMON STOCK (shares outstanding):              
Balance, beginning of period  1,000  1,000  1,000  1,000   1,000  1,000 
Issued during the period  -  - 
 
Balance, end of period  1,000  1,000  1,000  1,000   1,000  1,000 
 
ADDITIONAL PAID IN CAPITAL:  
Balance, beginning of period $275,041 $271,014 $271,652 $263,290  $292,281 $271,652 
Tax benefit from stock options exercised  1,445  44  4,735  7,678   3,918  2,830 
Dividend from parent  50  46  149  136   -  50 
 
Balance, end of period  276,536  271,104  276,536  271,104   296,199  274,532 
 
ACCUMULATED OTHER COMPREHENSIVE INCOME,  
NET OF DEFERRED INCOME TAXES:  
Balance, beginning of period  259,770  86,876  247,660  208,305   246,285  247,660 
Net (decrease) increase during the period  (3,135) 96,197  8,975  (25,232)
Net increase (decrease) during the period  6,800 (67,842) 
 
Balance, end of period  256,635  183,073  256,635  183,073   253,085  179,818 
 
RETAINED EARNINGS:  
Balance, beginning of period  1,453,268  1,239,088  1,247,430  1,098,219   1,252,136  1,247,430 
Net (loss) income  (173,552) 7,699  32,286  174,830 
Dividends paid  -  -  -  (26,262)
Net income  43,505  86,913 
 
Balance, end of period  1,279,716  1,246,787  1,279,716  1,246,787   1,295,641  1,334,343 
 
TREASURY SHARES AT COST:  
Balance, beginning of period  (22,950) (22,950) (22,950) (22,950)  - (22,950)
Treasury shares acquired during the period  -  - 
 
Balance, end of period  (22,950) (22,950) (22,950) (22,950)  - (22,950)
 
TOTAL STOCKHOLDERS' EQUITY, END OF PERIOD $1,789,937 $1,678,014 $1,789,937 $1,678,014 
TOTAL STOCKHOLDER'S EQUITY, END OF PERIOD $1,844,925 $1,765,743 
 
The accompanying notes are an integral part of the consolidated financial statements 
The accompanying notes are an integral part of the consolidated financial statements. 

5

EVEREST REINSURANCE HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS		EVEREST REINSURANCE HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
EVEREST REINSURANCE HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS

Three Months Ended
September 30,		Nine Months Ended
September 30,
Three Months Ended
March 31,
 
(Dollars in thousands)(Dollars in thousands)2005 2004 2005 2004 (Dollars in thousands)2006 2005 
 
(unaudited)(unaudited)(unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES:              
Net (loss) income $(173,552)$7,699 $32,286 $174,830 
Adjustments to reconcile net (loss) income to net cash provided by 
Net income $43,505 $86,913 
Adjustments to reconcile net income to net cash provided by 
operating activities:  
Decrease (increase) in premiums receivable  36,759  5,552  (33,132) (115,740)
(Increase) decrease in premiums receivable  (3,993)  16,744
Increase in funds held by reinsureds, net  (8,857) (24,056) (71,649) (61,756)  (67,498) (32,105)
Increase in reinsurance receivables  (254,000) (20,133) (72,919) (161,586)
Decrease (increase) in reinsurance receivables  2,263 (92,476) 
Increase in deferred tax asset  (32,179) (37,780) (44,310) (56,956)  (7,246) (15,132)
Increase in reserve for losses and loss adjustment expenses  599,349  427,235  786,232  928,464   9,627  83,061 
Increase in unearned premiums  23,022  10,988  41,862  164,021   10,380  26,289 
Increase (decrease) in other assets and liabilities  1,168  (126,674) (118,544) (41,769)
Amortization of bond premium/(Accrual of bond discount)  2,469  (971) 1,561  (137)
Decrease in other assets and liabilities, net  97,720  67,828
Amortization of bond premium  3,122  1,079 
Amortization of underwriting discount on senior notes  36  50  127  147   36  58 
Realized capital gains  (18,633) (9,388) (38,321) (59,846)  (9,020) (1,485) 
 
Net cash provided by operating activities  175,582  232,522  483,193  769,672   78,896  140,774 
 
CASH FLOWS FROM INVESTING ACTIVITIES:  
Proceeds from fixed maturities matured/called - available for sales  83,136  92,879  219,731  299,862 
Proceeds from fixed maturities matured/called - available for sale  100,108  44,495 
Proceeds from fixed maturities sold - available for sale  81,473  25,042  807,159  604,280   40,476  87,174 
Proceeds from equity securities sold  97,319  10,000  106,729  17,995   26,985  - 
Proceeds from other invested assets sold  8,374  80  30,016  517   3,266  284 
Cost of fixed maturities acquired - available for sale  (181,580) (349,841) (909,402) (1,455,444)  (323,296) (131,182)
Cost of equity securities acquired  (116,763) (93,094) (476,270) (302,786)  (25,069) (153,058)
Cost of other invested assets acquired  (25,716) (2,243) (98,867) (9,108)  (28,434) (5,390)
Net (purchases) sales of short-term securities  (104,055) 100,140  120,502  (314,387)
Net sales of short-term securities  123,063  277,553
Net (decrease) increase in unsettled securities transactions  (19,906) 7,385  (25,832) (12,007)  (9,627)  20,127 
Proceeds from sale of subsidiary, net of cash disposed  -  -  -  (2,744)
 
Net cash used in investing activities  (177,718) (209,652) (226,234) (1,173,822)
Net cash (used in) provided by investing activities  (92,528)  140,003
 
CASH FLOWS FROM FINANCING ACTIVITIES:  
Tax benefit from stock options exercised  1,445  44  4,735  7,678   3,918  2,830 
Dividend from parent  50  46  149  136   -  50 
Repayment of senior notes  -  -  (250,000) -   - (250,000) 
Net proceeds from issuance of junior subordinated notes  -  -  -  329,897 
 
Net cash provided by (used in) financing activities  1,495  90  (245,116) 337,711   3,918 (247,120) 
 
EFFECT OF EXCHANGE RATE CHANGES ON CASH  (1,251) 206  (5,120) (3,301)  5,345 (2,786)
 
Net (decrease) increase in cash  (1,892) 23,166  6,723  (69,740)  (4,369)  30,871
Cash, beginning of period  62,502  49,188  53,887  142,094   66,194  53,887 
 
Cash, end of period $60,610 $72,354 $60,610 $72,354  $61,825 $84,758 
 
SUPPLEMENTAL CASH FLOW INFORMATION:  
Cash transactions:  
Income taxes paid, net $2,446 $41,667 $108,383 $97,263  $(52,439) $36,782 
Interest paid $18,185 $29,072 $63,241 $62,756  $18,159 $28,784 
Non-cash financing transaction:  
Non-cash dividend to parent $- $- $- $26,262 
Non-cash tax benefit from stock options exercised $1,445 $44 $4,735 $7,678  $3,918 $2,830 

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

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

6

EVEREST REINSURANCE HOLDINGS, INC.
NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS (UNAUDITED)


For the Threethree months ended March 31, 2006 and Nine Months ended September 30, 2005 and 2004

1. General

As used in this document, “Holdings” means Everest Reinsurance Holdings, Inc.; “Group” means Everest Re Group, Ltd. (Holdings’ parent); “Bermuda Re” means Everest Reinsurance (Bermuda), Ltd., a subsidiary of Group; “Everest Re” means Everest Reinsurance Company, a subsidiary of Holdings, and its subsidiaries (unless the context otherwise requires); and the “Company” means Holdings and its subsidiaries.

The unaudited consolidated financial statements of the Company for the three and nine months ended September 30,March 31, 2006 and 2005 and 2004 include all adjustments, consisting of normal recurring accruals, which, in the opinion of management, are necessary for a fair statement of the results on an interim basis. Certain financial information, which is normally included in annual financial statements prepared in accordance with accounting principles generally accepted accounting principles in the United States of America (“GAAP”), has been omitted since it is not required for interim reporting purposes. The year end consolidated balance sheet data was derived from audited financial statements, but does not include all disclosures required by generally accepted accounting principles in the United States of America.GAAP. The results for the three and nine months ended September 30,March 31, 2006 and 2005 and 2004 are not necessarily indicative of the results for a full year. These financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto for the years ended December 31, 2005, 2004 2003 and 20022003 included in the Company’s most recent Form 10-K filing.

2. New Accounting Pronouncements

In January 2003,November 2005, the Financial Accounting Standards Board (“FASB”) issued Financial Interpretation No. 46, “Consolidation of Variable Interest Entities (“FIN 46”). FIN 46 addresses whether certain types of entities, referred to as variable interest entities (“VIEs”), should be consolidated or deconsolidated in a company’s financial statements. During October 2003, the FASB deferred the effective date of FIN 46 provisions for VIEs created prior to February 1, 2003 to the first reporting period ending after December 15, 2003. During December 2003, the FASB issued FIN 46R, replacing FIN 46. FIN 46R became effective, for entities that had not adopted FIN 46, as of December 24, 2003. The Company adopted FIN 46R in the first quarter of 2004, resulting in the deconsolidation of Everest Re Capital Trust (“Capital Trust”) and Everest Re Capital Trust II (“Capital Trust II”).

In March 2004, the FASB’s Emerging Issue Task Force (“EITF”) reached a final consensus on Issue 03-1, “The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments”. This issue establishes guidance for determining whether to record impairment losses associated with investments in certain equity and debt securities. The application of this issue was required for reporting periods beginning after June 15, 2004. On September 30, 2004, the FASB issued a FASB Staff Position EITF Issue 03-1-1, which delayed the effective date for the measurement and recognition guidance included in paragraphs 10 through 20 of EITF Issue 03-1. On June 29, 2005, the FASB met and reached a decision to issue the FASB Staff Position (“FSP”) FAS 115-1, “The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments” (“FAS 115-1”), which is effective for reporting periods beginning after December 15, 2005. FAS 115-1 addresses the determination as to replacewhen an investment is considered impaired, whether the guidance set forth in paragraphs 10-18 of Issue 03-1 with references to existingimpairment is other than temporary and the measurement of an impairment guidance. FSPloss. FAS 115-1 would be applied prospectivelyalso includes accounting considerations subsequent to the recognition of an other-than-temporary impairment and the effective date would be reporting periods beginning after

7

EVEREST REINSURANCE HOLDINGS, INC.
NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS (UNAUDITED
(continued)


For the Three and Nine Months ended September 30, 2005 and 2004

December 15, 2005.requires certain disclosures about unrealized losses not recognized as other-than-temporary impairments. The Company is unable to predict the impact on other than temporary impairments until the guidance is finalized. Currently, theadopted FAS 115-1 prospectively effective January 1, 2006. The Company continues to apply Statement of Financial Accounting Standards No. 115, “Accounting for Certain Investments in Debt and Equity Securities” (“FAS 115”), and the Securities and Exchange Commission (“SEC”)‘s Staff Accounting Bulletin Topic 5:M, “Other Than Temporary Impairment Of Certain Investments In Debt And Equity Securities” and believes that the unrealized losses in its investment portfolio are temporary in nature.

3. Capital Transactions

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

oOn 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 of approximately $0.3 million and Holdings sold Group shares it acquired in 2002 at a price of $102.89 per share, which resulted in $46.5 million of proceeds, before expenses of approximately $0.3 million.

On June 27, 2005,2003, Group and Holdings filed a shelf registration statement on Form S-3 with the SEC, providing for the issuance of up to $975.0 million of securities. Generally, under this shelf registration statement, Group was

7

authorized to issue common shares, preferred shares, debt securities, warrants and hybrid securities, Holdings was authorized to issue debt securities and Capital Trust II and Everest Re Capital Trust IIIII (“Capital Trust III”II”) and Capital Trust III were authorized to issue trust preferred securities. This shelf registration statement became effective on December 22, 2003 and was effectively exhausted with the October 6, 2005 transaction described below. The following securities have beenwere issued pursuant to that registration statement.

 o On March 29, 2004, Capital Trust II, an unconsolidated affiliate, issued trust preferred securities resulting in a takedown from the shelf registration statement of $320$320.0 million. In conjunction with the issuance of Capital Trust II’s trust preferred securities, Holdings issued $329.9 million of 6.20% junior subordinated debt securities due March 29, 2034 to Capital Trust II. Part of the proceeds from the junior subordinated debt securities issuance was used for capital contributions to Holdings’ operating subsidiaries.

 o On October 6, 2004, Holdings completed a public offering of $250.0 million principal amount of 5.40% senior notes due October 15, 2014. The net proceeds were used to retire existing debt of Holdings,the Company, which camewas due and retired on March 15, 2005.

 o On October 6, 2005, Group expanded the size of the remaining shelf registration to $486.0 million by filing under Rule 462(b) of the Securities Act of 1933, as amended, and General Instruction IV of Form S-3 promulgated thereunder.there under. On the same date, Group entered into an agreement to issue 5,200,000 of its common shares at a price of $91.50 per share, which resulted in $475.8 million in proceeds received on October 12, 2005, before expenses of approximately $0.3 million. This transaction effectively exhausted the December 22, 2003 shelf registration.

4. Contingencies

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

8

EVEREST REINSURANCE HOLDINGS, INC.
NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS (UNAUDITED
(continued)


For the Three and Nine Months ended September 30, 2005 and 2004

and ultimately resolved, through formalboth informal and informalformal 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.

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

The Company continues to receive claims under expired contracts, both insurance and reinsurance, asserting alleged injuries and/or damages relating to or resulting from environmental pollution and hazardous substances, including asbestos.asbestos (i.e. asbestos and environmental (“A&E”)). The Company’s asbestos claims typically involve

8

potential liability for bodily injury from exposure to asbestos or for property damage resulting from asbestos or products containing asbestos. The Company’s environmental claims typically involve potential liability for (a) the mitigation or remediation of environmental contamination or (b) bodily injury or property damages caused by the release of hazardous substances into the land, air or water.

TheAs of March 31, 2006, approximately 8% of the Company’s gross reserves includeare an estimate of the Company’s ultimate liability for asbestos and environmental (“A&E”)&E claims. This estimate is made based on judgmental assessment of the underlying exposures as the result of (1) long and variable reporting delays, both from insureds to insurance companies and from ceding companies to reinsurers; (2) historical data, which is more limited and variable on A&E losses than historical information on other types of casualty claims; and (3) unique aspects of A&E exposures for which ultimate value cannot be estimated using traditional reserving techniques. There are significant uncertainties in estimating the amount of the Company’s potential losses from A&E claims. Among the uncertainties are: (a) potentially long waiting periods between exposure and manifestation of any bodily injury or property damage; (b) difficulty in identifying sources of asbestos or environmental contamination; (c) difficulty in properly allocating responsibility and/or liability for asbestos or environmental damage; (d) changes in underlying laws and judicial interpretation of those laws; (e) the potential for an asbestos or environmental claim to involve many insurance providers over many policy periods; (f) questions concerning interpretation and application of insurance and reinsurance coverage; and (g) uncertainty regarding the number and identity of insureds with potential asbestos or environmental exposure.

With respect to asbestos claims in particular, several additional factors have emerged in recent years that further compound the difficulty in estimating the Company’s liability. These developments include: (a) continued growth in the number of claims filed, in part reflecting a much more aggressive plaintiff’splaintiff bar and including claims against defendants formerly regarded aswho may only have a “peripheral”; condition to asbestos; (b) a disproportionate percentage of claims filed by individuals with no functional injury, which should have little to no financial value but that have increasingly been considered in jury verdicts and settlements; (c) the growth in the number and significance of bankruptcy filings by companies as a result of asbestos claims (including, more recently, bankruptcy filings in which companies attempt to resolve their asbestos liabilities in a manner that is prejudicial to insurers and forecloses insurers from participating in the negotiation of asbestos related bankruptcy reorganization plans); (d) the concentration of claims in a small number of states that favor plaintiffs; (e) the growth in the number of claims that might impact the general liability portion of insurance policies rather

9

EVEREST REINSURANCE HOLDINGS, INC.
NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS (UNAUDITED
(continued)


For the Three and Nine Months ended September 30, 2005 and 2004

than the product liability portion; (f) measures adopted by specific courts to ameliorate the worst procedural abuses; (g) an increase in settlement values being paid to asbestos claimants, especially those with cancer or functional impairment; (h) legislation in some states to address asbestos litigation issues; and (i) the potential that other states or the U.S. Congress may adopt legislation on asbestos litigation.

Management believes that these uncertainties and factors continue to render reserves for A&E and particularly asbestos losses significantly less subject to traditional actuarial analysis than reserves for other types of losses. Given these uncertainties, management believes that no meaningful range for such ultimate losses can be established.established particularly for asbestos. Further, A&E reserves may be subject to more variability than non-A&E reserves and such variation could have a material adverse effect on the Company’s financial condition, results of operations and/or cash flows. The Company establishes reserves to the extent that, in the judgment of management, the facts and prevailing law reflect an exposure for the Company or its ceding companies.

9

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

Three Months Ended
March 31,
(Dollars in thousands)2006
2005
Gross basis:      
Beginning of period reserves  $649,460 $728,325 
Incurred losses   10,000  18,000 
Paid losses   (19,825) (21,500)
End of period reserves  $639,635 $724,825 
Net basis:  
Beginning of period reserves  $311,552 $303,335 
Incurred losses   606  700 
Paid losses   (11,124) (6,575)
End of period reserves  $301,034 $297,460 

The Company’s gross A&E liabilities stem from Mt. McKinley Insurance Company’s (“Mt. McKinley”) direct excess insurance business and Everest Re’s assumed business. At March 31, 2006, the gross reserves for A&E losses were comprised of $132.3 million representing case reserves reported by ceding companies, $160.0 million representing additional case reserves established by the Company on assumed reinsurance claims, $239.4 million representing case reserves established by the Company on direct excess insurance claims including Mt. McKinley and $107.9 million representing incurred but not reported reserves (“IBNR”). Approximately 88% or $561.6 million of gross A&E reserves relate to asbestos of which $306.5 million was for assumed business and $255.1 million was for direct excess business.

The Company’s net A&E liabilities reflect credit for reinsurance from Mt. McKinley as an affiliated reinsurer of Everest Re. Under a series of transactions dating to 1986, Mt. McKinley reinsured several components of Everest Re’s business. In particular, Mt. McKinley provided stop loss protection in connection with the 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 $17.1 million remains available (the “Stop Loss Agreement”). The Stop Loss Agreement and other reinsurance contracts between Mt. McKinley and Everest Re remain in effect following the Company’s acquisition of Mt. McKinley. However, these contracts became transactions with affiliates effective on the date of the Mt. McKinley Insurance Company (“acquisition. Effective September 19, 2000, Mt. McKinley”),McKinley and Bermuda Re entered into a loss portfolio transfer reinsurance agreement, whereby Mt. McKinley transferred, for what management believes to be arm’s length consideration, all of its net reinsurance exposures and reserves to Bermuda Re.

In connection with the acquisition of Mt. McKinley, which has significant exposure to A&E claims, PrudentialLM Property and Casualty Insurance Company (“Prupac”LM”), a subsidiary of The Prudential Insurance Company of America (“The Prudential”), provided reinsurance to Mt. McKinley covering 80% ($160.0 million) of the first $200.0 million of any adverse development of Mt. McKinley’s reserves as of September 19, 2000 and The Prudential Insurance Company of America (“The Prudential”) guaranteed Prupac’sLM’s obligations to Mt. McKinley. In late 2003, Prupac was purchased by LM Property and Casualty Insurance Company (“LM”) and all obligations of Prupac continue to be guaranteed by The Prudential. Cessions under this reinsurance agreement exhausted the limit available under the contract at December 31, 2003.

10

With respect to Mt. McKinley, where the Company has a direct relationship with policyholders, the Company’s aggressive litigation posture and the uncertainties inherent in the asbestos coverage and bankruptcy litigation have provided an opportunity to actively engage in settlement negotiations with a number of those policyholders who have potentially significant asbestos liabilities. Those discussions are oriented towardtowards achieving reasonable negotiated settlements that limit Mt. McKinley’s liability to a given policyholder to a sum certain. In 2004 and 2005 and thus far in 2005,2006, the Company had concluded such settlements or reached agreement in principle with 13 of its high profile policyholders. The Company has currently identified 10 remaining policyholders based on their past claim activity and/or potential future liabilities as “High Profile Policyholders” and its settlement efforts are generally directed at such policyholders, in part because their exposures have developed to the point where both the policyholder and the Company have sufficient information to be motivated to settle. The Company believes that this active approach will ultimately result in a more cost-effective liquidation of Mt. McKinley’s liabilities than a passive approach, although it may also introduce additional variability in Mt. McKinley’s losses and cash flows as reserves are adjusted to reflect the development of negotiations and, ultimately, potentially accelerated settlements.

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

10

EVEREST REINSURANCE HOLDINGS, INC.
NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS (UNAUDITED
(continued)


For the Three and Nine Months ended September 30, 2005 and 2004

available to estimate the reinsurers’ ultimate exposure. At September 30, 2005 the Company had gross asbestos loss reserves of $649.4 million, of which $319.5 million was for assumed business and $329.9 million was for direct business.

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

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

Three Months EndedNine Months Ended
September 30,September 30,
(Dollars in thousands)2005200420052004
Gross basis:          
Beginning of period reserves  $701,756 $829,899 $728,325 $765,257 
Incurred losses   49,550  20,000  67,550  139,300 
Paid losses   (16,224) (31,645) (60,793) (86,303)
End of period reserves  $735,082 $818,254 $735,082 $818,254 
Net basis:  
Beginning of period reserves  $298,131 $303,983 $303,335 $262,990 
Incurred losses   4,779  1,232  10,681  8,394 
Paid losses   16,858  3,556  5,752  37,387 
End of period reserves  $319,768 $308,771 $319,768 $308,771 


At September 30, 2005, the gross reserves for A&E losses were comprised of $132.8 million representing case reserves reported by ceding companies, $141.3 million representing additional case reserves established by the Company on assumed reinsurance claims, $312.7 million representing case reserves established by the Company on direct insurance claims, including Mt. McKinley, and $148.3 million representing incurred but not reported (“IBNR”) reserves.

Mt. McKinley is a reinsurer of Everest Re. Under a series of transactions dating to 1986, Mt. McKinley reinsured several components of Everest Re’s business. In particular, Mt. McKinley provided stop loss 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 $12.2 million remains available (the “Stop Loss Agreement”). The Stop Loss Agreement and other reinsurance contracts between Mt. McKinley and Everest Re remain in effect following the Company’s acquisition of Mt. McKinley. However, these contracts became transactions with affiliates effective on the date of the Mt. McKinley acquisition. Effective September 19, 2000, Mt. McKinley and Bermuda Re entered into a loss portfolio transfer reinsurance agreement, whereby

11

EVEREST REINSURANCE HOLDINGS, INC.
NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS (UNAUDITED
(continued)


For the Three and Nine Months ended September 30, 2005 and 2004

Mt. McKinley transferred, for what management believes to be arm’s-length consideration, all of its net reinsurance exposures and reserves to Bermuda Re.

In 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 September 30, 2005March 31, 2006 was $155.5$153.0 million.

Prior to the Company’sits 1995 initial public offering, the Company 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.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 September 30, 2005March 31, 2006 was $18.4$19.0 million.

11

5. Other Comprehensive Income (Loss) Income

The following table presents the components of other comprehensive income (loss) for the periods indicated:

Three Months EndedNine Months Ended
September 30,September 30,
(Dollars in thousands)2005200420052004
Net unrealized (depreciation)          
    appreciation of investments,  
    net of deferred income taxes  $(6,642)$91,604 $10,619 $(25,500)
Currency translation adjustments,  
    net of deferred income taxes   3,507  4,593  509  268 
Additional minimum pension liability   -  -  (2,153) - 
Other comprehensive (loss) income,  
    net of deferred income taxes  $(3,135)$96,197 $8,975 $(25,232)
Three Months Ended
March 31,
(Dollars in thousands)2006
2005
Net unrealized appreciation (depreciation)      
   of investments, net of deferred income taxes  $3,529 $(66,119)
Currency translation adjustments, net of  
   deferred income taxes   3,271  430 
Additional minimum pension liability   -  (2,153)
Other comprehensive income (loss), net of  
   deferred income taxes  $6,800 $(67,842)

6. Trust Agreements

A subsidiary of the Company, Everest Re, has established a trust agreement as security for assumed losses payable tofor a non-affiliated ceding company, which effectively uses Everest Re’s investments as collateral. At September 30, 2005,March 31, 2006, the total amount on deposit in the trust account was $20.7$21.3 million.

7. 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, Holdingsthe Company completed public

12

EVEREST REINSURANCE HOLDINGS, INC.
NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS (UNAUDITED
(continued)


For the Three and Nine Months ended September 30, 2005 and 2004

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 $7.8 million and $9.7$12.2 million for the three months ended September 30,March 31, 2006 and 2005, and 2004, respectively, and $27.7 million and $29.2 million for the nine months ended September 30, 2005 and 2004, respectively. Market value, which is based on quoted market price at September 30,March 31, 2006 and December 31, 2005, was $248.1$240.9 and $250.9 million, respectively, for the 5.40% senior notes and $227.2$221.3 million and $226.2 million, respectively, for the 8.75% senior 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 Capital Trust II. Holdings can redeem the junior subordinated debt securities before their maturity at 100% of their principal amount plus accrued interest as of the date of redemption, in whole or in part, on one or more occasions at any time on or after March 30, 2009; or at any time, in whole, but not in part, within 90 days of the occurrence and continuation of specific events.

On November 14, 2002, Holdings issued $216.5 million of 7.85% junior subordinated debt securities due November 15, 2032 to Everest Re Capital Trust.Trust (“Capital Trust”). Holdings can redeem the junior subordinated debt securities before their maturity at 100% of their principal amount plus accrued interest as of the date of

12

redemption, in whole or in part, on one or more occasions at any time on or after November 14, 2007; or at any time, in whole, but not in part, within 90 days of the occurrence and continuation of specific events.

Fair value, which is primarily based on quoted market price of the related trust preferred securities at September 30,March 31, 2006 and December 31, 2005, was $308.0$298.5 million and $293.5 million, respectively, for the 6.20% junior subordinated debt securities and $225.3$222.1 million and $220.5 million, respectively, for the 7.85% junior subordinated debt securities.

Interest expense incurred in connection with these junior subordinated notes was $9.4 million for the three months ended September 30, 2005March 31, 2006 and 2004, and $28.1 million and $23.0 million for the nine months ended September 30, 2005 and 2004, respectively.2005.

Capital Trust and Capital Trust II are wholly owned finance subsidiaries of Holdings.the Company.

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

Capital Trust and Capital Trust II will redeem all of the outstanding trust preferred securities when the junior subordinated debt securities are paid at maturity on November 15, 2032 and March 29, 2034, respectively. The Company may elect to redeem the junior subordinated debt securities, in whole or in part, at any time on or after November 14, 2007 and March 30, 2009, respectively. If such an early redemption occurs, the outstanding trust preferred securities would also be proportionately redeemed.

There are certain regulatory and contractual restrictions on the ability of the Company’s operating subsidiaries to transfer funds to the Company in the form of cash dividends, loans or advances. The insurance laws of the State of Delaware, where the Company’s direct insurance subsidiaries are domiciled, require regulatory approval before those subsidiaries can pay dividends or make loans or advances to the Company that exceed certain statutory thresholds. In addition, the terms of the HoldingsHoldings’ Credit Facility (discussed in Note 9)9 below) require Everest Re, the Company’s principal insurance subsidiary, to maintain a certain statutory surplus level as

13

EVEREST REINSURANCE HOLDINGS, INC.
NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS (UNAUDITED
(continued)


For the Three and Nine Months ended September 30, 2005 and 2004

measured at the end of each fiscal year. At December 31, 2004, $1,901.02005, $2,112.0 million of the $2,565.0$2,724.9 million in net assets of the Company’s consolidated subsidiaries were subject to the foregoing regulatory restrictions.

9. Credit Line

Effective October 10, 2003, Holdings entered into a three year, $150.0 million senior revolving credit facility with a syndicate of lenders, replacing the December 21, 1999, three year senior revolving credit facility, which expired on December 19, 2003. Both the October 10, 2003 and December 21, 1999 senior revolving credit agreements, which have similar terms, are referred to as the “Holdings Credit Facility”. Wachovia Bank is the administrative agent for the Holdings Credit Facility. The Holdings Credit Facility is used for liquidity and general corporate purposes. The Holdings Credit Facility provides for the borrowing of up to $150.0 million with interest at a rate selected by Holdings equal to either, (1) the Base Rate (as defined below) or (2) an adjusted London InterBank Offered Rate (“LIBOR”) plus a margin. The Base Rate is the higher of the rate of interest established by Wachovia Bank from time to time as its prime rate or the Federal Funds rate, in each case plus 0.5% per annum. The amount of margin and the fees payable for the Holdings Credit Facility dependdepends upon Holdings’Holdings senior unsecured debt rating.

13

The Holdings Credit Facility requires Holdings to maintain a debt to capital ratio of not greater than 0.35 to 1, andHoldings to maintain a minimum interest coverage ratio of 2.5 to 1 and requires Everest Re to maintain its statutory surplus at $1.0 billion plus 25% of future aggregate net income and 25% of future aggregate capital contributions after December 31, 2002. As of September 30, 2005,March 31, 2006, the Company was in compliance with these covenants.

DuringFor the three and nine months ended September 30,March 31, 2006 and 2005, and 2004, there were no payments made and no incrementaloutstanding borrowings under the Holdings Credit Facility. As of September 30, 2005 and 2004, there were outstanding Holdings Credit Facility borrowings of $0.0 million and $70.0 million, respectively.

Interest expense and fees incurred in connection with the Holdings Credit Facility were $0.1 million and $0.2$0.05 million for the three and nine months ended September 30, 2005, respectively,March 31, 2006 and $0.3 million and $1.0 million for the three and nine months ended September 30, 2004, respectively.2005.

10. Segment Reporting

The Company, through its subsidiaries, operates in four segments: U.S. Reinsurance, U.S. Insurance, Specialty Underwriting and International. The U.S. Reinsurance operation writes property and casualty reinsurance, on both a treaty and facultative basis, through reinsurance brokers, as well as directly with ceding companies within the U.S. The U.S. Insurance operation writes property and casualty insurance primarily through general agent relationships and surplus lines brokers within the U.S. The Specialty Underwriting operation writes accident and health (“A&H”), marine, aviation and surety business within the U.S. and worldwide through brokers and directly with ceding companies. The International operation writes property and casualty

14

EVEREST REINSURANCE HOLDINGS, INC.
NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS (UNAUDITED
(continued)


For the Three and Nine Months ended September 30, 2005 and 2004

reinsurance through Everest Re’s branches in Canada and Singapore, in addition to foreign business written through Everest Re’s Miami and New Jersey offices.

These segments are managed in a carefully coordinated fashion with strong elements of central control including with respect to pricing, risk management, monitoring aggregate exposures to catastrophe events, capital, investments and support operations. As a result, managementManagement generally monitors and evaluates the financial performance of these operating segments based upon their underwriting gain (loss)/underwriting results. Underwriting results include earned premium less losses and loss adjustment expenses (“LAE”) incurred, commission and brokerage expenses and other underwriting expenses. The Company utilizes inter-affiliate reinsurance, but such reinsurance generally does not impact segment results, as business is generally reported within the segmentexpenses and are analyzed using ratios, in particular loss, commission and brokerage and other underwriting expense ratios, which, the business was first produced.respectively, divide incurred losses, commission and brokerage and other underwriting expenses by earned premium.

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

Effective January 1, 2004, Everest Re sold the net assets of its United Kingdom branch to Bermuda Re, a Bermuda insurance company and direct subsidiary of Group, for $77.0 million. In connection with the sale, Everest Re provided Bermuda Re with a reserve indemnity agreement providing for indemnity payments of up to 90% of £25 million in the event December 31, 2002 loss and LAE reserves develop adversely. The impact on the financial statements for the nine months ended September 30, 2004 was a dividend to Group of $26.3 million as net assets sold exceeded the purchase price, an underwriting gain of $10.9 million due to the sale related transactions of the 2003 and 2002 whole account quota shares with Bermuda Re (discussed in Note 12) and an increase in incurred losses and LAE for the nine months ended September 30, 2004 of $36.8 million relating to liability under the reserve indemnity agreement with Bermuda Re. The limit available under this agreement was fully exhausted at December 31, 2004.14

15

EVEREST REINSURANCE HOLDINGS, INC.
NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS (UNAUDITED
(continued)


For the Three and Nine Months ended September 30, 2005 and 2004

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

U.S. Reinsurance

Three Months Ended		Nine Months Ended
September 30,September 30,
(Dollars in thousands)2005200420052004
Gross written premiums  $374,309 $362,129 $1,100,677 $1,048,879 
Net written premiums   283,598  287,779  835,535  823,368 

Premiums earned		  $263,059 $266,611 $855,213 $811,794 
Incurred losses and loss  
  adjustment expenses   499,648  267,820  920,017  649,921 
Commission and brokerage   52,130  60,645  191,633  195,400 
Other underwriting expenses   5,649  4,655  17,713  16,326 
Underwriting loss  $(294,368)$(66,509)$(274,150)$(49,853)

U.S. Insurance

Three Months Ended		Nine Months Ended
September 30,September 30,
(Dollars in thousands)2005200420052004
Gross written premiums  $210,768 $253,245 $755,876 $918,470 
Net written premiums   179,336  167,826  560,563  635,963 

Premiums earned		  $194,828 $192,965 $502,957 $546,624 
Incurred losses and loss  
  adjustment expenses   113,763  128,676  336,369  397,843 
Commission and brokerage   33,106  24,118  79,311  52,098 
Other underwriting expenses   13,575  11,153  37,814  32,467 
Underwriting gain  $34,384 $29,018 $49,463 $64,216 
U.S. Reinsurance
Three Months Ended
March 31,
(Dollars in thousands)2006
2005
Gross written premiums  $394,397 $349,800 
Net written premiums   295,686  268,774 

Premiums earned		  $289,717 $265,299 
Incurred losses and loss adjustment expenses   218,488  191,978 
Commission and brokerage   67,397  57,437 
Other underwriting expenses   4,776  5,713 
Underwriting (loss) gain  $(944) $10,171 

U.S. Insurance
Three Months Ended
March 31,
(Dollars in thousands)2006
2005
Gross written premiums  $218,006 $274,328 
Net written premiums   156,322  199,772 

Premiums earned		  $140,977 $174,239 
Incurred losses and loss adjustment expenses   105,983  124,718 
Commission and brokerage   18,537  22,561 
Other underwriting expenses   10,705  12,629 
Underwriting gain  $5,752 $14,331 

Specialty Underwriting
Three Months Ended
March 31,
(Dollars in thousands)2006
2005
Gross written premiums  $64,026 $102,991 
Net written premiums   48,327  74,566 

Premiums earned		  $51,734 $73,378 
Incurred losses and loss adjustment expenses   57,058  49,854 
Commission and brokerage   14,114  17,765 
Other underwriting expenses   1,305  1,639 
Underwriting (loss) gain  $(20,743) $4,120 

1615

EVEREST REINSURANCE HOLDINGS, INC.
NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS (UNAUDITED
(continued)


For the Three and Nine Months ended September 30, 2005 and 2004

Specialty Underwriting

Three Months Ended		Nine Months Ended
September 30,September 30,
(Dollars in thousands)2005200420052004
Gross written premiums  $51,891 $127,975 $247,868 $352,565 
Net written premiums   35,028  95,431  175,187  273,476 

Premiums earned		  $38,219 $93,070 $178,021 $270,428 
Incurred losses and loss  
  adjustment expenses   49,504  71,574  138,382  177,481 
Commission and brokerage   7,630  26,224  41,124  72,613 
Other underwriting expenses   1,635  1,386  4,990  4,841 
Underwriting (loss) gain  $(20,550)$(6,114)$(6,475)$15,493 

International

Three Months Ended		Nine Months Ended
September 30,September 30,
(Dollars in thousands)2005200420052004
Gross written premiums  $188,296 $204,084 $540,466 $512,337 
Net written premiums   132,078  143,194  382,986  366,283 

Premiums earned		  $121,644 $135,441 $368,890 $349,050 
Incurred losses and loss  
  adjustment expenses   85,635  101,819  217,234  212,103 
Commission and brokerage   29,226  31,805  81,208  74,923 
Other underwriting expenses   3,057  2,530  9,074  8,000 
Underwriting gain (loss)  $3,726 $(713)$61,374 $54,024 

17

EVEREST REINSURANCE HOLDINGS, INC.
NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS (UNAUDITED
(continued)


For the Three and Nine Months ended September 30, 2005 and 2004

International
Three Months Ended
March 31,
(Dollars in thousands)2006
2005
Gross written premiums  $175,522 $152,365 
Net written premiums   125,916  105,528 

Premiums earned		  $121,250 $106,090 
Incurred losses and loss adjustment expenses   83,982  67,579 
Commission and brokerage   24,431  19,387 
Other underwriting expenses   2,678  2,987 
Underwriting gain  $10,159 $16,137 

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

Three Months EndedNine Months Ended
September 30,September 30,Three Months Ended
March 31,
(Dollars in thousands)(Dollars in thousands)2005200420052004(Dollars in thousands)2006
2005
Underwriting (loss) gain $(276,808)$(44,318)$(169,788)$83,880 
UK branch sale and related 
transactions  -  -  -  (25,894)
Underwriting (loss) gain  (276,808) (44,318) (169,788) 57,986   (5,776)  $44,759 
Net investment income  67,585  81,227  242,577  242,381  83,905  85,922 
Net realized capital gains  18,633  9,388  38,321  59,846 
Realized gain 9,020  1,485 
Corporate expense  (1,081) (447) (4,599) (115) (938)  (1,957)
Interest expense  (17,220) (19,439) (55,982) (53,236)
Interest, fee and bond issue cost amortization expense (17,430)  (21,959)
Other expense  (15,240) (30,378) (14,528) (74,313) (13,047)  (3,667)
(Loss) income before taxes $(224,131)$(3,967)$36,001 $232,549 
Income before taxes 55,734 $104,583 

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

11. Investments — Interest Only Strips

The Company from time to time invests in interest only strips of mortgage-backed securities (“interest only strips”) in response to movement in, and levels of, capital market interest rates. These securities give the holder the right to receive interest payments at a stated coupon rate on an underlying pool of mortgages. The interest payments on the outstanding mortgages are guaranteed by entities generally rated AAA. The ultimate cash flow from these investments is primarily dependent upon the average life of the mortgage pool. Generally, as market interest rates and, more specifically, market mortgage rates decline, mortgagees tend to refinance which will decrease the average life of a mortgage pool and decrease expected cash flows. Conversely, as market interest rates and, more specifically, mortgage rates rise, repayments will slow and the ultimate cash flows will tend to rise. Accordingly, the market value of these investments tends to increase as general interest rates rise and decline as general interest rates fall. These movements are generally counter to the impact of interest rate movements on the Company’s other fixed income investments. The market value of the interest only strips was $51.1 million at September 30, 2005 and no such securities were held at September 30, 2004.

The Company accounts for its investment in interest only strips in accordance with Emerging Issues Task Force Issue No. 99-20, “Recognition of Interest Income and Impairment on Purchased and Retained Beneficial Interests in Securitized Financial Assets” (“EITF 99-20”). EITF 99-20 sets forth the rules for recognizing interest income on all credit-sensitive mortgage and asset-backed securities and certain prepayment-sensitive securities, including agency interest

18

EVEREST REINSURANCE HOLDINGS, INC.
NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS (UNAUDITED
(continued)


For the Three and Nine Months ended September 30, 2005 and 2004

only strips, whether purchased or retained in securitization, as well as the rules for determining when these securities must be written down to fair value because of impairment. EITF 99-20 requires decreases in the valuation of residual interests in securitizations to be recorded as a reduction to the carrying value of the residual interests through a charge to earnings, rather than an unrealized loss in stockholders’ equity, when any portion of the decline in fair value is attributable to, as defined by EITF 99-20, an impairment loss. The Company recorded no such realized capital losses due to impairments for the three months ended September 30, 2005 and 2004. The Company recorded pre-tax and after-tax realized capital losses due to impairments of $4.1 million and $2.7 million, respectively, for the nine months ended September 30, 2005 and $43.9 million and $28.5 million, respectively, for the nine months ended September 30, 2004. In response to movements in capital market interest rates, the Company liquidated a portion of an interest only strip portfolio during the third quarter of 2005 and recognized pre-tax and after-tax realized capital gains of $13.0 million and $8.5 million, respectively. As a result of liquidating an interest only strip investment portfolio during the second quarter of 2004, the Company recognized pre-tax and after-tax realized capital gains of $77.6 million and $50.4 million, respectively.

12. Related-Party Transactions

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

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

16

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

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

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

19

EVEREST REINSURANCE HOLDINGS, INC.
NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS (UNAUDITED
(continued)


For the Three and Nine Months ended September 30, 2005 and 2004

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

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

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

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

oEffective 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 cedes 31.5% and 3.5% of its casualty business to Bermuda Re and Everest International, respectively, and Everest Re will cede 18.0% and 2.0% of its property business to Bermuda Re and Everest International, respectively. However, in no event shall the loss cessions to Bermuda Re and Everest International relating to any one occurrence on the property business exceed $125 million (20% of $625 million).

2017

EVEREST REINSURANCE HOLDINGS, INC.
NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS (UNAUDITED
(continued)


For the Three and Nine Months ended September 30, 2005 and 2004

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

Three Months Ended		Nine Months Ended
September 30,September 30,
(Dollars in thousands)2005200420052004
Ceded written premiums  $151,285 $198,859 $530,932 $439,052 
Ceded earned premiums   139,881  198,847  536,654  426,054 
Ceded losses and LAE (a)   248,001  231,680  483,140  414,262 


Everest International

Three Months Ended		Nine Months Ended
September 30,September 30,
(Dollars in thousands)2005200420052004
Ceded written premiums  $14,824 $18,867 $59,275 $38,054 
Ceded earned premiums   12,625  13,120  53,544  23,009 
Ceded losses and LAE   20,862  13,713  44,304  19,358 
Bermuda Re
Three Months Ended
March 31,
(Dollars in thousands)2006
2005
Ceded written premiums  $      175,170 $171,546 
Ceded earned premiums   184,889  172,239 
Ceded losses and LAE (a)   101,110  96,063 

Everest International
Three Months Ended
March 31,
(Dollars in thousands)2006
2005
Ceded written premiums  $         18,786 $23,521 
Ceded earned premiums   19,060  21,528 
Ceded losses and LAE   11,425  11,708 

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

Effective January 1, 2004, Everest Re sold the net assets of its UK branch to Bermuda Re. In connection with the sale, Everest Re provided Bermuda Re with a reserve indemnity agreement allowing for indemnity payments of up to 90% of £25.0 million in the event December 31, 2002 losses and LAE reserves develop adversely. The amount included in incurred losses and LAE for the nine months ended September 30, 2004 was $36.8 million. The limit available under this agreement was fully exhausted at December 31, 2004.

13. Catastrophes

During the third quarter of 2005, there were two large hurricane events, Katrina and Rita, as well as other catastrophe losses, which resulted in significant incurred losses to the Company. For the third quarter of 2005, the incurred pre-tax catastrophe losses, net of reinstatement premiums of $33.7 million, were $432.5 million, of which Hurricane Katrina accounted for $347.7 million. Generally, catastrophe reinsurance provides coverage for one event; however, when limits are exhausted, some contractual arrangements provide for the availability of additional coverage upon the payment of additional premium. This additional premium is referred to as reinstatement premium. With respect to Hurricane Katrina, the unprecedented nature and scale of this hurricane, along with the lack of extensive data from ceding companies, has hampered the loss estimating process. Additionally, pending legal and regulatory issues may impact the amount of ultimate losses from these events. The Company’s loss estimate is based on a combination of

21

EVEREST REINSURANCE HOLDINGS, INC.
NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS (UNAUDITED
(continued)


For the Three and Nine Months ended September 30, 2005 and 2004

modeled information, underwriter analysis, preliminary client discussions and a profile of exposed limits within the affected regions. The Company’s recorded loss for Hurricane Katrina represents its current best estimate for this event, but ultimate losses could differ, perhaps materially. Any adjustments to this estimate in future quarters will result in an impact to incurred losses when such adjustments are made.

14.12. Income Taxes

The company uses a projected annual effective tax rate in accordance with Statement of Financial Accounting Standards No. 109, “Accounting for Income Taxes” (“FAS 109”) to calculate its quarterly tax expense. Under this methodology, when an interim quarter’s pre-tax income (loss) varies significantly from a full year’s income projection, the tax impact resulting from the income (loss) variance is effectively spread between the impacted quarter and the remaining quarters of the year. Accordingly, the tax benefit resulting from the catastrophe losses in the third quarter of 2005 will effectively be spread between the third and fourth quarter of 2005. This may result in a lower than normal effective tax rateyear, except for the fourth quarter of 2005, absent any other variations between projected and actual pre-tax income.discreet items impacting an individual quarter.

During the third quarter 2005, the Internal Revenue Service completed its examination of tax years 2000 through 2002, which years included the Company’s 2000 reorganization as well as several inter-affiliate reinsurance transactions. The finalization of these tax years did not result in any material adjustment to the quarter’s tax provision.18

15. Subsequent Events

oOn October 6, 2005, Group expanded the size of the remaining shelf registration by filing under Rule 462(b) of the Securities Act of 1933, as amended, and General Instruction IV of Form S-3 promulgated thereunder. On the same date, Group entered into an agreement to issue 5,200,000 of its common shares at a price of $91.50 per share, which resulted in $475.8 million in proceeds, before expenses of approximately $0.3 million. This transaction effectively exhausted the December 22, 2003 shelf registration.

oDuring the later part of October 2005, Hurricane Wilma hit the Yucatan Peninsula and Florida. At this point in time, management is not yet able to estimate the impact that this hurricane will have on the Company’s financial results for the fourth quarter, as all of the information essential to the estimating process for this catastrophe loss is not yet available.

22

PartPART I — Item 2.

EVEREST REINSURANCE HOLDINGS, INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONSOPERATION

RESULTS OF OPERATIONS

Industry Conditions

The worldwide reinsurance and insurance businesses are highly competitive, yet cyclical by product and market. Competition with respect toin the types of reinsurance and insurance business in whichthat the Company is engagedunderwrites 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 Company and/or Standard & Poor’s, (“S&P”), underwriting expertise, the jurisdictions where the reinsurer or insurer is licensed or otherwise authorized, capacity and coverages offered, premiums charged, other terms and conditions of the reinsurance and insurance business offered, services offered, speed of claims payment and reputation and experience in lines written. These factors operate at the individual market participant level to varying degrees, as applicable to the specific participant’s circumstances. They also operate in aggregate across the reinsurance industry more generally, contributing, in combination with background economic conditions and variations in the reinsurance buying practices of insurance companies (by participant and in the aggregate), to cyclical movements in reinsurance rates, terms and conditions and ultimately reinsurance industry aggregate financial results.

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

Through 2004 and the first nine monthsReinsurance pricing was generally flat to down during much of 2005, except for specific lines affected by the favorable market conditions, which had developed during the period from 2000 through 2003, generally weakened. Pricing for most property and casualty classes declined modestly. Competition increased modestly2004 Florida hurricane activity, as well, in part due toa result of the relative profitability achieved by many reinsurers over the period from 2002 through 2004,and the attendant buildupbuild-up of capital by these participants and growing pressuresfollowing hard market conditions that had developed from 2001-2004. However, 2005 proved to effectively deploy this capital. However, this profitability and capital buildup varied significantly by market participant, reflectingbe the fact thatworst year in the history of the industry was impacted by significantin terms of insured catastrophe losses – led by Hurricanes Katrina, Rita and Wilma – which negatively impacted the financial results of a significant number of industry participants.

In its January 1, 2006 renewals, the Company observed strong price increases in those property lines and regions that incurred the largest losses in 2005 where reinsurance capacity was, and continues to be, most constrained, specifically for catastrophe covers in the second half of 2004 and generally still remained exposed to fundamental issues that had negatively impacted its aggregate capacity in 2002 and 2003, including weak investment market conditions and adverse loss emergence. All of these factors had tended to depress the industry’s aggregate financial performance and perceptions of financial strength of industry participants over this period, albeit with significant variation by individual market participant. The Company notes that the cumulative market softening to date has not yet offset the market strengthening

23

which occurred over 2001 to 2003 and that the rate of change, even prior to third quarter 2005 catastrophe events, was subject to moderating influence arising from market participants’ refinement of their strategies for capital utilizationsoutheastern U.S. and in particular for avoiding the excessesU.S. property and energy lines. The historic run-up in catastrophe losses also generally led to modest strengthening of past market cycles.

With the catastrophe loss experience of the third quarter of 2005, which included the industry’s single largest loss event ever, Hurricane Katrina, as well as other lesser but still significant catastrophe events, many participantsnon-catastrophe exposed property lines and price stabilization in worldwidemost casualty insurance and reinsurance markets sawmarkets. Notable exceptions are the accident & health (“A&H”) and directors & officers (“D&O”) reinsurance classes and the California workers’ compensation insurance line, which continue to exhibit softening market conditions. While results varied by line and class, the Company generally maintained or enhanced its overall pricing levels on much of the business renewed in the first quarter. As property reinsurance market conditions have tightened, more cedants are raising retention levels and considering revisions to their financial results impacted adversely. Thereinsurance program structure to mitigate the impact of these depressed resultsreinsurance pricing and

19

coverage changes on existing trendstheir underlying insurance business. This dynamic, which occurs by cedant company and in the aggregate, is difficult to predict. Some, includingreflective of a fundamental disequilibrium between reinsurance supply and demand that the Company believe that the scope and scale of industry lossesbelieves will lead to a fairly immediate and significant tightening of industry conditions, which, although most focused on catastrophe business impacted by the third quarter catastrophe events, will likely extend in differing degrees to virtually all worldwide property and casualty classes. This view is based on an assessment that the character and magnitude of the third quarter events will inevitably increase individual company managements’ assessment of both the capital required to support business and the returns appropriate to that capital. This assessment recognizes the likelihood that regulators and rating agencies will tighten capital adequacy criteria raising the expected capitalization level for most industry participants. Others suggest that the existing capital strength of industry participants, in part reflecting favorable financial performanceresolve over the 2002-2004 period, supplemented by capital raising activities since Hurricane Katrina, including by both, existing industry participantsnext several quarters and potential new entrants,perhaps into 2007, likely resulting in a broad, albeit property line oriented market hardening.

With respect to property catastrophe markets in particular, the Company expects that as the U.S. hurricane season approaches, catastrophe pricing will be sufficientfurther strengthen as the result of several factors that will accentuate the supply and demand imbalance. Reinsurers have reassessed their risk management approach and are seeking considerably improved price-to-exposure metrics. Revisions to support the industry’s aggregate exposures without requiring significant price increases or fundamental change incatastrophe loss projection models are indicating significantly higher loss potential and consequently higher pricing requirements. Rating agencies have raised the pricingrequired capital levels for many cat-exposed companies and are scrutinizing those companies with excessive retained catastrophe exposures. In light of industry products.its 2005 catastrophe experience, the Company has reexamined its risk management practices, made modest adjustments and concluded that its risk management framework operated generally as intended.

The Company has generally been disappointed by industry developments in 2005marketplace continues to offer quality, well-priced opportunities for the company given its strong ratings, distribution system, reputation and 2004, which have, at least prior to the catastrophe events in the third quarter of 2005, operated to modestly weaken pricing in most business classes and lines.expertise. The Company notes that it continues to see opportunities for profitable writingsemploy its opportunistic strategy of targeting those segments offering the best profit potential, while maintaining balance and diversification in a variety of classes and lines owing mainly to the general adequacy of underlying pricing. However, the Company also notes that it, like many industry participants, is reexamining its view of price adequacy in light of 2005‘s third quarter catastrophe experience. Such reexamination includes consideration of: the magnitude and character of catastrophe exposures, the level of capital necessary to support its businesses as considered from both the Company and rating agency perspectives and the actual and potential volatility and variability of results, by product, business class and business unit, including with respect to the reliability of underlying statistical and modeling techniques. The Company cannot predict with any reasonable certainty whether and to what extent the trends and conditions noted earlier will persist, nor can it predict the eventual outcome of its own internal deliberations, or in aggregate, the deliberations of industry participants, as respects the issues raised by the third quarter’s catastrophe experience.overall portfolio.

2420

Financial Summary

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

Three Months EndedNine Months Ended
September 30,September 30,
Three Months Ended
March 31,
Percentage
Increase/
(Decrease)
(Dollars in thousands)(Dollars in thousands)2005200420052004(Dollars in thousands)2006
2005
 
Gross written premiums $825,264 $947,433 $2,644,887 $2,832,251   $851,951 $879,484  -3.1%
Net written premiums  630,040  694,230  1,954,271  2,238,841   626,251  648,640  -3.5%

REVENUES:		  
Premiums earned $617,750 $688,087 $1,905,081 $2,096,711  $603,678 $619,006  -2.5%
Net investment income  67,585  81,227  242,577  242,381   83,905  85,922  -2.3%
Net realized capital gains  18,633  9,388  38,321  59,846   9,020  1,485  NM
Other expense  (15,240) (30,378) (14,528) (74,313)  (13,047)  (3,667) NM
Total revenues  688,728  748,324  2,171,451  2,324,625   683,556  702,746  -2.7%
CLAIMS AND EXPENSES:  
Incurred losses and loss adjustment 
expenses  748,550  569,889  1,612,002  1,551,095 
Incurred losses and loss adjustment expenses  465,511  434,129  7.2%
Commission, brokerage, taxes and fees  122,092  142,792  393,276  425,996   124,479  117,150  6.3%
Other underwriting expenses  24,997  20,171  74,190  61,749   20,402  24,925  -18.1%
Interest expense  17,220  19,439  55,982  53,236 
Interest, fee and bond issue cost amortization expense  17,430  21,959  -20.6%
Total claims and expenses  912,859  752,291  2,135,450  2,092,076   627,822  598,163  5.0%
(LOSS) INCOME BEFORE TAXES  (224,131) (3,967) 36,001  232,549 
Income tax (benefit) expense  (50,579) (11,666) 3,715  57,719 
INCOME BEFORE TAXES  55,734  104,583  -46.7%
Income tax expense  12,229  17,670  -30.8%
NET (LOSS) INCOME $(173,552)$7,699 $32,286 $174,830 
NET INCOME $43,505 $86,913  -49.9%
RATIOS: 
Loss ratio  77.1% 70.1%
Commission and brokerage ratio  20.6% 18.9%
Other underwriting expense ratio  3.4% 4.0%
Combined ratio  101.1% 93.0%
As of
March 31, 2006
As of
December 31, 2005
Stockholder's equity $1,844.9 $1,790.7  3.0%
(NM, not meaningful) 

Overall,The Company’s net income for the Company was extremely disappointed with its 2005 thirdfirst quarter results, whichof 2006 decreased 50% compared to the first quarter of 2005. Results were heavilynegatively impacted by incurred lossesincreased catastrophe loss estimates relating to Hurricane2005 Hurricanes Katrina, Rita and Wilma, which were approximately $348$48.8 million pre-tax and $226$31.7 million after-tax, both netincluding the impact of reinstatement premiums. Generally, catastrophe reinsurance provides coverage for one event; however, when limits are exhausted, some contractual arrangements provideThe increased loss estimates for the availability2005 hurricanes reflect the unprecedented magnitude and nature of additional coverage upon the payment of additional premium. This additional premium is referred to as reinstatement premium. With respect to Hurricane Katrina, this was the single largestthese losses and complexities surrounding claim and related settlement activities. These 2005 hurricane catastrophe event ever experienced by the Company, and more broadly, the reinsurance industry. Theseloss impacts from Hurricane Katrina, as well as impacts from other catastrophe losses and the components of incurred losses in general, are discussed later in

21

this summary, which generally addresses significant individual line items in the order of their appearance on the Company’s income statement.consolidated statements of operations and comprehensive income.

UK Branch Sale.Effective January 1, 2004, Everest Re sold its UK branchCatastrophe risk is a fundamental risk element to Bermuda Re (“UK Branch Sale”) and in conjunction with the sale, Everest Re provided a reserve indemnity agreement for adverse development on loss and loss adjustment expenses (“LAE”) reserve

25

balances as of December 31, 2002, as well as made sale related adjustments for the 2003 and 2002 quota share cessions. The non-recurring impact on the results for the nine months ended September 30, 2004 was an increase in net written premiums of $139.8 million and an increase in premiums earned, incurred losses and LAE and underwriting expenses of $118.8 million, $113.7 million and $31.0 million, respectively.

Revenues.    As indicated in the preceding “Industry Conditions” section, the reinsurance and insurance industry generally experienced favorable market conditions from 2001 through 2003, which coupled with the Company’s financial strength, strategic positioning and market and underwriting expertise, enabled the Company to increase its volume of business significantly over this period. With the change in trend established in 2004 and continuing in 2005, the Company adapted its operations to slow its rate of growth and even decrease writings for some classes of business and reemphasize its focus on profitability as opposed to volume. The classes most affected by these actions were workers’ compensation insurance, individual risk underwritten insurance and reinsurance, medical stop loss reinsurance and select U.S. casualty reinsurance classes.

Accordingly, gross written premiums for the three months ended September 30, 2005 were $825.3 million, a decrease of 12.9% compared with $947.4 million for the three months ended September 30, 2004. For the nine months ended September 30, 2005, gross written premiums were $2,644.9 million, a decrease of 6.6% compared with $2,832.3 million for the nine months ended September 30, 2004.

Due to the nature of its businesses, the Company is unable to precisely differentiateexposed and its risk management framework considers such exposures carefully. As a consequence of the 2005 catastrophe experience, the Company has re-examined and adjusted its comprehensive framework of risk assessment, accumulation monitoring and risk mitigation seeking balance between risk versus reward in the effectscontext of price changes as compared to the effects of changes in exposure. Similarly, because individual reinsurance arrangements often reflect revised coverages, structuring, pricing, terms and/or conditions from period to period,changing market conditions. In this context, the Company is unableactively managing its catastrophe exposure by altering the business class mix and character of its catastrophe exposures.

Meanwhile, the Company is extremely well positioned to differentiate between the premium volumes attributablerespond to new business as compared to renewal business. Management believes thatgenerally improving market conditions which were softening prior toin 2006 in the occurrenceaftermath of Hurricane Katrina, generally remained favorableunprecedented catastrophe losses in late 2005. First, the Company’s non-catastrophe operating fundamentals remain very strong. Second, the Company’s capital base is as strong as it has ever been. Third, the Company’s broad, diversified global franchise and notes that it continues to seelow-cost operating platform provide a wide spectrum of business opportunities in a variety of product classes and markets. TheLastly, the discipline with which the Company continuesapproaches its business remains intact, including its risk management control framework, causing it to look opportunistically at improving market conditions while providing its underwriters with the flexibility to decline business that does not meet its objectives regarding underwriting profitability.

Revenues.     Gross written premiums for the three months ended March 31, 2006 were $852.0 million, a decrease of 3.1% compared with $879.5 million for the three months ended March 31, 2005. This decrease reflects a 21% decline in insurance premiums, partially offset by a 5% increase in the Company’s reinsurance premiums.

Net written premiums, comprised of gross written premiums less ceded premiums, were $630.0$626.3 million for the three months ended September 30, 2005,March 31, 2006, a decrease of 9.2%3.5% compared with $694.2$648.6 million for the three months ended September 30, 2004. ForMarch 31, 2005. These reflect premiums ceded of $225.7 million (26.5% of gross written premiums) and $230.8 million (26.2% of gross written premiums) for the ninethree months ended September 30,March 31, 2006 and 2005, net written premiums were $1,954.3 million, a decrease of 12.7% compared with $2,238.8 million for the nine months ended September 30, 2004.respectively. The majority of cessions in both periods continue to relatethe ceded premiums related to the quota share reinsurance contract between Everest Re and Everest Reinsurance (Bermuda), Ltd. (“Bermuda ReRe”) and Everest International Reinsurance, Ltd. (“Everest International”). In addition, the 2004 net written premiums included $139.8 million due to the UK Branch Sale.

Premiums earned were $617.8$603.7 million for the three months ended September 30, 2005,March 31, 2006, a decrease of 10.2%2.5% compared with $688.1$619.0 million for the three months ended September 30, 2004. ForMarch 31, 2005, comparable with the nine months ended September 30, 2005, premiums earned were $1,905.1 million, a decrease of 9.1% compared with $2,096.7 million for the nine months ended September 30, 2004. Included in the premium’s earned for the three and nine months ended September 30, 2005 were $33.7 million and $38.9 million, respectively, of reinstatement premiums of which $30.0 million was due to Hurricane Katrina. There were no such reinstatement premiums for the

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three and nine months ended September 30, 2004. Overall premium fluctuations reflect period to period changesdecline in net written premiums and business mix together with normal variability in earning patterns. Business mix changes occur not only as the Company shifts emphasis between products, lines of business, distribution channels and markets, but also as individual contracts renew or non-renew, almost always with changes in coverage, structure, prices and/or terms, and as new contracts are accepted with coverages, structures, prices and/or terms different from those of expiring contracts. Changes in estimates related to the reporting patterns of ceding companies also affect premiums earned. In addition, the 2004 premiums earned included $118.8 million due to the UK Branch Sale.premiums.

Net investment income was $67.6$83.9 million for the three months ended September 30, 2005,March 31, 2006, a decrease of 16.8%2.3% compared with $81.2$85.9 million for the three months ended September 30, 2004. For the nine months ended September 30, 2005, net investment income was $242.6 million, an increase of 0.1% compared with $242.4 million for the nine months ended September 30, 2004. Period to period changesMarch 31, 2005. The decline in investment income are impacted by changesis attributable to a modest decline in the leveloverall investment yield, driven by a larger portfolio of new investments allocated to equity securities and mix of invested assets, prevailing interest rates and thelimited partnership investments. Equity securities tend to have a lower current yield than fixed maturities. The results from equity investments in limited partnerships which tend to fluctuate, quarter by quarter.decreasing $2.9 million, period over period.

Premiums are generally collected over the first 12 to 15 months of the Company’s reinsurance and insurance contracts, while related losses are typically paid out over numerous years. This tends to generate cash flow from operations and this positive cash flow coupled with the increase in investable assets generates investment income. The Company’s cash flow from operations was $175.6Net realized capital gains were $9.0 million for the three months ended September 30, 2005, a decrease of 24.5% compared with $232.5 million for the three months ended September 30, 2004. For the nine months ended September 30, 2005, the company’s cash flowMarch 31, 2006, resulting from operations was $483.2 million, a decrease of 37.2% compared with $769.7 million for the nine months ended September 30, 2004. Cash flow from operations for the nine months ended September 30, 2005 in comparison with the nine months ended September 30, 2004 was impacted by the 2004 UK Branch Sale.

Net realized capital gains were $18.6 million and $38.3 million for the three and nine months ended September 30, 2005, respectively, reflectingnormal portfolio management activities, in response to interest rate and credit market movements, compared to net realized capital gains of $9.4 million and $59.8 million for the three and nine months ended September 30, 2004, respectively. The realized capital gains for the three and nine months ended September 30, 2004 were primarily the result of an early liquidation of a $20.0 million investment trust portfolio and gains on the sale of the Company’s interest only strips of mortgaged-backed securities (“interest only strips”) investment portfolio in the second quarter of 2004.

Expenses.    Incurred losses and loss adjustment expenses (“LAE”) were $748.6$1.5 million for the three months ended September 30, 2005, an increaseMarch 31, 2005. The realized gains for the three months ended March 31, 2006 were primarily the result of 31.4% compared with $569.9$4.8 million from the sale of equity securities and $4.2 million from the sale of fixed maturities.

Other expenses increased primarily as a result of unfavorable fluctuations in currency exchange rates and to a lesser extent, the impact from additional cessions under a loss portfolio contract between Mt. McKinley Insurance Company (“Mt. McKinley”) and Bermuda Re.

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Expenses.     Incurred losses and LAE were $465.5 million for the three months ended September 30, 2004.March 31, 2006, an increase of 7.2% compared with $434.1 million for the three months ended March 31, 2005. This increase in incurred losses and LAE was primarily the result of $311.8increases in prior period catastrophe reserve development, which increased $40.5 million, period over period. The catastrophe reserve development resulted in an 8.3 and 1.5 point increase in catastrophe losses in the third quarter of 2005 compared withloss and combined ratios for the third quarter of 2004. Partially offsetting these increases was a reversal with respect to prior year reserve development. Excluding the impact of catastrophes on prior year reserve development, favorable reserve development was $55.4 million more in the third quarter of 2005 than the third quarter 2004, reflecting a movement from favorable development of $14.6 million to favorable development of $70.0 million. For the ninethree months ended September 30,March 31, 2006 and 2005, incurred losses and LAE were $1,612.0 million, an increase of 3.9% compared with $1,551.1 million for the nine months ended September 30, 2004. The $60.9 million increase in

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incurred losses and LAE for the nine months ended September 30, 2005 was principally related to catastrophe losses which increased $345.2 million comparing the nine months ended of 2005 with 2004.respectively. The major contributing factor to the increased catastrophe development was the third quarter 2005 property catastrophe events, particularly hurricanesdue to Hurricanes Katrina, Rita Emily and DennisWilma, totaling $431.9$46.4 million. In addition, there was $4.9 million floods in Indiaof less unfavorable non-catastrophe, non-asbestos and Calgary totaling $12.0 million and storms in Ontario totaling $4.2 million. Partially offsetting this increase was a decrease in unfavorable netenvironmental (“A&E”) prior period reserve adjustments, excluding the impact of catastrophe development, which reversed to a favorable prior period reserve adjustment of $63.4 million from an unfavorable net prior period reserve adjustment of $33.1 million for the nine months ended September 30, 2005 as compared to the nine months ended September 30, 2004.over period. Other contributing factors impacting the level of incurred losses and LAE related to changes in volume as measured by earned premium;premium and changes in rates and terms, as well as the effect of changes in prior period loss reserve estimates, also contributed.terms.

Commission, brokerage and tax expense were $122.1$124.5 million and $142.8$117.2 million for the three months ended September 30,March 31, 2006 and 2005, respectively, with the increase largely due to changes in the Company’s business mix and 2004, respectively,a reduction in the ceding commission override on the quota share contract with Bermuda Re and $393.3 millionEverest International.

Income Before Taxes, Taxes and $426.0Net Income.Income before taxes of $55.7 million for the ninethree months ended September 30, 2005 and 2004, respectively. The decreaseMarch 31, 2006 decreased 50% when compared to $104.6 million for the ninethree months ended September 30, 2005 compared to September 30, 2004 was primarilyMarch 31, 2005. This decrease generally reflected the result of a $31.0 million increase due to the UK Branch Sale included in the nine months ended 2004. Other factors impacting the change in commission, brokerage and tax expense were changes, in premium volume, including changes in volume through the various distribution channels, and changes in the mix of business.period over period, mentioned above.

Taxes and Net Income (Loss).The Company’s income tax (benefit) expense for the three months ended March 31, 2006 of $12.2 million equates to an effective tax rate of 21.9% applied to its pre-tax income of $55.7 million. The effective tax rate is primarily a function of the U.S. statutory tax rates andcoupled with the impact from tax preferencedtax-preferenced investment income. The Company generatedlower effective tax rate for the three months ended March 31, 2005 of 16.9% reflects the favorable impact of a deferred tax adjustment.

Net income tax benefits of $50.6 million and $11.7$43.5 million for the three months ended September 30, 2005 and 2004, respectively, in each case reflecting significant catastrophe losses in these quarters. Income tax expense of $3.7 million and $57.7 million for the nine months ended September 30, 2005 and 2004, respectively, reflected the expected effective tax rate derived from blended full year results. The decrease in tax expense in 2005 primarily reflected the increase in incurred losses and LAE, in part driven by greater catastrophe losses, coupled with a decrease in premiums earned. Additionally, in conjunction with the transfer of the Company’s UK Branch to Bermuda Re, there were various tax items which gave rise to incremental net tax expenses in 2004.

The net loss of $173.6 millionMarch 31, 2006 decreased when compared to net income of $7.7$86.9 million for the three months ended September 30,March 31, 2005, and 2004, respectively, and net incomeprimarily reflecting the impact of $32.3 million compared to $174.8 million for the nine months ended September 30, 2005 and 2004, respectively, generally reflected theunfavorable catastrophe loss driven increase in incurred losses and LAE together with the decrease in premiums earned and realized capital gains, partially offset by a decrease in income taxes.development.

The Company’s stockholders’stockholder’s equity increased to $1,789.9$1,844.9 million at September 30, 2005as of March 31, 2006 from $1,743.8$1,790.7 million atas of December 31, 2004.2005. The increase was primarily due to net income for the period together with an increase of unrealized appreciation on the Company’s investment portfolio.period.

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Segment Information

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

These segments are managed in a carefully coordinated fashion with strong elements of central control including with respect to pricing, risk management, monitoring aggregate exposures to catastrophic events, capital, investments and support operations. As a result, managementManagement generally monitors and evaluates the financial performance of these operating segments based upon their underwriting gain (loss) or underwriting results. Underwriting results include earned premium less losses and LAE incurred, commission and brokerage expenses and other underwriting expenses and are analyzed

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using ratios, in particular loss, commission and brokerage and other underwriting expense ratios, which, respectively, divide incurred losses, commissionscommission and brokerage and other underwriting expenses by earned premium. The Company utilizes inter-affiliate reinsurance but such reinsurance generally does not impact segment results, as business is generally reported within the segment in which the business was first produced.

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

U.S. Reinsurance

Three Months Ended		Nine Months Ended
September 30,September 30,
(Dollars in thousands)2005200420052004
Gross written premiums  $374,309 $362,129 $1,100,677 $1,048,879 
Net written premiums   283,598  287,779  835,535  823,368 

Premiums earned		  $263,059 $266,611 $855,213 $811,794 
Incurred losses and loss  
  adjustment expenses   499,648  267,820  920,017  649,921 
Commission and brokerage   52,130  60,645  191,633  195,400 
Other underwriting expenses   5,649  4,655  17,713  16,326 
Underwriting loss  $(294,368)$(66,509)$(274,150)$(49,853)
U.S. Reinsurance
Three Months Ended
March 31,
(Dollars in thousands)2006
2005
Gross written premiums  $394,397 $349,800 
Net written premiums   295,686  268,774 

Premiums earned		  $289,717 $265,299 
Incurred losses and loss adjustment expenses   218,488  191,978 
Commission and brokerage   67,397  57,437 
Other underwriting expenses   4,776  5,713 
Underwriting (loss) gain  $(944) $10,171 

U.S. Insurance
Three Months Ended
March 31,
(Dollars in thousands)2006
2005
Gross written premiums  $218,006 $274,328 
Net written premiums   156,322  199,772 

Premiums earned		  $140,977 $174,239 
Incurred losses and loss adjustment expenses   105,983  124,718 
Commission and brokerage   18,537  22,561 
Other underwriting expenses   10,705  12,629 
Underwriting gain  $5,752 $14,331 

Specialty Underwriting
Three Months Ended
March 31,
(Dollars in thousands)2006
2005
Gross written premiums  $64,026 $102,991 
Net written premiums   48,327  74,566 

Premiums earned		  $51,734 $73,378 
Incurred losses and loss adjustment expenses   57,058  49,854 
Commission and brokerage   14,114  17,765 
Other underwriting expenses   1,305  1,639 
Underwriting (loss) gain  $(20,743) $4,120 

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U.S. Insurance

Three Months Ended		Nine Months Ended
September 30,September 30,
(Dollars in thousands)2005200420052004
Gross written premiums  $210,768 $253,245 $755,876 $918,470 
Net written premiums   179,336  167,826  560,563  635,963 

Premiums earned		  $194,828 $192,965 $502,957 $546,624 
Incurred losses and loss  
  adjustment expenses   113,763  128,676  336,369  397,843 
Commission and brokerage   33,106  24,118  79,311  52,098 
Other underwriting expenses   13,575  11,153  37,814  32,467 
Underwriting gain  $34,384 $29,018 $49,463 $64,216 


Specialty Underwriting

Three Months Ended		Nine Months Ended
September 30,September 30,
(Dollars in thousands)2005200420052004
Gross written premiums  $51,891 $127,975 $247,868 $352,565 
Net written premiums   35,028  95,431  175,187  273,476 

Premiums earned		  $38,219 $93,070 $178,021 $270,428 
Incurred losses and loss  
  adjustment expenses   49,504  71,574  138,382  177,481 
Commission and brokerage   7,630  26,224  41,124  72,613 
Other underwriting expenses   1,635  1,386  4,990  4,841 
Underwriting (loss) gain  $(20,550)$(6,114)$(6,475)$15,493 


International

Three Months Ended		Nine Months Ended
September 30,September 30,
(Dollars in thousands)2005200420052004
Gross written premiums  $188,296 $204,084 $540,466 $512,337 
Net written premiums   132,078  143,194  382,986  366,283 

Premiums earned		  $121,644 $135,441 $368,890 $349,050 
Incurred losses and loss  
  adjustment expenses   85,635  101,819  217,234  212,103 
Commission and brokerage   29,226  31,805  81,208  74,923 
Other underwriting expenses   3,057  2,530  9,074  8,000 
Underwriting gain (loss)  $3,726 $(713)$61,374 $54,024 

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International
Three Months Ended
March 31,
(Dollars in thousands)2006
2005
Gross written premiums  $175,522 $152,365 
Net written premiums   125,916  105,528 

Premiums earned		  $121,250 $106,090 
Incurred losses and loss adjustment expenses   83,982  67,579 
Commission and brokerage   24,431  19,387 
Other underwriting expenses   2,678  2,987 
Underwriting gain  $10,159 $16,137 

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

Three Months EndedNine Months Ended
September 30,September 30,
(Dollars in thousands)2005200420052004
Underwriting (loss) gain  $(276,808)$(44,318)$(169,788)$83,880 
UK branch sale and related  
  transactions   -  -  -  (25,894)
Underwriting (loss) gain   (276,808) (44,318) (169,788) 57,986 
Net investment income   67,585  81,227  242,577  242,381 
Net realized capital gains   18,633  9,388  38,321  59,846 
Corporate expense   (1,081) (447) (4,599) (115)
Interest expense   (17,220) (19,439) (55,982) (53,236)
Other expense   (15,240) (30,378) (14,528) (74,313)
(Loss) income before taxes  $(224,131)$(3,967)$36,001 $232,549 
Three Months Ended
March 31,
(Dollars in thousands)2006
2005
Underwriting (loss) gain  $(5,776) $44,759 
Net investment income   83,905  85,922 
Realized gain   9,020  1,485 
Corporate expenses   (938)  (1,957)
Interest, fee and bond issue cost amortization expense   (17,430)  (21,959)
Other expense   (13,047)  (3,667)
Income before taxes  $55,734 $104,583 

Three Months Ended September 30, 2005March 31, 2006 compared to Three Months Ended September 30, 2004March 31, 2005

As noted earlier, the principal driver of the quarter’s disappointing results was incurred losses related to Hurricane Katrina and other catastrophe events, which are discussed under the heading “Expenses” in the Financial Summary Section.

Premiums.    Premiums Written.Gross written premiums decreased 12.9%3.1% to $825.3$852.0 million forin the three months ended September 30, 2005March 31, 2006 from $947.4$879.5 million forin the three months ended September 30, 2004, reflecting continued impact of competitive pressures on pricing coupled with the Company maintainingMarch 31, 2005. The decrease in gross written premiums was due to a disciplined underwriting approach. Premium decline areas included a 59.5%37.8% ($76.139.0 million) decrease in the Specialty Underwriting operation, resulting primarily resulting from a $55.9$33.5 million decrease in A&H business, as pricing for this business continues to be difficult, and a $24.1$6.2 million decrease in suretymarine and aviation business, partially offset by a $3.9$0.7 million increase in marine and aviationsurety business. The U.S. Insurance operation decreased 16.8%20.5% ($42.556.3 million), principally as a result of a $35.5 million decreasemainly reflecting continued retrenchment in our California workers’ compensation business, primarily resulting from the 2004 termination of the American All-Risk Insurance Services, Inc. contract, and a $6.9 million decrease in program business outside of the workers’ compensation class.credit business. The International operation decreased 7.7%increased 15.2% ($15.823.2 million), primarily due to a $31.7$17.2 million decreaseincrease in international business written through the Miami and New Jersey offices, representing primarily Latin American business, partially offset by a $15.5$3.6 million increase in Canadian business and a $3.0 million increase in Asian business. The U.S. Reinsurance operation increased 3.4%12.7% ($12.244.6 million), principally reflecting a $71.7$52.1 million increase in treaty property business and $2.0 million increase in facultative business, partially offset by a $49.4$9.9 million decrease in treaty casualty business and a $9.6 million decrease in facultative business.

Ceded premiums decreased to $195.2$225.7 million for the three months ended September 30, 2005March 31, 2006 from $253.2$230.8 million for the three months ended September 30, 2004.March 31, 2005. Ceded premiums relate primarily relate to cessions under thequota share reinsurance agreements between Everest Re and, Bermuda Re and Everest International quota share agreements.International.

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Net written premiums decreased by 9.2%3.5% to $630.0$626.3 million for the three months ended September 30, 200531, 2006 from $694.2$648.6 million for the three months ended September 30, 2004,March 31, 2005, reflecting the $27.5 million decrease in gross written premiums partially offset bycombined with the $15.1 million decrease in ceded premiums.

Premium Revenues.Net premiums earned decreased by 10.2%2.5% to $617.8$603.7 million for the three months ended September 30, 2005March 31, 2006 from $688.1$619.0 million for the three months ended September 30, 2004.March 31, 2005. Contributing to this decrease was a 58.9%29.5% ($54.921.6 million) decrease in the Specialty Underwriting operation, a 10.2%19.1% ($13.833.3 million) decrease in the U.S. Insurance operation, partially offset by a 14.3% ($15.2 million) increase in the International operation and a 1.3%9.2% ($3.6 million) decrease in the U.S. Reinsurance operation, partially offset by a 1.0% ($1.924.4 million) increase in the U.S. InsuranceReinsurance operation. Included in net premiums earned for the three months ended March 31, 2006, was a reduction of $1.0 million of reinstatement premiums. All of these changes reflect period to period changes in net written premiums and business mix, together with normal variability in earningearnings patterns. Business mix changes occur not only as the Company shifts emphasis between products, lines of business, distribution channels and markets, but also as individual contracts renew or non-renew, almost always with changes in coverage, structure, prices and/or terms, and as new contracts are accepted with coverages, structures, prices and/or terms different from those of expiring contracts. As premium reporting, earnings, loss and commission characteristics derive from the provisions of individual contracts, the continuous turnover of individual contracts, arising from both strategic shifts and day to day underwriting, can and does introduce appreciable background variability in various underwriting line items. Changes in estimates related to the reporting patterns of ceding companies also affect premiums earned.

Expenses.Expenses
Incurred Losses and LAE.Incurred losses and LAE increased by 31.4%7.2% to $748.6$465.5 million for the three months ended September 30, 2005March 31, 2006 from $569.9$434.1 million for the three months ended September 30, 2004.March 31, 2005. The increase in incurred losses and LAE was principally attributable to thea $40.5 million increase in estimated losses due to property catastrophes mainly driven by Hurricane Katrina with incurred losses of $377.7 million, but also reflecting incurred losses related to hurricanes Rita ($37.5 million), Emily ($11.5 million) and Dennis ($5.3 million), floods in India ($9.4 million) and Calgary ($2.6 million) and storms in Ontario ($4.2 million). The 2005 results also reflect unfavorable development on 2004 catastrophes of $19.5 million. Additionally, Hurricane Katrina estimates are subject to considerable uncertainty due to the timing, complexity and unusual nature of the underlying ceding company exposures. These estimates reflect management’s best judgment based on all available information, but ultimate losses could differ, perhaps materially. This increase in incurred losses and LAE also reflects variability in premiums earned and changes in the loss expectation assumptions for business written, as well as the net prior period reserve development andestimated catastrophe losses, discussed above. Incurred losses and LAE were also impacted by changes in the pricing of the underlying business, as well as variability relating to changes in the mix of business by class and type.

The Company’s loss and LAE reserves reflect estimates of ultimate claim liability. Such estimates are re-evaluated on an ongoing basis, including re-estimates of prior period reserves, taking into consideration all available information and, in particular, newly reported loss and claim experience. The effect of such re-evaluations impacts incurred losses for the currentover period. The Company notes that its analytical methods and processes operate at multiple levels, including individual contracts, groupings of like contracts, classes and lines of business, internal business units, segments, legal entities, and in the aggregate. The complexities of the Company’s business and operations require analyses and adjustments, both qualitative and quantitative, at these various levels. Additionally, the attribution of reserves, changes in reserves and incurred losses between accident year and underwriting year requires adjustments and allocations, both

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qualitative and quantitative, at these various levels. All of these processes, methods and practices appropriately balance actuarial science, business expertise and management judgment in a manner intended to assure the accuracy, precision and consistency of the Company’s reserving practices, which are fundamental to the Company’s operation. The Company notes, however, that the underlying reserves remain estimates, which are subject to variation, and that the relative degree of variability is generally least when reserves are considered in the aggregate and generally increases as the focus shifts to more granular data levels.

Incurred losses and LAE for the three months ended September 30, 2005March 31, 2006 reflected ceded losses and LAE of $303.7$131.3 million compared to ceded losses and LAE for the three months ended September 30, 2004March 31, 2005 of $272.0$145.5 million. Ceded losses and LAE for the three months ended September 30, 2005 included $230.6 million ofThe decrease in ceded losses relating towas primarily the quota share reinsurance transactions between Everest Re and Bermuda Re and Everest International as compared withresult of fluctuation in losses ceded losses of $182.6 million forunder the three months ended September 30, 2004.

The following table shows the net catastrophe losses for each of the Company’s operating segments for the three months ended September 30, 2005 and 2004:

(Dollars in thousands)Segment Net Catastrophe Losses     
Segment  2005 2004 
U.S. Reinsurance  $395.0 $116.6 
U.S. Insurance   -  - 
Specialty Underwriting   43.4  8.4 
International   27.8  29.4 
    Total  $466.2 $154.4 

Incurred losses and LAE include catastrophe losses, which include the impact of both current period events and favorable and unfavorable development on prior period events and are net of reinsurance. Individual catastrophe losses are reported net of specific reinsurance but before recoveries under corporate level reinsurance. The Company defines a catastrophe as a property event with expected reported losses of at least $5.0 million before corporate level reinsurance and taxes. Effective for the third quarter of 2005, industrial risk losses have been excluded from catastrophe losses with prior periods adjusted for comparison purposes. Catastrophe losses, net of contract specific cessions, were $466.2 million for the three months ended September 30, 2005, related principally to aggregate estimated losses mainly drivencoverages purchased by Hurricane Katrina with catastrophe losses of $377.7 million, but also reflected catastrophe losses related to hurricanes Rita ($37.5 million), Emily ($11.5 million) and Dennis ($5.3 million), floods in India ($9.4 million) and Calgary ($2.6 million) and storms in Ontario ($4.2 million). The 2005 results also reflect unfavorable development on 2004 catastrophes of $19.5 million. Additionally, Hurricane Katrina estimates are subject to considerable uncertainty due to the timing, complexity and unusual nature of the underlying ceding company exposures. These estimates reflect management’s best judgment based on all available information, but ultimate losses could differ, perhaps materially. Catastrophe losses, net of contract specific cessions, were $154.4 million in the three months ended September 30, 2004, principally due to $186.8 million of estimated aggregate losses from hurricanes Charley, Frances, Ivan and Jeanne and Pacific typhoon activity, partially offset by a $30.6 million reserve reduction related to the World Trade Center events.

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The following table shows net prior period reserve adjustments for each of the Company’s operating segments for the three months ended September 30, 2005 and 2004:

(Dollars in thousands)Segment Net Prior Period Reserve Adjustments      
Segment  2005 2004 
U.S. Reinsurance  $0.1 $(51.8)
U.S. Insurance   (25.6) 3.1 
Specialty Underwriting   (22.3) 2.8 
International   (4.2) (1.0)
    Total  $(52.0)$(46.9)

Net favorable prior period reserve adjustments for the three months ended September 30, 2005 were $52.0 million compared to net favorable prior period reserve adjustments of $46.9 million for the three months ended September 30, 2004. For the three months ended September 30, 2005, the net favorable reserve adjustments included net favorable reserve adjustments for non-asbestos and environmental (“A&E”), non-catastrophe of $74.9 million, partially offset by net unfavorable catastrophe development of $18.1 million and net unfavorable A&E adjustments of $4.8 million. The favorable reserve adjustments for the three months ended September 30, 2004 included net favorable catastrophe adjustments of $32.3 million and non-A&E, non-catastrophe adjustments of $15.8 million, partially offset by net unfavorable development on A&E reserve adjustments of $1.2 million. It is important to note that non-A&E accident year reserve development arises from the re-evaluation of accident year results and that such re-evaluations may also impact premiums and commissions attributed by accident year, generally mitigating, in part, the impact of loss development, and that such impacts are recorded as part of the overall reserve evaluation process.

The U.S. Reinsurance segment accounted for $0.1 million of net unfavorable prior period reserve adjustments for the three months ended September 30, 2005, and net favorable prior period reserve adjustments of $51.8 million for the three months ended September 30, 2004. A&E accounted for $4.8 million and $1.2 million of net unfavorable reserve adjustments for the three months ended September 30, 2005 and 2004, respectively. Catastrophe losses accounted for $13.2 million of unfavorable net prior period reserve adjustments and $34.5 million of favorable net prior period reserve adjustments for the three months ended September 30, 2005 and 2004, respectively. Other non-A&E, non-catastrophe net favorable prior period reserve adjustments were $17.9 million and $18.5 million for the three months ended September 30, 2005 and 2004, respectively.

The U.S. Insurance segment reflected $25.6 million of net favorable prior period reserve adjustments for the three months ended September 30, 2005 and $3.1 million of net unfavorable prior period reserve adjustments for the three months ended September 30, 2004. These prior period reserve adjustments were principally due to liability classes relating to accident years 2000 through 2004.

The Specialty Underwriting segment had $22.3 million of net favorable prior period reserve adjustments for the three months ended September 30, 2005 and $2.8 million of net unfavorable prior period reserve adjustments for the three months ended September 30, 2004. The September 30, 2005 net favorable prior period reserve adjustments related principally to $26.3 million favorable non-A&E, non-catastrophe reserve adjustments primarily related to marine, aviation

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and surety business classes, partially offset by unfavorable catastrophe development of $4.0 million related to the marine business. The September 30, 2004 net unfavorable prior period reserve adjustment related principally to $3.2 million unfavorable catastrophe development.

The International segment had $4.2 million and $1.0 million of net favorable prior period adjustments for the three months ended September 30, 2005 and 2004, respectively. The September 30, 2005 net favorable prior period reserve adjustments related primarily to favorable non-A&E, non-catastrophe reserve development on the Canadian and Asian business of $5.0 million, partially offset by unfavorable property catastrophe loss development. The September 30, 2004 favorable development was related to catastrophe losses on International and Asian business.

The segment components of the increase in incurred losses and LAE for the three months ended September 30, 2005 over the three months ended September 30, 2004 were a 86.6% ($231.8 million) increase in the U.S. Reinsurance operation, partially offset by a 30.8% ($22.1 million) decrease in the Specialty Underwriting operation, a 15.9% ($16.2 million) decrease in the International operation and an 11.6% ($14.9 million) decrease in the U.S. Insurance operation. These changes reflect variability in premiums earned and changes in the loss expectation assumptions for business written, as well as the net prior period reserve development and catastrophe losses discussed above. Incurred losses and LAE for each operation were also impacted by changes in the pricing of the underlying business, as well as variability relating to changes in the mix of business by class and type.

The Company’s loss ratio, which is calculated by dividing incurred losses and LAE by net premiums earned, increased by 38.47.0 percentage points to 121.2%77.1% for the three months ended September 30, 2005March 31, 2006 from 82.8%70.1% for the three months ended September 30, 2004, which reflectedMarch 31, 2005, reflecting the impact of the changes in premiums earned and incurred losses and LAE discussed above, as well as changes in the underlying business mix and aggregate rates, terms and conditions.

The following table shows the loss ratios for each of the Company’s operating segments for the three months ended September 30, 2005March 31, 2006 and 2004.2005. The loss ratios for all operations were impacted by the factors noted above.

Segment Loss RatiosSegment Loss RatiosSegment Loss Ratios
SegmentSegment2005 2004Segment
2006
2005
U.S. Reinsurance  189.9%  100.5%    75.4% 72.4%
U.S. Insurance  58.4%  66.7%  75.2% 71.6%
Specialty Underwriting  129.5%  76.9%   110.3% 67.9%
International  70.4%  75.2%  69.3% 63.7%

The segment components of the increase in incurred losses and LAE for the three months ended March 31, 2006 from the three months ended March 31, 2005 were a 24.3% ($16.4 million) increase in the International operation, a 14.5% ($7.2 million) increase in the Specialty Underwriting operation, a 13.8% ($26.5 million) increase in the U.S. Reinsurance operation, partially offset by a 15.0% ($18.7 million) decrease in the U.S. Insurance operation.

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These changes reflect variability in premiums earned and changes in the loss expectation assumptions for business written, as well as the net prior period reserve development and catastrophe losses discussed below. Incurred losses and LAE for each operation were also impacted by changes in the pricing of the underlying business, as well as variability relating to changes in the mix of business by class and type.

The following table shows the net catastrophe losses for each of the Company’s operating segments for the three months ended March 31, 2006 and 2005:

(Dollars in thousands)
Segment Net Catastrophe Incurred Losses
Segment
2006
2005
U.S. Reinsurance  $15.5 $1.0 
U.S. Insurance   0.3  - 
Specialty Underwriting   23.3  1.6 
International   10.8  6.8 
   Total  $49.9 $9.4 

Incurred losses and LAE include catastrophe losses, which include the impact of both current period events and favorable and unfavorable development on prior period events and are net of reinsurance. The Company defines a catastrophe as a property event with expected reported losses of at least $5.0 million before corporate level reinsurance and taxes. Effective for the third quarter 2005, industrial risk losses were excluded from catastrophe losses with prior periods adjusted for comparison purposes. Catastrophe losses, net of contract specific cessions, were $49.9 million for the three months ended March 31, 2006, relating principally to aggregate estimated losses mainly driven by the 2005 Hurricanes Katrina ($11.9 million), Rita ($2.8 million) and Wilma ($31.7 million) and other catastrophe unfavorable development of $3.5 million. Estimates are subject to considerable uncertainly due to the timing, complexity and nature of the underlying ceded company exposures. These estimates reflect management’s best judgment based on all available information, but ultimate losses could differ, perhaps materially. Catastrophe losses, net of contract specific cessions, were $ 9.4 million for the three months ended March 31, 2005, relating principally to aggregate estimated additional losses of $12.8 million from the 2004 catastrophe events, which were partially offset by $3.4 million of net reserve takedowns related to pre-2004 catastrophes.

The following table shows net prior period reserve adjustments for each of the Company’s operating segments for the three months ended March 31, 2006 and 2005:

(Dollars in thousands)
Segment Net Prior Period Reserve Adjustments
Segment
2006
2005
U.S. Reinsurance  $41.9 $14.4 
U.S. Insurance   (21.2)  (3.6)
Specialty Underwriting   19.8  1.7 
International   14.1  6.6 
   Total  $54.6 $19.1 

Net unfavorable prior period reserve adjustments for the three months ended March 31, 2006 were $54.6 million compared to $19.1 million for the three months ended March 31, 2005. For the three months ended March 31, 2006, the net unfavorable reserve adjustments included net unfavorable catastrophe development of $49.9 million, net unfavorable non-A&E, non-catastrophe adjustments of $4.1 million and net unfavorable A&E adjustments of

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$0.6 million. The reserve adjustments for the three months ended March 31, 2005 included net unfavorable catastrophe development of $9.4 million, non-A&E, non-catastrophe net unfavorable adjustments of $9.0 million and net unfavorable A&E adjustments of $0.7 million.

The U.S. Reinsurance segment accounted for $41.9 million of net unfavorable prior period reserve adjustments for the three months ended March 31, 2006, which included $25.8 million of net unfavorable non-A&E, non-catastrophe prior period reserve adjustments mainly relating to the facultative and treaty casualty business. For the three months ended March 31, 2005, net unfavorable prior period reserve adjustments were $14.4 million, which included net unfavorable catastrophe development of $9.4 million, net unfavorable non-A&E, non-catastrophe development of $4.3 million and net unfavorable A&E development of $0.7 million.

The U.S. Insurance segment reflected $21.2 million and $3.6 million of net favorable prior period reserve adjustments for the three months ended March 31, 2006 and 2005, respectively. These favorable prior period reserve adjustments related principally to the California workers’ compensation business for the 2004 accident year due to the results of benefit reform.

The Specialty Underwriting segment had $19.8 million and $1.7 million of net unfavorable prior period reserve adjustments for the three months ended March 31, 2006 and 2005, respectively. The March 31, 2006 net unfavorable prior period reserve adjustments related principally to catastrophe loss development on the marine class of business.

The International segment had $14.1 million and $6.6 million net unfavorable prior period reserve adjustments for the three months ended March 31, 2006 and 2005, respectively. The March 31, 2006 net unfavorable prior period reserve development related primarily to catastrophe development on the Canadian and International business.

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

Underwriting Expenses. The Company’s expense ratio, which is calculated by dividing underwriting expenses by net premiums earned, was 23.8%24.0% for the three months ended September 30, 2005March 31, 2006 compared to 23.7%22.9% for the three months ended September 30, 2004.March 31, 2005.

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The following table shows the expense ratios for each of the Company’s operating segments for the three months ended September 30, 2005March 31, 2006 and 2004.2005.

Segment Expense RatiosSegment Expense RatiosSegment Expense Ratios
SegmentSegment2005 2004Segment
2006
2005
U.S. Reinsurance  22.0%  24.4%    24.9% 23.8%
U.S. Insurance  24.0%  18.3%  20.7% 20.2%
Specialty Underwriting  24.3%  29.7%   29.8% 26.5%
International  26.5%  25.3%  22.3% 21.1%

Segment underwriting expenses decreasedincreased by 10.2%2.7% to $146.0$143.9 million forin the thee months ended March 31, 2006 from $140.1 million in the three months ended September 30, 2005 from $162.5 million for the three months ended September 30, 2004.March 31, 2005. Commission, brokerage, taxes and fees decreasedincreased by $20.7$7.3 million, principally reflecting decreases in premium volume and changes in the mix and distribution channel of business. Segment other underwriting expenses increaseddecreased by $4.2$3.5 million, as the Company continuedprimarily due to expand operations to support its business.a decrease in other fees and assesments. Contributing to the segment underwriting expense decreasesincreases were a 66.4%21.2% ($18.34.7 million) decreaseincrease in the Specialty UnderwritingInternational operation, an 11.5%a 14.3% ($7.59.0 million) decreaseincrease in the U.S. Reinsurance operation, andpartially offset by a 6.0%20.5% ($2.14.0 million) decrease in the International

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Specialty Underwriting operation partially offset byand a 32.4%16.9% ($11.46.0 million) increasedecrease in the U.S. Insurance operation. The changes for each operation’s expenses principally resulted from changes in commission expenses related to changes in premium volume and business mix by class and type and, in some cases, changes in the use of specific reinsurance, as well as the underwriting performance of the underlying business.

The Company’s combined ratio, which is the sum of the loss and expense ratios, increased by 38.58.1 percentage points to 145.0% for101.1% in the three months ended September 30, 2005March 31, 2006 compared to 106.5% for93.0% in the three months ended September 30, 2004.March 31, 2005, primarily due to the increase resulting from development on the catastrophe losses and increased expenses due to the change in business mix.

The following table shows the combined ratios for each of the Company’s operating segments for the three months ended September 30, 2005March 31, 2006 and 2004.2005. The combined ratios for all operations were impacted by the loss and expense ratio variability noted above.

Segment Combined RatiosSegment Combined RatiosSegment Combined Ratios
SegmentSegment2005 2004Segment
2006
2005
U.S. Reinsurance  211.9%  124.9%    100.3% 96.2%
U.S. Insurance  82.4%  85.0%  95.9% 91.8%
Specialty Underwriting  153.8%  106.6%   140.1% 94.4%
International  96.9%  100.5%  91.6% 84.8%

Investment Results.Net investment income decreased 16.8%2.3% to $67.6$83.9 million for the three months ended September 30, 2005March 31, 2006 from $81.2$85.9 million for the three months ended September 30, 2004, despite an increase in invested assets from $7.1 billion at September 30, 2004 to $7.8 billion at September 30,March 31, 2005, principally reflecting variabilityattributable a modest decline in the overall investment income fromyield, driven by a larger portion of new investments allocated to equity investments insecurities and limited partnerships, whichpartnership investments. Equity securities tend to have a lower current yield than fixed maturities and limited partnership tend to fluctuate quarter by quarter. Investment (loss) income for these limited partnerships for the three months ended September 30, 2005 and 2004 was $8.2 million loss and $6.4 million income, respectively.period over period.

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

 
 2005 2004
Imbedded pre-tax yield of cash and invested assets at
   September 30, 2005 and 2004		   4.4%  4.5% 
Imbedded after-tax yield of cash and invested assets at
   September 30, 2005 and 2004		   3.6%  3.7%
Annualized pre-tax yield on average cash and invested
   assets for the three months ended September 30, 2005 and 2004		   3.7%  4.9% 
Annualized after-tax yield on average cash and invested
   assets for the three months ended September 30, 2005 and 2004		   3.1%  3.9%
2006
2005
Imbedded pre-tax yield of cash and invested assets at      
   March 31 and December 31   4.5% 4.5%
Imbedded after-tax yield of cash and invested assets at  
   March 31 and December 31   3.7% 3.6%
Annualized pre-tax yield on average cash and invested  
   assets for the three months ended March 31   4.4% 4.8%
Annualized after-tax yield on average cash and invested  
   assets for the three months ended March 31   3.6% 3.8%

Net realized capital gains of $18.6were $9.0 million for the three months ended September 30, 2005March 31, 2006, which reflected realized capital gains of $4.8 million on the Company’s investmentssale of $19.5equity securities and $4.2 million resulting principally from $13.0 million of gains on the partial sale of the interest only strip portfolio and $6.5 million gain on equity sales, partially offset by $0.9 million of realized capital losses.fixed maturities. Net realized capital gains of $9.4were $1.5 million for the three months ended September 30, 2004March 31, 2005, which reflected realized capital gains on the Company’s investments of $10.2$5.0 million, resulting primarily from the early liquidation of an investment portfolio trust, partially offset by $0.9 million of realized capital losses.losses of $3.5 million, all from fixed maturities.

Corporate, Non-allocated Expenses.Other expense for the three months ended September 30,March 31, 2006 and 2005 and 2004 were $15.2was $13.0 million and $30.4$3.7 million, respectively. The change in other incomeexpense for the three months ended September 30, 2005March 31, 2006 as compared to the three months ended September 30, 2004March 31, 2005 was primarily due to a decrease in deferred gains onincreased deferrals of recoverables under a retroactive reinsurance agreement with a non-consolidating affiliate.an affiliate as well as increased foreign exchange loss.

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Corporate underwriting expenses not allocated to segments were $1.1decreased to $1.0 million for the three months ended September 30, 2005 compared to $0.4March 31, 2006 from $2.0 million for the three months ended September 30, 2004.March 31, 2005.

Interest, expensefees and feesbond issue cost amortization expense for the three months ended September 30,March 31, 2006 and 2005 and 2004 were $17.2$17.4 million and $19.4$22.0 million, respectively. Interest, expensefees and feesbond issue cost amortization expense for the three months ended September 30, 2005March 31, 2006 included $7.8 million related to the senior notes, $9.3 million related to the junior subordinated debt securities and $0.1 million related to the Company’s revolving credit facility. Interest expense and fees for the three months ended September 30, 2004 included $9.7 million related to the senior notes, $9.4 million related to the junior subordinated debt securities, $0.2 million related to the bond issue cost amortization and $0.05 million related to the credit line under the Company’s revolving credit facilities. Interest, fees and bond issue cost amortization expense for the three months ended March 31, 2005 included $12.2 million related to the senior notes, $9.4 million related to the junior subordinated debt securities, $0.3 million to the bond issue cost amortization and $0.05 million related to borrowings under the Company’s revolving credit facility.facilities. Interest expense on senior notes decreased due to $7.8 million for the three months ended September 30,retirement on March 15, 2005 from $9.7 million forof the three months ended September 30, 2004 as the 5.4%8.5% senior notes issued on October 12, 2004 effectively replaced the 8.5% senior notes due March 15, 2005, which were retired.14, 2000.

Income Taxes.The Company’s income tax expense is primarily a function of its statutory tax rate, the level of its pre-tax income and the impact from tax preferenced investment income. The Company recognized an income tax benefitexpense of $50.6$12.2 million for the three months ended September 30, 2005March 31, 2006 compared to an income tax benefit of $11.7$17.7 million for the three months ended September 30, 2004. The increase in tax benefit reflected the increase in incurred losses related to catastrophes resulting, ultimately, in a substantial pre-tax loss for the period.

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Net (Loss) Income.Net loss was $173.6 million for the three months ended September 30, 2005 compared to net income of $7.7 million for the three months ended September 30, 2004, with the change primarily reflecting an increase in incurred losses, partially offset by related tax benefits.

Nine Months Ended September 30, 2005 compared to Nine Months Ended September 30, 2004

As noted earlier, the principal driver of the disappointing year to date results was incurred losses related to Hurricane Katrina and other third quarter 2005 catastrophe events, which are discussed under the heading “Expenses”.

Premiums.     Gross written premiums decreased 6.6% to $2,644.9 million for the nine months ended September 30, 2005 from $2,832.3 million for the nine months ended September 30, 2004, reflecting increased competitive pressures on pricing. Premium decline areas included a 29.7% ($104.7 million) decrease in the Specialty Underwriting operation, resulting primarily from a $106.0 million decrease in A&H business and a $21.0 million decrease in surety business, partially offset by a $22.2 million increase in marine and aviation business. The U.S. Insurance operation decreased 17.7% ($162.6 million), principally as a result of a $223.9 million decrease in workers’ compensation business, primarily resulting from the 2004 termination of the American All-Risk Insurance Services, Inc. contract, partially offset by a $61.4 million increase in program business outside of the workers’ compensation class. The International operation increased 5.5% ($28.1 million), primarily due to a $70.3 million increase in Asian business, partially offset by a $23.6 million decrease in international business written through the Miami and New Jersey offices, representing primarily Latin American business. The U.S. Reinsurance operation increased 4.9% ($51.8 million), principally reflecting a $161.2 million increase in treaty property business, partially offset by a $79.9 million decrease in treaty casualty business and a $24.7 million decrease in facultative business.

Ceded premiums increased to $690.6 million for the nine months ended September 30, 2005 from $593.4 million for the nine months ended September 30, 2004. The increase in ceded premiums was primarily related to a reduction in ceded premiums of $139.8 million in 2004 due to the UK Branch Sale coupled with an increase in cessions under the Bermuda Re and Everest International quota share agreements.

Net written premiums decreased by 12.7% to $1,954.3 million for the nine months ended September 30, 2005 from $2,238.8 million for the nine months ended September 30, 2004, reflecting the decrease in gross written premiums combined with the increase in ceded premiums.

Premium Revenues.Net premiums earned decreased by 9.1% to $1,905.1 million for the nine months ended September 30, 2005 from $2,096.7 million for the nine months ended September 30, 2004. In 2004, net premiums earned included a $118.8 million positive impact from the UK Branch Sale. Also contributing to this decrease were a 34.2% ($92.4 million) decrease in the Specialty Underwriting operation and an 8.0% ($43.7 million) decrease in the U.S. Insurance operation, partially offset by a 5.7% ($19.8 million) increase in the International operation and a 5.3% ($43.4 million) increase in the U.S. Reinsurance operation. All of these changes reflect period to period changes in net written premiums and business mix, together with normal variability in earnings patterns. Business mix changes occur not only as the Company shifts emphasis between products, lines of business, distribution channels and markets, but also as individual contracts renew or non-renew, almost always with changes in coverage, structure,

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prices and/or terms, and as new contracts are accepted with coverages, structures, prices and/or terms different from those of expiring contracts. As premium reporting, earnings, loss and commission characteristics derive from the provisions of individual contracts, the continuous turnover of individual contracts, arising from both strategic shifts and day to day underwriting, can and does introduce appreciable background variability in various underwriting line items. Changes in estimates related to the reporting patterns of ceding companies also affect premiums earned.

Expenses.    Incurred losses and LAE increased by 3.9% to $1,612.0 million for the nine months ended September 30, 2005 from $1,551.1 million for the nine months ended September 30, 2004. The increase in incurred losses and LAE was principally related to catastrophe losses and changes in the Company’s mix of business, partially offset by the decrease in reserve adjustments for prior period losses and a $113.7 million increase included in 2004 related to the UK Branch sale. These changes reflect variability in premiums earned and changes in the loss expectation assumptions for business written, as well as the net prior period reserve development and catastrophe losses discussed below. Incurred losses and LAE were also impacted by changes in the pricing of the underlying business, as well as variability relating to changes in the mix of business by class and type.

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

Incurred losses and LAE for the nine months ended September 30, 2005 reflected ceded losses and LAE of $622.9 million compared to ceded losses and LAE for the nine months ended September 30, 2004 of $537.7 million. Ceded losses and LAE relating to the quota share reinsurance transactions with affiliates were $481.6 million and $287.7 million for the nine months ended September 30, 2005 and 2004, respectively. Ceded losses and LAE in 2004 reflected a $76.9 million reduction due to the UK Branch Sale.

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The following table shows the net catastrophe losses for each of the Company’s operating segments for the nine months ended September 30, 2005 and 2004:

(Dollars in thousands)Segment Net Catastrophe Losses     
Segment  2005 2004 
U.S. Reinsurance  $413.4 $116.5 
U.S. Insurance   -  - 
Specialty Underwriting   49.9  9.2 
International   37.3  29.7 
    Total  $500.6 $155.4 

Incurred losses and LAE include catastrophe losses, which include the impact of both current period events and favorable and unfavorable development on prior period events and are net of reinsurance. Individual catastrophe losses are reported net of specific reinsurance, but before recoveries under corporate level reinsurance. The Company defines a catastrophe as a property event with expected reported losses of at least $5.0 million before corporate level reinsurance and taxes. Effective for the third quarter of 2005, industrial risk losses have been excluded from catastrophe losses with prior periods adjusted for comparison purposes. Catastrophe losses, net of contract specific cessions, were $500.6 million for the nine months ended September 30, 2005, related principally to aggregate estimated losses mainly driven by Hurricane Katrina with catastrophe losses of $377.7 million, but also reflected catastrophe losses related to hurricanes Rita ($37.5 million), Emily ($11.5 million) and Dennis ($5.3 million) and floods in India ($9.4 million) and Calgary ($2.6 million) and storms in Ontario ($4.2 million). The 2005 results also reflect unfavorable development on 2004 catastrophes of $56.2 million. Additionally, Hurricane Katrina estimates are subject to considerable uncertainty due to the timing, complexity and unusual nature of the underlying ceding company exposures. These estimates reflect management’s best judgment based on all available information, but ultimate losses could differ, perhaps materially. Catastrophe losses, net of contract specific cessions, were $155.4 million in the nine months ended September 30, 2004, related principally to aggregate estimated losses of $186.8 million from hurricanes Charley ($53.6 million), Frances ($48.4 million), Ivan ($44.3 million) and Jeanne ($36.8 million) and Pacific typhoons ($3.8 million), which were partially offset by $30.2 million of reserve reductions related to the World Trade Center events.

The following table shows net prior period reserve adjustments for each of the Company’s operating segments for the nine months ended September 30, 2005 and 2004:

(Dollars in thousands)Segment Net Prior Period Reserve Adjustments      
Segment  2005 2004 
U.S. Reinsurance  $42.6 $(14.0)
U.S. Insurance   (23.1) 21.2 
Specialty Underwriting   (15.0) (4.9)
International   (15.4) (0.6)
    Total  $(10.9)$1.7 

Net favorable prior period reserve adjustments, which include catastrophe development, for the nine months ended September 30, 2005 were $10.9 million compared to net unfavorable prior period reserve adjustments of $1.7 million for the nine months ended September 30, 2004. For

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the nine months ended September 30, 2005, the net favorable reserve adjustments included net favorable non-A&E, non-catastrophe prior period reserve adjustments of $74.1 million, partially offset by net unfavorable catastrophe development of $52.5 million and net unfavorable A&E adjustments of $10.7 million. The net unfavorable reserve adjustments for the nine months ended September 30, 2004 included net unfavorable non-A&E, non-catastrophe adjustments of $24.7 million and net unfavorable A&E adjustments of $8.4 million, partially offset by net favorable catastrophe development of $31.4 million, which included a $30.2 million reduction in reserves for the World Trade Center events. It is important to note that non-A&E accident year reserve development arises from the re-evaluation of accident year results and that such re-evaluations may also impact premiums and commissions attributed by accident year, generally mitigating, in part, the impact of loss development, and that such impacts are recorded as part of the overall reserve evaluation process.

The U.S. Reinsurance segment accounted for $42.6 million of net unfavorable prior period reserve adjustments for the nine months ended September 30, 2005, which included $31.7 million of net unfavorable catastrophe development, $10.7 million of net unfavorable A&E adjustments and $0.2 million of net unfavorable non-A&E, non-catastrophe prior period reserve adjustments. Net favorable prior period reserve adjustments of $14.0 million for the nine months ended September 30, 2004 included $34.7 million of net favorable catastrophe development, partially offset by $12.3 million of net unfavorable non-A&E, non-catastrophe reserve adjustments and $8.4 million of net unfavorable A&E reserve adjustments.

The U.S. Insurance segment reflected $23.1 million of net favorable prior period reserve adjustments for the nine months ended September 30, 2005 and $21.2 million of net unfavorable prior period reserve adjustments for the nine months ended September 30, 2004. These prior period reserve adjustments were principally due to casualty classes related to accident years 2000 through 2003.

The Specialty Underwriting segment had $15.0 million and $4.9 million of net favorable prior period reserve adjustments for the nine months ended September 30, 2005 and, 2004. Non-A&E, non-catastrophe development accounted for $25.6 million and $8.8 million favorable net prior period reserve adjustments for the nine months ended September 30, 2005 and 2004, respectively, principally on the marine, aviation and surety classes of business in 2005 and the marine, aviation and A&H classes of business in 2004. Catastrophe development accounted for $10.6 million and $3.9 million of net unfavorable prior period reserve adjustments for the nine months ended September 30, 2005 and 2004, respectively, and was primarily on the marine and aviation classes of business.

The International segment had $15.4 million and $0.6 million of net favorable prior period reserve adjustments for the nine months ended September 30, 2005 and 2004, respectively. The September 30, 2005 net favorable prior period reserve adjustments related primarily to favorable non-asbestos, non-catastrophe reserve development of $25.6 million, primarily on property business classes, partially offset by $10.2 million of property catastrophe loss development.

The Company’s loss ratio, which is calculated by dividing incurred losses and LAE by net premiums earned, increased by 10.6 percentage points to 84.6% for the nine months ended September 30, 2005 from 74.0% for the nine months ended September 30, 2004, reflecting the impact of the changes in premiums earned and incurred losses and LAE discussed above, the impact of the UK Branch Sale in 2004, as well as changes in the underlying business mix and aggregate rates, terms and conditions.

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The following table shows the loss ratios for each of the Company’s operating segments for the nine months ended September 30, 2005 and 2004. The loss ratios for all operations were impacted by the factors noted above.

Segment Loss Ratios
Segment2005 2004
U.S. Reinsurance   107.6%  80.1% 
U.S. Insurance   66.9%  72.8%
Specialty Underwriting   77.7%  65.6% 
International   58.9%  60.8%

The segment components of the increase in incurred losses and LAE for the nine months ended September 30, 2005 over the nine months ended September 30, 2004 were a 41.6% ($270.1 million) increase in the U.S. Reinsurance operation and a 2.4% ($5.1 million) increase in the International operation, partially offset by a 22.0% ($39.1 million) decrease in the Specialty Underwriting operation, and a 15.5% ($61.5 million) decrease in the U.S. Insurance operation. These changes reflect variability in premiums earned and changes in the loss expectation assumptions for business written, as well as the net prior period reserve development and catastrophe losses discussed above. Incurred losses and LAE for each operation were also impacted by changes in the pricing of the underlying business, as well as variability relating to changes in the mix of business by class and type, which in general reflected a more favorable mix.

The Company’s expense ratio, which is calculated by dividing underwriting expenses by net premiums earned, was 24.5% for the nine months ended September 30, 2005 compared to 23.2% for the nine months ended September 30, 2004.

The following table shows the expense ratios for each of the Company’s operating segments for the nine months ended September 30, 2005 and 2004.

Segment Expense Ratios
Segment2005 2004
U.S. Reinsurance   24.5%  26.0% 
U.S. Insurance   23.3%  15.5%
Specialty Underwriting   25.9%  28.7% 
International   24.5%  23.7%

Segment underwriting expenses increased by 1.4% to $462.9 million in the nine months ended September 30, 2005 from $456.7 million in the nine months ended September 30, 2004. Commission, brokerage, taxes and fees decreased by $1.8 million, principally reflecting decreases in premium volume and changes in the mix and distribution channel of business, partially offset by an increase in premium based taxes. Segment other underwriting expenses increased by $8.0 million, as the Company continued to expand operations to support its business activity. Contributing to the segment underwriting expense increases were a 38.5% ($32.6 million) increase in the U.S. Insurance operation and an 8.9% ($7.4 million) increase in the International operation, which were partially offset by a 40.5% ($31.3 million) decrease in the Specialty Underwriting operation and a 1.1% ($2.4 million) decrease in the U.S. Reinsurance operation. The changes for each operation’s expenses principally resulted from changes in commission expenses related to changes in premium volume and business mix by class and type

42

and, in some cases, changes in the use of specific reinsurance, as well as the underwriting performance of the underlying business.

The Company’s combined ratio, which is the sum of the loss and expense ratios, increased by 12.0 percentage points to 109.2% for the nine months ended September 30, 2005 compared to 97.2% for the nine months ended September 30, 2004.

The following table shows the combined ratios for each of the Company’s operating segments for the nine months ended September 30, 2005 and 2004. The combined ratios for all operations were impacted by the loss and expense ratio variability noted above.

Segment Combined Ratios
Segment2005 2004
U.S. Reinsurance   132.1%  106.1% 
U.S. Insurance   90.2%  88.3%
Specialty Underwriting   103.6%  94.3% 
International   83.4%  84.5%

Investment Results.Net investment income increased 0.1% to $242.6 million for the nine months ended September 30, 2005 from $242.4 million for the nine months ended September 30, 2004, principally reflecting a $0.7 billion year over year increase in invested assets, coupled with variability from equity investments in limited partnerships, which tend to fluctuate period to period. Investment income for these limited partnerships for the nine months ended September 30, 2005 and 2004 was $9.5 million and $32.5 million, respectively.

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

 
 2005 2004
Imbedded pre-tax yield of cash and invested assets at
   September 30, 2005 and December 31, 2004		   4.4%  4.5% 
Imbedded after-tax yield of cash and invested assets at
   September 30, 2005 and December 31, 2004		   3.6%  3.6%
Annualized pre-tax yield on average cash and invested
   assets for the nine months ended September 30, 2005 and 2004		   4.5%  5.0% 
Annualized after-tax yield on average cash and invested
   assets for the nine months ended September 30, 2005 and 2004		   3.6%  3.9%

Net realized capital gains were $38.3 million for the nine months ended September 30, 2005, which reflected realized capital gains on the Company’s investments of $48.1 million, resulting primarily from transactions to realign the investment portfolio in response to the interest and credit market conditions, coupled with gains from the partial sale of the Company’s interest only strip portfolio, partially offset by $9.8 million of realized capital losses, which included $4.1 million related to write-downs in the value of interest only strips deemed to be impaired on an other than temporary basis in accordance with EITF 99-20. Net realized capital gains were $59.8 million for the nine months ended September 30, 2004, which reflected realized capital gains on the Company’s investments of $105.4 million, which included $77.6 million on the sale of interest only strip investments, partially offset by $45.5 million of realized capital losses, which included $43.9 million related to the write-downs in the value of interest only strips deemed to be

43

impaired on an other than temporary basis in accordance with EITF 99-20, prior to liquidation of the interest only strip portfolio during the second quarter of 2004.

Other expense for the nine months ended September 30, 2005 and 2004 was $14.5 million and $74.3 million, respectively. The change in other expense for the nine months ended September 30, 2005 was primarily due to a decrease in deferred gains on a retroactive reinsurance agreement with an unconsolidated affiliate.

Corporate underwriting expenses not allocated to segments were $4.6 million for the nine months ended September 30, 2005 as compared to $0.1 million for the nine months ended September 30, 2004.

Interest expense and fees for the nine months ended September 30, 2005 and 2004 were $56.0 million and $53.2 million, respectively. Interest expense and fees for the nine months ended September 30, 2005 included $27.7 million related to the senior notes, $28.1 million related to the junior subordinated debt securities and $0.2 million related to the credit line under the Company’s revolving credit facility. Interest expense and fees for the nine months ended September 30, 2004 included $29.2 million related to the senior notes, $23.0 million related to the junior subordinated debt securities and $1.0 million related to borrowings under the Company’s revolving credit facility. The change in interest expense on the senior notes to $27.7 million for the nine months ended September 30, 2005 from $29.2 million for the nine months ended September 30, 2004 was due to the issuance of new senior notes on October 12, 2004, partially offset by the retirement of the senior notes due March 15,31, 2005.

Income Taxes.The Company’s income tax expense is primarily a function of its statutory tax rate, the level of its pre-tax income and the impact from tax preferenced investment income. The Company recognized an income tax expense of $3.7 million for the nine months ended September 30, 2005 compared to $57.7 million for the nine months ended September 30, 2004. The decrease in taxes generally reflects the decrease in the Company’s pre-tax income due to the significant increase in incurred losses related to catastrophes. Additionally, in conjunction with the transfer of the UK branch to Bermuda Re, there were various tax items which gave rise to incremental net tax expense in 2004.

Net Income.Net income was $32.3$43.5 million for the ninethree months ended September 30, 2005March 31, 2006 compared to net income of $174.8$86.9 million for the ninethree months ended September 30, 2004, with the change primarily reflecting an increase in catastrophe losses, partially offset by continued strong non-catastrophe operating results and tax benefits.March 31, 2005.

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

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

44

equity securities which it believes will enhance the risk-adjusted total return of the investment portfolio. Such investments account for 61.2% of the Company’s stockholders’ equity at September 30, 2005 as compared to 37.3% at December 31, 2004.

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

The Company’s $7.8$8.0 billion investment portfolio at September 30, 2005March 31, 2006, is principally comprised of fixed maturity securities, which are subject to interest rate risk and foreign currency rate risk, and equity securities, which are subject to equity price risk. The impact of the foreign exchangethese risks on the investment portfolio is generally mitigated by changes in the value of operating assets and liabilities and their associated income statement impact.

Interest rate risk is the potential change in value of the fixed maturity portfolio, including short-term investments, due to change in market interest rates. In a declining interest rate environment, it includes prepayment risk on the $542.3

30

$500.9 million of mortgage-backed securities in the $6,017.8$6,158.3 million fixed maturity portfolio. Prepayment risk results from potential accelerated principal payments that shorten the average life and thus the expected yield of the security.

The table below displays the potential impact of market value fluctuations and after-tax unrealized appreciation on the Company’s fixed maturity portfolio (including $391.3 million of short-term investments) as of September 30, 2005March 31, 2006 based on parallel and immediate 200 basis point shifts in interest rates up and down in 100 basis point increments. For legal entities with a U.S. dollar functional currency, this modeling was performed on each security individually. To generate appropriate price estimates on mortgage-backed securities, changes in prepayment expectations under different interest rate environments were taken into account. For legal entities with a non-U.S. dollar functional currency, the effective duration of the involved portfolio of securities was used as a proxy for the market value change under the various interest rate change scenarios. All amounts are in U.S. dollars and are presented in millions.

As of September 30, 2005
Interest Rate Shift in Basis Points
As of March 31, 2006
Interest Rate Shift in Basis Points
As of March 31, 2006
Interest Rate Shift in Basis Points
-200 -100 0 100 200 -200 -100 0 100 200
Total Market Value  $7,064.1 $6,746.1 $6,416.3 $6,043.6 $5,661.8   $7,209.3 $6,886.9 $6,549.6 $6,176.1 $5,793.1 
Market Value Change from Base (%)  10.1% 5.1% 0.0% -5.8% -11.8%  10.1% 5.2% 0.0% -5.7% -11.6%
Change in Unrealized Appreciation  
After-tax from Base ($) $421.0 $241.3$- $(242.3)$(490.4) $428.9 $219.3 $- $(242.8) $(491.7) 

The Company had $7,628.2$7,747.8 million and $6,846.9$7,729.2 million of reserves for lossesloss and LAE as of September 30, 2005March 31, 2006 and December 31, 2004.2005, respectively. These amounts are recorded at their nominal or estimated ultimate payment amount, as opposed to fair value, which would reflect a discount adjustment to reflect the time value of money. Since losses are paid out over a period of time, the fair value of the reserves is less than the nominal value. As interest rates rise, the fair value of the reserves decreases and, conversely, if interest rates decline, the fair value will increase. These movements are the opposite of the interest rate impacts on the fair value of investments

45

since reserves are future obligations. While the difference between fair value and nominal value is not reflected in the Company’s financial statements, the Company’s financial results will include investment income over time from the investment portfolio until the claims are paid. The Company’s loss and loss reserve obligations have an expected duration that is reasonably consistent with the Company’s fixed income portfolio. The existence of such obligations, and the variable differential between ultimate and fair value, which in theory applies equally to invested assets and insurance liability, provides substantial mitigation of the economic effects of interest rate variability even though such mitigation is not reflected in the Company’s financial statements.

Equity risk is the potential change in market value of the common stock and preferred stock portfolios arising from changing equity prices. The Company’s equity investmentsinvestment are mainly exchange traded and mutual funds, which invest principally in high quality common and preferred stocks that are traded on the major exchanges in the U.S. The primary objective in managing the equity portfolio is to provide long-term capital growth through market appreciation and income.

31

The table below displays the impact on market value and after-tax unrealized appreciation of a 20% change in equity prices up and down in 10% increments for the period indicated. The growth in exposure is primarily due to the growth in the equity portfolio. All amounts are in U.S. dollars and are presented in millions.

As of September 30, 2005
Change in Equity Values in Percent
 -20% -10% 0% 10% 20%
Market Value of the Equity Portfolio  $876.9 $986.6 $1,096.2 $1,205.8 $1,315.4 
After-tax Change in Unrealized
     Appreciation		  $(142.5)$(71.3)$- $71.3 $142.5 
As of March 31, 2006
Change in Equity Values in Percent
-20%
-10%
0%
10%
20%
Market Value of the Equity Portfolio  $881.4$991.6$1,101.7$1,211.9$1,322.1
After-tax Change in Unrealized  
   Appreciation  $(143.2)$(71.6)$- $71.6$143.2

Foreign currency rate risk is the potential change in value, income and cash flow arising from adverse changes in foreign currency exchange rates. Each of the Company’s non-U.S. (“foreign”) operations maintains capital in the currency of the country of its geographic location consistent with local regulatory guidelines. Generally, the Company prefers to maintain the capital of its operations in U.S. dollar assets, although this varies by regulatory jurisdiction in accordance with market needs. Each foreign operation may conduct business in its local currency, as well as the currency of other countries in which it operates. The primary foreign currency exposures for these foreign operations are the Canadian Dollar, the British Pound Sterling and the Euro. The Company mitigates foreign exchange exposure by a general matching of the currency and duration of its assets to its corresponding operating liabilities. In accordance with Financial Accounting Standards Board Statement No. 52, the Company translates the assets, liabilities and income of non-U.S. dollar functional currency legal entities to the U.S. dollar. This translation amount is reported as a component of other comprehensive income. As of September 30, 2005March 31, 2006 there has been no material change in exposure to foreign exchange rates as compared to December 31, 2004.2005.

Safe Harbor Disclosure.This report contains forward-looking statements within the meaning of the U.S. federal securities laws. The Company intends these forward-looking statements to be covered by the safe harbor provisions for forward-looking statements in the federal securities

46

laws. In some cases, these statements can be identified by the use of forward-looking words such as “may”, “will”, “should”, “could”, “anticipate”, “estimate”, “expect”, “plan”, “believe”, “predict”, “potential” and “intend”. Forward-looking statements contained in this report include information regarding the Company’s reserves for losses and LAE, including reserves for A&E claims, the adequacy of the Company’s provision for uncollectible balances, estimates of the Company’s catastrophe exposure, and the effects of catastrophic events, including the most recent hurricanes, on the Company’s financial statements and the ability of the Company’s subsidiaries to pay dividends. Forward-looking statements only reflect the Company’s expectations and are not guarantees of performance. These statements involve risks, uncertainties and assumptions. Actual events or results may differ materially from the Company’s expectations. Important factors that could cause the Company’s actual events or results to be materially different from the Company’s expectations include the uncertainties that surround the estimating of reserves for losses and LAE, those discussed in Note 4 of Notes to Consolidated Financial Statements (unaudited) included in this report and the risks described under the caption “Risk Factors” in the Company’s most recent Annual Report on Form 10-K, Part II,I, Item 7.1A. The Company undertakes no obligation to update or revise publicly any forward looking statements, whether as a result of new information, future events or otherwise.

4732

PartPART I – Item 3.

EVEREST REINSURANCE HOLDINGS, INC.


QUANTITATIVE AND QUALITATIVE DISCLOSURES


ABOUT MARKET RISK

Market Risk Instruments. See "Market Sensitive Instruments" in PartPART I - Item 2.

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PartPART I – Item 4.

EVEREST REINSURANCE HOLDINGS, INC.


CONTROLS AND PROCEDURES

As of the end of the period covered by this report, the Company’s management carried out an evaluation, with the participation of the Chief Executive Officer and Chief Financial Officer, of the effectiveness of the Company’s disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934 (the “Exchange Act”)). Based on their evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures are effective to ensure that information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission’s rules and forms. The Company’s management, with the participation of the Chief Executive Officer and Chief Financial Officer, also conducted an evaluation of the Company’s internal control over financial reporting to determine whether any changes occurred during the quarter covered by this report that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting. Based on that evaluation, there has been no such change during the quarter covered by this report.

4934

EVEREST REINSURANCE HOLDINGS, INC.


OTHER INFORMATION

PartPART II – Item 1. 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 mattes,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 that 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.

PartPART II – Item 1A. Risk Factors

No material changes.

PART II - Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

NoneNone.

PartPART II – Item 3. Defaults Upon Senior Securities

NoneNone.

PartPART II - Item 4. Submission of Matters to a Vote of Security Holders

NoneNone.

PartPART II – Item 5. Other Information

NoneNone.

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Part II – Item 6. Exhibits

Exhibit Index:

Exhibit No.Description

31.1

Exhibit Index:

Exhibit No. Description

31.1 Section 302 Certification of Joseph V. Taranto

31.2Section 302 Certification of Stephen L. Limauro

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


31.2 Section 302 Certification of Stephen L. Limauro

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

5136

 

 

Everest Reinsurance Holdings, Inc.

 

Signatures

 

Pursuant to the requirements 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.

 

 

Everest Reinsurance Holdings, Inc.

 

(Registrant)

 

 

                

 

 

 

 

 

 


/s/ STEPHEN L. LIMAURO

 

Stephen L. Limauro

Executive Vice President and

 

Chief Financial Officer

 

 

(Duly Authorized Officer and Principal Financial Officer)

 

 

 

 

 

Dated: November   14May 15, 2006

, 2005