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

For the Three and Nine Months Ended September 30,March 31, 2007 and 2006 and 2005

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, 2007 and 2006 and 2005 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 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 GAAP. The results for the three and nine months ended September 30,March 31, 2007 and 2006 and 2005 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, 2006, 2005 2004 and 20032004 included in the Company’s most recent Form 10-K filing.

2. New Accounting Pronouncements

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

In July 2006, the FASB released FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes – an interpretation of FASB Statement No. 109” (“FIN 48”), which is effective for fiscal years beginning after December 15, 2006. FIN 48 clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements in accordance with FASB Statement No. 109, “Accounting for Income Taxes” (“FAS 109”). FIN 48 prescribes the recognition and measurement criteria for the financial statements for tax positions taken or expected to be taken in a tax return. Further, FIN 48 expands the required disclosures associated with uncertain tax positions. The Company will adoptadopted FIN 48 on January 1, 2007. The Company is unable to determine2007 and the resulting impact on itsthe Company’s financial statements at this time, although it does not believe the impact willis deemed to be material.immaterial.

In September 2006, the FASB issued Statement of Financial Accounting Standards (“FAS”) No. 157 “Fair Value Measurements” (“FAS 157”), which is effective for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years. FAS 157 defines fair value, establishes a framework for measuring fair value consistently in GAAP and expands disclosures about fair value measurements. TheAs early adoption is an option, the Company will adoptadopted FAS 157 onas of January 1, 2008. The Company does not believe the impact on its financial statements will be material.2007.

7

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

For the Three and Nine Months Ended September 30, 2006 and 2005

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

In February 2007, the FASB issued FAS No. 159 “The Fair Value Option for Financial Assets and Financial Liabilities — including an amendment to FASB statement No. 115” (“FAS 159”), which is effective for employers with publicly traded equity securities as of September 30, 2006, the impact on the Company’s financial statements at December 31, 2006 is estimated to be a $27.5 million pre-tax or $17.9 million after-tax reduction to other comprehensive income. This amount will differ based on the end of the fiscal year weighted average discount rate usedending after November 15, 2007. FAS 159 permits entities to determinechoose to measure many financial instruments and certain other items at fair value. The

7

objective is to improve financial reporting by providing entities with the actuarial present valueopportunity to mitigate volatility in reported earnings caused by measuring related assets and liabilities differently without having to apply complex hedge accounting provisions. The Company adopted FAS 159 as of projected benefit obligations and the expected long-term annualized rate of return on plan assets at December 31, 2006.January 1, 2007.

3. Investments, Fair Value

Effective January 1, 2007, the Company adopted and implemented FAS 159 and FAS 157 for its equity securities available for sale and other invested assets, which are publicly traded equity securities. In conjunction with the Company implementing a more active management strategy for these specific investments, FAS 159 and FAS 157 provided an appropriate accounting and presentation of these investments in the Company’s consolidated financial statements. The Company did not elect FAS 159 for those equity investments in affiliated non-consolidated special purpose vehicles and non-publicly traded limited partnership investments. The Company recognized a $204.8 million cumulative-effect adjustment to retained earnings, net of $110.3 million of tax. The Company recorded a $2.3 million realized gain in the consolidated statements of operations and comprehensive income due to fair value measurement.

The following table presents the equity securities fair value measurements as of March 31, 2007:

                                                                      Fair Value Measurement Using
                                                         ----------------------------------------------------
                                                         Quoted Prices
                                                           in Active         Significant
                                                          Markets for           Other           Significant
                                                           Identical          Observable       Unobservable
                                                            Assets              Inputs            Inputs
(Dollars in thousands)        March 31, 2007               (Level 1)          (Level 2)          (Level 3)
                                                         ----------------------------------------------------

Equity securities             $ 1,167,814                $ 1,167,814           $    -             $    -
Other invested assets         $   201,861                $   201,861           $    -             $    -

4. 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-3S-3ASR with the Securities and Exchange Commission (“SEC”), as a Well Known Seasoned Issuer.Issuer under the new registration and offering revisions to the Securities Act of 1933. Generally, under this shelf registration statement, Group is authorized to issue common shares, preferred shares, debt securities, warrants and hybrid securities, Holdings is authorized to issue debt securities and Everest Re Capital Trust III (“Capital Trust III”) is authorized to issue trust preferred securities.

On June 27, 2003, Group and Holdings filed a shelf registration statement on Form S-3 with the SEC, providing for the issuance of up to $975.0 million of securities. Generally, under this shelf registration statement, Group was authorized to issue common shares, preferred shares, debt securities, warrants and hybrid securities, Holdings was authorized to issue debt securities and Everest Re Capital Trust II (“Capital Trust II”) and Capital Trust III were authorized to issue trust preferred securities. This shelf registration statement became effective on December 22, 2003 and was exhausted with the October 6, 2005 transaction described below. The following securities were issued pursuant to that registration statement.

8

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

For the Three and Nine Months Ended September 30, 2006 and 2005

4.5. Contingencies

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

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

As of September 30, 2006,March 31, 2007, approximately 9% of the Company’s gross reserves are an estimate of the Company’s ultimate liability for A&E claims. This estimate is made based on 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

9

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

For the Three and Nine Months Ended September 30, 2006 and 2005

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 who 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 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

9

the general liability portion of insurance policies rather than the product liability portion; (f) measures adopted by specific courts to ameliorate the worst procedural abuses; (g) an increase in settlement values being paid to asbestos claimants, especially those with cancer or functional impairment; (h) legislation in some states to address asbestos litigation issues; and (i) the potential that other states or the U.S. Congress may adopt legislation on asbestos litigation. Anecdotal evidence suggests that new claims filing rates have decreased, that new filings of asbestos-driven bankruptcies have decreased and that various procedural and legislative reforms are beginning to diminish the potential ultimate liability for asbestos losses.

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

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

10

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

For the

                                                                     Three and Nine Months Ended
September 30,(Dollars in thousands)                                                    March 31,
Gross basis                                                          2007            2006
                                                                 and 2005

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 September 30, 2006,March 31, 2007, the gross reserves for A&E losses were comprised of $144.2$141.2 million representing case reserves reported by ceding companies, $143.5$135.4 million representing additional case reserves established by the Company on assumed reinsurance claims, $210.3$208.4 million representing case reserves established by the Company on direct excess insurance claims, including Mt. McKinley, and $145.1$147.2 million representing incurred but not reported reserves (“IBNR”). Approximately 89.0%89%, or $572.6$563.7 million, of gross A&E reserves relate to asbestos, of which $312.5$309.8 million was for assumed business and $260.1$253.9 million was for direct excess business.

The Company’s net A&E liabilities reflect credit for reinsurance from Mt. McKinley as an affiliate 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. At September 30, 2006, the stop loss limits have been exhausted (the “Stop Loss Agreement”). The Stop Loss Agreement and other reinsurance contracts between Mt. McKinley and Everest Re remained in effect following the Company’s acquisition of Mt. McKinley. However, these contracts became transactions with affiliates effective on the date of the Mt. McKinley acquisition. Effective September 19, 2000, Mt. McKinley and Bermuda Re entered into a loss portfolio transfer reinsurance agreement, whereby Mt. McKinley transferred, for what management believes to be arm’s-length consideration, all of its net reinsurance exposures and reserves to Bermuda Re.

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

With respect to Mt. McKinley, where the Company has a direct relationship with policyholders, the Company’s aggressive litigation posture and the uncertainties inherent in the asbestos coverage and bankruptcy litigation have

10

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 toward achieving reasonable negotiated settlements that limit Mt. McKinley’s liability to a given policyholder to a sum certain. InSince 2004 and 2005 and thus far in 2006, the Company concluded such settlements or reached agreement in principle with 14some of its high profile policyholders. The Company has currently identified 9 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

11

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

For the Three and Nine Months Ended September 30, 2006 and 2005

reinsurers. These delays not only extend the timing of reinsurance claim settlements, but also restrict the information available to estimate the reinsurers’ ultimate exposure.

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

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, 2006March 31, 2007 was $153.1$83.2 million.

Prior to its 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. 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, 2006March 31, 2007 was $19.8$20.4 million.

11

5.6. Other Comprehensive (Loss) Income (Loss)

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

                                                               Three Months Ended
                                                                    March 31,
(Dollars in thousands)                                         2007           2006
                                                           -------------------------

Net unrealized (depreciation) appreciation
  of investments, net of deferred income taxes              $ (2,936)       $ 3,529
Currency translation adjustments, net of
  deferred income taxes                                         (212)         3,271
                                                           -------------------------
Other comprehensive (loss) income, net of
  deferred income taxes                                     $ (3,148)       $ 6,800
                                                           -------------------------

6.7. Trust Agreements

A subsidiary of the Company, Everest Re, has established a trust agreement as security for assumed losses payable forto a non-affiliated ceding company, which effectively uses Everest Re’s investments as collateral. At September 30, 2006,March 31, 2007, the total amount on deposit in the trust account was $22.9$23.7 million.

12

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

For the Three and Nine Months Ended September 30, 2006 and 2005

7.8. Senior Notes

On October 12, 2004, Holdings completed a public offering of $250.0 million principal amount of 5.40% senior notes due October 15, 2014. On March 14, 2000, Holdings completed a public offeringsoffering 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, 2005.2010.

Interest expense incurred in connection with these senior notes was $7.8 million each for the three months ended September 30, 2006March 31, 2007 and 2005 and $23.4 million and $27.7 million for the nine months ended September 30, 2006 and 2005, respectively.2006. Market value, which is based on quoted market price at September 30, 2006March 31, 2007 and December 31, 2005,2006, was $245.4$247.3 million and $250.9$248.1 million, respectively, for the 5.40% senior notes and $219.3$218.9 million and $226.2$219.8 million, respectively, for the 8.75% senior notes.

8.9. Junior Subordinated Debt Securities Payable

On March 29, 2004, Holdings issued $329.9 million of 6.20% junior subordinated debt securities due March 29, 2034 to Everest Re Capital Trust II.II (“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.a determination that the Trust may become subject to tax or the Investment Company Act.

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

Fair value, which is primarily based on quoted market price of the related trust preferred securities at September 30, 2006March 31, 2007 and December 31, 2005,2006, was $295.1$317.1 million and $293.5$316.3 million, respectively, for the 6.20% junior

12

subordinated debt securities and $222.7$221.0 million and $220.5$221.2 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, 2006March 31, 2007 and 2005 and $28.1 million for the nine months ended September 30, 2006 and 2005.2006.

Capital Trust and Capital Trust II are wholly owned finance subsidiaries of 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.

13

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

For the Three and Nine Months Ended September 30, 2006 and 2005

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 Holdings Credit Facility (discussed in Note 9)10) require Everest Re, the Company’s principal insurance subsidiary, to maintain a certain statutory surplus level as measured at the end of each fiscal year. At December 31, 2005, $2,112.02006, $2,451.4 million of the $2,724.9$3,102.6 million in net assets of the Company’s consolidated subsidiaries were subject to the foregoing regulatory restrictions.

9.10. Credit Line

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

The Holdings Credit Facility requires Holdings to maintain a debt to capital ratio of not greater than 0.35 to 1 and Everest Re to maintain its statutory surplus at $1.5 billion plus 25% of future aggregate net income and 25% of future aggregate capital contributions after December 31, 2005. As of September 30, 2006,March 31, 2007, Holdings was in compliance with these covenants.

For the three and nine months ended September 30, 2006 and 2005,March 31, 2007, there were no outstanding borrowings under the Holdings Credit Facility.

13

Interest expense and fees incurred in connection with the Holdings Credit Facility were $0.04$0.03 million and $0.07$0.05 million for the three months ended September 30, 2006 and 2005, respectively, and $0.1 million and $0.2 million for nine months ended September 30, 2006 and 2005, respectively.March 31, 2007.

10.11. 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 relationshipsagents 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.

14

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

For the Three and Nine Months Ended September 30, 2006 and 2005

These segments are managed in a carefully coordinated fashion with strong elements of central control with respect to pricing, risk management, monitoringcontrol of aggregate exposures to catastrophe events, capital, investments and support operations. Management generally monitors and evaluates the financial performance of these operating segments based upon their underwriting results. Underwriting results include earned premium less losses and loss adjustment expenses (“LAE”) incurred, commission and brokerage expenses and other underwriting expenses and are analyzed using ratios, in particular loss, commission and brokerage and other underwriting expense ratios, which, respectively, divide incurred losses, commission and brokerage and other underwriting expenses by earned premium.

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

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

15

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

For the

U.S. Reinsurance
                                                             Three and Nine Months Ended
                                                                 September 30,March 31,
(Dollars in thousands)                                      2007            2006
                                                        ---------------------------
Gross written premiums                                   $ 354,352       $ 394,397
Net written premiums                                       260,981         295,686

Premiums earned                                          $ 263,185       $ 289,717
Incurred losses and 2005

14

U.S. Insurance
                                                             Three Months Ended
                                                                 March 31,
(Dollars in thousands)                                      2007            2006
                                                        ---------------------------
Gross written premiums                                   $ 217,373       $ 218,006
Net written premiums                                       139,583         156,322

Premiums earned                                          $ 140,565       $ 140,977
Incurred losses and loss adjustment expenses               141,029         105,983
Commission and brokerage                                    21,173          18,537
Other underwriting expenses                                 12,365          10,705
                                                        ---------------------------
Underwriting (loss) gain                                 $ (34,002)      $   5,752
                                                        ---------------------------

                              Specialty Underwriting
                                                             Three Months Ended
                                                                 March 31,
(Dollars in thousands)                                      2007            2006
                                                        ---------------------------
Gross written premiums                                   $  54,681       $  64,026
Net written premiums                                        36,450          48,327

Premiums earned                                          $  38,614       $  51,734
Incurred losses and loss adjustment expenses                29,843          57,058
Commission and brokerage                                     9,304          14,114
Other underwriting expenses                                  1,589           1,305
                                                        ---------------------------
Underwriting loss                                        $  (2,122)      $ (20,743)
                                                        ---------------------------

                                   International
                                                             Three Months Ended
                                                                 March 31,
(Dollars in thousands)                                      2007            2006
                                                        ---------------------------
Gross written premiums                                   $ 173,344       $ 175,522
Net written premiums                                       121,272         125,916

Premiums earned                                          $ 127,474       $ 121,250
Incurred losses and loss adjustment expenses                68,261          83,982
Commission and brokerage                                    28,851          24,431
Other underwriting expenses                                  3,718           2,678
                                                        ---------------------------
Underwriting gain                                        $  26,644       $  10,159
                                                        ---------------------------

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

                                                             Three Months Ended
                                                                 March 31,
(Dollars in thousands)                                      2007            2006
                                                        ---------------------------
Underwriting gain (loss)                                 $ 105,685       $  (5,776)
Net investment income                                       95,934          83,905
Net realized capital gain                                   33,874           9,020
Corporate expense                                             (584)           (938)
Interest, fee and bond issue cost amortization expense     (17,413)        (17,430)
Other expense                                               (1,163)        (13,047)
                                                        ---------------------------
Income before taxes                                      $ 216,333       $  55,734
                                                        ---------------------------

15

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

16

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

For the Three and Nine Months Ended September 30, 2006 and 2005

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 Company held no interest only strips investments at September 30, 2006. The market value of the interest only strips at September 30, 2005 was $51.1 million.

The Company accounts for its investment in interest only strips in accordance with Emerging Issues Task Force Issue No. 99-20, “Recognition of Interest Income and Impairment on Purchased and Retained Beneficial Interests in Securitized Financial Assets” (“EITF 99-20”). EITF 99-20 sets forth the rules for recognizing interest income on all credit-sensitive mortgage and asset-backed securities and certain prepayment-sensitive securities, including agency interest only strips, whether purchased or retained in securitization, as well as the rules for determining when these securities must be written down to fair value because of impairment. EITF 99-20 requires decreases in the valuation of residual interests in securitizations to be recorded as a reduction to the carrying value of the residual interests through a charge to earnings, rather than an unrealized loss in stockholders’ equity, when any portion of the decline in fair value is attributable to, as defined by EITF 99-20, an impairment loss. The Company had no realized capital loss due to impairment for the three and nine months ended September 30, 2006 and for the three months ended September 30, 2005. The Company recorded a pre-tax and after-tax realized capital loss due to impairments of $4.1 million and $2.7 million, respectively, for the nine months ended September 30, 2005.

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 operationsoperation and cash flows.flow.

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

17

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

For the Three and Nine Months Ended September 30, 2006 and 2005

16

18

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

For the Three and Nine Months Ended September 30, 2006 and 2005

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
                                                        March 31,
                                                -------------------------
(Dollars in thousands)                              2007          2006
                                                -------------------------
Ceded written premiums                            $ 194,050     $ 175,170
Ceded earned premiums                               190,942       184,889
Ceded losses and LAE (a)                            102,292       101,110



                       Everest International
                                                   Three Months Ended
                                                        March 31,
                                                -------------------------
(Dollars in thousands)                              2007          2006
                                                -------------------------
Ceded written premiums                            $  20,577     $  18,786
Ceded earned premiums                                20,390        19,060
Ceded losses and LAE                                 10,870        11,425

(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 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 and 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 limit available under this agreement was fully exhausted at December 31, 2004.

13. Income Taxes

The Company uses a projected annual effective tax rate in accordance with 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 (loss) projection, the tax impact resulting from the income (loss) variance is effectively spread between the impacted quarter and the remaining quarters of the year, except for discreet items impacting an individual quarter.

1917

The Company adopted the provisions of FIN 48 as of January 1, 2007. As a result of the implementation of FIN 48, the Company recorded no adjustment in the liability for unrecognized income tax benefits and no adjustment to beginning retained earnings.

The Company recognizes interest and penalties related to uncertain tax positions in income tax expense. At the date of adoption, January 1, 2007, the Company has $1.3 million of accrued interest related to uncertain tax positions.

Tax years 2003-2006 remain open to examination by the major taxing jurisdictions to which the Company is subject.

14. Subsequent Event

On April 26, 2007, the Company announced that Holdings completed a public offering of $400.0 million of fixed to floating rate long term subordinated notes with a scheduled maturity of May 15, 2037 and a final maturity of May 1, 2067. The net proceeds from the offering are expected to be used to redeem all of the outstanding 7.85% junior subordinated debt securities as soon as possible after November 14, 2007 and for general corporate purposes.

18

PART I — Item 2

EVEREST REINSURANCE HOLDINGS, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATION

RESULTS OF OPERATIONS

Industry Conditions

The worldwide reinsurance and insurance businesses are highly competitive, yetas well as cyclical by product and market. As a result, financial results tend to fluctuate with periods of constrained availability, high rates and strong profits followed by periods of abundant capacity, low rates and constrained profitability. Competition in the types of reinsurance and insurance business that the Company underwrites is based on many factors, including the perceived overall financial strength of the reinsurer or insurer, ratings of the reinsurer or insurer by A.M. Best Company (“A.M. Best”) and/or Standard & Poor’s Rating Services (“S&P”Standard & Poor’s”), underwriting expertise, the jurisdictions where the reinsurer or insurer is licensed or otherwise authorized, capacity and coverages offered, premiums charged, other terms and conditions of the reinsurance and insurance business offered, services offered, speed of claims payment and reputation and experience in lines written. TheseFurthermore, the market impact from these competitive factors operate at the individual market participant levelrelated to varying degrees, as applicable to the specific participant’s circumstances. They also operate in aggregatereinsurance and insurance is generally not consistent across the reinsurance industry more generally, contributing, in combination with background economic conditionslines of business, domestic and variations in the reinsurance buying practices of insurance companies (by participantinternational geographical areas and in the aggregate), to cyclical movements in reinsurance rates, terms and conditions and ultimately reinsurance industry aggregate financial results.distribution channels.

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

During muchthe first quarter of 2005, global reinsurance2007, the Company observed increased competition with slightly reduced premiums, higher commissions and insurance pricing was generally flat to down principally as a resultdemands by cedants for improved terms and conditions. The extent of the relatively strong profitabilityincreased competition and capital generation achievedits affect on rates, terms and conditions varied widely by many reinsurersmarket and insurers followingcoverage types. One of the favorable market conditions that had persisted from 2001-2004. However, unprecedented catastrophic industry losseslesser impacted markets was retrocession catastrophe property coverage in the second half of 2005, principally driven by Hurricanes Katrina, Rita and Wilma, adversely impacted the 2005 financial results of most industry participants.

Thus far in 2006, the Company has observed strong price increases and more restricted limits in those property lines and regions that were most affected by the catastrophe events of 2005.2005, principally Hurricanes Katrina, Rita and Wilma. Reinsurance capacity in these areas was and continues to be, constrained, particularly for catastrophe reinsurance, which includesincluding southeastern U.S. exposures and energy lines continued to be constrained. In January 2007, the state of Florida passed legislation that increased coverage provided by the Florida Hurricane Catastrophe Fund, thus potentially reducing the amount of reinsurance that Florida companies will purchase from the private reinsurance market. In addition, the legislature broadened the mandate of the state sponsored homeowners’ insurance company to render it a fully competitive market participant. Although the Company is unable to predict the impact on future market conditions from the increased competition and legislative developments, the Company believes that its clients continue to write profitable business in Florida and will continue to purchase both quota share and catastrophe coverage, although at likely lower volumes. The balance of the retrocessionU.S. and energy lines. The record catastrophe losses of 2005 have also generally led to modest strengthening for U.S.international property lines that have little or no substantive catastrophe exposure andexperienced mostly modest price stabilization in most casualty insurance and reinsurance markets atdeclines but still exhibit adequate premium rates thus far in 2006. However, certain of thepricing levels.

The Company’s U.S. and international casualty lines continue to exhibitexperienced weaker market conditions led by the medical stop loss and directors & officers (“D&O”)&O reinsurance classes, as well as the California workers’ compensation insurance line. The Company believes that U.S. casualty reinsurance generally remains adequately priced; however,priced. The Company also

19

believes that increased primary price competition at the insurance company level and cedants’ increased appetite for retaining more profitable business net following several strong years of hard-market conditions, may

20

influence these markets toward modest softening.has resulted in modestly softer, but profitable, reinsurance pricing. The Company’s U.S. insurance operation iswas also affected, although somewhat less affectedso, by these standardprimary casualty insurance market conditions given the specialty nature of its specialty insurance program orientation. Finally,orientated business.

The Company is unable to predict the Company continues to observe generally stable property and casualty reinsuranceimpact on future market conditions in most countries outside of the U.S., except for hardening property market conditions in Mexico following Hurricane Wilma.

Focusing on U.S. property reinsurance, market conditions have tightened, particularly within peak catastrophe zones, during 2006. This market hardening was particularly pronounced in third quarter renewals with incrementally higher rate changes and even more restrictive coverages than earlier in 2006. As a result, many reinsurance buyers have not been able to fully place their reinsurance program and have been forced to raise retention levels and/or reduce catastrophe limit purchases. In turn, insurance companies continue to adjust limits and coverages and increase the premium rates they charge their customers. Together, these trends have generally resulted in insurance companies retaining more property risk exposure and being more prone to potential future earnings volatility than they would prefer. This market dynamic, both at the individual company and industry level, is reflective of a fundamental imbalance between reinsurance supply and demand. The Company believes that this disequilibrium may continue through 2007 despite the relatively benign loss experience from the 2006 U.S. hurricane season. Reinsurersincreased competition and legislative initiatives. In addition to these market forces, reinsurers continue to reassess their risk appetites and rebalance their property portfolios so as to reflect improved price to exposure metrics against the backdrop of: (i) recent revisions to the industry’s catastrophe loss projection models, which are indicating significantly higher loss potentials and consequently higher pricing requirements and (ii) elevated rating agency scrutiny and capital requirements for many catastrophe exposed companies.

In light of its 2005 catastrophe experience, the Company reexaminedhas re-examined its risk management practices and concluded that its control framework operated generally as intended and made appropriate portfolio adjustments tointended. The Company rebalanced its property reinsurance operations during the first nine months of 2006. This portfolio, repositioning, particularly within peak catastrophe zones, including the Southeast USA,U.S., Mexico and Gulf of Mexico,Mexico. This effort has enabled the Company to take advantage of these dislocated markets in abenefit from market dislocations by carefully managed fashion by: (i) shifting the mix of its writings toward the most profitable classes, lines, customers and territories (ii) reducing aggregate catastrophe exposed limits and (iii)by enhancing its portfolio balance and diversification.

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

2120

Financial Summary

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

                                                         Three Months Ended
                                                              March 31,                  Percentage
                                              ----------------------------------------   Increase/
(Dollars in thousands)                              2007              2006               (Decrease)
                                              ----------------------------------------  -------------

Gross written premiums                         $        799,750     $        851,951           -6.1%
Net written premiums                                    558,286              626,251          -10.9%

REVENUES:
Premiums earned                                $        569,838     $        603,678           -5.6%
Net investment income                                    95,934               83,905           14.3%
Net realized capital gains                               33,874                9,020          275.5%
Other expense                                            (1,163)             (13,047)         -91.1%
                                              -------------------  -------------------
Total revenues                                          698,483              683,556            2.2%
                                              -------------------  -------------------

CLAIMS AND EXPENSES:
Incurred losses and loss adjustment expenses            326,015              465,511          -30.0%
Commission, brokerage, taxes and fees                   113,975              124,479           -8.4%
Other underwriting expenses                              24,747               20,402           21.3%
Interest, fee and bond issue
 cost amortization expense                               17,413               17,430           -0.1%
                                              -------------------  -------------------
Total claims and expenses                               482,150              627,822          -23.2%
                                              -------------------  -------------------

INCOME BEFORE TAXES                                     216,333               55,734          288.2%
Income tax expense                                       57,015               12,229          366.2%
                                              -------------------  -------------------
NET INCOME                                     $        159,318     $         43,505          266.2%
                                              -------------------  -------------------

RATIOS:                                                                                  Point Change
                                                                                        -------------
Loss ratio                                                57.2%                77.1%           (19.9)
Commission and brokerage ratio                            20.0%                20.6%            (0.6)
Other underwriting expense ratio                           4.4%                 3.4%             1.0
                                              -------------------  -------------------  --------------
Combined ratio                                            81.6%               101.1%           (19.5)
                                              -------------------  -------------------  --------------

                                                     As of                 As of
(Dollars in millions)                            March 31, 2007     December 31, 2006
                                              -------------------  -------------------
Stockholder's equity                           $        2,375.2     $        2,218.4            7.1%
                                              -------------------  -------------------

Overall,Revenues.     Gross and net written premiums declined 6.1% and 10.9%, respectively, for the Company’s third quarter and ninethree months of 2006 results were very strong with net income of $115 million and $280 million, respectively. Premium volume increased during the third quarter of 2006ended March 31, 2007 as compared to the same period of 2005, while it declined over the ninethree months ofended March 31, 2006 compared to the same period of 2005, as the Companyresult of continued its disciplined underwriting and risk management approaches. In particular,practices. Net earned premium declined by 5.6% for the

22

Company re-engineered its U.S. property reinsurance portfolio resulting in improved pricing, but lower premium volume. The year to date premium volume decline also reflects the Company’s discontinued insurance credit program and the Company’s prudent response to market softening in many U.S. casualty reinsurance classes. The premium volume increased in the third quarter in comparison with the second quarter of 2006, reflecting strong premium rate growth in the U.S. property reinsurance market as the Company capitalized on much improved market conditions, as well as growth of new programs in the insurance operation.

The Company’s net income increased dramatically by $288 million and $248 million in the third quarter and nine three months ended September 30, 2006, respectively,March 31, 2007, compared to the same periods for 2005. This significant earnings improvement reflects the favorable effect of a benign hurricane season relativethree months ended March 31, 2006, primarily due to unprecedented Company and industry hurricane losses experienced in 2005, as well as continued strong underlying underwriting fundamentals and increased investment income from an expanded invested asset base. These improvements were partially offset by a decline in net realized capital gains.

The Company’s stockholders’ equity increased by $333.3 million from year end 2005 to $2,124.0 million at September 30, 2006, principally attributable to the net income generated during the nine months of 2006.

Revenues.     Netlower gross written premiums, declined 1% and 12% for the third quarter and nine months ended September 30, 2006, respectively, compared to the same periods for 2005.particularly in treaty casualty. Net premiums earned declined 9% and 13% for the third quarter and nine months ended September 30, 2006, respectively, compared to the same periods of 2005. The year to date net premiums earned decrease was primarily due to a decline7.2% in the U.S. insurance segment of 17% reflective of: i) a reduction in credit business from an auto loan program which is in runoff; and ii) continued declines in the California workers’ compensation writings due to competitive market conditions. In addition, net premiums earned for the worldwide reinsurance segments, primarily due to the decrease in treaty casualty gross written premiums, partially offset by an increase in treaty property gross written premiums. Net premiums earned during the aggregate decreased by 11%three months ended March 31, 2007 over the same period in 2006 for the nine months ended September 30, 2006, reflecting multipleU.S. Insurance segment level factors, including a significant return premium for a Florida property quota share contract cancelled in 2006, the absence of sizable reinstatement premiums triggered in 2005 from severe catastrophic events, as well as a disciplined underwriting approach within both property and casualty lines emphasizing potential profitability rather than volume growth.were relatively flat.

21

Net investment income increased 25% and 7%14.3% for the third quarter and ninethree months of 2006, respectively, asended March 31, 2007 compared to the same periods for 2005, reflecting continued year over yearthree months ended March 31, 2006, due primarily to the growth in invested assets from positive cash flow from operations, despite significant catastrophe loss payouts related to the 2005 and 2004 hurricanes.operations. The average investment portfolio yields through September 30, 2006for the three months ended March 31, 2007 were 4.6% pre-tax and 3.7%3.6% after-tax, and were slightly higher comparedsimilar to the prior year.three months ended March 31, 2006.

Net realized capital gains were modest in relation to$33.9 million and $9.0 million for the Company’s invested asset base, with variabilitythree months ended March 31, 2007 and 2006, respectively, mainly reflecting normal portfolio management activities.activities in response to changes in interest rates and credit spreads and movement in the equity markets. The 2007 net realized capital gains include $2.3 million of realized gain due to fair value remeasurement on the publicly traded equity portfolio.

Expenses.   The Company’s incurred losses and loss adjustment expenses (“LAE”) decreased 56% and 32%30.0% for the third quarter and ninethree months of 2006, respectively,ended March 31, 2007 compared to the same periods for 2005, primarilythree months ended March 31, 2006, principally due to a decrease in attritional losses from the absence of current yearchange in business mix and a decrease in prior years catastrophe losses and lower earned premiums.loss development.

The Company’s loss ratio improvements of 62 and 18improved by 20 points for the third quarterthree months ended March 31, 2007 compared to the three months ended March 31, 2006, primarily reflective of a 12 point improvement of current and nine months of 2006, respectively, year over year, were primarily the result of reduced catastrophe losses. Included in the Company’s third quarter 2006 loss ratio was 7 points of favorable prior years reserve development, comprisedattritional losses coupled with an 8 point improvement of a 14 point decrease in prior year attritional reserves, due to favorable claims emergence trends, primarily within property and other short-tailed lines, partially offset by a 6 point increase in prior years catastrophe reserve development and a 1 point increase in prior years asbestos and environmental (“A&E”) reserves. The Company’s loss ratio for the nine months ended September 30, 2006 was 66.2% representing an 18 point improvement from the prior

23

year, reflecting the absence of current year catastrophes and strong premium rate increases in property classes of business, partially offset by higher prior years reserve development, particularly related to catastrophes.losses.

Commission, brokerage, and tax expenses for the third quarter and nine months of 2006 decreased by 16% and 18%, respectively,8.4% in the three months ended March 31, 2007 compared to the same periodthree months ended March 31, 2006. The decline in 2005. Overall changesnet earned premiums and the change in the business mix and premium volume during the nine months of 2006 compared to 2005 were the primary reasons forprincipal drivers of the decrease in commissionthis directly variable expense. Other underwriting expenses for the third quarter and ninethree months of 2006ended March 31, 2007 increased by 2% and decreased by 6%, respectively, compared to the same periods for 2005. These expenses include infrastructure coststhree months ended March 31, 2006, primarily due to an increase in salaries and various assessments by state insurance departments, which fluctuate period over period.benefits.

The Company’s effective income tax rate for the third quarter and ninethree months of 2006ended March 31, 2007 was 29% and 25%, respectively. The Company’s26.4% compared with an effective tax rate for the three months ended March 31, 2006 of 21.9%. The increase is a functionreflective of increased taxable capital gains and operating income, which mitigated the statutory rate, coupledimpact of tax-preferenced investments on the effective tax rate.

Net Income.The Company’s net income for the three months ended March 31, 2007 was $159.3 million, which was significantly higher compared with the impactnet income for the three months ended March 31, 2006 of $43.5 million. This significant improvement in net earnings reflects higher realized gains, improved net prior years reserve development, as well as more favorable results from tax-preferenced investmentunderlying underwriting fundamentals.

Stockholder’s Equity.The Company’s stockholder’s equity increased by $0.2 billion to $2.4 billion for the three months ended March 31, 2007, due to the $159.3 million of net income and discreet items impacting individual quarters.generated for the period.

U.S. Reinsurance
                                                         Three Months Ended
                                                             March 31,
(Dollars in thousands)                                  2007            2006
                                                      --------------------------
Gross written premiums                                $ 354,352       $ 394,397
Net written premiums                                    260,981         295,686

Premiums earned                                       $ 263,185       $ 289,717
Incurred losses and loss adjustment expenses             86,882         218,488
Commission and brokerage                                 54,647          67,397
Other underwriting expenses                               6,491           4,776
                                                      --------------------------
Underwriting gain (loss)                              $ 115,165       $    (944)
                                                      --------------------------


                               U.S. Insurance
                                                         Three Months Ended
                                                             March 31,
(Dollars in thousands)                                  2007            2006
                                                      --------------------------
Gross written premiums                                $ 217,373       $ 218,006
Net written premiums                                    139,583         156,322

Premiums earned                                       $ 140,565       $ 140,977
Incurred losses and loss adjustment expenses            141,029         105,983
Commission and brokerage                                 21,173          18,537
Other underwriting expenses                              12,365          10,705
                                                      --------------------------
Underwriting (loss) gain                              $ (34,002)      $   5,752
                                                      --------------------------


                          Specialty Underwriting
                                                         Three Months Ended
                                                             March 31,
(Dollars in thousands)                                  2007            2006
                                                      --------------------------
Gross written premiums                                $  54,681       $  64,026
Net written premiums                                     36,450          48,327

Premiums earned                                       $  38,614       $  51,734
Incurred losses and loss adjustment expenses             29,843          57,058
Commission and brokerage                                  9,304          14,114
Other underwriting expenses                               1,589           1,305
                                                      --------------------------
Underwriting loss                                     $  (2,122)      $ (20,743)
                                                      --------------------------

International
                                                         Three Months Ended
                                                             March 31,
(Dollars in thousands)                                  2007            2006
                                                      --------------------------
Gross written premiums                                $ 173,344       $ 175,522
Net written premiums                                    121,272         125,916

Premiums earned                                       $ 127,474       $ 121,250
Incurred losses and loss adjustment expenses             68,261          83,982
Commission and brokerage                                 28,851          24,431
Other underwriting expenses                               3,718           2,678
                                                      --------------------------
Underwriting gain                                     $  26,644       $  10,159
                                                      --------------------------

                                                         Three Months Ended
                                                             March 31,
(Dollars in thousands)                                  2007            2006
                                                      --------------------------
Underwriting gain (loss)                              $ 105,685       $  (5,776)
Net investment income                                    95,934          83,905
Net realized capital gain                                33,874           9,020
Corporate expense                                          (584)           (938)
Interest, fee and bond issue cost amortization expense  (17,413)        (17,430)
Other expense                                            (1,163)        (13,047)
                                                      --------------------------
Income before taxes                                   $ 216,333       $  55,734
                                                      --------------------------

27

The following table shows the components of the Company’s incurred losses and LAE for the three months ended as indicated:

                                      March 31, 2007                  March 31, 2006
                              Current    Prior       Total     Current    Prior      Total
(Dollars in millions)          Year      Years     Incurred     Year      Years     Incurred
                             ------------------------------   ------------------------------
All Segments
 Attritional (a)             $ 305.0    $  16.6    $ 321.6    $ 410.9    $   4.1    $ 415.0
 Catastrophes                    4.2        0.2        4.4         -        49.9       49.9
 A&E                              -          -          -          -         0.6        0.6
                             ------------------------------   ------------------------------
 Total All segments          $ 309.2    $  16.8    $ 326.0    $ 410.9    $  54.6    $ 465.5
                             ------------------------------   ------------------------------
 Loss Ratio                    54.3%       2.9%      57.2%      68.1%       9.0%      77.1%

(a) Attritional losses exclude catastrophe and A&E losses.
(Some amounts may not reconcile due to rounding.)

The Company’s incurred losses and LAE decreased 55.9%30.0% to $330.0$326.0 million for the three months ended September 30, 2006March 31, 2007 from $748.6$465.5 million for the three months ended September 30, 2005,March 31, 2006, primarily reflective of improved prior years catastrophe losses, lower attritional losses due to lower earned premiums, a significant reductionlower accident year loss ratio in the current quarter and mix of current year catastrophe losses,business, partially offset by ana slight increase in prior years reserve strengthening, principally forcurrent year catastrophe losses.

The Company’s loss ratio, which is calculated by dividing incurred losses and LAE by current year net premiums earned, improved by 62.419.9 points to 58.8% over the comparable 2005 period, principally due to a 72.5 point improvement of current year catastrophe losses, partially offset by 8.4 points related to more current year attritional losses. The 6.7 points of prior years reserve adjustments57.2% for the three months ended September 30,March 31, 2007 over the comparable 2006 reflected 14.2 pointsperiod, principally due to an 8.3 point improvement of favorableprior years catastrophe losses, coupled with a 12.3 point improvement of current and prior years attritional reserve development due to favorable claims emergence trends, primarily within property and other short-tailed lines of business,losses, partially offset by 6.30.7 points of unfavorable prior yearscurrent year catastrophe reserve development, principally from the 2005 hurricanes and 1.2 points of unfavorable A&E reserve development.losses.

25

The following table shows the U.S. Reinsurance segment components of incurred losses and LAE for the three months ended as indicated:

28

                                      March 31, 2007                  March 31, 2006
                              Current    Prior       Total     Current    Prior      Total
(Dollars in millions)          Year      Years     Incurred     Year      Years     Incurred
                             ------------------------------   ------------------------------

Attritional                  $ 114.0    $ (19.5)   $  94.5    $ 176.6    $  25.8    $ 202.4
Catastrophes                      -        (7.6)      (7.6)        -        15.5       15.5
A&E                               -          -          -          -         0.6        0.6
                             ------------------------------   ------------------------------
Total segment                $ 114.0    $ (27.1)   $  86.9    $ 176.6    $  41.9    $ 218.5
                             ------------------------------   ------------------------------
Loss Ratio                     43.3%     -10.3%      33.0%      61.0%      14.5%      75.4%
(Some amounts may not reconcile due to rounding.)

The U.S. Reinsurance segment’s incurred losses and LAE decreased 68.1%60.2%, or $340.1$131.6 million, for the three months ended September 30, 2006March 31, 2007 as compared to the same period in 2005.2006, principally due to the reduction in current and prior years attritional losses within treaty property. The segment’s loss ratio improvement of 121.9for the three months ended March 31, 2007 improved by 42.4 points over the comparable 2005 period was primarily due tofirst quarter of 2006, reflecting a significant decrease17.7 point improvement in current year catastropheattritional losses within the treaty property unit, partially offset by an increase in the current year attritional losses. Favorable prior years loss development on attritional reserves was basically offset by an increaseand 24.7 point improvement in prior years catastrophe loss development as well as an increase to A&E reserves.losses.