10-K 1 group10k.htm EVEREST RE GROUP, LTD--10K



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

_________________

FORM 10-K 
_________________

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

For the fiscal year ended December 31, 2004   Commission file number 1-15731  

EVEREST RE GROUP, LTD.
(Exact name of registrant as specified in its charter)


Bermuda   98-0365432  
  (State or other jurisdiction  (I.R.S. Employer 
of incorporation or organization)  Identification No.) 

Wessex House – 2 nd Floor
45 Reid Street
PO Box HM 845
Hamilton HM DX, Bermuda
441-295-0006
(Address, including zip code, and telephone number, including area code,
of registrant’s principal executive office)

_________________

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

  Name of Each Exchange  
          Title of Each Class  on Which Registered 
Common Shares, $.01 par value per share  New York Stock Exchange 

___________________

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

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

Yes   X       No___

        Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or

information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ X ]

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

Yes   X       No___

        The aggregate market value on June 30, 2004, the last business day of the registrant’s most recently completed second quarter, of the voting stock held by non-affiliates of the registrant was $4,505.3 million.

        At March 1, 2005, the number of shares outstanding of the registrant’s common shares was 56,246,539.

DOCUMENTS INCORPORATED BY REFERENCE

        Certain information required by Items 10, 11, 12, 13 and 14 of Form 10-K is incorporated by reference into Part III hereof from the registrant’s proxy statement for the 2005 Annual General Meeting of Shareholders, which will be filed with the Securities and Exchange Commission within 120 days of the close of the registrant’s fiscal year ended December 31, 2004.

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TABLE OF CONTENTS

Item Page


PART I

1.

Business

1
2. Properties 30
3. Legal Proceedings 30
4. Submission of Matters to a Vote of Security Holders 31


PART II

5.

Market for Registrant’s Common Equity, Related Shareholder Matters and Issuer Purchases
of Equity Securities


31
6. Selected Financial Data 33
7. Management’s Discussion and Analysis of Financial Condition and Results of Operation 34
7A. Quantitative and Qualitative Disclosures About Market Risk 93
8. Financial Statements and Supplementary Data 93
9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 93
9A. Controls and Procedures 94
9B. Other Information 94


PART III

10.

Directors and Executive Officers of the Registrant

95
11. Executive Compensation 95
12. Security Ownership of Certain Beneficial Owners and Management and Related Shareholder
Matters

95
13. Certain Relationships and Related Transactions 95
14. Principal Accountant Fees and Services 95


PART IV

15.

Exhibits and Financial Statement Schedules

95

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PART I

Unless otherwise indicated, all financial data in this document have been prepared using generally accepted accounting principles (“GAAP”) in the United States of America. As used in this document, “Group” means Everest Re Group, Ltd. (formerly Everest Reinsurance Group, Ltd.); “Holdings” means Everest Reinsurance Holdings, Inc.; “Everest Re” means Everest Reinsurance Company and its subsidiaries (unless the context otherwise requires); and the “Company” means Everest Re Group, Ltd. and its subsidiaries, except when referring to periods prior to February 24, 2000, when it means Holdings and its subsidiaries.

ITEM 1. Business

The Company
Group, a Bermuda company, was established in 1999 as a wholly-owned subsidiary of Holdings. On February 24, 2000, a corporate restructuring was completed and Group became the new parent holding company of Holdings, which remains the holding company for the Company’s U.S. based operations. Holders of shares of common stock of Holdings automatically became holders of the same number of common shares of Group. Prior to the restructuring, Group had no significant assets or capitalization and had not engaged in any business or prior activities other than in connection with the restructuring. The Company had gross written premiums in 2004 of $4.7 billion and shareholders’ equity at December 31, 2004 of $3.7 billion.

In connection with the restructuring, Group established a Bermuda-based reinsurance subsidiary, Everest Reinsurance (Bermuda), Ltd. (“Bermuda Re”), which commenced business in the second half of 2000. Group also formed Everest Global Services, Inc., a Delaware subsidiary, to perform administrative and back-office functions for Group and its U.S. based and non-U.S. based subsidiaries.

Holdings, a Delaware corporation, was established in 1993 to serve as the parent holding company of Everest Re, a Delaware property and casualty reinsurer formed in 1973. Until October 6, 1995, Holdings was an indirect wholly-owned subsidiary of The Prudential Insurance Company of America (“The Prudential”). On October 6, 1995, The Prudential sold its entire interest in the shares of common stock of Holdings in an initial public offering (the “IPO”).

The Company’s principal business, conducted through its operating subsidiaries, is the underwriting of reinsurance and insurance in the U.S., Bermuda and international markets. The Company underwrites reinsurance both through brokers and directly with ceding companies, giving it the flexibility to pursue business regardless of the ceding company’s preferred reinsurance purchasing method. The Company underwrites insurance principally through general agent relationships and surplus lines brokers. Group’s operating subsidiaries, excluding Mt. McKinley Insurance Company (“Mt. McKinley”), which is in run-off, are each rated A+ (“Superior”) by A.M. Best Company (“A.M. Best”), an independent insurance industry rating organization that rates insurance companies on factors of concern to policyholders.

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

o Bermuda Re, a Bermuda insurance company and a direct subsidiary of Group, is registered in Bermuda as a Class 4 insurer and long-term insurer and is authorized to write property and casualty business and life and annuity business. Bermuda Re commenced business in the second half of 2000. On January 1, 2004 Bermuda Re purchased the UK branch of Everest Re. Bermuda Re’s UK branch provides property and casualty reinsurance to the United Kingdom and European markets. Bermuda Re had shareholders’equity at December 31, 2004 of $1.7 billion based on U.S. GAAP.

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o Everest International Reinsurance, Ltd. (“Everest International”), a Bermuda insurance company and a direct subsidiary of Group, is registered in Bermuda as a Class 4 insurer and is authorized to write property and casualty business. All of Everest International’s business during 2004, related to quota share reinsurance of Everest Re and the UK branch of Bermuda Re. Everest International had shareholders’ equity at December 31, 2004 of $142 million based on U.S. GAAP.

o Everest Re, a Delaware insurance company and a direct subsidiary of Holdings, is a licensed property and casualty insurer and/or reinsurer in all states (except Nevada and Wyoming), the District of Columbia and Puerto Rico and is authorized to conduct reinsurance business in the United Kingdom (through July 12, 2004), Canada and Singapore. Everest Re underwrites property and casualty reinsurance for insurance and reinsurance companies in the U.S. and international markets. Everest Re had statutory surplus at December 31, 2004 of $2.1 billion.

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

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

o Everest Security Insurance Company (“Everest Security”), formerly Southeastern Security Insurance Company, a Georgia insurance company and a direct subsidiary of Everest Re, was acquired in January 2000 and writes property and casualty insurance on an admitted basis in Georgia and Alabama. The majority of Everest Security’s business is reinsured by its parent, Everest Re.

o Mt. McKinley (f/k/a Gibraltar Casualty Company, “Gibraltar”), a Delaware insurance company and a direct subsidiary of Holdings, was acquired by Holdings in September 2000 from The Prudential. Mt. McKinley was formed by Everest Re in 1978 to engage in the excess and surplus lines insurance business in the U.S. In 1985, Mt. McKinley ceased writing new and renewal insurance and now its ongoing operations relate to servicing claims arising from its previously written business. Effective September 19, 2000, Mt. McKinley and Bermuda Re entered into a loss portfolio transfer reinsurance agreement, whereby Mt. McKinley transferred, for what management believes to be arm’s-length consideration, all of its net insurance exposures and reserves to Bermuda Re.

o Everest Re Holdings, Ltd. ("Everest Ltd."), a Bermuda company and a direct subsidiary of Everest Re, was formed in 1998 and owned Everest Re Ltd., a United Kingdom company that was dissolved after its reinsurance operations were converted into branch operations of Everest Re. Everest Ltd. holds $79 million of investments and cash, the management of which constitutes its principal operations.

Reinsurance Industry Overview
Reinsurance is an arrangement in which an insurance company, the reinsurer, agrees to indemnify another insurance company, the ceding company, against all or a portion of the insurance risks underwritten by the ceding company under one or more insurance contracts. Reinsurance can provide a ceding company with

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several benefits, including a reduction in net liability on individual risks or classes of risks, catastrophe protection from large or multiple losses and assistance in maintaining acceptable financial ratios. Reinsurance also provides a ceding company with additional underwriting capacity by permitting it to accept larger risks and write more business than would be possible without a concomitant increase in capital and surplus. Reinsurance, however, does not discharge the ceding company from its liability to policyholders.

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

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

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

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

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

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

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The Company’s products include: (1) the full range of property and casualty reinsurance and insurance coverages, including marine, aviation, surety, errors and omissions liability (“E&O”), directors’ and officers’ liability (“D&O”), medical malpractice, other specialty lines, accident and health (“A&H”), workers’ compensation and (2) reinsurance of life and annuity business. The Company’s product distribution includes direct and broker reinsurance channels; U.S., Bermuda and international markets; treaty and facultative reinsurance and admitted and non-admitted insurance.

The Company’s underwriting strategy emphasizes underwriting profitability rather than premium volume, writing specialized property and casualty risks and integration of underwriting expertise across all underwriting units. Key elements of this strategy are prudent risk selection, appropriate pricing through strict underwriting discipline and continuous adjustment of the Company’s business mix to respond to changing market conditions. The Company focuses on reinsuring companies that effectively manage the underwriting cycle through proper analysis and pricing of underlying risks and whose underwriting guidelines and performance are compatible with its objectives.

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

Marketing
The Company writes business on a worldwide basis for many different customers and for many lines of business, providing a broad array of coverages. The Company is not materially dependent on any single customer, small group of customers, line of business or geographical area. For the 2004 calendar year, no single customer (ceding company or insured) generated more than 7.8% of the Company’s gross written premiums. The Company does not believe that a reduction of business from any one customer would have a material adverse effect on its future financial condition or results of operations due to the Company’s competitive position in the marketplace and the continuing availability of other sources of business.

Approximately 60.0%, 13.1% and 26.9% of the Company’s 2004 gross written premiums were written in the broker reinsurance, direct reinsurance and insurance markets, respectively. The Company’s ability to write reinsurance both through brokers and directly with ceding companies gives it the flexibility to pursue business regardless of the ceding company’s preferred reinsurance purchasing method.

The broker reinsurance market consists of several substantial national and international brokers and a number of smaller specialized brokers. Brokers do not have the authority to bind the Company with respect to reinsurance agreements, nor does the Company commit in advance to accept any portion of a broker’s submitted business. Reinsurance business from any ceding company, whether new or renewal, is subject to acceptance by the Company. Brokerage fees are generally paid by reinsurers. The Company’s ten largest brokers accounted for an aggregate of approximately 45.1% of gross written premiums in 2004, with the two largest brokers accounting for approximately 16.9% (Marsh & McLennan Companies, Inc.) and 8.3% (Aon Risk Services) of gross written premiums, respectively. The Company does not believe that a reduction of business assumed from any one broker would have a materially adverse effect on the Company due to its competitive position in the market place, relationships with ceding companies and the continuing availability of other sources of business.

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The direct reinsurance market remains an important distribution channel for reinsurance business written by the Company. Direct placement of reinsurance enables the Company to access clients who prefer to place their reinsurance directly with reinsurers based upon the reinsurer’s in-depth understanding of the ceding company’s needs.

The Company’s insurance business is written principally through general agent relationships and surplus lines brokers. In 2004, the Company’s largest agency relationship, American All-Risk Insurance Services, LLC, accounted for approximately 7.8% of gross written premiums, which consists of approximately 15,000 individual workers’ compensation policies. In June 2004, the Company received notification of termination with respect to its contract with American All-Risk Insurance Services, LLC. Under the terms of the contract, the agency continued to produce business exclusively for the Company through October 15, 2004. The business produced under this relationship will continue in force through the policy expiration dates or cancellation. The Company does not believe that the termination of this contract will have a material adverse effect on future Company operations.

The Company continually evaluates each business relationship, including the underwriting expertise and experience brought to bear through the involved distribution channel, performs analyses to evaluate financial security, monitors performance and adjusts underwriting decisions accordingly.

Segment Information
The Company, through its subsidiaries, operates in five segments: U.S. Reinsurance, U.S. Insurance, Specialty Underwriting, International and Bermuda. The U.S. Reinsurance operation writes property and casualty reinsurance, on both a treaty and facultative basis, through reinsurance brokers, as well as directly with ceding companies within the U.S. The U.S. Insurance operation writes property and casualty insurance primarily through general agent relationships and surplus lines brokers within the U.S. The Specialty Underwriting operation writes A&H, marine, aviation and surety business within the U.S. and worldwide through brokers and directly with ceding companies. The International operation writes property and casualty reinsurance through Everest Re’s branches in Canada and Singapore, in addition to foreign business written through Everest Re’s Miami and New Jersey offices. The Bermuda operation provides reinsurance and insurance to worldwide property and casualty markets and reinsurance to life insurers through brokers and directly with ceding companies from its Bermuda office and property and casualty reinsurance to the United Kingdom and European markets through its UK branch.

These segments are managed in a carefully coordinated fashion with strong elements of central control, including with respect to capital, investments and support operations. As a result, management monitors and evaluates the financial performance of these operating segments based upon their underwriting gain (loss) or underwriting results. Underwriting results include earned premium less losses and 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, commissions 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. For selected financial information regarding these segments, see Note 18 of Notes to Consolidated Financial Statements.

Effective January 1, 2004, Everest Re sold its United Kingdom branch to Bermuda Re. Business for this branch was previously included in the International segment and is now included in the Bermuda segment. Due to the sale and in accordance with Statement of Financial Accounting Standards No. 131, “Disclosures about Segments of an Enterprise and Related Information” (“FAS 131”), the Company restated the International and Bermuda segments for the years ended 2003 and 2002 to conform to December 31, 2004 segment reporting.

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

Underwriting Operations
The following table presents the distribution of the Company’s gross written premiums by its U.S. Reinsurance, U.S. Insurance, Specialty Underwriting, International and Bermuda operations for the years ended December 31, 2004, 2003, 2002, 2001, and 2000, classified according to whether the premium is derived from property or casualty business and, for reinsurance business, whether it represents pro rata or excess of loss business:

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Gross Written Premiums by Operation

Years Ended December 31,










(Dollars in millions) 2004 2003 2002 2001 2000










U.S. Reinsurance                                                      
    Property  
        Pro Rata (1)   $ 339.7     7.2 %   $ 357.8     7.8 %   $ 148.7     5.2 %   $ 62.9     3.4 %   $ 60.2     4.3 %  
        Excess    208.8     4.4    241.0     5.3    177.8     6.2    104.0     5.5    75.6     5.5  
    Casualty  
        Pro Rata (1)    702.8    14.9    625.7    13.7    219.2     7.7    191.2    10.2    151.1    10.9  
        Excess    226.8     4.8    527.8    11.5    348.9    12.3    252.3    13.5    194.7    14.1  










     Total (2)    1,478.1    31.4    1,752.3    38.3    894.6    31.4    610.4    32.6    481.6    34.8  










U.S. Insurance  
    Property  
        Pro Rata (1)    159.0     3.4    42.9     0.9    6.5     0.2    6.2     0.3    9.3     0.7  
        Excess    -     0.0    -     0.0    -     0.0    -     0.0    -     0.0  
    Casualty  
        Pro Rata (1)    1,008.8    21.4    1,026.6    22.5    815.0    28.6    496.1    26.5    241.2    17.4  
        Excess    -     0.0    -     0.0    -     0.0    -     0.0    -     0.0  










     Total (2)    1,167.8    24.8    1,069.5    23.4    821.5    28.9    502.4    26.8    250.5    18.1  










Specialty Underwriting  
    Property  
        Pro Rata (1)    374.8     8.0    396.7     8.7    397.5    14.0    356.3    19.0    274.0    19.8  
        Excess    65.4     1.4    64.3     1.4    43.8     1.5    35.0     1.9    19.3     1.4  
    Casualty  
        Pro Rata (1)    34.1     0.7    28.1     0.6    41.9     1.5    18.4     1.0    21.4     1.5  
        Excess    12.8     0.3    13.8     0.3    5.3     0.2    4.3     0.2    3.6     0.3  










     Total (2)    487.1    10.4    502.9    11.0    488.5    17.2    414.0    22.1    318.3    23.0  










Total U.S.  
    Property  
        Pro Rata (1)    873.5    18.6    797.4    17.4    552.7    19.4    425.5    22.7    343.4    24.8  
        Excess    274.2     5.8    305.3     6.7    221.6     7.8    139.0     7.4    94.9     6.9  
    Casualty  
        Pro Rata (1)    1,745.7    37.1    1,680.4    36.8    1,076.1    37.8    705.8    37.6    413.8    29.9  
        Excess    239.6     5.1    541.6    11.8    354.2    12.4    256.7    13.7    198.3    14.3  










     Total (2)    3,133.0    66.6    3,324.7    72.7    2,204.6    77.4    1,526.8    81.4    1,050.4    75.9  










International (4)  
    Property  
        Pro Rata (1)    426.0     9.1    328.5     7.2    229.4     8.1    126.9     6.8    96.1     6.9  
        Excess    159.7     3.4    118.6     2.6    78.4     2.8    40.6     2.2    25.1     1.8  
    Casualty  
        Pro Rata (1)    51.2     1.1    31.3     0.7    30.6     1.1    47.1     2.5    64.9     4.7  
        Excess    50.8     1.1    42.4     0.9    26.1     0.9    20.3     1.1    29.0     2.1  










     Total (2)    687.7    14.6    520.8    11.4    364.5    12.8    234.9    12.5    215.1    15.6  










Bermuda Operations (4)  
    Property  
        Pro Rata (1)    309.7     6.6    230.0     5.0    136.1     4.8    50.3     2.7    47.3     3.4  
        Excess    232.5     4.9    239.5     5.2    80.5     2.8    20.0     1.1    30.5     2.2  
    Casualty  
        Pro Rata (1)    227.0     4.8    175.4     3.8    19.8     0.7    25.2     1.3    25.1     1.8  
        Excess    114.2     2.4    83.3     1.8    41.0     1.4    17.3     0.9    17.2     1.2  










     Total (2) (3)    883.4    18.8    728.2    15.9    277.4     9.7    112.8     6.0    120.1     8.7  










Total Company  
    Property  
        Pro Rata (1)    1,609.2    34.2    1,355.9    29.6    918.2    32.3    602.6    32.1    486.8    35.1  
        Excess    666.4    14.2    663.4    14.5    380.5    13.4    199.6    10.6    150.5    10.9  
    Casualty  
        Pro Rata (1)    2,023.9    43.0    1,887.2    41.3    1,126.5    39.6    778.1    41.5    503.8    36.4  
        Excess    404.6     8.6    667.3    14.6    421.3    14.8    294.3    15.7    244.5    17.6  










     Total (2)   $ 4,704.1   100.0 %   $ 4,573.8   100.0 %   $ 2,846.5   100.0 %   $ 1,874.6   100.0 %   $ 1,385.6   100.0 %  











____________________

(1)     For purposes of the presentation above, pro rata includes reinsurance attaching to the first dollar of loss incurred by the ceding company and insurance.
(2)     Certain totals and subtotals may not reconcile due to rounding.
(3)      Includes immaterial amounts of life and annuity premium.
(4)      International and Bermuda operations have been restated in accordance with FAS 131 due to the sale of the UK Branch.

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U.S. Reinsurance Operation.     The Company’s U.S. Reinsurance operation writes property and casualty reinsurance, both treaty and facultative, through reinsurance brokers as well as directly with ceding companies within the U.S. The Company targets certain brokers and, through the broker market, specialty companies and small to medium sized standard lines companies. On a direct basis, the Company targets companies that place their business predominantly in the direct market, including small to medium sized regional ceding companies, and seeks to develop long-term relationships with those companies. In addition, the U.S. Reinsurance operation writes portions of reinsurance programs for larger, national insurance companies.

In 2004, $452.1 million of gross written premiums were attributable to U.S. treaty property business, of which 24.9% was written on an excess of loss basis and 75.1% was written on a pro rata basis. The Company’s property underwriters utilize sophisticated underwriting methods, which management believes are necessary to analyze and price property business, particularly that segment of the property market which has catastrophe exposure.

U.S. treaty casualty business accounted for $792.6 million of gross written premiums in 2004, of which 11.3% was written on an excess of loss basis and 88.7% was written on a pro rata basis. The treaty casualty portfolio consists of professional liability, D&O liability, workers’ compensation, excess and surplus lines and other liability coverages. As a result of the complex technical nature of most of these risks, the Company’s casualty underwriters tend to specialize by line of business and work closely with the Company’s pricing actuaries.

The Company’s facultative unit conducts business both through brokers and directly with ceding companies, and consists of four underwriting units representing property, casualty, specialty and national brokerage lines of business. Business is written from a facultative headquarter office in New York and satellite offices in Chicago and Oakland. In 2004, $64.3 million, $115.3 million, $21.7 million and $32.1 million of gross written premiums were attributable to the property, casualty, specialty and national brokerage lines of business, respectively.

In 2004, 83.0%, 10.4% and 6.6% of the U.S. Reinsurance operation’s gross written premiums were written in the broker reinsurance, direct reinsurance and insurance markets, respectively.

U.S. Insurance Operation.     In 2004, the Company’s U.S. Insurance operation wrote $1,167.8 million of gross written premiums, of which 86.4% was casualty, predominantly workers’ compensation insurance, and 13.6% was property. Of the total business written, Everest National wrote $953.1 million and Everest Re wrote $10.6 million, with both principally targeting commercial property and casualty business written through general agency relationships with program administrators. Workers’ compensation business accounted for $686.4 million, or 58.8% of the total business written, including $371.7 million, or 54.2% of the total workers’ compensation business written as California workers’ compensation business and $481.4 million, or 41.2% of the total business written as non-workers’ compensation business. Everest Indemnity wrote $176.6 million, principally targeting excess and surplus lines insurance business written through surplus lines brokers. Everest Security wrote $27.5 million, principally targeting non-standard auto business written through retail agency relationships. With respect to insurance written through general agents and surplus lines brokers, the Company supplements the initial underwriting process with periodic claims, underwriting and operational reviews and ongoing monitoring.

Specialty Underwriting Operation.     The Company’s Specialty Underwriting operation writes A&H, marine, aviation and surety reinsurance. The A&H unit primarily focuses on health reinsurance of traditional indemnity plans, self-insured health plans, accident coverages and specialty medical plans. The marine and aviation unit focuses on ceding companies with a particular expertise in marine and aviation business. The marine and aviation business is written primarily through brokers and contains a significant international component written primarily in the London market. Surety business underwritten by the Company consists mainly of reinsurance of contract surety bonds.

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Gross written premiums of the A&H unit in 2004 totaled $281.9 million, of which 63.8% was written through the broker market and 36.2% was written through the direct market.

Gross written premiums of the marine and aviation unit in 2004 totaled $100.1 million, substantially all of which was written on a treaty basis and sourced through reinsurance brokers. Marine treaties represented 53.1% of marine and aviation gross written premiums in 2004 and consisted mainly of hull and liability coverage. Approximately 43.3% of the marine unit premiums in 2004 were written on a pro rata basis and 56.7% as excess of loss. Aviation premiums accounted for 46.9% of marine and aviation gross written premiums in 2004 and included reinsurance for airlines and general aviation. Approximately 72.6% of the aviation unit’s premiums in 2004 were written on a pro rata basis and 27.4% as excess of loss.

In 2004, gross written premiums of the surety unit totaled $105.1 million. Approximately 93.9% of the surety unit premiums in 2004 were written on a pro rata basis and 6.1% on an excess of loss basis. Most of the portfolio is reinsurance of contract surety bonds written directly with ceding companies, with the remainder being credit reinsurance, mostly in international markets.

International Operation.     The Company’s International operation aims to capitalize on the growth opportunities in the international reinsurance markets. The Company targets several international markets, including: Canada, with a branch in Toronto; Asia, with a branch in Singapore; and Latin America, Africa and the Middle East, which business is serviced from Everest Re’s Miami and New Jersey offices. The Company also writes “home-foreign” business, which provides reinsurance on the international portfolios of U.S. insurers, from New Jersey. Approximately 85.2% of the gross written premiums by the Company’s international underwriters in 2004 represented property business, while 14.8% represented casualty business. As with its U.S. operations, the Company’s International operation focuses on financially sound companies that have strong management and underwriting discipline and expertise. Approximately 66.1% of the Company’s international business was written through brokers, with 33.9% written directly with ceding companies.

Gross written premiums of the Company’s Canadian branch totaled $140.5 million in 2004 and consisted of pro rata property (42.1%), excess property (24.4%), pro rata casualty (6.0%) and excess casualty (27.5%). Approximately 72.2% of the Canadian premiums consisted of treaty reinsurance, while 27.8% was facultative reinsurance.

The Company’s Singapore branch covers the Asian markets and accounted for $112.1 million of gross written premiums in 2004. This business consisted of pro rata property (58.1%), excess property (37.0%), pro rata casualty (4.2%) and excess casualty (0.7%).

International business written out of Everest Re’s Miami and New Jersey offices accounted for $435.1 million of gross written premiums in 2004 and consisted of pro rata treaty property (69.7%), pro rata treaty casualty (8.3%), excess treaty property (9.6%), excess treaty casualty (2.4%) and excess facultative property and casualty (10.0%). Of this international business, 60.6% was sourced from Latin America, 25.7% was sourced from the Middle East, 10.4% was sourced from Africa and 3.3% was “home-foreign” business.

Bermuda Operation.    The Company’s Bermuda operation writes property, casualty, life and annuity business through Bermuda Re and property and casualty reinsurance through its UK branch. In 2004, the Bermuda operation continued to scale up and had gross property and casualty written premiums of $342.2 million accounting for virtually all of its business, of which $117.7 million or 34.4% was facultative reinsurance or individual risk insurance and $224.5 million or 65.6% was treaty reinsurance.

In 2004, the Company’s gross written premiums by the UK branch of Bermuda Re totaled $541.2 million and consisted of pro rata property (34.1%), excess property (22.0%), pro rata casualty (27.2%) and excess casualty (16.7%). All of London’s gross written premiums related to treaty reinsurance.

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Geographic Areas
The Company conducts its business in Bermuda, the U.S. and a number of foreign countries. For select financial information about geographic areas, see Note 18 of Notes to the Consolidated Financial Statements. Risks attendant to the foreign operations of the Company parallel those attendant to the U.S. operations of the Company, with the primary exception of foreign exchange risks. For more information about the risks, see ITEM 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Safe Harbor Disclosure”.

Underwriting Process
The Company offers ceding companies full service capability, including actuarial, claims, accounting and systems support, either directly or through the broker community. The Company’s capacity for both property and casualty risks allows it to underwrite entire contracts or major portions thereof that might otherwise need to be syndicated among several reinsurers. The Company’s strategy is to act as “lead” reinsurer in many of the reinsurance treaties it underwrites. The lead reinsurer on a treaty generally accepts one of the largest percentage shares of the treaty and is in a stronger position to negotiate price, terms and conditions than is a reinsurer that takes a smaller position. Management believes this strategy enables it to more effectively influence the terms and conditions of the treaties on which it participates. When the Company does not lead the treaty, it may still suggest changes to any aspect of the treaty. The Company may decline to participate in a treaty based upon its assessment of all relevant factors.

The Company’s treaty underwriting process emphasizes a team approach among the Company’s underwriters, actuaries and claim staff. Treaties are reviewed for compliance with the Company’s general underwriting standards and certain larger treaties are evaluated in part based upon actuarial analyses by the Company. The actuarial models used in such analyses are tailored in each case to the exposures and experience underlying the specific treaty and the loss experience for the risks covered by such treaties. The Company does not separately evaluate each of the individual risks assumed under its treaties. The Company does, however, generally evaluate the underwriting guidelines of its ceding companies to determine their adequacy prior to entering into a treaty. The Company, when appropriate, also conducts underwriting, operational and claim audits at the offices of ceding companies to ensure that the ceding companies operate within such guidelines. Underwriting audits focus on the quality of the underwriting staff, the selection and pricing of risks and the capability of monitoring price levels over time. Claim audits, when appropriate, are performed in order to evaluate the client’s claims handling abilities and practices.

The Company’s facultative underwriters operate within guidelines specifying acceptable types of risks, limits and maximum risk exposures. Specified classes of U.S. risks and large premium risks are referred to Everest Re’s New York facultative headquarters for specific review before premium quotations are given to clients. In addition, the Company’s guidelines require certain types of risks to be submitted for review because of their aggregate limits, complexity or volatility, regardless of premium amount on the underlying contract. Non-U.S. risks exhibiting similar characteristics are reviewed by senior managers within the involved operations.

The Company’s insurance operations principally write property and casualty coverages for homogeneous risks through select program managers. These programs are evaluated based upon actuarial analysis and the program manager’s capabilities. The Company’s rates, forms and underwriting guidelines are tailored to specific risk types. The Company’s underwriting, actuarial, claim and financial functions work closely with its program managers to establish appropriate underwriting and processing guidelines as well as appropriate monitoring mechanisms.

Risk Management and Retrocession Arrangements
The Company manages its risk of loss through a combination of aggregate exposure limits, underwriting guidelines that take into account risks, prices and coverage, and retrocessional arrangements.

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The Company is exposed to multiple insured losses arising out of a single occurrence, whether a natural event, such as a hurricane or an earthquake, or other catastrophe, such as an explosion at a major factory. Any such catastrophic event could generate insured losses in one, several or many of the Company’s treaties or lines of business, including property and/or casualty exposures. The Company employs various techniques, including licensed modeling software, to assess its accumulated exposure. Such techniques are inherently more difficult to apply to non-property exposures. Accumulated exposures with respect to catastrophe losses are generally summarized in terms of the probable maximum loss (“PML”). The Company defines PML as its anticipated maximum loss, taking into account contract limits, caused by a single catastrophe affecting a broad contiguous geographic area, such as that caused by a hurricane or earthquake, of such a magnitude that it is expected to occur once in every 100 years.

Management believes that the Company’s greatest catastrophe exposure world wide from any single event is to a U.S. earthquake affecting the west coast including workers’ compensation exposure where the Company estimates it has a pre-tax PML exposure of $427 million. The Company further estimates that its second largest exposure relates to a hurricane affecting the U.S. east coast with a pre-tax PML of $390 million. There can be no assurance that the Company will not experience losses from one or more catastrophic events that exceed, perhaps by a substantial amount, its estimated PML.

The U.S. Terrorism Risk Insurance Act of 2002 was signed into law in November 2002. This legislation provides Federal reimbursement of 90% of insured losses, in excess of statutory retention levels, due to acts of terrorism carried out by foreign powers on U.S. soil or against U.S. air carriers, vessels or foreign missions. This coverage does not apply to reinsurance. Reinsurance contracts generally exclude losses arising from terrorist events, except where such coverage has been specifically included in the underwriting and pricing of the involved reinsurance. As the Terrorism Risk Insurance Act of 2002 is due to expire on December 31, 2005, the Company is generally excluding coverage for terrorism risks effective January 1, 2006 on its insurance business, where such exclusions have been approved by state regulators. These endorsements are conditional based on an extension or modification of the legislation. The Company does not believe that this legislation has had a significant impact on its operations.

Underwriting guidelines have been established for each business unit. These guidelines place dollar limits on the amount of business that can be written based on a variety of factors, including ceding company, line of business, geographical location and risk hazards. In each case, those guidelines permit limited exceptions, which must be authorized by the Company’s senior management.

The Company employs a retrocessional approach under which the Company may purchase reinsurance to cover specific business written or exposure accumulations or as a corporate level retrocessional program covering the potential accumulation or aggregation of exposures across some or all of the Company’s operations. All reinsurance purchasing decisions consider both the potential coverage and market conditions with respect to the pricing, terms, conditions and availability of such coverage, with the aim of securing cost-effective protection. The level of reinsurance coverage varies over time, reflecting the underwriter’s and/or Company’s view of the changing dynamics of both the underlying exposure and the reinsurance markets.

The Company does not typically purchase significant amounts of reinsurance to cover specific reinsurance business written, but it does from time to time purchase retrocessional protections where underwriting management deems it to be prudent and/or cost-effective to reinsure a portion of the specific risks being assumed. The Company purchased an excess property facultative retrocessional program in 2002 and 2001 as well as an excess workers’ compensation retrocessional program in 2001. In addition, the Company purchased an excess property catastrophe retrocessional program for losses incurred outside of the U.S. in 2002 and 2001. The 2002 program, which expired on June 5, 2003, was not renewed. The Company also participates in “common account” retrocessional arrangements for certain reinsurance treaties. Common account reinsurance arrangements are arrangements whereby the ceding company purchases reinsurance for the benefit of itself and

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its reinsurers on one or more of its reinsurance treaties. Common account retrocessional arrangements reduce the effect of individual or aggregate losses to all participating companies, including the ceding company, with respect to the involved treaties.

The Company typically considers the purchase of reinsurance to cover insurance program exposures written by the U.S. Insurance operation. The type of reinsurance coverage considered is dependent upon individual risk exposures, individual program exposures, aggregate exposures by line of business, overall segment exposures and the cost effectiveness of available reinsurance. Facultative reinsurance will typically be considered for individual accounts with large exposure and quota share reinsurance will generally be considered for individual programs of business. In evaluating the purchase of reinsurance for a line of business, the Company generally seeks to limit exposure to individual claim severity as opposed to frequency. For workers’ compensation, the Company’s predominant business line at the time, the Company purchased in 1998, for policies incepting during and after November 1998, a workers’ compensation reinsurance program that provided for statutory limits coverage in excess of $75,000 of losses per occurrence on the Company’s workers’ compensation insurance business written prior to November 1, 2000. Effective November 2000, this primary workers’ compensation reinsurance program provided statutory limits coverage in excess of $250,000 of losses per occurrence for business written prior to December 31, 2001. The Company has not purchased such coverage for the period subsequent to December 31, 2001. The remaining net aggregate U.S Insurance segment exposures, after purchasing facultative reinsurance, quota share program reinsurance and/or aggregate line of business coverage, are considered in evaluating the purchase of corporate level retrocessional protection.

The Company considers purchasing corporate level retrocessional protection covering the potential accumulation of exposures. Such consideration includes balancing the underlying exposures against the availability of cost-effective retrocessional protection. For years ended December 31, 1999, 2000 and 2001, the Company purchased accident year aggregate excess of loss retrocession coverage that provided up to $175 million of coverage for each year. These excess of loss policies provided coverage if Everest Re’s consolidated statutory basis accident year loss ratio exceeded a loss ratio attachment point for each year of coverage. The attachment point was net of inuring reinsurance and included adjustable premium provisions that effectively caused the Company to offset, on a pre-tax income basis, up to approximately 57% of such ceded losses. The maximum recovery for each year was $175 million before giving effect to the adjustable premium. As of December 31, 2004, the Company has ceded the maximum limits under all three contracts. The Company did not purchase similar coverage subsequent to December 31, 2001.

Although certain of the Company’s catastrophe and aggregate excess of loss retrocessions have terms which provide for additional premiums to be paid to the retrocessionaire in the event that losses are ceded, all aspects of the Company’s retrocessional program have been structured to permit these agreements to be accounted for as reinsurance under Statement of Financial Accounting Standards No. 113, “Accounting and Reporting for Reinsurance of Short Duration and Long Duration Contracts”.

If a single catastrophe were to occur that resulted in $427 million of gross loss and LAE in 2005 (an amount equivalent to the Company’s PML), management estimates that the effect on the Company’s income would be approximately $427 million and $341 million before and after taxes, respectively. There can be no assurance that the Company will not experience one or more catastrophic events that could cause these estimates to be exceeded, perhaps by a substantial amount.

In connection with the Company’s acquisition of Mt. McKinley in September 2000, the Company had coverage under an aggregate excess of loss reinsurance agreement provided by Prudential Property and Casualty Insurance Company of Indiana (“Prupac”), a wholly-owned subsidiary of The Prudential. On October 31, 2003, LM Property & Casualty Insurance Company (“LM”) completed its purchase of Prupac and its obligations from The Prudential. The Prudential continues to guarantee LM’s obligation under this agreement. This agreement covers 80% or $160 million of the first $200 million of any adverse loss reserve development on the carried

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reserves of Mt. McKinley at the date of acquisition and reimburses the Company as such losses are paid by the Company. Cessions under this reinsurance agreement exhausted the limit available under the contract at December 31, 2003.

As of December 31, 2004, the Company carried as an asset $1,210.8 million in reinsurance receivables with respect to losses ceded. Of this amount, $405.0 million, or 33.4%, was receivable from subsidiaries of London Reinsurance Group (“London Life”), $160.0 million, or 13.2%, was receivable from LM, $132.5 million, or 10.9%, was receivable from Transatlantic Reinsurance Company (“Transatlantic”) and $100.0 million, or 8.3%, was receivable from Continental Insurance Company (“Continental”). No other retrocessionaire accounted for more than 5% of the Company’s receivables. See ITEM 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Financial Condition”.

The Company’s arrangements with both London Life and Continental are managed on a funds held basis, which means that the Company has not released premium payments to the retrocessionaire, but rather retains such payments to secure obligations of the retrocessionaire, records them as a liability, credits interest on the balances and reduces the liability account as payments become due. As of December 31, 2004, such funds had reduced the Company’s net exposure to London Life to $184.1 million, effectively 100% of which has been secured by letters of credit, and its exposure to Continental to $43.7 million. LM’s obligations are guaranteed by The Prudential.

No assurance can be given that the Company will seek or be able to obtain retrocessional coverage in the future similar to that in place currently or in the past. The Company continuously evaluates its exposures and risk capacities in the context of reinsurance market conditions, at both the specific and corporate level. Although management carefully selects its reinsurers, the Company is subject to credit risk with respect to its reinsurance because the ceding of risk to reinsurers does not relieve the Company of its liability to insureds or ceding companies.

Claims
Reinsurance claims are managed by the Company’s professional claims staff whose responsibilities include reviewing initial loss reports and coverage issues, monitoring claims handling activities of ceding companies, establishing and adjusting proper case reserves and approving payment of claims. In addition to claims assessment, processing and payment, the claims staff selectively conducts comprehensive claim audits of both specific claims and overall claim procedures at the offices of selected ceding companies. Insurance claims, except those relating to Mt. McKinley’s business, are generally handled by third party claims services providers who have limited authority and are subject to oversight by the Company’s professional claims staff.

The Company intensively manages its asbestos and environmental (“A&E”) exposures through dedicated, centrally managed claim staffs for Mt. McKinley and Everest Re. Both are staffed with experienced claim and legal professionals that specialize in the handling of such exposures. These units actively manage each individual insured and reinsured account, responding to claim developments with evaluations of the involved exposures and adjustment of reserves as appropriate. Specific or general claim developments that may have material implications for the Company are regularly communicated to senior management, actuarial, legal and financial areas. Meetings among these areas, claim management and senior management are held at least quarterly to review the Company’s overall reserve positions and make changes, if appropriate. The Company continually reviews its internal processing, communications and analytics, seeking to enhance the management of its A&E exposures, in particular in the context of changes in the landscape of asbestos claims and litigation.

Reserves for Unpaid Property and Casualty Losses and Loss Adjustment Expenses
Significant periods of time may elapse between the occurrence of an insured loss, the reporting of the loss to the insurer and the reinsurer and the payment of that loss by the insurer and subsequent payments to the insurer by the reinsurer. To recognize liabilities for unpaid losses and LAE, insurers and reinsurers establish reserves,

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which are balance sheet liabilities representing estimates of future amounts needed to pay reported and unreported claims and related expenses on losses that have already occurred. Actual losses and LAE paid may deviate, perhaps substantially, from such reserves. To the extent reserves prove to be insufficient to cover actual losses and LAE after taking into account available reinsurance coverage, the Company would have to augment such reserves and incur a charge to earnings, which could be material in the period such augmentation takes place. See ITEM 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Loss and LAE Reserves”.

While the reserving process is difficult and subjective for insurance companies, the inherent uncertainties of estimating such reserves are even greater for the reinsurer, due primarily to the longer time between the date of an occurrence and the reporting of any attendant claims to the reinsurer, the diversity of development patterns among different types of reinsurance treaties or facultative contracts, the necessary reliance on the ceding companies for information regarding reported claims and differing reserving practices among ceding companies. In addition, trends that have affected development of liabilities in the past may not necessarily occur or affect liability development to the same degree in the future. As a result, actual losses and LAE may deviate, perhaps substantially, from estimates of reserves reflected in the Company’s consolidated financial statements.

Like many other property and casualty insurance and reinsurance companies, the Company has experienced adverse loss development for prior accident years, which has led to adjustments in losses and LAE reserves. The increase in net reserves for prior accident years reduced net income for the periods in which the adjustments were made. There can be no assurance that adverse development from prior years will not continue in the future or that such adverse development will not have a material adverse effect on net income.

Changes in Historical Reserves
The following table shows changes in historical loss reserves for the Company for 1994 and subsequent years. The table is presented on a GAAP basis except that the Company’s loss reserves for its Canadian branch operations are presented in Canadian dollars, the impact of which is not material. The top line of the table shows the estimated reserves for unpaid losses and LAE recorded at each year end date. Each amount in the top line represents the estimated amount of future payments for losses and LAE on claims occurring in that year and in all prior years. The upper (paid) portion of the table presents the cumulative amounts paid through each subsequent year on those claims for which reserves were carried as of each specific year end. The lower (liability re-estimated) portion shows the re-estimated amount of the previously recorded reserves based on experience as of the end of each succeeding year. The reserve estimates change as more information becomes known about the actual claims for which the initial reserves were carried. The cumulative redundancy/deficiency line represents the cumulative change in estimates since the initial reserve was established. It is equal to the initial reserve less the latest liability re-estimated amount.

Each amount other than the original reserves in the top half of the table below includes the effects of all changes in amounts for prior periods. For example, if a loss settled in 1997 for $100,000, was first reserved in 1994 at $60,000 and remained unchanged until settlement, the $40,000 deficiency (actual loss minus original estimate) would be included in the cumulative redundancy (deficiency) in each of the years in the period 1994 through 1996 shown below. Conditions and trends that have affected development of liability in the past are not indicative of future developments. Accordingly, it is not appropriate to extrapolate future redundancies or deficiencies based on this table.

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Ten Year GAAP Loss Development Table Presented Net of Reinsurance with Supplemental Gross Data (1) (2) (3)
 
Years Ended December 31,











(Dollars in millions) 1994   1995   1996   1997   1998   1999   2000   2001   2002   2003   2004  











Reserves for unpaid                                                                      
   loss and LAE   $ 2,104.2   $ 2,316.1   $ 2,551.6   $ 2,810.0   $ 2,953.5   $ 2,977.4   $ 3,364.9   $ 3,472.5   $ 3,895.8   $ 5,158.4   $ 6,766.9    
Paid (cumulative) as of:  
   One year later      359.5      270.4      331.2      450.8      484.3      673.4      718.1      892.7      902.6    1,141.7  
   Two years later      638.0      502.8      619.2      747.9      955.3    1,159.1    1,264.2    1,517.9    1,641.7  
   Three years later      828.0      682.0      813.7    1,101.5    1,295.5    1,548.3    1,637.5    2,033.5  
   Four years later      983.6      806.3    1,055.9    1,363.1    1,575.9    1,737.8    2,076.0  
   Five years later    1,143.4      990.9    1,253.0    1,592.5    1,693.3    1,787.2  
   Six years later    1,294.8    1,131.5    1,450.2    1,673.4    1,673.9  
   Seven years later    1,412.2    1,300.0    1,510.2    1,665.3  
   Eight years later    1,538.6    1,347.0    1,516.1  
   Nine years later    1,579.2    1,352.3  
   Ten years later    1,664.2  
Liability re-estimated  
   as of:  
   One year later    2,120.8    2,286.5    2,548.4    2,836.2    2,918.1    2,985.2    3,364.9    3,612.6    4,152.7    5,470.4  
   Two years later    2,233.7    2,264.5    2,575.9    2,802.2    2,921.6    2,977.2    3,484.6    3,901.8    4,635.0  
   Three years later    2,271.2    2,285.1    2,546.0    2,794.7    2,910.3    3,070.5    3,688.6    4,400.0  
   Four years later    2,452.3    2,260.7    2,528.0    2,773.5    2,924.5    3,202.6    4,210.3  
   Five years later    2,381.7    2,254.5    2,515.7    2,765.2    3,002.2    3,430.3  
   Six years later    2,382.0    2,247.3    2,507.9    2,778.9    2,997.8  
   Seven years later    2,380.8    2,243.9    2,510.1    2,767.3  
   Eight years later    2,367.3    2,248.4    2,517.3  
   Nine years later    2,381.4    2,257.6  
   Ten years later    2,465.3  
   Cumulative (deficiency)/  
      redundancy   $ (361.1 ) $ 58.5   $ 34.3   $ 42.7   $ (44.3 ) $ (452.9 ) $ (845.4 ) $ (927.5 ) $ (739.2 ) $ (312.0 )        











   Gross liability-  
     end of year   $ 2,752.7   $  3,017.0   $ 3,298.2   $ 3,498.7   $ 3,869.2   $ 3,705.2   $ 3,853.7   $ 4,356.0   $ 4,985.8   $ 6,424.7   $ 7,886.6    
   Reinsurance receivable      648.5      700.9      746.6      688.7      915.7      727.8      488.8      883.5    1,090.0    1,266.3    1,119.7  











   Net liability-end of year    2,104.2    2,316.1    2,551.6    2,810.0    2,953.5    2,977.4    3,364.9    3,472.5    3,895.8    5,158.4    6,766.9  











   Gross re-estimated  
     liability at  
     at December 31, 2004    3,594.2    3,680.8    3,803.7    3,919.4    4,114.3    4,582.6    5,284.1    5,715.5    5,907.6    6,758.7  
   Re-estimated receivable  
     at December 31, 2004    1,128.9    1,423.2    1,286.4    1,152.1    1,116.5    1,152.3    1,073.8    1,315.5    1,272.6    1,288.3  











   Net re-estimated liability  
     at December 31, 2004    2,465.3    2,257.6    2,517.3    2,767.3    2,997.8    3,430.3    4,210.3    4,400.0    4,635.0    5,470.4  











   Gross cumulative  
     (deficiency)/redundancy   $ (841.5 ) $ (663.8 ) $ (505.5 ) $ (420.7 ) $ (245.1 ) $ (877.4 ) $ (1,430.4 ) $ (1,359.5 ) $ (921.8 ) $ (334.0 )        











_____________

(1)    Includes $480.9 million relating to Mt. McKinley at December 31, 2000, principally reflecting $491.1 million of Mt. McKinley reserves at the acquisition date.
(2)    The Canadian Branch reserves are reflected in Canadian dollars.
(3)    Some totals may not reconcile due to rounding.

15

The most recent six years on the above table reflect cumulative deficiencies, also referred to as adverse development, with the largest indicated deficiency in 2001. Three active classes of business are the principal contributors to those deficiencies: professional liability reinsurance, general casualty reinsurance and workers’ compensation insurance. In addition to these active business classes, there continues to be adverse experience on A&E reserves.

In the professional liability reinsurance class, the late 1990s and early 2000s saw a proliferation of claims relating to bankruptcies and other corporate, financial and/or management improprieties. This resulted in an increase in the frequency and severity of claims on the professional liability policies reinsured by the Company. In the general casualty area, the Company continues to experience claim frequency and severity greater than expected in the Company’s pricing and reserving assumptions, particularly for accident years 1999 and 2000. These losses reflect unfavorable trends in litigation and economic variability. With respect to both of these classes, another factor was the increasingly competitive conditions in insurance and reinsurance markets during this period. While the Company seeks to manage the impact of competitive condition changes on its results, it is generally unable to divorce itself entirely from the underlying industry cycles of its principal business. See ITEM 1, “Business – Competition”.

In the workers’ compensation insurance class, the majority of which was written in California, the Company has experienced adverse development primarily for accident years 2001 and 2002. As a result of significant growth in this book of business in a challenging business environment, the Company’s writings in this class were relatively more subject to variability than are some of its more established and/or stable lines of business. Although cumulative results through 2004 continue to be quite profitable for this book of business, there has been some deterioration in claim frequency and severity related to accident years 2001 and 2002.

With respect to active business classes, the Company actively manages the collection, auditing and analysis of loss data, and factors the resulting information into both its reserving processes and its prospective underwriting and pricing activities on as timely a basis as possible.

For years 1994 and prior, management believes that two factors had the most significant impact on loss development. First, through the 1980s, a number of industry and external factors, such as the propensity of courts to award large damage awards in liability cases, combined to increase loss frequency and severity to unexpectedly high levels. Second, contracts written prior to 1986 contained coverage terms which, for the Company and the industry in general, have been interpreted by courts to provide coverage for A&E exposures not contemplated by either the pricing or the initial reserving of the contracts. Legal developments during the 1980s, and continuing to date, have necessitated additional reserving for such exposures on both a case basis and an incurred but not reported (“IBNR”) basis. These factors were the primary reasons for the cumulative adverse development on the 1994 and prior calendar year reserves. See ITEM 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Critical Accounting Policies – Asbestos and Environmental Exposures”.

The change between 1994 and 1995 reflects the impact of a stop loss reinsurance agreement with Mt. McKinley, which was then a subsidiary of The Prudential. This stop loss agreement commenced in 1995 when The Prudential sold the stock of the Company in an initial public offering and hence recoveries under this coverage are attributed to the 1995 accident year. As a result of this agreement, reserve development arising from claims incurred prior to July 1, 1995 (January 1, 1995 as respects catastrophe losses) was ceded under the agreement with no impact on net development, except for a modest retention, when the adverse development reflected for accident year 1994 and prior is considered in the context of the mitigating favorable development attributed to the 1995 accident year. This coverage became an inter-affiliate reinsurance transaction with the acquisition of Mt. McKinley in 2000, which eliminated any subsequent impact on net reserve development. See ITEM 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Financial Condition”.

16

Management believes that adequate provision has been made for the Company’s loss and LAE reserves. While there can be no assurance that reserves for and losses from these claims will not increase in the future, management believes that the Company’s existing reserves, reserving methodologies and retrocessional arrangements lessen the probability that any such increases would have a material adverse effect on the Company’s financial condition, results of operations or cash flows. These statements regarding the Company’s loss reserves are forward looking statements within the meaning of the U.S. federal securities laws and are intended to be covered by the safe harbor provisions contained therein. See ITEM 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Safe Harbor Disclosure”.

The following table is derived from the Ten Year GAAP Loss Development Table above and summarizes the effect of reserve re-estimates, net of reinsurance, on calendar year operations by accident year for the same ten year period ended December 31, 2004. Each column represents the amount of reserve re-estimates made in the indicated calendar year and shows the accident years to which the re-estimates are applicable. The amounts in the total accident year column on the far right represent the cumulative reserve re-estimates for the indicated accident years.

Effects on Pre-tax Income Resulting from Reserve Re-estimates (1)
    Cumulative  
  Calendar Year Ended December 31, Re-estimates  










for Each
(Dollars in millions) 1995   1996   1997   1998   1999   2000   2001   2002   2003   2004   Accident Year  











Accident Years                                                                      
1994 &prior   $ (16.7 ) $ (112.8 ) $ (37.5 ) $ (181.1 ) $ 70.6   $ (0.4 ) $ 1.0   $ 13.6   $ (14.0 ) $ (83.9 )   $ (361.2 )
1995            142.4       59.6    160.4    (46.2 )      6.5      6.1    (10.2 )      9.6     74.7      402.9  
1996                (18.9 )     (6.8 )      5.5     11.8      5.0      4.5      2.2      2.1        5.4  
1997                        1.3      4.1    (10.4 )      8.9      0.4    (11.5 )     18.8       11.6  
1998                              1.4      (11.0 )     (9.8 )    (22.5 )    (64.0 )     (7.2 )     (113.1 )
1999                                   (4.3)    (3.3)   (79.1)   (54.4)  (232.1)    (373.2 )
2000                                         (7.9 )    (26.4 )    (71.9 )   (294.1 )     (400.3 )
2001                                              (20.4 )    (85.2 )     23.5        (82.1 )
2002                                                     32.3     15.9       48.2  
2003                                                          170.3      170.3  
Total calendar  
      year effect   $ (16.7 ) $ 29.6   $ 3.2   $ (26.2 ) $ 35.4   $ (7.8 ) $ 0.0   $ (140.1 ) $ (256.9 ) $ (312.0 )   $ (691.5 )

__________________

(1)    Some totals may not reconcile due to rounding.

The reserve development by accident year reflected in the above table was generally the result of the same factors discussed above that caused the deficiencies shown in the Ten Year GAAP Loss Development Table. Development in accident years 1994 and prior principally reflect the impact of the liability award inflation and A&E exposures discussed above. The favorable development experienced for the 1995 accident year is due to stop loss reinsurance provided to the Company at the time of its initial public offering, which, when established, was specifically intended to mitigate the impact of development on reserves at June 30, 1995. The adverse development experienced in the 1998 through 2001 accident years relates principally to casualty reinsurance, including professional liability classes and workers’ compensation insurance where, in retrospect, the Company’s initial estimates of losses were underestimated principally as the result of unanticipated variability in the underlying exposures. The favorable development for accident years 2002 and 2003 relates primarily to favorable experience with respect to property reinsurance business.

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

The following table presents a reconciliation of beginning and ending reserve balances for the years indicated on a GAAP basis:

Reconciliation of Reserves for Losses and LAE
Years Ended December 31,



(Dollars in millions) 2004   2003   2002  



Reserves at beginning of period     $ 6,361.2   $ 4,905 .6 $ 4,278 .3



Incurred related to:  
    Current year    2,979.1    2,343 .3  1,489 .3
    Prior years    312.0    256 .9  140 .1



       Total incurred losses    3,291.1    2,600 .2  1,629 .4
Paid related to:  
    Current year    607.1    501 .1  352 .9
    Prior years    1,141.7    902 .6  892 .7



       Total paid losses    1,748.8    1,403 .7  1,245 .6



Paid related to:    78.9    86 .7  38 .4
Change in reinsurance receivables on unpaid losses and LAE    (146.1 )  172 .5  205 .1



Reserves at end of period   $ 7,836.3   $ 6,361 .2 $ 4,905 .6



Prior year incurred losses were $312.0 million in 2004 and $256.9 million in 2003. Such losses were the result of the reserve development noted above, as well as inherent uncertainty in establishing loss and LAE reserves.

Reserves for Asbestos and Environmental Losses and Loss Adjustment Expenses
The Company’s reserves include an estimate of the Company’s ultimate liability for A&E claims for which ultimate value cannot be estimated using traditional reserving techniques. There are significant uncertainties in estimating the amount of the Company’s potential losses from A&E claims. See ITEM 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Asbestos and Environmental Exposures” and Note 3 of Notes to Consolidated Financial Statements.

Mt. McKinley’s book of direct A&E exposed insurance is relatively small and homogenous. The book is based principally on excess liability policies; thus the claim/legal staff does not have to analyze exposure under many different policy forms, but rather can focus on a limited number of policies and policy forms. As a result of this focused structure, the Company believes that it is able to comprehensively analyze its exposures, allowing it to identify and analyze those claims on which it has unusual exposure, such as policies in which it may be exposed to pay expenses in addition to policy limits or non-products asbestos claims, for concentrated ongoing attention.

The Company aims to be actively engaged with every insured account posing significant potential asbestos exposure to Mt. McKinley. Such engagement can take the form of pursuing a final settlement, negotiation, litigation, or the monitoring of claim activity under Settlement in Place (“SIP”) agreements. SIP agreements generally condition an insurer’s payment upon the actual claim experience of the insured and may have annual payment caps or other measures to control the insurer’s payments. The Company’s Mt. McKinley operation is currently managing nine SIP agreements, three of which were executed prior to the acquisition of Mt. McKinley

18

in 2000. The Company’s preference with respect to coverage settlements is to execute settlements that call for a fixed schedule of payments, because such settlements eliminate future uncertainty.

The Company has significantly enhanced its classification of insureds by exposure characteristics over time, as well as its analysis by insured for those it considers to be more exposed or active. Those insureds identified as relatively less exposed or active are subject to less rigorous, but still active management, with an emphasis on monitoring those characteristics, which may indicate an increasing exposure or levels of activity. The Company continually focuses on further enhancement of the detailed estimation processes used to evaluate potential exposure of policyholders, including those that may not have reported significant A&E losses.

Everest Re’s book of assumed reinsurance is relatively concentrated within a modest number of A&E exposed relationships. Because the book of business is relatively concentrated and the Company has been managing the A&E exposures for many years, its claim staff is familiar with the ceding companies that have generated most of these liabilities in the past and which are therefore most likely to generate future liabilities. The Company’s claim staff has developed familiarity both with the nature of the business written by its ceding companies and the claims handling and reserving practices of those companies. This level of familiarity enhances the quality of the Company’s analysis of its exposure through those companies. As a result, the Company believes that it can identify those claims on which it has unusual exposure, such as non-products asbestos claims, for concentrated attention. However, in setting reserves for its reinsurance liabilities, the Company relies on claims data supplied by its ceding companies and brokers. This information is not always timely or accurate and can impact the accuracy and timeliness of ultimate loss projections.

The following table summarizes the composition of the Company’s total reserves for A&E losses, gross and net of reinsurance, for the years ended December 31:

(Dollars in millions) 200 4 200 3 200 2



Case reserves reported by ceding companies     $ 148 .5 $ 123 .1 $ 112 .5
Additional reserves established by the Company (assumed reinsurance) (1)    151 .3  109 .1  55 .5
Case reserves established by the Company    272 .1  251 .3  262 .1
IBNR reserves    156 .4  281 .8  237 .8



Gross reserves    728 .3  765 .3  667 .9
Reinsurance receivable    (221 .6)  (230 .9)  (140 .4)



Net reserves   $ 506 .7 $ 534 .4 $ 527 .5



______________

(1) Additional reserves are case specific reserves determined by the Company to be needed over and above those reported by the ceding      company.

Additional losses, including those relating to latent injuries and other exposures, which are as yet unrecognized, the type or magnitude of which cannot be foreseen by either the Company or the industry, may emerge in the future. Such future emergence could have material adverse effects on the Company’s future financial condition, results of operations and cash flows.

Future Policy Benefit Reserves
Future policy benefit liabilities for annuities are reported at the accumulated fund balance of these contracts. Reserves for those liabilities include both mortality and morbidity provisions with respect to life and annuity claims, both reported and unreported. Actual experience in a particular period may be worse than assumed experience and, consequently, may adversely affect the Company’s operating results for the period. See Note 1F of Notes to Consolidated Financial Statements.

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Activity in the reserve for future policy benefits is summarized as follows:

Years Ended December 31,



(Dollars in thousands) 2004   2003   2002  



Balance at beginning of year     $ 205,275   $ 227,925   $ 238,753  
Liabilities assumed    300    512    6,563  
Adjustments to reserves    8,544    11,239    8,519  
Benefits paid in the current year    (19,543 )  (34,401 )  (25,910 )
Contract terminations    (42,397 )  -    -  



Balance at end of year   $ 152,179   $ 205,275   $ 227,925  



Investments
The Company’s overall financial strength and results of operations are, in part, dependent on the quality and performance of its investment portfolio. Net investment income and net realized capital gains (losses) on the Company’s invested assets constituted 11.7%, 8.9%, and 11.8% of the Company’s revenues for the years ended December 31, 2004, 2003 and 2002, respectively. The Company’s cash and invested assets totaled $11.5 billion at December 31, 2004, which consisted of 93.0% fixed maturities of which 95.5% were investment grade, 5.6% equity securities and 1.4% other invested assets.

The Company’s current investment strategy seeks to maximize after-tax income, through a high quality, diversified, taxable bond and tax-preferenced fixed maturity portfolio, while maintaining an adequate level of liquidity. The Company’s mix of taxable and tax-preferenced investments is adjusted continuously, consistent with the Company’s current and projected operating results, market conditions and tax position. Additionally, the Company invests in equity securities, which it believes will enhance the risk-adjusted total return of the investment portfolio.

The board of directors of each of the Company’s operating subsidiaries is responsible for establishing investment policy and guidelines and, together with senior management, for overseeing their execution. The Company’s investment portfolio is in compliance with the insurance laws of the jurisdictions in which its subsidiaries are regulated. Generally, an independent investment advisor is utilized to manage the Company’s fixed income investment portfolio within the established guidelines and is required to report activities on a current basis and to meet with the Company periodically to review and discuss the portfolio structure, securities selection and performance results. The Company manages directly its investments in its equity and other invested asset portfolios.

The Company’s investment guidelines include a general duration guideline of five to six years. The duration of an investment is based on the maturity of the security but also reflects the payment of interest and the possibility of early prepayment of such security. This investment duration guideline is established and periodically revised by management, which considers economic and business factors. An important factor considered by management is the Company’s average duration of potential liabilities, which, at December 31, 2004, is estimated at approximately 4.5 years based on the estimated payouts of underwriting liabilities using standard duration calculations.

The duration of the fixed income portfolio at December 31, 2004 was 5.2 years. The Company made a decision to shorten duration during the second half of 2003 by purchasing interest only strips of mortgaged-back securities (“interest only strips”). The interest only strips 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 underlying mortgage pool. Generally, as market interest rates and more

20

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 market mortgage rates rise, repayments will slow and the ultimate cash flows will tend to rise. Accordingly, the market value of these investments tends to increase as general interest rates rise and decline as general interest rates fall. These movements are generally counter to the impact of interest rate movements on the Company’s other fixed income investments. As interest rates peaked during the second quarter of 2004 the Company liquidated its portfolio of interest only strips causing duration to rise back to the present levels. Such investments contributed to the 4.2 year duration at December 31, 2003.

For each currency in which the Company has established substantial reserves, the Company seeks to maintain invested assets denominated in such currency in an amount approximately comparable to the estimated liabilities. Approximately 8.5% of the Company’s consolidated reserves for losses and LAE and unearned premiums represent estimated amounts payable in foreign currencies.

As of December 31, 2004, 93.0% of the Company’s total investments and cash were comprised of fixed maturity investments or cash and 95.5% of the Company’s fixed maturities consisted of investment grade securities. The average maturity of fixed maturities was 8.1 years at December 31, 2004, and their overall duration was 5.2 years. As of December 31, 2004, the Company did not have any investments in commercial real estate or direct commercial mortgages or any material holdings of derivative investments or securities of issuers that are experiencing cash flow difficulty to an extent that the Company’s management believes could threaten the issuer’s ability to meet debt service payments, except where other than temporary impairments have been recognized.

As of December 31, 2004, the Company’s common stock portfolio, which is comprised primarily of publicly traded equity index funds, had a market value of $650.9 million, comprising 5.6% of total investments and cash.

21

The following table reflects investment results for the Company for each of the five years ended December 31:

(Dollars in millions) Average
Investments (1)
Pre-Tax
Investment
Income (2)
Effective
Yield
Pre-Tax
Realized Net
Capital Gains
(Losses)
Pre-Tax
Unrealized Net
Capital Gains
(Losses)





2004     $ 10,042 .2 $ 495 .9  4 .94% $89 .6 $ 40 .1
2003    7,779 .1  402 .6  5 .18%  (38 .0)  68 .1
2002    6,068 .1  350 .7  5 .78%  (50 .0)  135 .9
2001    5,374 .9  340 .4  6 .33%  (22 .3)  57 .3
2000    4,824 .0  301 .5  6 .25%  0 .8  131 .0
______________

(1) Average of the beginning and ending carrying values of investments and cash, less net funds held, future policy benefit reserve, and non-interest bearing cash. Bonds, common stock      and redeemable and non-redeemable preferred stocks are carried at market value.
(2) After investment expenses, excluding realized net capital gains (losses).

The following table summarizes fixed maturities as of December 31, 2004 and 2003:

(Dollars in millions) Amortized
Cost
Unrealized
Appreciation
Unrealized
Depreciation
Market
Value




December 31, 2004:                    
    U.S. Treasury securities and obligations of U.S.  
         government agencies and corporations   $ 184 .1 $ 2 .1 $ 0 .8 $ 185 .4
    Obligations of states and political subdivisions    3,281 .4  160 .2  2 .3  3,439 .3
    Corporate securities    3,211 .7  137 .5  17 .7  3,331 .5
    Mortgage-backed securities    1,468 .8  13 .3  8 .1  1,474 .0
    Foreign government securities    921 .5  31 .2  0 .6  952 .1
    Foreign corporate securities    542 .1  24 .6  1 .8  564 .9




          Total   $ 9,609 .6 $ 368 .9 $ 31 .3 $ 9,947 .2




December 31, 2003:                    
    U.S. Treasury securities and obligations of U.S.  
         government agencies and corporations   $ 152 .0 $ 6 .0 $ 0 .6 $ 157 .4
    Obligations of states and political subdivisions    2,798 .4  156 .4  3 .1  2,951 .7
    Corporate securities    2,969 .2  172 .6  24 .8  3,117 .0
    Mortgage-backed securities    1,369 .2  26 .7  12 .6  1,383 .3
    Foreign government securities    708 .1  24 .6  2 .1  730 .6
    Foreign corporate securities    360 .8  26 .5  0 .4  386 .9




          Total   $ 8,357 .7 $ 412 .8 $ 43 .6 $ 8,726 .9




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The following table presents the credit quality distribution of the Company’s fixed maturities as of December 31:






  2004   2003  





Rating Agency Credit Quality Distribution Market Percent of   Market Percent of  
(Dollars in millions) Value Total   Value Total  






AAA     $ 5,237 .1  52 .7%   $ 4,612 .6  52 .9%
AA    968 .7  9 .7    756 .9  8 .7
A    1,965 .6  19 .8    1,672 .9  19 .2
BBB    1,293 .3  13 .0    1,171 .6  13 .4
BB    369 .1  3 .7    430 .1  4 .9
B    92 .7  0 .9    52 .7  0 .6
Other    20 .7  0 .2    30 .1  0 .3





      Total (1)   $ 9,947 .2  100 .0%   $ 8,726 .9  100 .0%





______________

(1) Certain totals may not reconcile due to rounding.
  

The following table summarizes fixed maturities by contractual maturity as of December 31, 2004:

(Dollars in millions) Market
Value
Percent of
Total



Maturity category:            
     Less than one year   $ 283 .4  2 .9%
     1-5 years    1,917 .8  19 .3
     5-10 years    2,499 .8  25 .1
     After 10 years    3,772 .2  37 .9



          Subtotal    8,473 .2  85 .2
     Mortgage-backed securities (1)    1,474 .0  14 .8



          Total   $ 9,947 .2  100 .0%



______________

(1) Mortgage-backed securities generally are more likely to be prepaid than other fixed maturities. Therefore, contractual maturities are excluded from this table since they may not be      indicative of actual maturities.

23

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

Operating Subsidiary A.M. Best Standard & Poor's Moody's




Everest Re     A+ (Superior)     AA- (Very Strong)     Aa3 (Excellent)    
Bermuda Re   A+ (Superior)   AA- (Very Strong)   Aa3 (Excellent)  
Everest International   A+ (Superior)   Not Rated   Not Rated  
Everest National   A+ (Superior)   AA- (Very Strong)   Not Rated  
Everest Indemnity   A+ (Superior)   Not Rated   Not Rated  
Everest Security   A+ (Superior)   Not Rated   Not Rated  
Mt. McKinley   Not Rated   Not Rated   Not Rated  

A.M. Best states that the “A+” (“Superior”) rating is assigned to those companies which, in its opinion, have a superior ability to meet their ongoing obligations to policyholders based on A.M. Best’s comprehensive quantitative and qualitative evaluation of a company’s balance sheet strength, operating performance and business profile. The “A+" (“Superior”) rating is the second highest of fifteen ratings assigned by A.M. Best, which range from “A++” (“Superior”) to “F” (“In Liquidation”). Additionally, A.M. Best has five classifications within the “Not Rated” category. Standard & Poor’s states that the “AA-” rating is assigned to those insurance companies which, in its opinion, have very strong financial security characteristics with respect to their ability to pay under its insurance policies and contracts in accordance with their terms. The “AA-” rating is the fourth highest of nineteen ratings assigned by Standard & Poor’s, which range from “AAA” to “R”. Ratings from AA to CCC may be modified by the use of a plus or minus sign to show relative standing of the insurer within those rating categories. Moody’s states that insurance companies rated “Aa” offer excellent financial security. Together with the Aaa rated companies, Aa rated companies constitute what are generally known as high-grade companies, with Aa rated companies generally having somewhat larger long-term risks. Moody’s rating gradations are shown through the use of nine distinct symbols, each symbol representing a group of ratings in which the financial security is broadly the same. The “Aa3” (Excellent) rating is the fourth highest of ratings assigned by Moody’s, which range from “Aaa” (Exceptional) to “C” (Lowest). Moody’s appends numerical modifiers 1, 2 and 3 to each generic rating classification from Aa through Caa. Numeric modifiers are used to refer to the ranking within a group – with 1 being the highest and 3 being the lowest.

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

The following table shows the debt ratings by A.M. Best, Standard & Poor’s and Moody’s of the Holdings’ senior notes due March 15, 2005, March 15, 2010 and October 15, 2014 and Everest Re Capital Trust (“Capital Trust”) and Everest Re Capital Trust II’s (“Capital Trust II”) trust preferred securities due November 15, 2032 and March 29, 2034, all of which are considered investment grade. Debt ratings are a current assessment of the credit worthiness of an obligor with respect to a specific obligation.

  A.M. Best Standard & Poor's Moody's




Senior Notes     a     A-     A3    
Trust Preferred Securities   a-   BBB   Baal  

24

A debt rating of “a” or “a-” is assigned by A.M. Best where the issuer, in A.M. Best’s opinion, has a strong ability to meet the terms of the obligation. The “a” and “a-” ratings are the sixth and seventh highest of 19 ratings assigned by A.M. Best, which range from “aaa” to “ccc”. A debt rating of “A-” is assigned by Standard & Poor’s where the obligor has a strong capacity to meet its financial commitment on the obligation, although it is somewhat more susceptible to the adverse effects of changes in circumstances and economic conditions than obligations in higher rated categories. Standard & Poor’s assigns a debt rating of “BBB” to issues that exhibit adequate protection parameters although adverse economic conditions or changing circumstances are more likely to lead to a weakened capacity of the obligor to meet its financial commitment on the obligation. The “A-” and “BBB” ratings from Standard & Poor’s are the seventh and ninth highest of 24 ratings assigned by Standard & Poor’s, which range from “AAA” to “D”. According to Moody’s, a debt rating of “A3” is assigned to issues that are considered upper-medium-grade obligations and subject to low credit risk. Obligations rated “Baa1” are subject to moderate credit risk and are considered medium-grade and as such may possess certain speculative characteristics. The “A3” and “Baa1” ratings are the seventh and eighth highest of 21 ratings assigned by Moody’s, which range from “AAA” to “C”.

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

The Company believes that its ratings, in general, have become increasingly important to its operations because they provide the Company’s customers and investors with an independent assessment of the Company’s underlying financial strength using a scale that provides for relative comparisons.

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

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

In 2004, the favorable market conditions, which had developed during 2000 through 2003, generally began to weaken. There were signs that pricing for most property classes declined modestly and that pricing for most casualty classes softened. Competition increased, in part due to the relative profitability achieved by many reinsurers over 2002 and 2003 and the attendant buildup of capital in these participants. However, this profitability and capital buildup varied significantly by market participant, reflecting the fact that the industry

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generally still remained exposed to fundamental issues that had negatively impacted its aggregate capacity in 2002 and 2003, including weak investment market conditions and adverse loss emergence. Both of these had tended to depress the industry’s aggregate financial performance and perceptions of financial strength of industry participants over this period albeit with significant variation by individual market participant. The industry experienced a record level of catastrophe losses during 2004, particularly in the second half of the year, and it remains unclear whether the aggregate catastrophe losses experienced by the industry will reverse, stop or even moderate the trends toward market softening, particularly as respects property classes.

Through 2003, reinsurance and insurance markets had generally continued to firm, reflecting the continuing, although diminishing, implications of losses arising from the terrorist attacks of September 11, 2001, and more broadly, the impact of aggregate company reactions to broad and growing recognition that competition in the late 1990s reached extremes in many classes and markets, which ultimately led to inadequate pricing and overly broad terms, conditions and coverages. The effect of these extremes, which became apparent through excessive loss emergence, varied widely by company depending on product offerings, markets accessed, underwriting and operating practices, competitive strategies and business volumes. Across all market participants, however, the aggregate general effect was depressed financial results and erosion of the industry capital base. Coupled with deteriorating investment market conditions and results, and renewed concerns regarding longer-term industry specific issues, including legacy reserve issues and sub-par capital returns, these financial impacts introduced substantial, and in some cases extreme, pressure for the initiation and/or strengthening of corrective action by individual market participants. These pressures, aggregating across industry participants, reinforced the trend established in 2000 through 2003 toward firming prices, more restrictive terms and conditions, tightened coverage availability across most classes and markets and increasing concern with respect to the financial security of insurance and reinsurance providers, impacts which set the stage for the 2004 trends discussed above.

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

Employees
As of March 1, 2005, the Company employed 606 persons. Management believes that its employee relations are good. None of the Company’s employees are subject to collective bargaining agreements, and the Company is not aware of any current efforts to implement such agreements.

Regulatory Matters
The Company and its insurance subsidiaries are subject to regulation under the insurance statutes of the various jurisdictions in which they conduct business, including essentially all states of the U.S., Canada, Singapore, the United Kingdom and Bermuda. These regulations vary from jurisdiction to jurisdiction and are generally designed to protect ceding insurance companies and policyholders by regulating the Company’s conduct of business, financial integrity and ability to meet its obligations relating to its business transactions and operations. Many of these regulations require reporting of information designed to allow insurance regulators to closely monitor the Company’s performance.

Insurance Holding Company Regulation.   Under applicable U.S. laws and regulations, no person, corporation or other entity may acquire a controlling interest in the Company, unless such person, corporation or entity has obtained the prior approval for such acquisition from the Insurance Commissioners of Delaware and the other states in which the Company’s insurance subsidiaries are domiciled or deemed domiciled, currently Arizona,

26

California and Georgia. Under these laws, “control” is presumed when any person acquires, directly or indirectly, 10% or more of the voting securities of an insurance company. To obtain the approval of any change in control, the proposed acquirer must file an application with the relevant insurance commissioner disclosing, among other things, the background of the acquirer and that of its directors and officers, the acquirer’s financial condition and its proposed changes in the management and operations of the insurance company. U.S. state regulators also require prior notice or regulatory approval of material inter-affiliate transactions within the holding company structure. See “Dividends”.

The Insurance Companies Act of Canada also requires prior approval by the Minister of Finance of anyone acquiring a significant interest in an insurance company authorized to do business in Canada. In addition, the Company is subject to regulation by the insurance regulators of other states and foreign jurisdictions in which it is authorized to do business. Certain of these states and foreign jurisdictions impose regulations regulating the ability of any person to acquire control of an insurance company authorized to do business in that jurisdiction without appropriate regulatory approval similar to those described above.

Dividends.  Under Bermuda law, Group is prohibited from declaring or paying a dividend if such payment would reduce the realizable value of its assets to an amount less than the aggregate value of its liabilities and its issued share capital and share premium (additional paid-in capital) accounts. Group’s ability to pay dividends and its operating expenses is partially dependent upon dividends from its subsidiaries. The payment of dividends by insurance subsidiaries is limited under Bermuda law as well as the laws of the various U.S. states in which Group’s insurance and reinsurance subsidiaries are domiciled or deemed domiciled. The limitations are generally based upon net income and compliance with applicable policyholders’ surplus or minimum solvency margin and liquidity ratio requirements as determined in accordance with the relevant statutory accounting practices. As Holdings has outstanding debt obligations, it is dependent upon dividends and other permissible payments from its operating subsidiaries to enable it to meet its debt and operating expense obligations and to pay dividends to Group.

Under Bermuda law, Bermuda Re is unable to declare or make payment of a dividend if it fails to meet its minimum solvency margin or minimum liquidity ratio. As a long-term insurer, Bermuda Re is also unable to declare or pay a dividend to anyone who is not a policyholder unless, after payment of the dividend, the value of the assets in its long-term business fund, as certified by its approved actuary, exceeds its liabilities for long-term business by at least the $250,000 minimum solvency margin. Prior approval of the Bermuda Monetary Authority is required if Bermuda Re’s dividend payments would reduce its prior year end total statutory capital by 15.0% or more. At December 31, 2004, Bermuda Re and Everest International met their solvency and liquidity requirements by a significant margin.

The payment of dividends to Holdings by Everest Re is subject to limitations imposed by Delaware law. Generally, Everest Re may only pay dividends out of its statutory earned surplus, which was $1,368.4 million at December 31, 2004, and only after it has given 10 days prior notice to the Delaware Insurance Commissioner. During this 10-day period, the Commissioner may, by order, limit or disallow the payment of ordinary dividends if the Commissioner finds the insurer to be presently or potentially in financial distress. Further, the maximum amount of dividends that may be paid without the prior approval of the Delaware Insurance Commissioner in any twelve month period is the greater of (1) 10% of an insurer’s statutory surplus as of the end of the prior calendar year or (2) the insurer’s statutory net income, not including realized capital gains, for the prior calendar year. Under this definition, the maximum amount that will be available for the payment of dividends by Everest Re in 2005 without triggering the requirement for prior approval of regulatory authorities in connection with a dividend is $209.3 million.

Insurance Regulation.  NeitherBermuda Re nor Everest International are admitted to do business in any jurisdiction in the U.S. Both conduct their insurance business from their offices in Bermuda, and in the case of Bermuda Re, its branch in the UK. In Bermuda, Bermuda Re and Everest International are regulated by the

27

Insurance Act 1978 (as amended) and related regulations (the “Act”). The Act establishes solvency and liquidity standards and auditing and reporting requirements and subjects Bermuda Re and Everest International to the supervision, investigation and intervention powers of the Bermuda Monetary Authority. Under the Act, Bermuda Re and Everest International, as Class 4 insurers, are each required to maintain a principal office in Bermuda, to maintain a minimum of $100 million in statutory capital and surplus, to have an independent auditor approved by the Bermuda Monetary Authority conduct an annual audit and report on their respective statutory financial statements and filings and to have an appointed loss reserve specialist (also approved by the Bermuda Monetary Authority) review and report on their respective loss reserves annually.

Bermuda Re is also registered under the Act as a long-term insurer and is thereby authorized to write life and annuity business. As a long-term insurer, Bermuda Re is required to maintain $250,000 in statutory capital separate from its Class 4 minimum statutory capital and surplus, to maintain a long-term business fund, to separately account for this business and to have an approved actuary prepare a certificate concerning its long-term business assets and liabilities to be filed annually.

U.S. domestic property and casualty insurers, including reinsurers, are subject to regulation by their state of domicile and by those states in which they are licensed. The regulation of reinsurers is typically related to the reinsurer’s financial condition, investments, management and operation. The rates and policy terms of reinsurance agreements are generally not subject to direct regulation by any governmental authority.

The operations of Everest Re’s foreign branch offices in Canada, and Singapore are subject to regulation by the insurance regulatory officials of those jurisdictions. Management believes that the Company is in material compliance with applicable laws and regulations pertaining to its business and operations. Effective January 1, 2004, Everest Re sold its United Kingdom branch to Bermuda Re, a Bermuda insurance company and direct subsidiary of Group. Business for this branch was previously included in the International segment and is now included in the Bermuda segment. Through this transaction, Bermuda Re’s operations in the United Kingdom and worldwide are subject to regulation by the Financial Services Authority (the “FSA”). The FSA imposes solvency, capital adequacy, audit, financial reporting and other regulatory requirements on insurers transacting business in the United Kingdom. Bermuda Re presently meets or exceeds all of the FSA’s solvency and capital requirements.

Everest Indemnity, Everest National, Everest Security and Mt. McKinley are subject to regulations similar to the U.S. regulations applicable to Everest Re. In addition, Everest National and Everest Security must comply with substantial regulatory requirements in each state where they conduct business. These additional requirements include, but are not limited to, rate and policy form requirements, requirements with regard to licensing, agent appointments, participation in residual markets and claim handling procedures. These regulations are primarily designed for the protection of policyholders.

Licenses.  Everest Re is a licensed property and casualty insurer and/or reinsurer in all states (except Nevada and Wyoming), the District of Columbia and Puerto Rico. In New Hampshire and Puerto Rico, Everest Re is licensed for reinsurance only. Such licensing enables U.S. domestic ceding company clients to take credit for reinsurance ceded to Everest Re.

Everest Re is licensed as a property and casualty reinsurer in Canada. It is also authorized to conduct reinsurance business in Singapore. Everest Re can also write reinsurance in other foreign countries. Because some jurisdictions require a reinsurer to register in order to be an acceptable market for local insurers, Everest Re is registered as a foreign insurer and/or reinsurer in the following countries: Argentina, Bolivia, Chile, Colombia, Ecuador, El Salvador, Guatemala, Honduras, Mexico, Peru, Venezuela and the Philippines. Everest National is licensed in 47 states and the District of Columbia. Everest Indemnity is licensed in Delaware and is eligible to write insurance on a surplus lines basis in 49 states, the District of Columbia and Puerto Rico. Everest Security is licensed in Georgia and Alabama. Mt. McKinley is licensed in Delaware and California.

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Bermuda Re and Everest International are registered as Class 4 insurers in Bermuda. Bermuda Re is also registered as a long-term insurer in Bermuda.

Periodic Examinations.  Everest Re, Everest National, Everest Indemnity, Everest Security and Mt. McKinley are subject to periodic financial examination (usually every 3 years) of their affairs by the insurance departments of the states in which they are licensed, authorized or accredited. Everest Re’s, Everest Security’s, Everest Indemnity’s and Mt. McKinley’s last examination reports were as of December 31, 2000, while Everest National’s last examination was as of December 31, 2001. None of these reports contained any material findings or recommendations. In addition, U.S. insurance companies are subject to examinations by the various state insurance departments where they are licensed concerning compliance with applicable conduct of business regulations.

NAIC Risk-Based Capital Requirements.   The U.S. National Association of Insurance Commissioners (“NAIC”) employs a formula to measure the amount of capital appropriate for a property and casualty insurance company to support its overall business operations in light of its size and risk profile. The major categories of a company’s risk profile are its asset risk, credit risk, and underwriting risk. The standards are an effort by the NAIC to prevent insolvencies, to ward off other financial difficulties of insurance companies and to establish uniform regulatory standards among state insurance departments.

Under the approved formula, a company’s statutory surplus is compared to its risk based capital (“RBC”). If this ratio is above a minimum threshold, no action is necessary. Below this threshold are four distinct action levels at which a regulator can intervene with increasing degrees of authority over a domestic insurer as the ratio of surplus to RBC decreases. The mildest intervention requires the Company to submit a plan of appropriate corrective actions. The most severe action requires the Company to be rehabilitated or liquidated.

Based on their financial positions at December 31, 2004, Everest Re, Everest National, Everest Indemnity and Everest Security exceed the minimum thresholds. Since Mt. McKinley ceased writing new and renewal insurance in 1985, its domiciliary regulator, Delaware, has exempted Mt. McKinley from complying with RBC requirements. Various proposals to change the RBC formula arise from time to time. The Company is unable to predict whether any such proposal will be adopted, the form in which any such proposals would be adopted or the effect, if any, the adoption of any such proposal or change in the RBC calculations would have on the Company.

Tax Matters.  The following summary of the taxation of the Company is based on current law. There can be no assurance that legislative, judicial, or administrative changes will not be enacted that materially affect this summary.

Bermuda.  Under current Bermuda law, no income, withholding or capital gains taxes are imposed upon Group and its Bermuda subsidiaries. Group and its Bermuda subsidiaries have received an undertaking from the Minister of Finance in Bermuda that, in the event of any taxes being imposed, Group and its Bermuda subsidiaries will be exempt from taxation in Bermuda until March 2016. Non-Bermuda branches of Bermuda subsidiaries are subject to local taxes in the jurisdictions in which they operate.

Barbados.  Through December 31, 2004, Group, maintained its principal office in Barbados and was registered as an external company under the Companies Act, Cap. 308 of Barbados and was licensed as an international business company under the Barbados International Business Companies Act, 1991-24. As a result, Group was subject to a preferred rate of corporation tax on profits and gains in Barbados and was exempt from withholding tax on dividends, interest, royalties, management fees, fees or other income paid or deemed paid to a person who is not resident in Barbados or who, if so resident, carried on an international business. No tax was imposed on capital gains. Effective January 1, 2005, Group’s principal office was relocated to Bermuda.

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United States.   Group’s U.S. subsidiaries conduct business in and are subject to taxation in the U.S. Non-U.S. branches of U.S. subsidiaries are subject to local taxation in the jurisdictions in which they operate. Should the U.S. subsidiaries distribute current or accumulated earnings and profits in the form of dividends or otherwise to Group, the Company would be subject to withholding taxes. Group and its Bermuda subsidiaries believe that they have operated and will continue to operate their businesses in a manner that will not cause them to generate income treated as effectively connected with the conduct of a trade or business within the U.S. On this basis, Group does not expect that it and its Bermuda subsidiaries will be required to pay U.S. corporate income taxes other than withholding taxes on certain investment income and premium excise taxes. If Group or its Bermuda subsidiaries were subject to U.S. income tax; there could be a material adverse effect on the Company’s financial condition, results of operations or cash flows.

United Kingdom.   Bermuda Re’s UK branch conducts business in the UK and is subject to taxation in the UK. Bermuda Re’s Bermuda operations believe that they have operated and will continue to operate in a manner which will not cause them to be subject to UK taxation. If Bermuda Re’s Bermuda operations were subject to UK income tax there could be a material adverse impact on the Company’s financial condition, results of operations or cash flow.

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

ITEM 2. Properties

Everest Re’s corporate offices are located in approximately 115,000 square feet of leased office space in Liberty Corner, New Jersey. Bermuda Re’s corporate offices are located in approximately 3,600 total square feet of leased office space in Hamilton, Bermuda. The Company’s other twelve locations occupy a total of approximately 76,400 square feet, all of which are leased. Management believes that the above-described office space is adequate for its current and anticipated needs.

ITEM 3. Legal Proceedings

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

In the ordinary course of business, the Company is involved in lawsuits, arbitrations and other formal and informal dispute resolution procedures, the outcomes of which will determine the Company’s rights and obligations under insurance, reinsurance and other contractual agreements. In some disputes, the Company seeks to enforce its rights under an agreement or to collect funds owing to it. In other matters, the Company is resisting attempts by others to collect funds or enforce alleged rights. Such disputes are resolved through formal and informal means, including litigation and arbitration.

In all such matters, the Company believes that its positions are legally and commercially reasonable. The Company also regularly evaluates those positions and, where appropriate, establishes or adjusts insurance reserves to reflect its evaluation. The Company’s aggregate reserves take into account the possibility that the Company may not ultimately prevail in each and every disputed matter. The Company believes its aggregate reserves reduce the potential that an adverse resolution of one or more of these matters, at any point in time, would have a material impact on the Company’s financial condition or results of operations. However, there

30

can be no assurance that adverse resolutions of such matters in any one period or in the aggregate will not result in a material adverse effect on the Company’s results of operations.

ITEM 4. Submission of Matters to a Vote of Security Holders

None.


PART II


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

Market Information
The common shares of Group trade on the New York Stock Exchange under the symbol, “RE”. Quarterly high and low market prices of the Company’s common shares in 2004 and 2003 were as follows:

High Low


First Quarter 2004:      $  88 .7400  $  82 .5000
Second Quarter 2004:    89 .8500  77 .9200
Third Quarter 2004:    80 .9600  69 .9900
Fourth Quarter 2004:    90 .1300  74 .1100

First Quarter 2003:
    $  57 .4200  $  48 .1400
Second Quarter 2003:    78 .0700  57 .3500
Third Quarter 2003:    77 .8700  71 .7400
Fourth Quarter 2003:    84 .6000  76 .5100

Number of Holders of Common Shares
The number of record holders of common shares as of March 1, 2005 was 79. That number excludes the beneficial owners of shares held in “street” name or held through participants in depositories, such as The Depository Trust Company.

Dividend History and Restrictions
In 1995, the Board of Directors of the Company established a policy of declaring regular quarterly cash dividends and has paid a regular quarterly dividend in each quarter since the fourth quarter of 1995. The Company declared and paid its regular quarterly cash dividend of $0.10 per share for each quarter of 2004 and $0.09 per share for each quarter of 2003. A committee of the Company’s Board of Directors declared a dividend of $0.11 per share, payable on or before March 25, 2005 to shareholders of record on March 7, 2005.

The declaration and payment of future dividends, if any, by the Company will be at the discretion of the Board of Directors and will depend upon many factors, including the Company’s earnings, financial condition, business needs and growth objectives, capital and surplus requirements of its operating subsidiaries, regulatory restrictions, rating agency considerations and other factors. As an insurance holding company, the Company is partially dependent on dividends and other permitted payments from its subsidiaries to pay cash dividends to its stockholders. The payment of dividends to Group by Holdings and to Holdings by Everest Re is subject to Delaware regulatory restrictions and the payment of dividends to Group by Bermuda Re will be subject to

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Bermuda insurance regulatory restrictions. See “Regulatory Matters – Dividends” and Note 14A of Notes to Consolidated Financial Statements.

Recent Sales of Unregistered Securities
None.

Changes in Securities, Use of Proceeds and Issuer Purchases of Equity Securities
None.

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ITEM 6. Selected Financial Data

The following selected consolidated GAAP financial data of the Company as of and for the years ended December 31, 2004, 2003, 2002, 2001 and 2000 were derived from the consolidated financial statements of the Company, which were audited by PricewaterhouseCoopers LLP. The following financial data should be read in conjunction with the Consolidated Financial Statements and accompanying notes.

(Dollars in millions, Years Ended December 31,
except per share amounts) 2004     2003     2002     2001     2000    






Operating data:                                  
Gross premiums written $ 4,704.1 $ 4,573.8 $ 2,846.5 $ 1,874.6 $ 1,385.6  
   Net premiums written      4,531.5      4,315.4      2,637.6      1,560.1      1,218.9  
   Net premiums earned      4,425.1      3,737.9      2,273.7      1,467.5      1,174.2  
   Net investment income        495.9        402.6        350.7        340.4        301.5  
   Net realized capital gains (losses)         89.6        (38.0)       (50.0)       (22.3)         0.8  
   Losses and LAE incurred  
       (including catastrophes)      3,291.1      2,600.2      1,629.4      1,209.5        884.6  
Total catastrophe losses (1)        403.0         36.8         30.2        222.6         13.9  
   Commission, brokerage, taxes and fees     975.2          863.9        551.8        396.8        272.4  
   Other underwriting expenses        107.1         94.6         69.9         58.9         51.6  
   Interest expense         75.5         57.3         44.6         46.0         39.4  
   Income before taxes        559.7        491.2        262.0         90.3        231.7  
   Income tax expense (benefit)         64.9         65.2         30.7         (8.7)        45.4  
   Net income (2) $ 494.9 $ 426.0 $ 231.3 $ 99.0 $ 186.4  





   Net income per basic share (3) $ 8.85 $ 7.89 $ 4.60 $ 2.14 $ 4.06  





   Net income per diluted share (4) $ 8.71 $ 7.74 $ 4.52 $ 2.10 $ 4.02  





   Dividends paid per share $ 0.40 $ 0.36 $ 0.32 $ 0.28 $ 0.24  





Certain GAAP financial ratios: (5)  
   Loss and LAE ratio     74.4 %   69.6 %   71.7 %   82.4 %   75.3 %  
   Underwriting expense ratio   24.4   25.6   27.3   31.1   27.6  





   Combined ratio (2)     98.8 %   95.2 %   99.0 %   113.5 %   102.9 %  





Balance sheet data (at end of period):  
   Total investments and cash $ 11,530.2 $ 9,321.3 $ 7,265.6 $ 5,783.5 $ 5,493.0  
   Total assets     15,072.8     12,689.5      9,871.2      7,796.2      7,013.1  
   Loss and LAE reserves      7,836.3      6,361.2      4,905.6      4,278.3      3,786.2  
   Total debt        1,245.3        735.6        735.4        553.8        683.6  
   Total liabilities     11,360.2      9,524.6      7,502.5      6,075.6      5,429.7  
   Shareholders' equity      3,712.5      3,164.9      2,368.6      1,720.5      1,583.4  
   Book value per share (6)        66.09        56.84        46.55        37.19        34.40  
________________

(1)     Catastrophe losses are net of reinsurance. A catastrophe is defined, for purposes of the Selected Consolidated Financial Data, as an
         event that causes a pre-tax loss on property exposures before reinsurance of at least $5.0 million before corporate level reinsurance
         and taxes.
(2)     Some amounts may not reconcile due to rounding.
(3)     Based on weighted average basic shares outstanding of 55.9 million, 54.0 million, 50.3 million, 46.2 million and 45.9 million for
         2004, 2003, 2002, 2001 and 2000, respectively.
(4)     Based on weighted average diluted shares outstanding of 56.8 million, 55.0 million, 51.1 million, 47.1 million and 46.4 million for
         2004, 2003, 2002, 2001 and 2000, respectively.
(5)     Loss ratio is the GAAP losses and LAE incurred as a percentage of GAAP net premiums earned. Underwriting expense ratio is the
         GAAP commissions, brokerage, taxes, fees and general expenses as a percentage of GAAP net premiums earned. Combined ratio is
          the sum of the loss ratio and underwriting expense ratio.
(6)     Based on 56.2 million, 55.7 million, 50.9 million, 46.3 million and 46.0 million shares outstanding for December 31, 2004, 2003,
         2002, 2001 and 2000, respectively.

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

Unless otherwise indicated, all financial data in this document have been prepared using generally accepted accounting principles (“GAAP”) in the United States of America. As used in this document, “Group” means Everest Re Group, Ltd. (formerly Everest Reinsurance Group, Ltd.); “Holdings” means Everest Reinsurance Holdings, Inc.; “Everest Re” means Everest Reinsurance Company and its subsidiaries (unless the context otherwise requires); and the “Company” means Everest Re Group, Ltd. and its subsidiaries, except when referring to periods prior to February 24, 2000, when it means Holdings and its subsidiaries.

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

RESTRUCTURING
On February 24, 2000, a corporate restructuring was completed and Group became the new parent holding company of Holdings, which remains the holding company for Group’s U.S. operations. Effective January 1, 2005 the principal executive offices of Group were relocated from Barbados to Bermuda.

INDUSTRY CONDITIONS
The worldwide reinsurance and insurance businesses are highly competitive yet cyclical by product and market. Competition with respect to the types of reinsurance and insurance business in which the Company is engaged is based on many factors, including the perceived overall financial strength of the reinsurer or insurer, ratings of the reinsurer or insurer by A.M. Best and/or Standard & Poor’s, underwriting expertise, the jurisdictions where the reinsurer or insurer is licensed or otherwise authorized, capacity and coverages offered, premiums charged, other terms and conditions of the reinsurance and insurance business offered, services offered, speed of claims payment and reputation and experience in lines written. These factors operate at the individual market participant level to varying degrees as applicable to the specific participant’s circumstances. They also operate in aggregate across the reinsurance industry more generally contributing, in combination with background, economic conditions and variations in the reinsurance buying practices of insurance companies, by participant and in the aggregate, to cyclical movements in reinsurance rates, terms and conditions and ultimately reinsurance industry aggregate financial results.

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

In 2004, the favorable market conditions, which had developed during 2000 through 2003, generally began to weaken. There were signs that pricing for most property classes declined modestly and that pricing for most casualty classes softened. Competition increased, in part due to the relative profitability achieved by many reinsurers over 2002 and 2003 and the attendant buildup of capital in these participants. However, this profitability and capital buildup varied significantly by market participant, reflecting the fact that the industry generally still remained exposed to fundamental issues that had negatively impacted its aggregate capacity in 2002 and 2003, including weak investment market conditions and adverse loss emergence. Both of these had tended to depress the industry’s aggregate financial performance and perceptions of financial strength of

34

industry participants over this period albeit with significant variation by individual market participant. The industry experienced a record level of catastrophe losses during 2004, particularly in the second half of the year, and it remains unclear whether the aggregate catastrophe losses experienced by the industry will reverse, stop or even moderate the trends toward market softening, particularly as respects property classes.

Through 2003, reinsurance and insurance markets had generally continued to firm, reflecting the continuing, although diminishing, implications of losses arising from the terrorist attacks of September 11, 2001, and more broadly, the impact of aggregate company reactions to broad and growing recognition that competition in the late 1990s reached extremes in many classes and markets, which ultimately led to inadequate pricing and overly broad terms, conditions and coverages. The effect of these extremes, which became apparent through excessive loss emergence, varied widely by company depending on product offerings, markets accessed, underwriting and operating practices, competitive strategies and business volumes. Across all market participants, however, the aggregate general effect was depressed financial results and erosion of the industry capital base. Coupled with deteriorating investment market conditions and results, and renewed concerns regarding longer-term industry specific issues, including asbestos exposure and sub-par capital returns, these financial impacts introduced substantial, and in some cases extreme, pressure for the initiation and/or strengthening of corrective action by individual market participants. These pressures, aggregating across industry participants, reinforced the trend established in 2000 through 2003 toward firming prices, more restrictive terms and conditions, tightened coverage availability across most classes and markets and increasing concern with respect to the financial security of insurance and reinsurance providers, impacts which set the stage for the 2004 trends discussed above.

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

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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 for the periods indicated:

Years Ended December 31,



(Dollars in thousands) 2004   2003   2002  



Gross written premiums     $4,704,135   $4,573,802   $2,846,501  
Net written premiums    4,531,488    4,315,389    2,637,620  

REVENUES:
  
Premiums earned   $ 4,425,082   $ 3,737,851   $ 2,273,677  
Net investment income    495,908    402,610    350,668  
Net realized capital gains (losses)    89,614    (38,026 )  (50,043 )
Net derivative (expense) income    (2,660 )  5,851    (14,509 )
Other income (expense)    741    (1,033 )  (2,091 )



Total revenues    5,008,685    4,107,253    2,557,702  




CLAIMS AND EXPENSES:
  
Incurred losses and loss adjustment expenses    3,291,139    2,600,196    1,629,382  
Commission, brokerage, taxes and fees    975,176    863,933    551,787  
Other underwriting expenses    107,120    94,623    69,916  
Interest expense    75,539    57,288    44,573  



Total claims and expenses    4,448,974    3,616,040    2,295,658  




INCOME BEFORE TAXES
    559,711    491,213    262,044  
Income tax expense    64,853    65,185    30,741  



NET INCOME   $ 494,858   $ 426,028   $ 231,303  



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

Gross written premiums were $4.7 billion for the year ended December 31, 2004, an increase of 2.8% as compared with $4.6 billion for the year ended December 31, 2003, which had increased 60.7% compared with the year ended December 31, 2002. Gross written premiums were $2.8 billion for the year ended December 31, 2002, an increase of 51.8% compared with the year ended December 31, 2001.

Due to the nature of its businesses, the Company is unable to precisely differentiate between the effects of price changes as compared to the effects of changes in exposure. Similarly, because individual reinsurance arrangements often reflect revised coverages, structuring, pricing, terms and/or conditions from period to period, the Company is unable to differentiate between the premium volumes attributable to new business as compared to renewal business. Management believes, however, that on balance, the Company’s growth has been reasonably balanced between growth in exposures underwritten and increased pricing and/or improved terms and conditions. Management believes further that market conditions, although changing, remain generally more

36

favorable for casualty business classes than for property business classes; however, management notes that it continues to see business opportunities in most product classes and markets. Although premium volumes on a year to date basis have increased, the Company continues to decline business that does not meet its objectives regarding underwriting profitability, a discipline which became more apparent over the second half of 2004 with quarterly volumes for the third and fourth quarters which reflected year over year declines in gross premiums written.

In June 2004, the Company received notification of termination with respect to its contract with American All-Risk Insurance Services, LLC, its single largest producer of California workers’ compensation insurance. In 2004, American All–Risk Insurance Services, LLC accounted for approximately 7.8% of total gross written premiums. Under the terms of the contract, the agency continued to produce business exclusively for the Company through October 15, 2004. The business produced under this relationship will continue in force through the policy expiration dates or cancellation. The Company does not believe that the termination of this contract will have a material adverse effect on future Company operations and believes the termination was not entirely inconsistent with its plan to moderate its writings in this market.

Net written premiums, comprised of gross written premiums less ceded premiums, were $4.5 billion for the year ended December 31, 2004, an increase of 5.0% compared with $4.3 billion for the year ended December 31, 2003, which had increased 63.6% compared with the year ended December 31, 2002. Net written premiums for the year ended December 31, 2002 were $2.6 billion, an increase of 69.1% compared with the year ended December 31, 2001. The increases in net written premium are in line with the increases in gross written premium, as ceded written premium over the period was relatively stable at $172.6 million, $258.4 million and $208.9 million for the years ended December 31, 2004, 2003 and 2002, respectively. Ceded premiums relate primarily to specific reinsurance purchased by the U.S. Insurance operation and, to a lesser extent, adjustment premiums in 2003 and 2002 on loss cessions made to the Company’s corporate level aggregate reinsurance coverages.

Premiums earned were $4.4 billion for the year ended December 31, 2004, an increase of 18.4% compared with $3.7 billion for the year ended December 31, 2003, which had increased 64.4% compared with the year ended December 31, 2002. Premiums earned for the year ended December 31, 2002 were $2.3 billion, an increase of 54.9% compared with the year ended December 31, 2001. These increases reflect period to period changes in net written premiums and business mix together with normal variability in earning patterns. Business mix changes occur not only as the Company shifts emphasis between products, lines of business, distribution channels and markets, but also as individual contracts renew or non-renew, almost always with changes in coverage, structure, prices and/or terms, and as new contracts are accepted with coverages, structures, prices and/or terms different from those of expiring contracts. Changes in estimates related to unreported reinsurance activity also contribute.

Incurred losses and LAE for the year ended December 31, 2004 were $3.3 billion, an increase of 26.6% compared with $2.6 billion for the year ended December 31, 2003, which had increased 59.6% compared with the year ended December 31, 2002. Incurred losses and LAE for the year ended December 31, 2002 were $1.6 billion, an increase of 34.7% compared with the year ended December 31, 2001. The major contributing factor for the increases in 2004 was the increase in incurred losses and LAE due to property catastrophe net event losses of $403 million, arising principally from hurricanes Charley, Frances, Ivan and Jeanne, Pacific typhoons, Edmonton hailstorms and the Asian tsunami. Other factors, including the level of incurred losses and LAE related to changes in volume as measured by earned premium, changes in rates, and terms and the effect of changes in prior period loss reserve estimates, also contributed. The increase in incurred losses and LAE relating to net adverse prior period reserve strengthening of $312.0 million, $256.9 million and $140.1 million for years ended December 31, 2004, 2003 and 2002, respectively, principally related to the Company’s asbestos exposures, treaty casualty and workers’ compensation, partially offset in 2004 by a $33.4 million reduction in

37

reserves related to the World Trade Center events. See ITEM 1, “Business — Changes in Historical Reserves” for additional details and explanation.

Commission, brokerage and tax expense for the years ended December 31, 2004, 2003 and 2002 were $975.2 million, $863.9 million and $551.8 million, respectively, increasing principally as a result of premium volume changes, as these expenses generally vary in direct proportion to premiums earned. However, the percentage increase in expenses was somewhat less than the change in premiums, primarily reflecting the impact of changes in the Company’s business mix.

Net investment income was $495.9 million for the year ended December 31, 2004, an increase of 23.2% compared with $402.6 million for the year ended December 31, 2003, which had increased 14.8% compared with the year ended December 31, 2002. Net investment income for the year ended December 31, 2002 was $350.7 million, an increase of 3.0% compared with the year ended December 31, 2001. The year ended December 31, 2004 included a $32.7 million increase arising from an atypical increase in the value of one of the Company’s limited partnership investments. Excluding this increase, the net investment income increase generally reflected growth in the Company’s cash and invested assets. Premiums are generally collected over the first 12 to 15 months of the Company’s reinsurance and insurance contract, while related losses are typically paid out over numerous years. This tends to increase cash flow from operations when premiums are increasing. The Company’s cash flow from operations was $1,487.6 million, $1,653.8 million and $742.7 million for the years ended December 31, 2004, 2003 and 2002, respectively. Cash flow from operations was impacted in particular by increased loss payments relating to catastrophe losses and asbestos claim settlements in 2004. Coupled with common stock offerings and the issuance of junior subordinated debt securities, this contributed to the growth in the Company’s total investments and cash to $11,530.2 million.

Net realized capital gains of $89.6 million for the year ended December 31, 2004 were primarily the result of gains on the sale of the Company’s interest only strips investment portfolio. Net realized capital losses of $38.0 million and $50.0 million for the years ended December 31, 2003 and 2002, respectively, were primarily the result of valuation adjustments on the interest only strip portfolio in accordance with Emerging Issues Task Force No. 99-20, “Recognition of Interest Income and Impairment on Purchases and Beneficial Interests in Securitized Financial Assets” (“EITF 99-20”) and write-downs in the value of securities deemed to be impaired on an other than temporary basis, partially offset by realized gains.

The Company’s income tax expense is primarily a function of the statutory tax rates and corresponding net income in the jurisdictions where the Company operates, coupled with the impact from tax preferenced investment income. Variations between years generally reflect changes in the relative levels of pre-tax income between jurisdictions with different tax rates. Additionally, in conjunction with the transfer of the Company’s UK Branch to Bermuda Re, there were various tax issues giving rise to incremental net tax expenses in 2004. The Company incurred income tax expenses of $64.9 million, $65.2 million and $30.7 million for the years ended December 31, 2004, 2003 and 2002, respectively. The slight decrease in tax expense primarily reflected the impact of the catastrophe losses on 2004 underwriting results, which were partially offset by additional taxable net investment income, taxable realized capital gains and the expense associated with the transfer of the UK branch.

Net income for the years ended December 31, 2004, 2003 and 2002 was $494.9 million, $426.0 million and $231.3 million, respectively, generally reflecting improving underwriting and investment results and realized capital gains in 2004, partially offset by realized capital losses in 2003 and 2002 and, particularly in 2004, catastrophe and asbestos losses, all moderated by the impact of income taxes.

SEGMENT INFORMATION
The Company, through its subsidiaries, operates in five segments: U.S. Reinsurance, U.S. Insurance, Specialty Underwriting, International and Bermuda. The U.S. Reinsurance operation writes property and casualty

38

reinsurance, on both a treaty and facultative basis, through reinsurance brokers, as well as directly with ceding companies within the U.S. The U.S. Insurance operation writes property and casualty insurance primarily through general agent relationships and surplus lines brokers within the U.S. The Specialty Underwriting operation writes A&H, marine, aviation and surety business within the U.S. and worldwide through brokers and directly with ceding companies. The International operation writes property and casualty reinsurance through Everest Re’s branches in Canada and Singapore, in addition to foreign business written through Everest Re’s Miami and New Jersey offices. The Bermuda operation provides reinsurance and insurance to worldwide property and casualty markets and reinsurance to life insurers through brokers and directly with ceding companies from its Bermuda office and property and casualty reinsurance to the United Kingdom and European markets through its UK branch.

These segments are managed in a carefully coordinated fashion with strong elements of central control, including with respect to capital, investments and support operations. As a result, management generally monitors and evaluates the financial performance of these operating segments based upon their underwriting gain (loss) or underwriting results. Underwriting results include earned premium less losses and LAE incurred, commission and brokerage expenses and other underwriting expenses and are analyzed using ratios, in particular loss, commission and brokerage and other underwriting expense ratios, which, respectively divide incurred losses, commissions and brokerage and other underwriting expenses by earned premium. 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. For selected financial information regarding these segments, see Note 18 of Notes to Consolidated Financial Statements.

Effective January 1, 2004, Everest Re sold its United Kingdom branch to Bermuda Re. Business for this branch was previously included in the International segment and is now included in the Bermuda segment. Due to the sale and in accordance with FAS 131, the Company restated the International and Bermuda segments for the years ended December 31, 2003 and 2002 to conform to December 31, 2004 segment reporting.

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

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

U.S. Reinsurance

(Dollars in thousands)
2004   2003   2002  



Gross written premiums     $ 1,478,159   $ 1,752,302   $ 894,555  
Net written premiums    1,468,466    1,687,333    834,234  

Premiums earned
   $ 1,473,545   $ 1,423,841   $ 726,352  
Incurred losses and loss adjustment expenses    1,168,563    1,059,087    535,950  
Commission and brokerage    373,581    350,641    182,558  
Other underwriting expenses    23,390    21,670    18,876  



Underwriting loss   $ (91,989 ) $ (7,557 ) $ (11,032 )



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U.S. Insurance

(Dollars in thousands)
2004   2003   2002  



Gross written premiums     $ 1,167,808   $ 1,069,527   $ 821,442  
Net written premiums    1,019,716    923,147    705,313  

Premiums earned
   $ 937,576   $ 823,601   $ 573,081  
Incurred losses and loss adjustment expenses    658,777    605,602    432,917  
Commission and brokerage    130,380    146,782    122,806  
Other underwriting expenses    44,834    38,569    25,802  



Underwriting gain (loss)   $ 103,585   $ 32,648   $ (8,444 )





Specialty Underwriting

(Dollars in thousands)
2004   2003   2002  



Gross written premiums     $ 487,072   $ 502,888   $ 488,583  
Net written premiums    470,571    498,013    486,979  

Premiums earned
   $ 459,284   $ 468,932   $ 459,973  
Incurred losses and loss adjustment expenses    302,010    295,397    313,352  
Commission and brokerage    129,209    133,531    130,552  
Other underwriting expenses    7,068    6,475    6,363  



Underwriting gain   $ 20,997   $ 33,529   $ 9,706  





International

(Dollars in thousands)
2004   2003   2002  



Gross written premiums     $ 687,657   $ 520,800   $ 364,476  
Net written premiums    684,390    518,919    351,004  

Premiums earned
   $ 655,694   $ 461,607   $ 318,207  
Incurred losses and loss adjustment expenses    419,101    267,707    184,490  
Commission and brokerage    161,106    113,091    80,853  
Other underwriting expenses    11,298    9,734    9,256  



Underwriting gain   $ 64,189   $ 71,075   $ 43,608  



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Bermuda

(Dollars in thousands)
2004   2003   2002  



Gross written premiums     $ 883,439   $ 728,285   $ 277,445  
Net written premiums    888,345    687,977    260,090  

Premiums earned
   $ 898,983   $ 559,870   $ 196,064  
Incurred losses and loss adjustment expenses    742,688    372,403    162,673  
Commission and brokerage    180,900    119,888    35,018  
Other underwriting expenses    13,998    12,222    6,433  



Underwriting (loss) gain   $ (38,603 ) $ 55,357   $ (8,060 )



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

(Dollars in thousands) 2004   2003   2002  



Underwriting gain     $ 58,179   $ 185,052   $ 25,778  
Net investment income    495,908    402,610    350,668  
Realized gain (loss)    89,614    (38,026 )  (50,043 )
Net derivative (expense) income    (2,660 )  5,851    (14,509 )
Corporate expenses    (6,532 )  (5,953 )  (3,186 )
Interest expense    (75,539 )  (57,288 )  (44,573 )
Other income (expense)    741    (1,033 )  (2,091 )



Income before taxes   $ 559,711   $ 491,213   $ 262,044  



CONSOLIDATED RESULTS OF OPERATIONS

YEAR ENDED DECEMBER 31, 2004 COMPARED TO YEAR ENDED DECEMBER 31, 2003
Premiums.     Gross written premiums increased 2.8% to $4,704.1 million in 2004 from $4,573.8 million in 2003, as the Company took advantage of selected growth opportunities, while continuing to maintain a disciplined underwriting approach. Premium growth areas included a 32.0% ($166.9 million) increase in the International operations, primarily due to a $97.7 million increase in international business written through the Miami and New Jersey offices, representing primarily Latin American business, and a $67.2 million increase in Asian business. The Bermuda operation grew 21.3% ($155.2 million) reflecting an emphasis on traditional business classes in Bermuda and the UK. The U.S. Insurance operation grew 9.2% ($98.3 million), principally as a result of a $193.8 million increase in program business other than workers’ compensation, partially offset by a $95.5 million decrease in workers’ compensation business. The Specialty Underwriting operation decreased 3.1% ($15.8 million), resulting primarily from a $70.4 million decrease in A&H business, partially offset by an increase in surety business of $29.6 million and an increase in marine and aviation business of $25.0 million. The U.S. Reinsurance operation decreased 15.6% ($274.1 million), principally relating to an $142.5 million decrease in treaty casualty business, a $74.9 million decrease in facultative business, a $32.6 million decrease in treaty property business and a $19.8 million decrease in treaty non-property business.

Ceded premiums decreased to $172.6 million in 2004 from $258.4 million in 2003, principally resulting from the inclusion in 2003 of $49.6 million in adjustment premiums relating to claims made under the 2000 accident year aggregate excess of loss element of the Company’s corporate retrocessional programs, compared with no such adjustment premiums in 2004. Aside from the corporate retrocessional programs, ceded premiums

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generally relate to specific reinsurance purchased by the U.S. Insurance operation and fluctuate based upon the level of premiums written in the applicable programs.

Net written premiums increased by 5.0% to $4,531.5 million in 2004 from $4,315.4 million in 2003, reflecting the increase in gross written premiums, combined with the decrease in ceded premiums.

Premium Revenues.   Net premiums earned increased by 18.4% to $4,425.1 million in 2004 from $3,737.9 million in 2003. Contributing to this increase was a 60.6% ($339.1 million) increase in the Bermuda operation, a 42.0% ($194.1 million) increase in the International operation, a 13.8% ($114.0 million) increase in the U.S. Insurance operation and a 3.5% ($49.7 million) increase in the U.S. Reinsurance operation, partially offset by a 2.1% ($9.6 million) decrease in the Specialty Underwriting operation. All of these changes reflect period to period changes in net written premiums and business mix, together with normal variability in earnings patterns. Business mix changes occur not only as the Company shifts emphasis between products, lines of business, distribution channels and markets, but also as individual contracts renew or non-renew, almost always with changes in coverage, structure, prices and/or terms, and as new contracts are accepted with coverages, structures, prices and/or terms different from those of expiring contracts. As premium reporting, earnings, loss and commission characteristics derive from the provisions of individual contracts, the continuous turnover of individual contracts, arising from both strategic shifts and day to day underwriting, can and does introduce appreciable background variability in various underwriting line items. Changes in estimates related to unreported reinsurance activity also contribute.

Expenses.  Incurred loss and LAE increased by 26.6% to $3,291.1 million in 2004 from $2,600.2 million in 2003. The increase in incurred losses and LAE was principally attributable to the provision for estimated catastrophe losses from hurricanes Charley, Frances, Ivan and Jeanne, Pacific typhoons, the Asian tsunami and reserve adjustments for prior period losses, together with the mitigating effects of the increase in net premiums earned and the impact of favorable changes in the Company’s underlying business mix and aggregate rates, terms and conditions.

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

Incurred losses and LAE in 2004 reflected ceded losses and LAE of $141.0 million compared to ceded losses and LAE in 2003 of $278.4 million. The decrease in ceded losses is primarily the result of the absence in 2004 of cessions under the corporate level aggregate reinsurance covers. The ceded losses and LAE in 2003 included $85.0 million of losses ceded under the 2000 accident year aggregate excess of loss component of the Company’s corporate retrocessional program and $81.1 million under the LM/Mt. McKinley reinsurance agreement.

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Incurred losses and LAE include catastrophe losses, which include the impact of both current period events and favorable and adverse development on prior period events and are net of reinsurance. Individual catastrophe losses are reported net of specific reinsurance, but before recoveries under corporate level reinsurance and potential IBNR reserve offsets. The Company defines a catastrophe as a property event with expected reported losses of at least $5.0 million before corporate level reinsurance and taxes. Catastrophe losses, net of contract specific cessions, were $403.0 million in 2004, relating principally to aggregate estimated losses of $428.8 million from hurricanes Charley, Frances, Ivan and Jeanne, Pacific typhoons, Edmonton hailstorms and the Asian tsunami, which were partially offset by $33.4 million of reserve reductions related to the World Trade Center events. Catastrophe losses, net of contract specific cessions, were $36.8 million in 2003, relating principally to the May 2003 tornado and hailstorm events and hurricanes Fabian and Isabel.

(Dollars in millions)                                                                                   Segment Net Catastrophe Losses



Segment 2004   2003



U.S. Reinsurance     $ 250 .7   $ 23 .9
U.S. Insurance    1 .0    1 .4
Specialty Underwriting    18 .4    3 .2
International    88 .0    1 .1
Bermuda    44 .9    7 .2



                          Total   $403 .0   $36 .8



Net adverse prior period reserve adjustments for the year ended December 31, 2004 were $312.0 million compared to $256.9 million in 2003. For the year ended December 31, 2004, the adverse reserve adjustments included net adverse A&E adjustments of $159.4 million and net adverse non-A&E adjustments of approximately $186.0 million relating primarily to casualty reinsurance, partially offset by favorable development of $33.4 million relating to the reduction of reserves for the World Trade Center events. For the year ended December 31, 2003, net adverse prior period reserve adjustments for A&E exposures were $50.2 million and net adverse non-A&E adjustments were $206.7 million, which were net of a cession of $85 million under the 2000 accident year aggregate excess of loss component of the Company’s corporate retrocessional program. It is important to note that adverse non-A&E accident year reserve development arises from the reevaluation of accident year results and that such reevaluations also impact premiums and commissions attributed by accident year, generally mitigating, in part, the impact of loss development and that such impacts are recorded as part of the overall reserve evaluation.

The U.S. Reinsurance segment accounted for $77.7 million of net adverse prior period reserve adjustments for the year ended December 31, 2004, which included $34.2 million of favorable development due to the reserve reduction related to the catastrophe losses from the World Trade Center events, as compared to net adverse prior period reserve adjustments of $150.9 million for the year ended December 31, 2003. Asbestos exposures accounted for $10.3 million and $16.8 million of adverse reserve adjustments for the years ended December 31, 2004 and 2003, respectively, with the remainder principally attributable to professional liability and casualty business classes. During the late 1990s and early 2000s, there had been a proliferation of claims relating to bankruptcies and other financial management improprieties. This increased number of claims, combined with larger claims, has significantly increased incurred losses on the professional liability policies. In the general casualty area, the Company continues to experience losses greater than historical trends for accident years 1998 through 2001. These losses are being driven by adverse trends in litigation and economic variability. In both the professional liability and general casualty reinsurance areas, the Company relies upon loss reports from ceding companies. Although the Company may record reserves at higher levels than those reported by ceding companies, actual reported results have exceeded the initial loss indications.

The U.S. Insurance segment reflected $43.3 million and $58.7 million of net adverse prior period reserve adjustments for the years ended December 31, 2004 and 2003, respectively. The adverse prior period reserve adjustments were principally due to accident years 2000 through 2002, where the Company strengthened its

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reserves for California workers’ compensation insurance. This was a relatively new book of business and was written in a challenging political and economic environment. While management believes the cumulative results through 2004 remain quite positive, there has been some deterioration in claim frequency and severity related to accident years 2001 and 2002.

The Specialty Underwriting segment had $5.1 million of net adverse prior period reserve adjustments for the year ended December 31, 2004, principally related to net adverse prior period reserve adjustments in the surety and A&H business lines partially offset by favorable development from marine and aviation. The net favorable prior period reserve adjustments for the year ended December 31, 2003 were $23.9 million, primarily related to A&H business.

The International segment had $4.4 million of favorable net prior period reserve adjustments for the year ended December 31, 2004 and net adverse prior period reserve adjustments of $15.8 million for the year ended December 31, 2003. The favorable development in 2004 related primarily to 2003 Canadian property catastrophe, international and Asia business. The prior period reserve development for 2003 related primarily to general casualty business written in the U.S. and Canada on both a quota share and excess basis for accident years 1996 through 2002.

The Bermuda segment reflected $190.3 million of net adverse prior period reserve adjustments for the year ended December 31, 2004 and $55.4 million of net adverse prior reserve adjustments for the year ended December 31, 2003. The development in the year ended December 31, 2004 was primarily the result of $149.1 million of A&E reserve development. For the year ended December 31, 2003, reserve adjustments included $33.5 million related to A&E exposures. All of the development related to asbestos exposures that were assumed through the September 19, 2000 loss portfolio transfer from Mt. McKinley in 2000.

Aggregate reserve development related to A&E exposures was $159.4 million and $50.2 million for the years ended December 31, 2004 and 2003, respectively. The Company has A&E exposure related to contracts written by the Company prior to 1986 and to claim obligations acquired as part of the Mt. McKinley acquisition in September 2000. The reserve strengthening on business written by the Company, net of reinsurance, was $10.3 million and the net strengthening on the acquired business was $149.1 million in 2004. Substantially all of the Company’s A&E exposures relate to insurance and reinsurance contracts with coverage periods prior to 1986. Given the uncertainties surrounding the settlement of A&E losses, management is unable to establish a meaningful range for these obligations.

(Dollars in millions)                                                                Segment Net Prior Period Reserve Adjustments




Segment 2004   2003




U.S. Reinsurance     $ 77 .7   $ 150 .9
U.S. Insurance    43 .3    58 .7
Specialty Underwriting    5 .1    (23 .9 )
International    (4 .4 )  15 .8
Bermuda    190 .3    55 .4




                          Total   $312 .0   $256 .9




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

The segment components of the increase in incurred losses and LAE in 2004 from 2003 were a 99.4% ($370.3 million) increase in the Bermuda operation, a 56.6% ($151.4 million) increase in the International operation, a 10.3% ($109.5 million) increase in the U.S Reinsurance operation, an 8.8% ($53.2 million) increase in the U.S.

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Insurance operation and a 2.2% ($6.6 million) increase in the Specialty Underwriting operation. These changes reflect variability in premiums earned and changes in the loss expectation assumptions for business written, as well as the net prior period reserve development and catastrophe losses discussed above. Incurred losses and LAE for each operation were also impacted by generally improved pricing of the underlying business, as well as variability relating to changes in the mix of business by class and type, which in general reflected a more favorable mix.

The Company’s loss ratio, which is calculated by dividing incurred losses and LAE by net premiums earned, increased by 4.8 percentage points to 74.4% in 2004 from 69.6% in 2003, reflecting the impact of the changes in premiums earned and incurred losses and LAE discussed above, as well as favorable changes in the underlying business mix and aggregate rates, terms and conditions.

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

Segment Loss Ratios




Segment 2004   2003




U.S. Reinsurance       79 .3%    74 .4%
U.S. Insurance    70 .3%    73 .5%
Specialty Underwriting    65 .8%    63 .0%  
International    63 .9%    58 .0%
Bermuda    82 .6%    66 .5%

Segment underwriting expenses increased by 12.9% to $1,075.8 million in 2004 from $952.6 million in 2003. Commission, brokerage, taxes and fees increased by $111.2 million, principally reflecting increases in premium volume and changes in the mix of business. Segment other underwriting expenses increased by $11.9 million as the Company continues to expand operations to support its increased business volume. Contributing to the segment underwriting expense increases were a 47.5% ($62.8 million) increase in the Bermuda operation, a 40.4% ($49.6 million) increase in the International operation and a 6.6% ($24.7 million) increase in the U.S. Reinsurance operation, which were all partially offset by a 5.5% ($10.1 million) decrease in the U.S. Insurance operation and a 2.7% ($3.7 million) decrease in the Specialty Underwriting operation. The changes for each operation’s expenses principally resulted from changes in commission expenses related to changes in premium volume and business mix by class and type and, in some cases, changes in the use of specific reinsurance, as well as the underwriting performance of the underlying business. The Company’s expense ratio, which is calculated by dividing underwriting expenses by net premiums earned, was 24.4% in 2004 compared to 25.6% in 2003.

Segment Expense Ratios




Segment 2004   2003




U.S. Reinsurance      26 .9%    26 .1%
U.S. Insurance    18 .7%    22 .5%
Specialty Underwriting    29 .6%    29 .9%  
International    26 .3%    26 .6%
Bermuda    21 .7%    23 .6%

The Company’s combined ratio, which is the sum of the loss and expense ratios, increased by 3.6 percentage points to 98.8% in 2004 compared to 95.2% in 2003.

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

Segment Combined Ratios




Segment 2004   2003




U.S. Reinsurance      106 .2%    100 .5%
U.S. Insurance    89 .0%    96 .0%
Specialty Underwriting    95 .4%    92 .9%  
International    90 .2%    84 .6%
Bermuda    104 .3%    90 .1%

Investments.      Net investment income increased 23.2% to $495.9 million in 2004 from $402.6 million in 2003, principally reflecting the effects of investing $1,487.6 million of cash flow from operations for the twelve months ended December 31, 2004, as well as $320.0 of net proceeds from the issuance of junior subordinated debt securities in March 2004 and $250.0 of net proceeds from the issuance of senior notes in October 2004. The increase also reflected $32.7 million representing an atypical increase in the carrying value of a limited partnership investment.

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

 
  2004   2003




Imbedded pre-tax yield of cash and invested assets at December 31, 2004 and 2003      4 .7%    4 .8%
Imbedded after-tax yield of cash and invested assets at December 31, 2004 and 2003    4 .1%    4 .1%
Annualized pre-tax yield on average cash and invested assets for the twelve months
ended December 31, 2004 and 2003
    5 .0%    5 .1%  
Annualized after-tax yield on average cash and invested assets for the twelve months
ended December 31, 2004 and 2003
    4 .2%    4 .4%

The Company, because of its historical income orientation, has generally considered total return, the combination of income yield and capital appreciation/depreciation, to be relatively less important as a measure of performance than its overall income yield. With changes the Company perceives in overall investment market conditions, and more specifically the acquisition of $496.5 million of equity securities into the overall investment portfolio in 2004, the Company is reweighting its view of total return. The following table provides a comparison of the Company’s total return by asset class to broadly accepted industry benchmarks for 2004 and 2003.

 
  2004   2003




Fixed income portfolio total return      6 .5%    6 .2%
Lehman bond aggregate    4 .3%    4 .1%
Common equity portfolio total return    21 .9%    17 .0%  
S&P 500    10 .9%    28 .7%

Net realized capital gains were $89.6 million in 2004, which reflected realized capital gains on the Company’s investments of $164.3 million, including $118.2 million on the sale of interest only strip investments, partially offset by $74.7 million of realized capital losses, which included $65.0 million related to the write-downs in the value of interest only strips deemed to be impaired on an other than temporary basis in accordance with EITF 99-20, prior to liquidation of the interest only strip portfolio during the second quarter of 2004. Net realized capital losses of $38.0 million in 2003 reflected realized capital losses on the Company’s investments of $88.7 million, which included $25.7 million relating to write-downs in the value of securities deemed to be impaired on an other than temporary basis and $46.2 million related to the impairment on interest only strips,

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partially offset by $50.7 million of realized capital gains, which included $16.8 million of realized capital gains on sales of the interest only strips.

The Company has one credit default swap, which it no longer writes, and five specialized equity put options in its product portfolio. These products meet the definition of a derivative under Financial Accounting Standards No. 133, “Accounting for Derivative Instruments and Hedging Activities” (“FAS 133”). Net derivative expense from these derivative transactions in 2004 was $2.7 million and net derivative income from these derivative transactions in 2003 was $5.9 million, with both periods principally reflecting changes in fair value for the specialized equity put options. See also Note 2 of Notes to the Consolidated Financial Statements.

Other income in 2004 was $0.7 million compared to other expense of $1.0 million in 2003. The decrease in net expense for 2004 was primarily due to variability in the impact of foreign exchange, partially offset by other miscellaneous expenses.

Corporate underwriting expenses not allocated to segments increased to $6.5 million for 2004 compared with $6.0 million for 2003 as the Company expanded its infrastructure to support increased business volume.

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

Income Taxes.   The Company’s income tax expense is primarily a function of the statutory tax rates and corresponding net income in the jurisdictions where the Company operates, coupled with the impact from tax preferenced investment income. Variations between years generally reflect changes in the relative levels of pre-tax income between jurisdictions with different tax rates. Additionally, in conjunction with the transfer of the Company’s UK Branch to Bermuda Re, there were various tax issues giving rise to net tax expenses. The Company recognized income tax expense of $64.9 million in 2004 compared to $65.2 million in 2003.

Net Income.   Net income was $494.9 million in 2004 compared to net income of $426.0 million in 2003, reflecting improved investment income and realized capital gains, partially offset by reduced underwriting profitability due to catastrophe losses.

YEAR ENDED DECEMBER 31, 2003 COMPARED TO YEAR ENDED DECEMBER 31, 2002
Premiums.  Gross written premiums increased 60.7% to $4,573.8 million in 2003 from $2,846.5 million in 2002, as the Company took advantage of the general firming of rates, terms and conditions and selected growth opportunities, while continuing to maintain a disciplined underwriting approach. Premium growth areas included a 95.9% ($857.7 million) increase in the U.S. Reinsurance operation, principally related to a $519.4 million increase in treaty casualty business, a $253.9 million increase in treaty property business and a $62.8 million increase in facultative business. The International operation increased 42.9% ($156.3 million), primarily due to a $79.6 million increase in international business written through the Miami and New Jersey offices representing primarily Latin American business and a $67.4 million increase to Canadian business. The U.S. Insurance operation grew 30.2% ($248.1 million), principally as a result of an $89.5 million increase in workers’ compensation and a $73.2 million increase in excess and surplus lines insurance. The Bermuda operation increased $450.8 million, reflecting a $256.9 million increase in premiums from the UK branch, and a shift toward more traditional business resulting from the rollout of treaty, facultative and individual risk capabilities in Bermuda. The Specialty Underwriting operation increased 2.9% ($14.3 million), resulting primarily from a $38.0 million increase in A&H business and a $19.0 million decrease in marine and aviation.

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Ceded premiums increased to $258.4 million in 2003 from $208.9 million in 2002, principally reflecting growth in specific reinsurance of the Company’s primary insurance business, which increased from $116.1 million to $146.4 million. In addition, ceded premiums for 2003 included $49.6 million in adjustment premiums relating to claims made under the 2000 accident year aggregate excess of loss element of the Company’s corporate retrocessional programs, while ceded premiums for 2002 included $5.1 million and $49.4 million in adjustment premium relating to claims made under the 2001 and 2000 accident year aggregate excess of loss elements of the Company’s corporate retrocessional programs, respectively.

Net written premiums increased by 63.6% to $4,315.4 million in 2003 from $2,637.6 million in 2002, reflecting the increase in gross written premiums, combined with the growth in ceded premiums.

Premium Revenues.   Net premiums earned increased by 64.4% to $3,737.9 million in 2003 from $2,273.7 million in 2002. Contributing to this increase was a 96.0% ($697.5 million) increase in the U.S. Reinsurance operation, a 45.1% ($143.4 million) increase in the International operation, a 43.7% ($250.5 million) increase in the U.S. Insurance operation, a $363.8 million increase in the Bermuda operation and a 1.9% ($9.0 million) increase in the Specialty Underwriting operation. All of these changes reflect period to period changes in net written premiums and business mix together with normal variability in earnings patterns. Business mix changes occur not only as the Company shifts emphasis between products, lines of business, distribution channels and markets but also as individual contracts renew or non-renew, almost always with changes in coverage, structure, prices and/or terms, and as new contracts are accepted with coverages, structures, prices and/or terms different from those of expiring contracts. As premium reporting and earnings and loss and commission characteristics derive from the provisions of individual contracts, the continuous turnover of individual contracts, arising from both strategic shifts and day to day underwriting, can and does introduce appreciable background variability in various underwriting line items.

Expenses.  Incurred loss and LAE increased by 59.6% to $2,600.2 million in 2003 from $1,629.4 million in 2002. The increase in incurred losses and LAE was principally attributable to the increase in net premiums earned, the impact of changes in the Company’s mix of business and reserve adjustments for prior period losses.

Incurred losses and LAE in 2003 reflected ceded losses and LAE of $278.4 million compared to ceded losses and LAE in 2002 of $287.7 million. The ceded losses and LAE in 2003 included $85.0 million of losses ceded under the 2000 accident year aggregate excess of loss component of the Company’s corporate retrocessional program and $81.1 million under the LM/Mt. McKinley reinsurance agreement. The ceded losses and LAE in 2002 included $11.0 million and $90.0 million of losses ceded under the 2001 and 2000 accident year aggregate excess of loss component of the Company’s corporate retrocessional program, respectively, and $56.7 million under the LM/Mt. McKinley reinsurance agreement.

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Incurred losses and LAE include catastrophe losses, which include the impact of both current period events and favorable and adverse development on prior period events, and are net of reinsurance. A catastrophe is an event that causes a pre-tax loss on property exposures of at least $5.0 million before corporate level reinsurance and taxes. Catastrophe losses, net of contract specific cessions, were $36.8 million in 2003, relating principally to the May 2003 tornado and hailstorm events and hurricanes Fabian and Isabel, compared to $30.2 million in 2002.

(Dollars in millions)                                                                                   Segment Net Catastrophe Losses



Segment 2003   2002



U.S. Reinsurance     $23 .9   $5 .4
U.S. Insurance    1 .4    -  
Specialty Underwriting    3 .2    1 .1
International    1 .1    18 .2
Bermuda    7 .2    5 .5



                          Total   $36 .8   $30 .2



Net adverse prior period reserve adjustments for the year ended December 31, 2003 were $256.9 million, which were net of a cession of $85 million under the 2000 accident year aggregate excess of loss component of the Company’s corporate retrocessional program. For the year ended December 31, 2002, net adverse prior period reserve adjustments were $140.1 million, which were net of cessions of $11 million and $90 million under the 2001 and 2000 accident year aggregate excess of loss component of the Company’s corporate retrocessional program, respectively.

The U.S. Reinsurance segment accounted for $134.2 million and $96.7 million of the non-A&E net prior period reserve adjustments for the years ended December 31, 2003 and 2002, respectively. The two principal underwriting areas responsible for these deficiencies are professional liability and general casualty. During the late 1990s and early 2000s, there had been a proliferation of claims relating to bankruptcies and other financial management improprieties. This increased number of claims combined with larger claims has significantly increased incurred losses on the professional liability policies. In the general casualty area, the Company continues to experience losses greater than historical trends for accident years 1998 through 2003. These losses are being driven by adverse trends in litigation and economic variability. In both the professional liability and general casualty reinsurance areas, the Company relies upon loss reports from ceding companies. Although the Company generally records reserves at higher levels than those reported by ceding companies, actual reported results have exceeded the initial loss indications. The reserve adjustments in these areas were partially offset by favorable reserve development relating to property reinsurance for the 2002 accident year.

The U.S. Insurance segment reflected $58.7 million and $14.0 million of net prior period reserve adjustments for years ended December 31, 2003 and 2002, respectively, principally due to California workers’ compensation insurance. This was a relatively new book of business and was written in a challenging political and economic environment. While management believes the cumulative results through 2003 remain positive, there has been some deterioration in claim frequency and severity related to accident years 2001 and 2002.

The Specialty Underwriting segment had favorable net prior period reserve adjustments of $23.9 million and $0.4 million for the years ended December 31, 2003 and 2002, respectively. The favorable adjustments for 2003, related primarily to A&H business and cessions under the corporate retrocessional program and related principally to the 2000 through 2002 accident years.

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The International segment had an unfavorable net prior period reserve adjustment of $15.8 million and a favorable net prior period reserve adjustment of $6.2 million for the years ended December 31, 2003 and 2002, respectively. These reserve adjustments relate primarily to general casualty business written in the U.S. and Canada on both a quota share and excess basis for accident years 1996 through 2002, with the larger development on the 1998 through 2000 years.

The Bermuda segment reflected $21.9 million of unfavorable non-A&E net prior period reserve adjustments for the year ended December 31, 2003 and $11.7 million of development for the year ended December 31, 2002.

Reserve development related to A&E exposures were $50.2 million and $23.5 million for the years ended December 31, 2003 and 2002, respectively. The Company has A&E exposure related to contracts written by the Company prior to 1986 and to claim obligations acquired as part of the Mt. McKinley acquisition in September 2000. The reserve strengthening on business written by the Company, net of reinsurance, was $16.7 million in the U.S. Reinsurance segment and the net strengthening on the acquired business was $33.5 million in the Bermuda segment in 2004. Substantially all of the Company’s A&E exposures relate to insurance and reinsurance contracts with coverage periods prior to 1986.

(Dollars in millions)                                                                Segment Net Prior Period Reserve Adjustments




Segment 2003   2002




U.S. Reinsurance     $150 .9   $102 .9
U.S. Insurance    58 .7    14 .0
Specialty Underwriting    (23 .9 )  (0 .4)
International    15 .8 (6 .2)
Bermuda    55 .4    29 .8




                          Total   $256 .9   $140 .1




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

The segment components of the increase in incurred losses and LAE in 2003 from 2002 were a 97.6% ($523.1 million) increase in the U.S. Reinsurance operation, an 45.1% ($83.2 million) increase in the International operation, a 39.9% ($172.7 million) increase in the U.S Insurance operation and a $209.7 million increase in the Bermuda operation, partially offset by a 5.7% ($18.0 million) decrease in the Specialty Underwriting operation. These changes generally reflect increases in premiums earned, changes in the current year loss expectation assumptions for business written, generally reflecting continued improvement in market conditions and pricing, an increase in catastrophe losses and the net prior period reserve development discussed above. Incurred losses and LAE for each operation were also impacted by variability relating to changes in the level of premium volume and 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, decreased by 2.1 percentage points to 69.6% in 2003 from 71.7% in 2002, reflecting the premiums earned and incurred losses and LAE discussed above, as well as the general firming of rates, terms and conditions and changes in business mix.

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

Segment Loss Ratios




Segment 2003   2002




U.S. Reinsurance      74 .4%    73 .8%
U.S. Insurance    73 .5%    75 .5%
Specialty Underwriting    63 .0%    68 .1%  
International    58 .0%    58 .0%
Bermuda    66 .5%    83 .0%

Segment underwriting expenses increased by 54.0% to $952.6 million in 2003 from $618.5 million in 2002. Commission, brokerage, taxes and fees increased by $312.2 million, principally reflecting increases in premium volume and changes in the mix of business, together with the Company’s emphasis on acquisition cost control. Segment other underwriting expenses increased by $21.9 million as the Company expanded operations to support its increased business volume. Contributing to these underwriting expense increases were an 84.8% ($170.9 million) increase in the U.S. Reinsurance operation, a 36.3% ($32.7 million) increase in the International operation, a 24.7% ($36.7 million) increase in the U.S. Insurance operation, a $90.7 million increase in the Bermuda operation and a 2.3% ($3.1 million) increase in the Specialty Underwriting operation. The changes for each operation’s expenses principally resulted from changes in commission expenses related to changes in premium volume and business mix by class and type and, in some cases, changes in the use of specific reinsurance as well as the underwriting performance of the underlying business. The Company’s expense ratio, which is calculated by dividing underwriting expenses by net premiums earned, was 25.6% in 2003 compared to 27.3% in 2002.

Segment Expense Ratios




Segment 2003   2002




U.S. Reinsurance      26 .1%    27 .7%
U.S. Insurance    22 .5%    25 .9%
Specialty Underwriting    29 .9%    29 .8%  
International    26 .6%    28 .3%
Bermuda    23 .6%    21 .1%

The Company’s combined ratio, which is the sum of the loss and expense ratios, decreased by 3.8 percentage points to 95.2% in 2003 compared to 99.0% in 2002.

The following table shows the combined ratios for each of the Company’s operating segments in 2003 and 2002. The combined ratios for all operations were impacted by the loss and expense ratio variability noted above.

Segment Combined Ratios




Segment 2003   2002




U.S. Reinsurance      100 .5%    101 .5%
U.S. Insurance    96 .0%    101 .5%
Specialty Underwriting    92 .9%    97 .9%  
International    84 .6%    86 .3%
Bermuda    90 .1%    104 .1%

Investments.  Net investment income increased 14.8% to $402.6 million in 2003 from $350.7 million in 2002, principally reflecting the effects of investing $1,653.8 million of cash flow from operations for the twelve months ended December 31, 2003, $209.9 million of net proceeds from Holdings’ issuance of junior

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subordinated debt securities in November 2002 and $316.8 million of net proceeds from the issuance of Group’s common shares in April 2003, all partially offset by the effects of the lower interest rate environment.

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

 
  2003   2002




Imbedded pre-tax yield of cash and invested assets at December 31, 2003 and 2002      4 .8%    5 .3%
Imbedded after-tax yield of cash and invested assets at December 31, 2003 and 2002    4 .1%    4 .6%
Annualized pre-tax yield on average cash and invested assets for the twelve months
ended December 31, 2003 and 2002
    5 .1%    5 .6%  
Annualized after-tax yield on average cash and invested assets for the twelve months
ended December 31, 2003 and 2002
    4 .4%    4 .6%

The Company, because of its income orientation, considers total return, the combination of income yield and capital appreciation/depreciation, to be less relevant as a measure of performance than may be the case for investment portfolios managed with alternate strategies. The following table provides a comparison of the Company’s total return by asset class to broadly accepted industry benchmarks for 2003 and 2002.

 
  2003   2002




Fixed income portfolio total return      6 .2%    8 .7%
Lehman bond aggregate    4 .1%    10 .3%
Common equity portfolio total return    17 .0%    (14 .4)%  
S&P 500    28 .7%    (22 .1)%

Net realized capital losses were $38.0 million in 2003, reflecting realized capital losses on the Company’s investments of $88.7 million, which included $25.7 million relating to write-downs in the value of securities deemed to be impaired on an other than temporary basis, and $46.2 million related to the impairment on interest only strips in accordance with EITF 99-20, partially offset by $50.7 million of realized capital gains, which included $16.8 million of realized capital gains on sales of the interest only strips, compared to net realized capital losses of $50.0 million in 2002. The net realized capital losses in 2002 reflected realized capital losses on the Company’s investments of $142.8 million, which included $101.3 million relating to write-downs in the value of securities deemed to be impaired on an other than temporary basis, of which $33.0 million was for WorldCom, Inc., partially offset by $92.8 million of realized capital gains. The company owned no interest only strips during 2002.

The Company has a small number of credit default swaps, which it no longer writes, and specialized equity put options in its product portfolio. These products meet the definition of a derivative under FAS 133. Net derivative income from these derivative transactions in 2003, was $5.9 million, which principally reflects changes in fair value of the specialized equity put options, compared to net derivative expenses of $14.5 million in 2002, which principally related to the specialized equity put options. See also Note 2 of Notes to the Consolidated Financial Statements.

Other expense in 2003 was $1.0 million compared to $2.1 million in 2002. The decrease in net expenses for 2003 was due to foreign exchange gains, partially offset by other miscellaneous expenses.

Corporate underwriting expenses not allocated to segments increased to $6.0 million for 2003 compared with $3.2 million for 2002 as the Company expanded its infrastructure to support increased business volume.

Interest expense in 2003 was $57.3 million compared to $44.6 million in 2002. Interest expense in 2003 reflected $38.9 million relating to the senior notes, $17.0 million relating to the junior subordinated debt securities and $1.4 million relating to borrowings under the Company’s revolving credit facility. Interest

52

expense in 2002 reflected $38.9 million relating to the issuance of the senior notes, $2.2 million relating to the junior subordinated debt securities and $3.5 million relating to borrowings under the Company’s revolving credit facility.

Income Taxes.   The Company recognized income tax expense of $65.2 million in 2003 compared to $30.7 million in 2002. The increase in taxes generally reflects the improved underwriting and investment income results.

Net Income.   Net income was $426.0 million in 2003 compared to net income of $231.3 million in 2002, reflecting improved underwriting and investment income results partly offset by increased income taxes.

CRITICAL ACCOUNTING POLICIES
The following is a summary of the critical accounting policies related to accounting estimates that (1) require management to make assumptions about highly uncertain matters and (2) could materially impact the consolidated financial statements if management made different assumptions.

LOSS AND LAE RESERVES.  The Company’s most critical accounting policy is the determination of its loss and LAE reserves. The Company maintains reserves to cover its estimated ultimate liability for losses and LAE with respect to reported and unreported claims relating to both its insurance and reinsurance businesses. Because reserves are estimates of ultimate losses and LAE, management, using a variety of statistical and actuarial techniques, monitors reserve adequacy over time, evaluating new information as it becomes known and adjusting reserves as necessary. Management considers many factors when setting reserves, including: (1) the Company’s exposure base, generally its premiums earned; (2) its expected loss ratios on current year writings as determined through extensive interaction between its underwriters and actuaries by product and class categories; (3) internal actuarial methodologies which analyze the Company’s loss reporting and payment experience with similar cases, information from ceding companies and historical trends, such as reserving patterns, loss payments and product mix; (4) current legal interpretations of coverage and liability; (5) economic conditions; and (6) the uncertainties discussed below regarding reserve requirements for A&E claims. Based on these considerations, management believes that adequate provision has been made for the Company’s insurance and reinsurance loss and LAE reserves. Actual losses and LAE ultimately paid may deviate, perhaps substantially, from such reserves, impacting income in the period in which the change in reserves is made. See also Note 1 of Notes of the Consolidated Financial Statements.

The Company acknowledges that there is more uncertainty in establishing loss reserves on assumed business as compared to direct business. At December 31, 2004 the Company had assumed loss reserves of $5,939.1 million, of which $313.0 million were loss reserves on A&E business.

Reserving for assumed reinsurance requires evaluating loss information received from ceding companies. Depending on the type of contract and the contractual reporting requirements, ceding companies report losses to the Company in many forms. Generally, proportional/quota share contracts require the submission of a monthly/quarterly account, which includes premium and loss settlement activity for the period with corresponding reserves as established by the ceding company. This information is recorded into the Company’s records. For certain proportional contracts, there is also an individual loss reporting clause, which requires a detailed loss report on claims that exceed a certain dollar threshold or relate to a particular type of loss. Excess of loss and facultative contracts generally require individual loss reporting with precautionary notices generally sent when losses reach a significant percentage of the attachment point of the contract. All individual loss reports and supporting claim information are managed by the Company’s experienced claims staff. Based on the evaluation of the claim, the Company may choose to establish additional case reserves over that reported by the ceding company. The Underwriting, Claim, Reinsurance Accounting and Internal Audit departments of the Company perform various reviews of the ceding carriers, particularly larger ceding carriers, to ensure that underwriting and claims procedures meet required standards. The claim information received from the ceding

53

companies is compiled into loss development triangles. Accepted actuarial methodologies, supplemented by judgment where appropriate, are then used to develop the appropriate IBNR for the Company. Included in the determination of IBNR, is a factor for reporting lags of the ceded carriers. Each quarter, the Company compares its actual reported losses for the quarter and cumulatively since the most recently completed reserve study to the expected reported losses for the respective period, which may result in additional reserving actions. This is done by aggregate class and/or type of business. This information is used as a tool in the judgmental process by which management assesses the overall adequacy of loss and LAE reserves.

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

The Company’s reserves include an estimate of the Company’s ultimate liability for A&E claims. This estimate is made based on 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 bar and including claims against defendants formerly regarded as “peripheral”; (b) a disproportionate percentage of claims filed by individuals with no functional injury, which should have little to no financial value but that have increasingly been considered in jury verdicts and settlements; (c) the growth in the number and significance of bankruptcy filings by companies as a result of asbestos claims (including, more recently, bankruptcy filings in which companies attempt to resolve their asbestos liabilities in a manner that is prejudicial to insurers and forecloses insurers from the negotiation of bankruptcy plans); (d) the concentration of claims in a small number of states that favor plaintiffs; (e) the growth in the number of claims that might impact the general liability portion of insurance policies rather than the product liability portion; (f) measures adopted by specific courts to ameliorate the worst procedural abuses; (g) an increase in settlement values being paid to asbestos claimants, especially those with cancer or functional impairment; (h) legislation in some states to address asbestos litigation issues; and (i) the potential that other states or the U.S. Congress may adopt legislation on asbestos litigation.

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

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In connection with the acquisition of Mt. McKinley, which has significant exposure to A&E claims, LM provided reinsurance to Mt. McKinley covering 80% ($160.0 million) of the first $200.0 million of any adverse development of Mt. McKinley’s reserves as of September 19, 2000 and The Prudential guaranteed LM’s obligations to Mt. McKinley. Cessions under this reinsurance agreement exhausted the limit available under the contract at December 31, 2003. Due to the uncertainties discussed above, the ultimate losses may vary materially from current loss reserves and, depending on coverage under the Company’s various reinsurance arrangements, could have a material adverse effect on the Company’s future financial condition, results of operations and cash flows. See also Note 1 and 3 of Notes to the Consolidated Financial Statements.

With respect to Mt. McKinley, where the Company has a direct relationship with policyholders, the Company’s aggressive litigation posture and the uncertainties inherent in the asbestos coverage and bankruptcy litigation have provided an opportunity to actively engage in settlement negotiations with a number of those policyholders who have potentially significant asbestos liabilities. Those discussions are oriented towards achieving reasonable negotiated settlements that limit Mt. McKinley’s liability to a given policyholder to a sum certain. In 2004, the Company has concluded such settlements or reached agreement in principle with 9 of its high profile policyholders. The Company currently has identified 15 policyholders based on their past claim activity and/or potential future liabilities as “High Profile Policyholders” and its settlement efforts are generally directed at such policyholders, in part because their exposures have developed to the point where both the policyholder and the Company have sufficient information to be motivated to settle. The Company believes that this active approach will ultimately result in a more cost-effective liquidation of Mt. McKinley’s liabilities than a passive approach, although it may also introduce additional variability in Mt. McKinley’s losses and cash flows 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 available to estimate the reinsurers’ ultimate exposure. At December 31, 2004 the Company had asbestos loss reserves of $632.3 million, of which $313.0 million was for assumed business and $319.3 was for direct business. See the reserve discussion under the heading Financial Condition.

REINSURANCE RECEIVABLES.   The Company utilizes reinsurance agreements to reduce its exposure to large claims and catastrophic loss occurrences. These agreements provide for recovery from reinsurers of a portion of losses and loss expenses under certain circumstances without relieving the insurer of its obligation to the policyholder. In the event reinsurers were unable to meet their obligations under these reinsurance agreements or were able to successfully challenge losses ceded by the Company under the reinsurance contracts, the Company would not be able to realize the full value of the reinsurance recoverable balance. In some cases, the Company may hold partial collateral, including letters of credit and funds held arrangements, for these agreements. The Company establishes reserves for uncollectible balances based on management’s assessment of the collectibility of the outstanding balances. To minimize exposure from uncollectible reinsurance receivables, the Company has a reinsurance credit security committee that generally evaluates the financial strength of a reinsurer prior to entering into a reinsurance arrangement. Additionally, creditworthy foreign reinsurers of business written in the U.S. are generally required to secure their obligations. Management believes that adequate provision has been made for the Company’s uncollectible balances. Actual uncollectible amounts may vary, perhaps substantially, from such reserves, impacting income in the period in which the change in reserves is made. See also Note 1 of Notes to the Consolidated Financial Statements. See also Financial Condition.

PREMIUMS WRITTEN AND EARNED.  Premiums written by the Company are earned ratably over the periods of the related insurance and reinsurance contracts or policies. Unearned premium reserves are established to cover the

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remainder of the unexpired contract period. Such reserves are established based upon reports received from ceding companies or computed using pro rata methods based on statistical data. Premiums earned, and the related costs, which have not yet been reported to the Company, are estimated and accrued. Standard accepted actuarial methodologies are used to estimate earned but not reported premium at each financial reporting date.

The following table displays the estimated earned premiums before reduction for related expenses for the periods indicated at December 31:

(Dollars in thousands) Earned But Not Reported Premium By Segment
2004 2003 2002



U.S. Reinsurance     $ 485,880   $ 391,885   $ 140,823  
U.S. Insurance    38,487    38,430    31,013  
Specialty Underwriting    136,687    105,865    106,245  
International    216,632    169,847    122,760  
Bermuda    233,940    120,349    53,721  



                         Total   $ 1,111,626   $ 826,376   $ 454,562  



These earned but not reported premiums are combined with reported premiums to comprise the exposure base for determining the Company’s incurred losses and loss and LAE reserves. Commission expense and incurred losses related to the change in earned but not reported premium is not differentiated from current period reported premium and the effects of both are included in current period company and segment financial results. See also Note 1 of Notes to the Consolidated Financial Statements.

INVESTMENT VALUATION.   The Company’s investment portfolio consists of investments available for sale and accordingly these securities are marked to market on a quarterly basis. Most securities are traded on national exchanges where market values are readily available. The Company holds some privately placed securities that are either valued by an investment advisor or by the Company using cash flow projections. Through the second quarter of 2004 the Company owned interest only strips that were accounted for in accordance with EITF 99-20, which set forth the rules for determining when these securities must be written down to fair value due to impairment. Unrealized gains and losses from market fluctuations are reflected as comprehensive income, while market value declines that are considered other than temporary impairments are reflected in the income statement as realized capital losses. The Company considers many factors when determining whether a market value decline is other than temporary, including: (1) the length of time the market value has been below book value, (2) the credit strength of the issuer, (3) the issuer’s market sector, (4) the length of time to maturity and (5) for asset backed securities, increases in prepayments. If management assessments change in the future, the Company may ultimately record a realized loss after management originally concluded that the decline in value was temporary. See also Note 1 of Notes to the Consolidated Financial Statements.

FINANCIAL CONDITION
CASH AND INVESTED ASSETS.  Aggregate invested assets, including cash and short-term investments, were $11,530.2 million at December 31, 2004, $9,321.3 million at December 31, 2003 and $7,265.6 million at December 31, 2002. The increase in cash and invested assets in 2004 from 2003 resulted primarily from $1,487.6 million in cash flows from operations generated during 2004, $320.0 million from net proceeds of the issuance of junior subordinated debt securities, $250 million from net proceeds of the issuance of senior notes and $40.1 million in net pre-tax unrealized appreciation of the Company’s investments, partially offset by a $70 million repayment on the revolving credit agreement. The increase in cash and invested assets in 2003 from 2002 resulted primarily from $1,653.8 million in cash flows from operations generated during 2003, $316.8

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million of net proceeds from the offering of common shares in April 2003 and $68.1 million in net unrealized appreciation of the Company’s investments.

The Company’s current investment strategy generally seeks to maximize after-tax income through a high quality, diversified, taxable and tax-preferenced fixed maturity portfolio, while maintaining an adequate level of liquidity. Although not a primary objective, the Company actively considers total return performance, in particular as respects the exposures of its fixed income portfolio to variability in unrealized appreciation/depreciation as interest rates shift. The Company’s mix of taxable and tax-preferenced investments is adjusted continuously, consistent with the Company’s current and projected operating results, market conditions and the Company’s tax position. The fixed maturities in the investment portfolio are comprised of available for sale securities. Additionally, the Company is expanding its investments in equity securities, principally public equity index securities, which it believes will enhance the risk-adjusted total return of the investment portfolio.

Commencing with the second quarter of 2003 and through the second quarter of 2004, the Company had investments in interest only strips. These investments were aimed at mitigating potential decreases in unrealized appreciation on the Company’s fixed income portfolio during a period where management judged that there was extraordinary potential for an increase in general interest rates. These fixed maturity 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, market 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 liquidated its interest only strip investment portfolio in the second quarter of 2004, at which point management concluded the extraordinary potential for increases in general interest rates had subsided to a more normal level.

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The tables below summarize the composition of and the characteristics of the Company’s investment portfolio at December 31:

2004 2003 2002



Fixed maturities      86 .3%  93 .6%  93 .4%
Equity securities    5 .6%  1 .7%  0 .7%
Short-term investments    5 .1%  1 .6%  2 .3%
Other invested assets    1 .4%  1 .1%  0 .7%
Cash    1 .6%  2 .0%  2 .9%



     Total investments and cash    100 .0%  100 .0%  100 .0%

2004
2003 2002



Fixed income portfolio duration   5.2 years 4.2 years 5.4 years
Fixed income composite credit quality      Aa2    Aa2    Aa2
Imbedded end of period yield, pre-tax    4 .7%  4 .8%  5 .3%
Imbedded end of period yield, after-tax    4 .1%  4 .1%  4 .6%

The increase in short-term investments is due principally to maintaining liquidity to repay the maturing $250 million of senior notes due in March 2005. The increase in equity securities reflects a modest and continuing reweighting of the Company’s target investment mix.

The Company, because of its historical income orientation, has generally considered total return, the combination of income yield and capital appreciation/depreciation, to be relatively less important as a measure of performance than its overall income yield. With changes the Company perceives in overall investment market conditions, and more specifically the acquisition of $496.5 million of equity securities into the overall investment portfolio in 2004, the Company is reexamining the weighting of total return in its overall investment strategy.

The following table provides a comparison of the Company’s total return by asset class to broadly accepted industry benchmarks for the periods indicated:

  Years Ended December 31,



  2004   2003



Fixed income portfolio total return      6 .5%    6 .2%
Lehman bond aggregate    4 .3%    4 .1%
Common equity portfolio total return    21 .9%    17 .0%  
S&P 500    10 .9%    28 .7%

REINSURANCE RECEIVABLES.   Reinsurance receivables for both paid and unpaid losses totaled $1,210.8 million at December 31, 2004, $1,284.1 million at December 31, 2003, and $1,116.4 million at December 31, 2002. At December 31, 2004, $405.0 million, or 33.4%, was receivable from subsidiaries of London Life. These receivables are effectively secured by a combination of letters of credit and funds held arrangements under which the Company has retained the premium payments due the retrocessionaire, recognized liabilities for such amounts and reduced such liabilities as payments are due from the retrocessionaire. In addition, $160.0 million, or 13.2%, was receivable from LM, whose obligations are guaranteed by The Prudential, $132.5 million, or 10.9%, was receivable from Transatlantic and $100.0 million, or 8.3%, was receivable from Continental, which is partially secured by funds held arrangements. No other retrocessionaire accounted for more than 5% of the Company’s receivables.

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LOSS AND LAE RESERVES.  Gross loss and LAE reserves totaled $7,836.3 million at December 31, 2004, $6,361.2 million at December 31, 2003, and $4,905.6 million at December 31, 2002. The increase in 2004, 2003 and 2002 is primarily attributable to increased premiums earned, increase in catastrophe losses, net prior period reserve adjustments in select areas and normal variability in claim settlements.

Effective January 1, 2004, Everest Re sold its United Kingdom branch to Bermuda Re. Business for this branch was previously included in the International segment and is now included in the Bermuda segment. Due to the sale and in accordance with FAS 131, the Company restated the International and Bermuda segments for the years ended December 31, 2003 and 2002 to conform to December 31, 2004 segment reporting.

The following tables summarize gross outstanding loss and LAE reserves, segregated into case reserves and IBNR reserves, which are managed on a combined basis, for the periods indicated.

Gross Reserves By Segment
As of December 31, 2004
(Dollars in thousands) Case
Reserves
IBNR
Reserves
Total
Reserves
% of
Total




U.S. Reinsurance     $ 1,354,647   $ 2,174,762   $ 3,529,409    45 .0%
U.S. Insurance    599,200    793,451    1,392,651    17 .7%
Specialty Underwriting    215,187    158,793    373,980    4 .8%
International    421,804    359,073    780,877    10 .0%
Bermuda    425,273    605,791    1,031,064    13 .2%




Total excluding A&E    3,016,111    4,091,870    7,107,981    90 .7%
A&E    571,939    156,386    728,325    9 .3%




Total including A&E   $ 3,588,050   $ 4,248,256   $ 7,836,306    100 .0%






As of December 31, 2003
(Dollars in thousands) Case
Reserves
IBNR
Reserves
Total
Reserves
% of
Total




U.S. Reinsurance     $ 1,271,956   $ 1,835,902   $ 3,107,858    48 .9%
U.S. Insurance    445,802    620,895    1,066,697    16 .7%
Specialty Underwriting    228,572    80,839    309,411    4 .9%
International    353,686    149,717    503,403    7 .9%
Bermuda    256,059    352,559    608,618    9 .6%




Total excluding A&E    2,556,075    3,039,912    5,595,987    88 .0%
A&E    483,433    281,824    765,257    12 .0%




Total including A&E   $ 3,039,508   $ 3,321,736   $ 6,361,244    100 .0%




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As of December 31, 2002
(Dollars in thousands) Case
Reserves
IBNR
Reserves
Total
Reserves
% of
Total




U.S. Reinsurance     $ 1,143,500   $ 1,459,749   $ 2,603,249    53 .1%
U.S. Insurance    242,306    452,290    694,596    14 .2%
Specialty Underwriting    234,809    50,929    285,738    5 .8%
International    295,212    59,052    354,264    7 .2%
Bermuda    187,585    112,228    299,813    6 .1%




Total excluding A&E    2,103,412    2,134,248    4,237,660    86 .4%
A&E    430,115    237,807    667,922    13 .6%




Total including A&E   $ 2,533,527   $ 2,372,055   $ 4,905,582    100 .0%




The increases by segment generally reflect increases in earned premium, changes in business mix and the impact of reserve reestimations together with claim settlement activity. The fluctuations for A&E reflect the impact of reserve reevaluations and claim settlement activity.

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

There can be no assurance that reserves for, and losses from, claim obligations will not increase in the future. However, management believes that the Company’s existing reserves and reserving methodologies lessen the probability that any such increase would have a material adverse effect on the Company’s financial condition, results of operations or cash flows. In this context, the Company notes that over the past 10 years, its past calendar year operations have been affected variably by effects from prior period reserve re-estimates, with such effects ranging from a favorable $35.4 million, representing 1.2% of the net prior period reserves for the year in which the adjustment was made, to an unfavorable $312.0 million, representing 6.0% of the net prior period reserves for the year in which the adjustment was made. The Company has noted that variability has increased over the past three years and has taken actions to attempt to reduce this year to year variability prospectively.

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The following table represents the reserve levels and ranges as of December 31, 2004 for each of the Company’s business segments.

Outstanding Reserves and Ranges By Segment (1)
As of December 31, 2004





(Dollars in thousands) As
Reported
Low
Range % (2)
Low
Range (2)
High
Range % (2)
High
Range (2)





Gross Reserves By Segment                            
     U.S. Reinsurance   $ 3,529,409   -7.4%   $ 3,267,944   8.1%   $ 3,813,682  
     U.S. Insurance    1,392,651   -5.0%    1,323,018   5.0%    1,462,284  
     Specialty Underwriting    373,980   -8.3%    342,944   8.3%    405,016  
     International    780,877   -5.5%    737,795   6.2%    828,909  
     Bermuda    1,031,064   -6.2%    967,138   6.2%    1,094,990  





Total Gross Reserves  
   (excluding A&E)    7,107,981   -6.6%    6,638,840   7.0%    7,604,880  





     A&E (All Segments) (3) (4)    728,325   NA    728,325   NA    728,325  





Total Gross Reserves (4)   $ 7,836,306   NA   $ 7,367,165   NA     $ 8,333,205  





______________

(1)    There can be no assurance that reserves will not ultimately exceed the indicated ranges, requiring additional income statement
        expense.
(2)    Although totals are displayed for both the low range and high range amounts, it should be noted that statistically the range of the
        total is not equal to the sum of the ranges of the segments.
(3)    Given the uncertainties surrounding the settlement of A&E losses, management is unable to establish a range for these obligations.
        As a result, which relate principally to the U.S. Reinsurance and Bermuda segments, have been segregated from reserves for which a
        range has been determined
(4)     NA means not applicable.

The Company has included ranges for loss reserve estimates determined by the Company’s actuaries, which are derived through a combination of objective and subjective criteria. The Company notes that its presentation of this information is not directly comparable to similar presentations of other companies as there are no consistently applied actuarial or accounting standards governing such presentations. The Company further notes that its recorded reserves reflect the Company’s best point estimate of its liabilities and that its actuarial methodologies focus on such point estimates around which ranges are subsequently developed.

Depending on the specific segment, the range derived for the loss reserves, excluding reserves for A&E exposures, ranges from minus 5.0% to minus 8.3% for the low range and from plus 5.0% to plus 8.3% for the high range. Both the higher and lower ranges are associated with the Specialty Underwriting segment. Within each range, management’s best estimate of loss reserves is based on the point estimate derived by the Company’s actuaries in detailed reserve studies. Such ranges are necessarily subjective due to the lack of generally accepted actuarial standards with respect to their development. In particular, the Company notes that the width of the range is dependent on the level of confidence associated with the outcome. For the above presentation, management has assumed what it believes is a reasonable confidence level but notes that there can be no assurance that the Company’s claim obligations will not vary within and potentially outside of these ranges, requiring incurred loss adjustments in the period the variability is recognized. The Company is not able to establish a meaningful range for A&E reserves.

Additional losses, including those relating to latent injuries, and other exposures, which are as yet unrecognized, the type or magnitude of which cannot be foreseen by the Company or the reinsurance and insurance industry generally, may emerge in the future. Such future emergence, to the extent not covered by existing retrocessional

61

contracts, could have material adverse effects on the Company’s future financial condition, results of operations and cash flows.

The Company generally has exposure to A&E losses through its Mt. McKinley operation with respect to insurance policies and through Everest Re with respect to reinsurance contracts. In each case, the Company’s management and analysis of its exposures takes into account a number of features of its business that differentiate the Company’s exposures from many other insurers and reinsurers that have significant A&E exposures.

Mt. McKinley began writing small amounts of A&E exposed insurance in 1975 and increased the volume of its writings in 1977. These writings ceased in 1984, giving Mt. McKinley an approximate 10-year window of potential A&E exposure, which is appreciably shorter than is the case for many companies with significant A&E exposure. Additionally, due to changes in and standardization of policy forms, it is rare for policies in the 1970s and 1980s to have been issued without aggregate limits on at least the product liability coverage offered; policies issued in earlier decades are generally more at risk of not having aggregate limits.

The vast majority of Mt. McKinley’s A&E exposed insurance policies are excess casualty policies, with aggregate coverage limits, which by definition also have protection afforded by underlying coverage. Mt. McKinley’s attachment points vary but usually are protected by millions, often tens of millions, of dollars of underlying coverage. The excess nature of most of Mt. McKinley’s policies also offers protection against non-product claims (for example, claims arising under general liability coverage). Although under some circumstances an excess policy could be exposed to non-product claims, such claims generally pose more of a risk to primary policies because non-product claims are generally less likely to aggregate. In addition, environmental claims arise under general liability coverage, and generally do not aggregate. Thus, these claims tend to create exposure for primary policies to a greater extent than excess policies.

Virtually all of the Mt. McKinley policies that are still potentially exposed to claims have policy language providing that expenses were paid within limits rather than in addition to limits. This is a substantial difference from primary coverage, which would most often cover expenses in addition to limits.

Everest Re was formed in 1973 but was not fully engaged in underwriting casualty business, under which A&E exposures generally arise, until 1974, and it effectively eliminated A&E exposures through contract exclusions effected in 1984. Therefore, Everest Re has an approximate 11-year window of A&E exposure, much shorter than that of many reinsurance companies that have significant A&E exposures. In the earlier years of its existence, Everest Re was not as heavily involved in casualty business as in property business, which generally is not exposed to asbestos claims. Everest Re generally took smaller lines of exposure per contract than many other reinsurers operating in the casualty reinsurance market and those lines were generally also smaller than the excess limits provided by Mt. McKinley policies. This means that the potential adverse development on Everest Re’s reinsurance business would not be subject to the same level of volatility as would be the case for companies having greater exposures per risk. Everest Re reinsured both primary and excess policies. However, its claim experience to date indicates that the majority of its reinsurance supported excess policies. As a result, most of Everest Re’s exposure derives from excess policies similar to those written by Mt. McKinley.

With respect to both the Mt. McKinley and Everest Re operations, the Company was not a member of the Asbestos Claims Facility (“Wellington”) or the Center for Claims Resolution (“CCR”) claim settlement facilities. Insurers supporting those facilities made broad commitments concerning the application of insurance coverage to asbestos claims. With respect to its direct insurance exposures, the fact that the Company has not made those commitments may allow it to resolve insurance exposure to Wellington/CCR insureds more economically than if it had joined these facilities. With respect to its reinsurance exposures, although the Company was not a signatory to the Wellington or CCR facilities, it has, within the bounds of its reinsurance contracts, generally supported ceding companies that were signatories. Because the insurers supporting these

62

facilities have generally paid their exposures more quickly than non-signatory insurers, the Company believes that this has generally meant that it has paid its reinsurance exposure more quickly than it likely would have if it had not been subject to Wellington/CCR payments.

The Company believes that its A&E exposures are unique and differentiated, by the points noted above, from those insurers and reinsurers with appreciable A&E exposure but there can be no assurance that such factors will protect the Company from adverse development, perhaps material, or allow it to secure advantages in the settlement of its claims obligations.

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

Asbestos and Environmental Reserves
Years Ended December 31,



(Dollars in millions) 2004 2003 2002



Gross Basis:                
Beginning of period reserves   $ 765 .3 $ 667 .9 $ 644 .4



Incurred losses and LAE:  
Reported losses    297 .1  128 .6  180 .9
Change in IBNR    (125 .4)  44 .0  (85 .9)



Total incurred losses and LAE    171 .7  172 .6  95 .0
Paid losses    (208 .7)  (75 .2)  (71 .5)



End of period reserves   $ 728 .3 $ 765 .3 $ 667 .9



Net Basis:  
Beginning of period reserves   $ 534 .4 $ 527 .5 $ 568 .6



Incurred losses and LAE:  
Reported losses    271 .8  15 .9  102 .7
Change in IBNR    (112 .4)  34 .3  (79 .2)



Total incurred losses and LAE    159 .4  50 .2  23 .5
Paid losses    (187 .1)  (43 .3)  (64 .6)



End of period reserves   $ 506 .7 $ 534 .4 $ 527 .5



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

The gross incurred losses for A&E exposures increased by $171.7 million and $172.6 million for the years ended December 31, 2004 and 2003, respectively. These increases are the result of reevaluations by management reflecting additional information received from insureds and ceding companies, ongoing litigation, additional claims received and settlement activity. Management closely monitors this additional information and adjusts reserves accordingly. The net incurred losses primarily reflect the impact of the reinsurance agreement between Mt. McKinley and LM.

Industry analysts have developed a measurement, known as the survival ratio, to compare the A&E reserves among companies with such liabilities. The survival ratio is typically calculated by dividing a company’s current net reserves by the three year average of paid losses, and therefore measures the number of years that it would take to exhaust the current reserves based on historical payment patterns. Using this measurement, the Company’s net three year A&E survival ratio was 5.2 years at December 31, 2004. Adjusting for the effect of the reinsurance ceded under the reinsurance agreement with LM, this ratio rises to the equivalent of 6.8 years at December 31, 2004. The cession of $160.0 million to the stop loss reinsurance provided by LM in connection with the acquisition of Mt. McKinley results in unpaid proceeds that are not reflected in past net payments and effectively extend the funding available for future net payments.

Because the survival ratio was developed as a comparative measure of reserve strength and not of absolute reserve adequacy, the Company considers, but does not rely on, the survival ratio when evaluating its reserves.

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In particular, the Company notes that loss payout variability, which can be material, due in part to the Company’s orientation to negotiated settlements, particularly on its Mt. McKinley exposures, significantly impairs the credibility and utility of this measure as an analytical tool. During 2004, the Company made asbestos net claim payments of $134.3 million on Mt McKinley high profile claimants where the claim was either closed or a settlement was reached. Such payments, which are effectively non-repetitive, do for 2004, and will for 2005 and 2006, distort the Company’s three year survival ratio. Adjusting for such settlements, recognizing total settlements are generally considered fully reserved to an agreed settlement, the Company considers that its adjusted survival ratio for net unsettled claims is 16.0 years.

Developments in 2004 and 2003 affecting asbestos exposures in general and the Company’s asbestos exposures in particular, together with enhancements in the Company’s claim management and analytical processes, resulted in the reserve strengthening noted earlier. These developments and actions have increased the emphasis on asbestos exposures as a separate component of the Company’s A&E exposures. Despite the Company’s approach of handling A&E exposures on a combined basis, management believes additional disclosure of the asbestos element of its A&E exposures is appropriate.

The following tables summarize reserve and claim activity for asbestos claims, on both a gross and net of ceded reinsurance basis, for the periods indicated with particular emphasis on the differentiation of insured categories within the Mt. McKinley operation, which the Company believes reflects the most volatile element of its asbestos exposures for the years ended December 31:

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Gross Asbestos Exposures (1)



(Dollars in millions) 2004   2003   2002  



Beginning of period reserves:                
    Direct Operations (Mt. McKinley)  
        Settlements in place ("SIP") (2)   $ 110.1   $ 72.1   $ 43.5  
        Actively managed (3)       -     6.6     32.2  
        Remaining high profile insureds    98.8    147.7    41.2  
        Other direct exposures    11.9    1.7    2.5  
        Incurred by not reported ("IBNR")    187.0    91.7    100.6  



        407.8   319.8     220.0  
    Reinsurance Operations (Everest Re)  
        Case reserves     196.1     133.3     120.5  
        IBNR    48.9    88.2    117.3  



        244.9   221.6   237.7



    Total beginning of period reserves    652.7    541.4    457.7  



Incurred losses and LAE:  
    Direct Operations (Mt. McKinley)  
        SIP settlements in place (2)    163.1    64.6    32.8  
        Actively managed (3)     -   (0.7 ) (0.3 )
        Remaining high profile insureds    19.7    (44.7 )  108.2  
        Other direct exposures    1.6    11.3    3.2  
        IBNR    (116.2 )  95.3    (8.9 )



    68.2   125.8   135.0  
    Reinsurance Operations (Everest Re)  
        Reported Losses    102.1    89.9    29.0  
        IBNR    1.5    (39.4 )  (29.0 )



    103.6   50.5   -  



    Total incurred losses and LAE    171.7    176.3    135.0  



Paid losses:  
    Direct Operations (Mt. McKinley)  
        SIP settlements in place (2)    148.0    26.6    4.2  
        Actively managed (3)     -   5.9   25.3
        Remaining high profile insureds    7.7    4.2    1.7  
        Other direct exposures    1.0    1.1    4.0  



    156.7   37.8   35.2  
    Reinsurance Operations (Everest Re)    35.4    27.2    16.1  



    Total paid losses    192.1    65.0    51.3  



End of period reserves:  
    Direct Operations (Mt. McKinley)  
        SIP settlements in place (2)    125.2    110.1    72.1  
        Actively managed (3)     -   0.0   6.6
        Remaining high profile insureds    110.8    98.8    147.7  
        Other direct exposures    12.5    11.9    1.7  
        IBNR    70.8    187.0    91.7  



      319.3   407.8   319.8
    Reinsurance Operations (Everest Re)  
        Case reserves    262.7    196.1    133.3  
        IBNR    50.3    48.9    88.2  



    313.0   244.9   221.6  



    Total end of period reserves   $ 632.3   $ 652.7   $ 541.4  



______________

(1)    Some totals may not reconcile due to rounding.
(2)    Under SIP agreements, payments depend upon the insured's actual claims experience and may be subject to annual caps or other
         controls on the rate of payment.
(3)    Actively Managed means that Mt. McKinley is managing the defense of claims against the insured.

         3 Year Survival Ratio
6.2  
         3 Year Survival Ratio excluding SIP and actively managed 15.5  

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Net Asbestos Exposures (1)



(Dollars in millions) 2004   2003   2002  



Beginning of period reserves:                
    Direct Operations (Mt. McKinley)  
        Settlements in place ("SIP") (2)   $ 99.3   $ 65.4   $ 39.4  
        Actively managed (3)   -    5.9    28.5  
        Remaining high profile insureds    89.7    132.8    36.8  
        Losses Ceded to Prupac    (160.0 )  (80.7 )  (19.6 )
        Other direct exposures    9.4    1.5    1.8  
        IBNR    165.3    84.8    94.5  



      203.7   209.7   181.5  
    Reinsurance Operations (Everest Re)  
        Case reserves    183.5    123.5    110.7  
        IBNR    32.7    70.2    97.3  



    216.2   193.7   207.9  



    Total beginning of period reserves    419.9    403.4    389.4  



Incurred losses and LAE:  
    Direct Operations (Mt. McKinley)  
        SIP settlements in place (2)    146.3    57.6    29.8  
        Actively managed (3)   -   (0.6 ) 1.1  
        Remaining high profile insureds    22.1    (39.3 )  97.5  
        Losses Ceded to Prupac     -   (79.3 )