10-K 1 group10k.htm GROUP 10-K 2005



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, 2005

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 – 2nd 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 if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.

Yes   X       No___

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

Yes   X       No___

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

Large accelerated filer  X   Accelerated Filer___   Non-accelerated Filer___

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

Yes   X       No___

        Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act.)

Yes ___     No  X  

        The aggregate market value on June 30, 2005, the last business day of the registrant’s most recently completed second quarter, of the voting shares held by non-affiliates of the registrant was $5,245.2 million.

        At March 1, 2006, the number of shares outstanding of the registrant’s common shares was 64,842,077.

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 2006 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, 2005.

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TABLE OF CONTENTS

      Item Page


PART I

1.    

Business

1
1A.  Risk Factors 30
1B.  Unresolved Staff Comments 43
2.     Properties 44
3.     Legal Proceedings 44
4.     Submission of Matters to a Vote of Security Holders 44


PART II

5.    

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


45
6.     Selected Financial Data 46
7.     Management’s Discussion and Analysis of Financial Condition and Results of Operation 48
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 93
9B. Other Information 94


PART III

10. 

Directors and Executive Officers of the Registrant

94
11.  Executive Compensation 94
12.  Security Ownership of Certain Beneficial Owners and Management and Related Shareholder
Matters

94
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 accounting principles generally accepted in the United States of America (“GAAP”). 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.

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 had gross written premiums in 2005 of $4.1 billion with approximately 76% representing reinsurance and 24% representing insurance, and shareholders’ equity at December 31, 2005 of $4.1 billion. The Company underwrites reinsurance both through brokers and directly with ceding companies, giving it the flexibility to pursue business based on the ceding company’s preferred reinsurance purchasing method. The Company underwrites insurance principally through general agent relationships and surplus lines brokers. Group’s active 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”), a leading provider of insurer ratings that assigns financial strength ratings to insurance companies based on their ability to meet their obligations to policyholders.

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

  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, 2005 of $1.7 billion based on U.S. GAAP.

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  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. Through 2005, all of Everest International’s business has been inter-affiliate quota share reinsurance assumed from Everest Re and the UK branch of Bermuda Re. Everest International had shareholders’ equity at December 31, 2005 of $300 million based on U.S. GAAP.

  Everest Re, a Delaware insurance company and a direct subsidiary of Holdings, is a licensed property and casualty insurer and/or reinsurer in all states (except Nevada and Wyoming), the District of Columbia and Puerto Rico and is authorized to conduct reinsurance business in Canada and Singapore. Everest Re underwrites property and casualty reinsurance for insurance and reinsurance companies in the U.S. and international markets. Everest Re had statutory surplus at December 31, 2005 of $2.3 billion.

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

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

  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.

  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 write the excess and surplus lines insurance business in the U.S. In 1985, Mt. McKinley ceased writing new and renewal insurance and commenced a run-off operation to service claims arising from its previously written business. In 1991, Mt. McKinley was distributed to its ultimate parent, The Prudential. 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.

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

2

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

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

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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 business 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 unacceptable geographic or other risk concentrations.

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 substantially dependent on any single customer, small group of customers, line of business or geographical area. For the 2005 calendar year, no single customer (ceding company or insured) generated more than 7.5% 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 66.0%, 10.5% and 23.5% of the Company’s 2005 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 based on 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 54.7% of gross written premiums in 2005, with the two largest brokers accounting for approximately 17.8% (Marsh & McLennan Companies, Inc.) and 10.1% (Willis Group, Ltd.) 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.

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 2005, no single general agent generated more than 5% of the Company’s gross written premiums. In June 2004, the Company received notification of termination with respect to its contract with American All-

4

Risk Insurance Services, LLC, which accounted for approximately 7.8% of the Company’s 2004 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 continued in force through the policy expiration dates or cancellation.

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 with respect to pricing, risk management, monitoring aggregate exposures to catastrophe events, capital, investments and support operations. Management generally monitors and evaluates the financial performance of these operating segments based upon their underwriting results. Underwriting results include earned premium less losses and loss adjustment expenses (“LAE”) incurred, commission and brokerage expenses and other underwriting expenses and are analyzed using ratios, in particular loss, commission and brokerage and other underwriting expense ratios, which, respectively, divide incurred losses, 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 year ended 2003 to conform to December 31, 2005 and 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.

Underwriting Operations
The following five year table presents the distribution of the Company’s gross written premiums segmented by its U.S. Reinsurance, U.S. Insurance, Specialty Underwriting, International and Bermuda operations. The premiums for each operation are further split as 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:

5

Gross Written Premiums by Operation
Years Ended December 31,

(Dollars in millions) 2005
2004
2003
2002
2001

U.S. Reinsurance
                                           
   Property  
      Pro Rata (1)   $ 414.0   10.1 % $339.7 7.2 % $357.8 7.8 % $148.7 5.2 % $62.9 3.4 %
      Excess    236.9    5.8 %  208.8    4.4 %  241.0    5.3 %  177.8    6.2 %  104.0    5.5 %
   Casualty  
      Pro Rata (1)    529.4    12.9 %  702.8    14.9 %  625.7    13.7 %  219.2    7.7 %  191.2    10.2 %
      Excess    205.9    5.0 %  226.8    4.8 %  527.8    11.5 %  348.9    12.3 %  252.3    13.5 %










   Total (2)    1,386.2    33.8 %  1,478.1    31.4 %  1,752.3    38.3 %  894.6    31.4 %  610.4    32.6 %











U.S. Insurance
   Property  
      Pro Rata (1)    196.9    4.8 %  159.0    3.4 %  42.9  0.9 %  6.5  0.2 %  6.2  0.3 %
      Excess    -  0.0 %  -  0.0 %  -  0.0 %  -  0.0 %  -  0.0 %
   Casualty  
      Pro Rata (1)    735.6    17.9 %  1,008.8    21.4 %  1,026.6    22.5 %  815.0    28.6 %  496.1    26.5 %
      Excess    -  0.0 %  -  0.0 %  -  0.0 %  -  0.0 %  -  0.0 %










   Total (2)    932.5    22.7 %  1,167.8    24.8 %  1,069.5    23.4 %  821.5    28.9 %  502.4    26.8 %











Specialty Underwriting
   Property  
      Pro Rata (1)    206.1    5.0 %  374.8    8.0 %  396.7    8.7 %  397.5    14.0 %  356.3    19.0 %
      Excess    65.2  1.6 %  65.4  1.4 %  64.3  1.4 %  43.8  1.5 %  35.0    1.9 %
   Casualty  
      Pro Rata (1)    30.7  0.7 %  34.1  0.7 %  28.1  0.6 %  41.9  1.5 %  18.4    1.0 %
      Excess    12.6  0.3 %  12.8  0.3 %  13.8  0.3 %  5.3  0.2 %  4.3  0.2 %










   Total (2)    314.6    7.6 %  487.1    10.4 %  502.9    11.0 %  488.5    17.2 %  414.0    22.1 %











Total U.S.
   Property  
      Pro Rata (1)    817.0    19.9 %  873.5    18.6 %  797.4    17.4 %  552.7    19.4 %  425.5    22.7 %
      Excess    302.1    7.4 %  274.2    5.8 %  305.3    6.7 %  221.6    7.8 %  139.0    7.4 %
   Casualty  
      Pro Rata (1)    1,295.7    31.5 %  1,745.7    37.1 %  1,680.4    36.8 %  1,076.1    37.8 %  705.8    37.6 %
      Excess    218.5    5.3 %  239.6    5.1 %  541.6    11.8 %  354.2    12.4 %  256.7    13.7 %










   Total (2)    2,633.3    64.1 %  3,133.0    66.6 %  3,324.7    72.7 %  2,204.6    77.4 %  1,526.8    81.4 %











International (4)
   Property  
      Pro Rata (1)    421.4    10.3 %  426.0    9.1 %  328.5    7.2 %  229.4    8.1 %  126.9    6.8 %
      Excess    160.4    3.9 %  159.7    3.4 %  118.6    2.6 %  78.4  2.8 %  40.6    2.2 %
   Casualty  
      Pro Rata (1)    66.4  1.6 %  51.2  1.1 %  31.3  0.7 %  30.6  1.1 %  47.1    2.5 %
      Excess    58.4  1.4 %  50.8  1.1 %  42.4  0.9 %  26.1  0.9 %  20.3    1.1 %










   Total (2)    706.6    17.2 %  687.7    14.6 %  520.8    11.4 %  364.5    12.8 %  234.9    12.5 %











Bermuda Operations (4)
   Property  
      Pro Rata (1)    322.9    7.8 %  309.7    6.6 %  230.0    5.0 %  136.1    4.8 %  50.3    2.7 %
      Excess    151.8    3.7 %  232.5    4.9 %  239.5    5.2 %  80.5  2.8 %  20.0    1.1 %
   Casualty  
      Pro Rata (1)    208.8    5.1 %  227.0    4.8 %  175.4    3.8 %  19.8  0.7 %  25.2    1.3 %
      Excess    85.2  2.1 %  114.2    2.4 %  83.3  1.8 %  41.0  1.4 %  17.3    0.9 %










   Total (2) (3)    768.7    18.7 %  883.4    18.8 %  728.2    15.9 %  277.4    9.7 %  112.8    6.0 %











Total Company
   Property  
      Pro Rata (1)    1,561.3    38.0 %  1,609.2    34.2 %  1,355.9    29.6 %  918.2    32.3 %  602.6    32.1 %
      Excess    614.3    15.0 %  666.4    14.2 %  663.4    14.5 %  380.5    13.4 %  199.6    10.6 %
   Casualty  
      Pro Rata (1)    1,570.9    38.2 %  2,023.9    43.0 %  1,887.2    41.3 %  1,126.5    39.6 %  778.1    41.5 %
      Excess    362.1    8.8 %  404.6    8.6 %  667.3    14.6 %  421.3    14.8 %  294.3    15.7 %










   Total (2)   $ 4,108.6 100.0 % $4,704.1 100.0 % $4,573.8 100.0 % $2,846.5 100.0 % $1,874.6 100.0 %










______________

(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 2005, $571.0 million of gross written premiums were attributable to U.S. treaty property business, of which 27.5% was written on an excess of loss basis and 72.5% 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. Further, the Company manages its exposure to catastrophe and other large losses by limiting exposures to individual contracts and limiting aggregate exposures to catastrophes in any particular zone.

U.S. treaty casualty business accounted for $610.9 million of gross written premiums in 2005, of which 13.3% was written on an excess of loss basis and 86.7% 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 headquarters office in New York and satellite offices in Chicago and Oakland. In 2005, $53.5 million, $105.1 million, $19.3 million and $26.3 million of gross written premiums were attributable to the property, casualty, specialty and national brokerage lines of business, respectively.

In 2005, 89.3%, 8.4% and 2.3% 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 2005, the Company’s U.S. Insurance operation wrote $932.5 million of gross written premiums, of which 78.9% was casualty, predominantly workers’ compensation insurance, and 21.1% was property. Of the total business written, Everest National wrote $716.6 million and Everest Re wrote $5.6 million, principally targeting commercial property and casualty business written through general agency relationships with program administrators. Workers’ compensation business accounted for $412.3 million, or 44.2% of the total business written, including $230.3 million, or 55.9% of the total workers’ compensation business written as California workers’ compensation business and $520.2 million, or 55.8% of the total business written as non-workers’ compensation business. Everest Indemnity wrote $183.4 million, principally targeting excess and surplus lines insurance business written through surplus lines brokers. Everest Security wrote $26.8 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

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primarily in the London market. Surety business underwritten by the Company consists mainly of reinsurance of contract surety bonds.

Gross written premiums of the A&H unit in 2005 totaled $136.5 million, of which 88.1% was written through the broker market and 11.9% was written through the direct market.

Gross written premiums of the marine and aviation unit in 2005 totaled $121.0 million, substantially all of which was written on a treaty basis and sourced through reinsurance brokers. Marine treaties represented 64.3% of marine and aviation gross written premiums in 2005 and consisted mainly of hull and energy coverage. Approximately 35.9% of the marine unit premiums in 2005 were written on a pro rata basis and 64.1% as excess of loss. Aviation premiums accounted for 35.7% of marine and aviation gross written premiums in 2005 and included reinsurance for airlines and general aviation. Approximately 70.9% of the aviation unit’s premiums in 2005 were written on a pro rata basis and 29.1% as excess of loss.

In 2005, gross written premiums of the surety unit totaled $57.1 million. Approximately 98.8% of the surety unit premiums in 2005 were written on a pro rata basis and 1.2% 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 82.3% of the gross written premiums by the Company’s international underwriters in 2005 represented property business, while 17.7% 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 69.8% of the Company’s international business was written through brokers, with 30.2% written directly with ceding companies.

Gross written premiums of the Company’s Canadian branch totaled $129.2 million in 2005 and consisted of pro rata property (30.1%), excess property (27.1%), pro rata casualty (9.9%) and excess casualty (32.9%). Approximately 70.7% of the Canadian premiums consisted of treaty reinsurance, while 29.3% was facultative reinsurance.

The Company’s Singapore branch covers the Asian markets and accounted for $187.1 million of gross written premiums in 2005. This business consisted of pro rata property (69.6%), excess property (25.3%), pro rata casualty (4.2%) and excess casualty (0.9%).

International business written out of Everest Re’s Miami and New Jersey offices accounted for $388.6 million of gross written premiums in 2005 and consisted of pro rata treaty property (64.8%), pro rata treaty casualty (11.5%), excess treaty property (13.2%), excess treaty casualty (3.3%) and excess facultative property and casualty (7.2%). Of this international business, 58.0% was sourced from Latin America, 23.0% was sourced from the Middle East, 9.9% was sourced from Africa, 6.7% was “home-foreign” business, 2.0% was sourced from Asia and 0.4% was sourced from Europe.

Bermuda Operation.    The Company’s Bermuda operation writes property and casualty and is licensed to write life and annuity business through Bermuda Re and property and casualty reinsurance through its UK branch. In 2005, the Bermuda operation had gross property and casualty written premiums of $293.7 million accounting for virtually all of its business, of which $77.5 million or 26.4% was facultative reinsurance or individual risk insurance and $216.2 million or 73.6% was treaty reinsurance.

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In 2005, the Company’s gross written premiums by the UK branch of Bermuda Re totaled $475.0 million and consisted of pro rata property (44.4%), excess property (15.6%), pro rata casualty (26.2%) and excess casualty (13.8%). All of the UK branch’s gross written premiums related to treaty reinsurance.

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
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 large premium U.S. 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 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 results monitoring mechanisms.

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Risk Management of Underwriting and Retrocession Arrangements

Underwriting Risk and Accumulation Controls.    Guidelines have been established for each segment and underlying business unit to manage its underwriting risk. These guidelines place dollar limits on the amount of business that can be written based on a variety of factors, including ceding company profile, 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. These guidelines are regularly reviewed to attune them to business unit market conditions, including risk versus reward considerations, as well as the Company’s business portfolio management activities.

The operating results and financial condition of the Company can be adversely affected by catastrophe and other large losses stemming from its more volatile lines of business, particularly those that are catastrophe-exposed. The Company manages its exposure to catastrophes and other large losses by:

     • selective underwriting practices;
     • diversifying its risk portfolio by geographic area and by types and classes of business;
     • limiting its aggregate catastrophe loss exposure in any particular geographic zone;
     • purchasing retrocessional protection to the extent that such coverage can be secured in a cost-efficient manner. See "Retrocession Arrangements".

Like other insurance and reinsurance companies, 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 or more of the Company’s reinsurance treaties, facultative certificates, or across lines of business, including property and/or casualty.

The Company focuses on potential portfolio losses that can be generated by any single event as part of its evaluation and monitoring of its aggregate exposures to catastrophic events. Accordingly, the Company employs various techniques to estimate the amount of loss it could sustain from any single catastrophic event in various geographic areas. These techniques range from non-modeled deterministic approaches—such as tracking aggregate limits exposed in catastrophe-prone zones and applying historic damage factors—to modeled approaches that scientifically measure catastrophe risks using sophisticated Monte Carlo simulation techniques that provide insights into the frequency and severity of expected losses on a probabilistic basis.

To date, there is not one universal model capable of projecting the amount and probability of loss in all global geographical regions that the Company conducts business. In addition, the form, quality, and granularity of underwriting exposure data furnished by ceding companies is not always fully aligned with the data requirements for the Company’s licensed model(s) creating potential imprecision in the potential loss projections. Further, the results from multiple models and analytical methods must be combined and interpolated to estimate potential losses by and across business units. Such combination techniques are inherently difficult to apply and may affect the precision of the Company’s estimates. Also, most models have not been accurate in forecasting losses from the unprecedented series of hurricanes that impacted the insurance industry in 2004 and 2005. In particular, many models did not fully consider some of the perils and factors, which have been major contributors to the scale of events like the Katrina loss, such as flood, storm surge, and potential demand surge. Finally, uncertainties with respect to future climate patterns and cycles introduce significant uncertainty with respect to the accuracy of loss projections from models using historic long-term frequency and severity data.

Nevertheless, when combined with traditional risk management and sound underwriting judgment, catastrophe models continue to be a useful tool for underwriters to price cat-exposed risks and for providing management with quantitative analysis with regard to monitoring and managing its catastrophe risk exposure by zone and risk hazard.

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Projected losses with respect to catastrophe events are generally summarized in terms of the probable maximum loss (“PML”). The Company defines PML as its anticipated loss, taking into account contract terms and limits, caused by a single catastrophe affecting a broad contiguous geographic area, such as that caused by a hurricane or earthquake. The expected PML will vary with the severity of modeled simulated losses and vary with the in-force book of business. The projected severity levels are described in terms of “return periods”, such as “100-year events” and “250-year events”. Simply speaking, a 100-year PML corresponds to a 1% probability that losses from an event could exceed the indicated PML; alternatively, it corresponds to a 99% probability that the loss distribution for an event falls below the indicated PML. It is important to note that PMLs are estimates derived quantitatively, with qualitative input as well, and that the events modeled are hypothetical events from a stochastic model. As a result, there can be no assurance that any actual event(s) will align with the modeled event(s) or that actual losses from events similar to the modeled events will not vary materially from the modeled event PML.

From a risk management perspective, the Company continues to manage its catastrophe risk such that its largest individual 100-year event, on an after-tax basis, generally does not exceed approximately one-half of projected net income. Management also monitors its largest PMLs at multiple points along the loss distribution curve, such as loss amounts at the 20, 50, 100, 250, 500, and 1,000 year return periods. This monitoring procedure enables management to identify discrete risk zone and risk hazard exposure accumulations for integration into risk, underwriting and capital management processes.

The Company’s catastrophe loss projections, segmented by risk zones, are updated quarterly and reviewed as part of a formal risk management review process. The table below reflects the Company’s pre-tax PMLs at various return times for its top three zones/perils (as ranked by the largest 1 in 100 year events) based on loss projection data as of January 1, 2006:

(Dollars in million)
Return Periods (in years) 1 in 20
1 in 50
1 in 100
1 in 250
1 in 500
1 in 1,000
Exceeding Probability 5.0%
2.0%
1.0%
0.4%
0.2%
0.1%
Zone/Area, Peril
SE USA, Wind     $ 270   $ 425   $ 532   $ 703   $ 858    959  
California, Earthquake    118    252    356    560    708    851  
Europe, Wind    137    317    338    459    551    582  

The above PML table is both gross and net of retrocessional coverage. While the Company considers purchasing corporate level retrocessional protection by evaluating the underlying exposures in comparison to the availability of cost-effective protection, there was no retrocessional coverage in place at January 1, 2006. The Company continues to evaluate the availability and cost of various retrocessional products and approaches in the marketplace.

The impact of income taxes on the PML losses depends on the distribution of the losses by corporate entity, which is also affected by inter-affiliate reinsurance. Using the 1 in 100 PML for a windstorm in the southeastern United States with a pre-tax loss of $532 million, the estimated after-tax loss would be $415 million.

The Company believes that its methods of monitoring, analyzing and managing catastrophe exposures provide a credible risk management framework, which can be integrated with its underwriting business and capital management activities. However, there is much uncertainty and imprecision inherent in the models, risk management framework and underlying exposures. As a result, there can be no assurance that the Company will not experience losses from individual events that exceed the PML or other return period projections, including events impacting multiple zones, perhaps by a material amount. Nor can there be assurance that the

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Company will not experience multiple severe events that could, in aggregate, exceed the Company’s PML expectations by a significant amount.

Terrorism Risk. The Company does not have significant exposure to losses from terrorism risk. Reinsurance contracts generally exclude losses arising from terrorism, except where such coverage has been specifically included in the underwriting and pricing of the involved reinsurance. While the Company writes some reinsurance contracts covering terrorists’ events, the Company’s risk management philosophy is to limit the amount of coverage provided and specifically not provide terrorism coverage for properties or in areas that may be considered a target for terrorists. Although providing terrorism coverage on reinsurance contracts is negotiable, most insurance policies mandate inclusion of terrorism coverage. As a result, the Company is exposed to losses from terrorism on its U.S. insurance book of business, particularly its workers’ compensation policies; however, the Company generally does not insure the large corporations or corporate locations that would result in a large concentration of risk.

As a result of its limited exposure, the Company does not believe the U.S. Terrorism Risk Insurance Act of 2002 that was signed into law November 2002 and amended in December 2005 has had or will have a significant impact on its operations.

Retrocession Arrangements.    The Company considers retrocessional agreements to reduce its exposure on specific business written and potential accumulations of exposures across some or all of the Company’s operations. Where reinsurance is purchased, the agreements provide for recovery of a portion of losses and loss adjustment expenses from retrocessionaires. The level of retrocessional 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. All retrocessional 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. 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 does not typically purchase significant retrocessional coverage for specific reinsurance business written, but it will do so when management deems it to be prudent and/or cost-effective to reinsure a portion of the specific risks being assumed. The Company also participates in “common account” retrocessional arrangements for certain reinsurance treaties whereby a ceding company purchases reinsurance for the benefit of itself and its reinsurers under 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.

The Company also 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 specified attachment point for each year of coverage. The attachment point was net of inuring reinsurance and included adjustable premium provisions that effectively

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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, 2005, the Company has ceded the maximum limits under all three contracts. The Company has not purchased similar corporate level 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”.

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 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, 2005, the Company carried as an asset $1,048.7 million in reinsurance receivables with respect to losses ceded. Of this amount, $239.8 million, or 22.9%, was receivable from subsidiaries of London Reinsurance Group (“London Life”), $171.5 million, or 16.4%, was receivable from Transatlantic Reinsurance Company (“Transatlantic”), $160.0 million, or 15.3%, was receivable from LM and $100.0 million, or 9.5%, was receivable from Continental Insurance Company (“Continental”). No other retrocessionaire accounted for more than 5% of the Company’s receivables. 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. 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, 2005, such funds had reduced the Company’s net exposure to London Life to $115.4 million, effectively 100% of which has been secured by letters of credit, and its exposure to Continental to $38.7 million.

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 service 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

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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, 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 recognize such reserve shortfalls and incur a charge to earnings, which could be material in the period such recognition takes place. See ITEM 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Loss and LAE Reserves”.

As part of the reserving process, insurers and reinsurers evaluate historical data and trends and make judgments as to the impact of various factors such as legislative and judicial developments that may affect future claim amounts, changes in social and political attitudes that may increase loss exposures and inflationary and general economic trends. 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 1995 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 initial reserves for unpaid losses and LAE recorded at each year end date. 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.

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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 1998 for $100,000, was first reserved in 1995 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 1995 through 1997 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) 1995   1996   1997   1998   1999   2000   2001   2002   2003   2004   2005  











Net Reserves for unpaid                                                                      
   loss and LAE   $ 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   $ 8,175.4    
Paid (cumulative) as of:  
   One year later      270.4      331.2      450.8      484.3      673.4      718.1      892.7      902.6      1,141.7    1,553.1  
   Two years later      502.8      619.2      747.9      955.3    1,159.1    1,264.2    1,517.9    1,641.7    1,932.6  
   Three years later      682.0      813.7      1,101.5    1,295.5    1,548.3    1,637.5    2,033.5    2,176.8  
   Four years later      806.3    1,055.9    1,363.1    1,575.9    1,737.8    2,076.0    2,413.1  
   Five years later      990.9    1,253.0    1,592.5    1,693.3    1,787.2    2,286.4  
   Six years later    1,131.5    1,450.2    1,673.4    1,673.9    1,856.0  
   Seven years later    1,300.0    1,510.2    1,665.3    1,711.1  
   Eight years later    1,347.0    1,516.1    1,669.3  
   Nine years later    1,352.3    1,503.2  
   Ten years later    1,329.6  
Net Liability re-estimated  
   as of:  
   One year later    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    6,633.7  
   Two years later    2,264.5    2,575.9    2,802.2    2,921.6    2,977.2    3,484.6    3,901.8    4,635.0    5,407.1  
   Three years later    2,285.1    2,546.0    2,794.7    2,910.3    3,070.5    3,688.6    4,400.0    4,705.3  
   Four years later    2,260.7    2,528.0    2,773.5    2,924.5    3,202.6    4,210.3    4,516.7  
   Five years later    2,254.5    2,515.7    2,765.2    3,002.2    3,430.3    4,216.5  
   Six years later    2,247.3    2,507.9    2,778.9    2,997.8    3,338.1  
   Seven years later    2,243.9    2,510.1    2,767.3    2,941.6  
   Eight years later    2,248.4    2,517.3    2,738.7  
   Nine years later    2,257.6    2,517.6  
   Ten years later    2,273.4  
   Cumulative redundancy/  
      (deficiency)   $ 42.7   $ 34.0   $ 71.3   $ 11.9   $ (360.7 ) $ (851.6 ) $ (1,044.2 ) $ (809.5 ) $ (248.6 ) $ 133.3          











   Gross liability-  
     end of year   $  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   $ 9,175.1    
   Reinsurance receivable      700.9      746.6      688.7      915.7      727.8      488.8      883.5      1,090.0    1,266.3    1,119.7    999.7  











   Net liability-end of year    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    8,175.4  











   Gross re-estimated  
     liability at  
     at December 31, 2005    3,736.7    3,842.1    3,931.3    4,097.0    4,532.6    5,310.6    5,861.3    6,013.4    6,723.8    7,731.7  
   Re-estimated receivable  
     at December 31, 2005    1,463.4    1,324.5    1,192.6    1,155.4    1,194.6    1,094.1    1,344.6    1,308.2    1,316.7    1,098.1  











   Net re-estimated liability  
     at December 31, 2005    2,273.4    2,517.6    2,738.7    2,941.6    3,338.1    4,216.5    4,516.7    4,705.3    5,407.1    6,633.7  











   Gross cumulative  
     (deficiency)/redundancy   $ (719.7 ) $ (543.9 ) $ (432.6 ) $ (227.8 ) $ (827.4 ) $ (1,456.9 ) $ (1,505.3 ) $ (1,027.7 ) $ (299.0 ) $ 154.9          











______________

(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 cumulative redundancy/(deficiency) includes the impact of foreign currency translation adjustments, except for the Canadian branch reserves, which are reflected in Canadian dollars.
(3)   Some totals may not reconcile due to rounding.

Five of 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 were the principal contributors to those deficiencies: professional liability reinsurance, general casualty reinsurance and workers’

16

compensation insurance. In addition to these active business classes, there has continued 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 has experienced claim frequency and severity greater than expected in the Company’s pricing and reserving assumptions, particularly for accident years 1999 and 2000. This experience reflects 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 insulate 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 due to higher than expected claim frequency and severity. As a result of significant growth in this book of business in a challenging business environment, the Company’s writings in this class were subject to more relative variability than are some of its established and/or stable lines of business. Although, cumulative results through 2005 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.

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 likelihood 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”.

17

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, 2005. Each column represents the amount of net 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.

Since the Company has operations in many countries, part of the Company’s loss and LAE reserves are in foreign currencies and translated to U.S. dollars for each reporting period. Fluctuations in the exchange rates for the currencies, period over period, affect the U.S. dollar amount of outstanding reserves. The translation adjustment line at the bottom of the table eliminates the impact of the exchange fluctuations from the reserve re-estimates.

Effects on Pre-tax Income Resulting from Reserves Re-estimates(1)
    Cumulative
Re-estimates
 
  for Each  










(Dollars in millions) 1996   1997   1998   1999   2000   2001   2002   2003   2004   2005   Accident Year  











Accident Years                                                                      
1995 &prior   $ 29.6   $ 22.1   $ (20.7 ) $ 24.4   $ 6.1   $ 7.1   $ 3.4   $ (4.4 ) $ (9.2 ) $ (15.8 )   $ 42.6  
1996            (18.9 )     (6.8)   5.5    11.8        5.0      4.5    2.2        2.1     15.5      20.9  
1997                1.3       4.1        (10.4)    8.9      0.4      (11.5)     18.8      28.8        40.5  
1998                        1.4      (11.0)   (9.8 )      (22.5)     (64.0)   (7.2 )     27.6       (85.5 )
1999                              (4.3 )    (3.3 )     (79.1 )    (54.4 )    (232.1 )     36.0       (337.1 )
2000                                   (7.9)    (26.4)   (71.9)   (294.1)  (98.3)    (498.6 )
2001                                         (20.4 )    (85.2 )    23.5     (110.6 )     (192.6 )
2002                                              32.3      15.9       46.4        94.6  
2003                                                     170.3     133.7       303.9  
2004                                                          69.9      69.9  
Total calendar  











      year effect   $ 29.6   $ 3.2   $ (26.2 ) $ 35.4   $ (7.8 ) $ 0.0   $ (140.1 ) $ (256.9 ) $ (312.0 ) $ 133.3   $ (541.5 )
Canada (2)   $ 3.7   $ 9.6   $ 8.3   $ (11.0 ) $ 4.9   $ 7.4   $ (1.4 ) $ (26.6 ) $ (16.3 ) $ 6.6        
Translation Adjustment   $ (57.2 ) $ 49.3   $ -   $ (17.0 ) $ (26.9 ) $ (17.7 ) $ 38.4   $ 86.7   $ 78.9   $ (100.3)       










Re-estimate of net reserve after translation adjustment   $ (23.9 ) $ 62.1   $ (17.9 ) $ 7.4   $ (29.8 ) $ 10.3   $ (103.1 ) $ (196.8 ) $ (249.4 ) $ 26.4        










______________

(1)   Some totals may not reconcile due to rounding.
(2)   This adjustment converts Canadian dollars to U.S. dollars

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. The unfavorable 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 through 2004 relates primarily to favorable experience with respect to property reinsurance business.

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.

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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) 2005     
2004     
2003     
Gross reserves at beginning of period     $ 7,836.3   $ 6,361.2   $ 4,905.6  



Incurred related to:  
   Current year    3,750.7    3,041.7    2,403.4  
   Prior years    (26.4 )  249.4    196.8  



      Total incurred losses    3,724.3    3,291.1    2,600.2  



Paid related to:  
   Current year    664.9    607.1    501.1  
   Prior years    1,553.1    1,141.7    902.6  



      Total paid losses    2,218.0    1,748.8    1,403.7  



Foreign exchange/translation adjustment    (100.3 )  78.9    86.7  
Change in reinsurance receivables on unpaid losses and LAE    (115.6 )  (146.1 )  172.5  



Gross reserves at end of period   $ 9,126.7   $ 7,836.3   $ 6,361.2  



Prior year incurred losses were $26.4 million favorable in 2005 and $249.4 million and $196.8 million unfavorable in 2004 and 2003, respectively. 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
As of year end 2005, 7.1% of reserves reflect an estimate for the Company’s ultimate liability for A&E claims for which ultimate value cannot be estimated using traditional reserving techniques. The Company’s A&E liabilities stem from Mt. McKinley’s direct insurance business and Everest Re’s assumed reinsurance business. 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. It also arises from a limited period, effective 1978 to 1984. The book is based principally on excess liability policies, thereby limiting exposure analysis to a limited number of policies and forms. As a result of this focused structure, the Company believes that it is able to comprehensively analyze its exposures, allowing it to identify, analyze and actively monitor those claims which have unusual exposure, including policies in which it may be exposed to pay expenses in addition to policy limits or non-products asbestos claims.

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 seven SIP agreements, three of which were executed prior to the acquisition of Mt. McKinley 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

19

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. It also arises from a limited period, effectively 1977 to 1984. 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, both formally and informally by its ceding companies and brokers. This furnished information is not always timely or accurate and can impact the accuracy and timeliness of the Company’s 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) 2005     
2004     
2003     
Case reserves reported by ceding companies     $ 125.2   $ 148.5   $ 123.1  
Additional reserves established by the Company (assumed reinsurance) (1)    157.6    151.3    109.1  
Case reserves established by the Company (direct insurance)    243.5    272.1    251.3  
IBNR reserves    123.3    156.4    281.8  



Gross reserves    649.6    728.3    765.3  
Reinsurance receivable    (199.1 )  (221.6 )  (230.9 )



Net reserves   $ 450.5   $ 506.7   $ 534.4  



______________

(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) 2005     
2004     
2003     
Balance at beginning of year     $ 152.2   $ 205.3   $ 227.9  
Liabilities assumed    0.2    0.3    0.5  
Adjustments to reserves    11.6    8.5    11.2  
Benefits paid in the current year    (30.8 )  (19.5 )  (34.3 )
Contract terminations    -    (42.4 )  -  



Balance at end of year   $ 133..2   $ 152.2   $ 205.3  



Investments
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 policies and guidelines stress diversification of risk, capital preservation, market liquidity and stability of income. Beyond these fundamental objectives, 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 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 directly manages its investments in its equity and other invested asset portfolios.

The Company’s fixed income 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, as well as the Company’s average duration of potential liabilities, which, at December 31, 2005, is estimated at approximately 3.9 years based on the estimated payouts of underwriting liabilities using standard duration calculations.

The duration of the fixed income portfolio at December 31, 2005 was 4.3 years, down from 5.2 years for the prior year. This shortened duration mainly reflects the Company’s elevated short-term investment holdings following the $758.3 million of net proceeds raised in connection with the secondary common shares offerings in the fourth quarter. In addition, at various times during the past three years the Company shortened duration in response to market interest rate movements by purchasing interest only strips of mortgage-backed 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 specifically, market mortgage rates decline, mortgagors 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

21

rates fall. These movements are generally counter to the impact of interest rate movements on the Company’s other fixed income investments.

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 9.0% of the Company’s consolidated reserves for losses and LAE and unearned premiums represent estimated amounts payable in foreign currencies.

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 13.5%, 11.7%, and 8.9% of the Company’s revenues for the years ended December 31, 2005, 2004 and 2003, respectively. The Company’s cash and invested assets totaled $13.0 billion at December 31, 2005, which consisted of 89.4% fixed maturities and cash of which 97.5% were investment grade, 8.4% equity securities and 2.2% other invested assets. The average maturity of fixed maturities was 7.7 years at December 31, 2005, and their overall duration was 4.3 years. As of December 31, 2005, the Company did not have any investments in commercial real estate or direct commercial mortgages or any material holdings of derivative investments, other than equity index puts discussed in Note 2 of Notes to Consolidated Financial Statements, 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, 2005, the Company’s common stock portfolio, which is comprised primarily of publicly traded equity index funds, had a market value of $1,090.8 million, comprising 8.4% of total investments and cash.

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)

Pre-Tax
Effective
Yield

Pre-Tax
Realized Net
Capital Gains
(Losses)

Pre-Tax
Unrealized Net
Capital (Losses)
Gains

2005       $12,067 .8   $522 .8  4 .33%   $90 .3   $(77 .8)
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
______________

(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).

22

The following table summarizes fixed maturities as of December 31, 2005 and 2004:

(Dollars in millions) Amortized  
Cost  

Unrealized  
Appreciation  

Unrealized  
Depreciation  

Market  
Value  

December 31, 2005:                    
   U.S. Treasury securities and obligations of U.S.  
      government agencies and corporations   $ 205 .0 $ 0 .1 $ (3 .5) $ 201 .6
   Obligations of states and political subdivisions    3,615 .0  153 .4  (8 .1)  3,760 .3
   Corporate securities    2,857 .4  51 .9  (49 .9)  2,859 .4
   Mortgage-backed securities    1,556 .0  4 .4  (33 .2)  1,527 .2
   Foreign government securities    1,047 .7  33 .5  (1 .7)  1,079 .5
   Foreign corporate securities    591 .1  28 .0  (5 .0)  614 .1




      Total   $ 9,872 .2 $ 271 .3 $ (101 .4) $ 10,042 .1




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




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





2005
2004
Rating Agency Credit Quality Distribution
(Dollars in millions)
Market  
Value  

Percent of  
Total  

Market  
Value  

Percent of  
Total  

AAA       $5,923 .0  59 .0%   $ 5,237 .1  52 .7%
AA   1,087 .4 10 .8%  968 .7  9 .7%
A   1,794 .8 17 .9%  1,965 .6  19 .8%
BBB   943 .3 9 .4%  1,293 .3  13 .0%
BB   208 .2 2 .1%  369 .1  3 .7%
B   74 .4 0 .7%  92 .7  0 .9%
Other   11 .0 0 .1%  20 .7  0 .2%




      Total (1)     $ 10,042 .1 100 .0%   $ 9,947 .2  100 .0%




______________

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

23

The following table summarizes fixed maturities by contractual maturity as of December 31, 2005:

(Dollars in millions) Market  
Value  

Percent of  
Total  

Maturity category:            
   Less than one year   $ 393 .5  3 .9%
   1-5 years    2,481 .2  24 .7%
   5-10 years    1,990 .3  19 .8%
   After 10 years    3,649 .9  36 .4%


      Subtotal    8,514 .9  84 .8%
   Mortgage-backed securities (1)    1,527 .2  15 .2%


      Total   $ 10,042 .1  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.

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

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

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

Operating Subsidiary
A.M. Best
Standard & Poor's
Moody's
Everest Re     A+ (Superior)     AA- (Very Strong)     Aa3 (Excellent)    
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 Company’s “A+” (“Superior”) rating is the second highest of fifteen ratings assigned by A.M. Best, which range from “A++” (“Superior”) to “F” (“In Liquidation”). 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

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their terms. The Company’s “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 Company’s “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.

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.

Debt Ratings
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, 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, respectively, all of which are considered investment grade. Debt ratings are a current assessment of the credit worthiness of an obligor with respect to a specific obligation.


   A.M. Best
   Standard & Poor's
   Moody's
Senior Notes       a   (Strong ability)     A-     (Strong security)     A3    (Good security)  
Trust Preferred Securities   a-  (Strong ability)  BBB (Good security)  Baal  (Adequate security) 

A debt rating of “a” or “a-” is assigned by A.M. Best where the issuer, in A.M. Best’s opinion, has a strong ability to meet the terms of the obligation. 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”.

Competition
The worldwide reinsurance and insurance businesses are highly competitive, yet cyclical by product and market. Competition in the types of reinsurance and insurance business that the Company underwrites is based on many factors, including the perceived overall financial strength of the reinsurer or insurer, ratings of the reinsurer or insurer by A.M. Best and/or Standard & Poor’s (“S&P”), underwriting expertise, the jurisdictions where the reinsurer or insurer is licensed or otherwise authorized, capacity and coverages offered, premiums charged, other terms and conditions of the reinsurance and insurance business offered, services offered, speed of claims payment and reputation and experience in lines written. These factors operate at the individual market participant level to varying degrees, as applicable to the specific participant’s circumstances. They also operate

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

In 2004 and 2005, market conditions weakened following hard market conditions that had developed from 2000 through 2003. Pricing for most property and casualty classes declined modestly. Competition increased modestly as well, in part due to the relative profitability achieved by many reinsurers from 2002 through 2004, the attendant buildup of capital by these participants and growing pressures to effectively redeploy this capital. However, this profitability and capital buildup varied significantly by market participant, reflecting the fact that the industry was impacted by significant catastrophe losses in the second halves of both 2005 and 2004, generally weak investment market conditions and ongoing adverse loss development. All of these factors depressed the industry’s aggregate financial performance and perceptions of individual insurer’s financial strength during the period.

For the insurance industry, 2005 was a year of unprecedented catastrophe losses in terms of both frequency and severity, which negatively impacted the financial results of a broad number of (re)insurance market participants. The Company believes that the scope and scale of industry losses have helped to stabilize the weakening that was taking place in many sectors and will lead to generally improving market conditions during 2006 that are likely to vary by product and market. For the property catastrophe and retrocession lines, the Company expects that demand and pricing will increase the most as companies reassess their risk management approach and rating agencies raise the required capital levels for many industry participants. The Company believes that price increases for these two lines will be most pronounced in peak catastrophe zones, such as the southeastern U.S. For remaining property lines, there will likely be modest rate increases, while the casualty markets have generally steadied and are expected to stabilize at adequate pricing levels in 2006 for both insurance and reinsurance.

The Company notes that it continues to see opportunities for profitable writings in a variety of classes and lines owing mainly to the general adequacy of underlying pricing. However, the Company continues to examine its view of price adequacy for property lines in light of 2005‘s unprecedented catastrophe experience from both a frequency and severity perspective. This reexamination is focused on several key factors including the magnitude and character of catastrophe exposures, the level of required capital to support the Company’s businesses from both the Company’s and rating agencies’ perspectives and the actual and potential volatility and variability of results, by product, business class and business unit, including with respect to the reliability of underlying statistical and modeling techniques.

Employees
As of March 1, 2006, the Company employed 670 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.

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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 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, 2005, 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 $1,423.0 million at

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December 31, 2005, 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 2006 without triggering the requirement for prior approval of regulatory authorities in connection with a dividend is $232.8 million.

Insurance Regulation.   Neither Bermuda Re nor Everest International is 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 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. As a result of 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.

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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. 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 and an authorized reinsurer in the U.K.

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, 2003, 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 an insurer to submit a plan of appropriate corrective actions. The most severe action requires an insurer to be rehabilitated or liquidated.

Based on their financial positions at December 31, 2005, Everest Re, Everest National, Everest Indemnity and Everest Security significantly 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 affects this summary.

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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.

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 1A. Risk Factors

The following risk factors, in addition to the other information provided in this report, should be considered when evaluating us. If the circumstances contemplated by the individual risk factors materialize, our business, financial condition or results of operations could be materially and adversely affected and the trading price of our common shares could decline significantly.

RISKS RELATING TO OUR BUSINESS

Our results could be adversely affected by catastrophic events.

Like all property and catastrophe insurance and reinsurance companies, we are exposed to unpredictable catastrophic events, including weather-related and other natural catastrophes, as well as acts of terrorism. Any

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material reduction in our operating results caused by the occurrence of one or more catastrophes could inhibit our ability to pay dividends or to meet our interest and principal payment obligations. We define a catastrophe as an event that causes a pre-tax loss on property exposures before reinsurance of at least $5.0 million, before corporate level reinsurance and taxes. Effective for the third quarter 2005, industrial risk losses have been excluded from catastrophe losses, with prior periods adjusted for comparison purposes. By way of illustration, during the past five calendar years, pre-tax catastrophe losses, net of contract specific reinsurance but before cessions under corporate reinsurance programs, were as follows:

Calendar year
Pre-tax catastrophe losses      
2005     $ 1,485.7 million               
2004   $    390.0 million              
2003   $      35.0 million              
2002   $      30.0 million              
2001   $    213.7 million              

Our losses from future catastrophic events could exceed our projections.

As with most industry participants, we use projections of possible losses from future catastrophic events of varying types and magnitudes as a strategic underwriting tool. Based upon these loss projections, we may choose to decline additional business in certain geographical areas, purchase retrocessional coverage or take other actions to limit the extent of potential losses in a given geographical area from catastrophic events. These loss projections are approximations reliant on a mix of quantitative and qualitative processes and actual losses may exceed the projections by a material amount.

We focus on potential losses that can be generated by any single event as part of our evaluation and monitoring of our aggregate exposure to catastrophic events. Accordingly, we employ various techniques to estimate the amount of loss we could sustain from any single catastrophic event in various geographical areas. These techniques range from non-modeled deterministic approaches – such as tracking aggregate limits exposed in catastrophe-prone zones and applying historic damage factors – to modeled approaches that scientifically measure catastrophe risks using sophisticated Monte Carlo simulation techniques that provide insights into the frequency and severity of expected losses on a probabilistic basis.

As a result of the significant hurricane losses over the past two years, vendors for the statistical models are in the process of recalibrating their models, which may have a material impact on potential loss projections for us and the insurance industry.

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

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

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Calendar year
Effect on pre-tax net income
2005     $ 26.4 million increase  
2004   $ 249.4 million decrease  
2003   $ 196.8 million decrease  
2002   $ 103.1 million decrease  
2001    $ 10.3 million decrease  

See ITEM 1, “Business — Changes in Historical Reserves,” which provides a more detailed chart showing the effect of reserve re-estimates on calendar year operating results for the past ten years.

During 2005, there were three large hurricane events, Katrina, Rita and Wilma, as well as other catastrophe losses, which resulted in significant incurred losses to our Company. The unprecedented magnitude and nature of these losses, the continuing lack of precise information from ceding companies regarding exposures, the complexities surrounding claim adjusting and settlement activities and the potential related regulatory and legal issues, as well as inflation in repair costs due to the limited availability of labor and materials, all contribute to uncertainty in the loss estimating process.

Our current estimate for these losses is based on modeled information, underwriter analysis and judgments, client input and discussion, event modeling and profiling of exposed limits. We expect it will be several quarters before relative clarity emerges with respect to ceding companies’ underlying losses. As a result, losses may ultimately be materially greater than our initial estimated losses. Any future adjustments to estimated pre-tax catastrophe losses will have an impact on incurred losses in the quarters during which such adjustments are made, and such impacts could be material.

The difficulty in estimating our reserves is significantly more challenging as it relates to reserving for potential A&E liabilities. At year-end 2005, roughly 7% of our gross reserves were comprised of explicit A&E reserves. A&E liabilities are especially hard to estimate for many reasons, including the long waiting periods between exposure and manifestation of any bodily injury or property damage, difficulty in identifying the source of the asbestos or environmental contamination, long reporting delays and difficulty in properly allocating liability for the asbestos or environmental damage. Legal tactics and judicial and legislative developments affecting the scope of insurers’ liability, which can be difficult to predict, also contribute to uncertainties in estimating reserves for A&E liabilities.

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

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

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

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

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

In 2004 and 2005, market conditions weakened following hard market conditions that had developed from 2000 through 2003. Pricing for most property and casualty classes declined modestly. Competition increased modestly as well, in part due to the relative profitability achieved by many reinsurers from 2002 through 2004, the attendant buildup of capital by these participants and growing pressures to effectively redeploy this capital. However, this profitability and capital buildup varied significantly by market participant, reflecting the fact that the industry was impacted by significant catastrophe losses in the second half of 2004, generally weak investment market conditions, and ongoing adverse loss development. All of these factors depressed the industry’s aggregate financial performance and perceptions of individual insurer’s financial strength during this period.

For the insurance industry, 2005 was a year of unprecedented catastrophe losses in terms of both frequency and severity which negatively impacted the financial results of a broad number of (re)insurance market participants. We believe that the scope and scale of industry losses have helped to stabilize the weakening that was taking place in many sectors and will lead to generally improving market conditions during 2006 albeit variable by product and market. For the property catastrophe and retrocession lines, we expect that demand and pricing will likely increase the most as companies reassess their risk management approach and rating agencies raise the required capital levels for many industry participants. We believe that price increases for these two lines will be most pronounced in peak catastrophe zones, such as the southeastern U.S. For remaining property lines there will likely be modest rate increases, while the casualty markets have generally steadied and are expected to stabilize at adequate pricing levels in 2006 for both insurance and reinsurance.

However, beyond 2006, it is possible that market conditions could weaken again. In that regard, the capital strength of industry participants, as supplemented by new capital raised, by both existing industry participants and new opportunistic market entrants, could be perceived as sufficient to support the industry’s aggregate exposures without requiring significant price increases or any fundamental changes in the pricing of industry products. This development could have a material and adverse effect on our future prospects for growth and profitability. Further discussion of competitive issues can be found in ITEM 1, “Business – Competition”.

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

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

During the last five years, no active subsidiary of ours has experienced a financial strength rating downgrade. However, we cannot assure that a downgrade will not occur in the future if we do not continue to meet the

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evolving criteria expected of our current rating. In that regard, several of the rating agencies are in the process of modifying their approaches to evaluating catastrophic risk relative to their capital and risk management requirements. Therefore, we cannot predict the outcome of this reassessment or its potential impact upon our ratings.

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

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

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

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

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

We are generally less reliant on the purchase of reinsurance than many of our competitors, in part because of our strategic emphasis on underwriting discipline and management of the cycles inherent in our business. We try to separate our risk taking process from our risk mitigation process in order to avoid developing too great a reliance on reinsurance. Thus, we generally evaluate, underwrite, select and price our products prior to consideration of reinsurance. However, our underwriters generally consider purchasing reinsurance with respect to specific insurance contracts or programs, and our senior management generally considers purchasing reinsurance with respect to potential accumulations of exposures across some or all of our operations, where reinsurance is deemed prudent from a risk mitigation perspective or is expected to have a positive cost/benefit relationship. Because we generally purchase reinsurance only when we expect a net benefit, the percentage of business that we reinsure, as indicated below, varies considerably from year to year, depending on our view of the relationship between cost and expected benefit for the contract period.

2005  
2004  
2003  
2002  
2001  
Percentage of ceded written premiums to gross written premiums      3.3 %  3.7 %  5.6 %  7.3 %  16.8 %

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

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

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

According to Standard & Poor’s, we rank among the top ten global reinsurance groups where 80% of the market share is concentrated. The top twenty groups in our industry represent 95% of the market’s revenues. The leaders in this market are Munich Re, Swiss Re (including Employers Re), Berkshire Hathaway, Hannover Re, and syndicates at Lloyd’s. Relative to us, some of these competitors have greater financial resources than we do and have established long-term and continuing business relationships throughout the industry, which can be a significant competitive advantage. In addition, the lack of strong barriers to entry into the reinsurance business and the potential for securitization of reinsurance and insurance risks through capital markets provide additional sources of potential reinsurance and insurance capacity and competition. We may not be able to compete successfully in the future should there be a significant change to the competitive landscape of our market.

We are dependent on our key personnel.

Our success has been, and will continue to be, dependent on the ability to retain the services of existing key executive officers and to attract and retain additional qualified personnel in the future. The loss of the services of any key executive officer or the inability to hire and retain other highly qualified personnel in the future could adversely affect our ability to conduct business. Generally, we consider key executive officers to be those individuals who have the greatest influence in setting overall policy and controlling operations: Chairman and Chief Executive Officer, Joseph V. Taranto (age 57), President and Chief Operating Officer, Thomas J. Gallagher (age 57), and Executive Vice President and Chief Financial Officer, Stephen L. Limauro (age 54). Of those three officers, we only have an employment contract with Mr. Taranto. That contract has been previously filed with the SEC and was most recently amended on August 31, 2005 to extend Mr. Taranto’s term of employment from March 31, 2006 until March 31, 2008. We are not aware that any of the above three officers are planning to leave Group or retire in the near future. We do not maintain any key employee insurance on any of our employees.

Special considerations apply to our Bermuda operations. Under Bermuda law, non-Bermudians, other than spouses of Bermudians and individuals holding permanent resident certificates, are not permitted to engage in any gainful occupation in Bermuda without a work permit issued by the Bermuda government. A work permit is only granted or extended if the employer can show that, after a proper public advertisement, no Bermudian, spouse of a Bermudian or individual holding a permanent resident certificate is available who meets the minimum standards for the position. The Bermuda government places a six-year term limit on individuals with work permits, subject to specified exemptions for persons deemed to be key employees of businesses with a significant physical presence in Bermuda. Currently, all seven of our Bermuda-based professional employees who require work permits have been granted permits by the Bermuda government that expire at various times between March 2006 and December 2008. This includes Mark de Saram, the chief executive officer of our Bermuda reinsurance operation. In the event his work permit were not renewed, we could lose his services, thereby adversely affecting our ability to conduct our business in Bermuda until we were able to replace him with an individual in Bermuda who did not require a work permit or who was granted the permit.

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

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

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

Because all of our fixed income securities are classified as available for sale, temporary changes in the market value of these investments as well as equities are reflected as changes to our shareholders’ equity. As a result, a decline in the value of the securities in our portfolio could reduce our capital or cause us to incur a loss.

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

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

(Dollars in thousands)
Type of Security

As of
December 31, 2005

% of Total  
Fixed income:            
Mortgage-backed securities   $ 1,527,199    11.8 %
Other asset-backed    367,861    2.8 %


   Total asset-backed    1,895,060    14.6 %
Other fixed income    8,147,074    62.8 %


   Total fixed income    10,042,134    77.4 %
Equity securities    1,090,825    8.4 %
Other invested assets    286,812    2.2 %
Cash and short-term investments    1,551,026    12.0 %


   Total Investments and Cash   $ 12,970,797    100.0 %


Further discussion of market-sensitive instruments can be found in ITEM 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations Market Sensitive Instruments”.

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

Through our Bermuda and international operations, we conduct business in a variety of foreign (non-U.S.) currencies, principally the Euro, the British pound, the Canadian dollar, and the Singapore dollar. Assets, liabilities, revenues and expenses denominated in foreign currencies are exposed to changes in currency exchange rates. Our functional currency is the U.S. dollar, and exchange rate fluctuations relative to the U.S.

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dollar may materially impact our results and financial position. In 2005, we wrote approximately 25.5% of our reinsurance coverages in non-U.S. currencies; as of December 31, 2005, we maintained approximately 10.9% of our investment portfolio in investments denominated in non-U.S. currencies. During 2005, 2004, 2003, the impact on our quarterly pre-tax net income from exchange rate fluctuations ranged from a loss of $3.9 million to a gain of $7.8 million. Further discussion of foreign currency rate risk can be found in ITEM 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Market Sensitive Instruments”.

RISKS RELATING TO REGULATION

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

We are subject to extensive and increasing regulation under U.S., state and foreign insurance laws. These laws limit the amount of dividends that can be paid to us by our operating subsidiaries, impose restrictions on the amount and type of investments that we can hold, prescribe solvency, accounting and internal control standards that must be met and maintained and require us to maintain reserves. These laws also require disclosure of material intercompany transactions and require prior approval of “extraordinary” transactions. Such “extraordinary” transactions include declaring dividends from operating subsidiaries that exceed statutory thresholds. These laws also generally require approval of changes of control of insurance companies. The application of these laws could affect our liquidity and ability to pay dividends, interest and other payments on securities, as applicable, and could restrict the ability to expand business operations through acquisitions of new insurance subsidiaries. In addition, we may not have or maintain all required licenses and approvals or fully comply with the wide variety of applicable laws and regulations or the relevant authority’s interpretation of the laws and regulations. If we do not have the requisite licenses and approvals or do not comply with applicable regulatory requirements, the insurance regulatory authorities could preclude or temporarily suspend us from carrying on some or all of our activities or monetarily penalize us. These types of actions could have a material adverse effect on our business. To date, no material fine, penalty or restriction has been imposed on us for failure to comply with any insurance law or regulation.

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

The insurance industry has experienced uncertainty and negative publicity as a result of current litigation, investigations, and regulatory activity by various insurance, governmental, and enforcement authorities, including the SEC, with regard to certain practices within the insurance industry. These practices include the payment of contingent commissions by insurance companies to insurance brokers and agents, the solicitation and provision of fictitious or inflated quotes, and the accounting treatment for finite reinsurance or other non-traditional, loss mitigation insurance and reinsurance products.

At this time, it appears the effects of these investigations will have more of an impact on specific companies being investigated rather than the industry as a whole, with greater transparency and financial reporting disclosures being required for the entire industry in these areas; however, the future impact, if any, on our operation, net income or financial condition can not be determined at this time.

RISKS RELATING TO GROUP’S SECURITIES

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

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

Provisions in Group’s bye-laws could have an anti-takeover effect, which could diminish the value of its common shares.

Group’s bye-laws contain provisions that may entrench directors and make it more difficult for shareholders to replace directors even if the shareholders consider it beneficial to do so. In addition, these provisions could delay or prevent a change of control that a shareholder might consider favorable. The effect of these provisions could be to prevent a shareholder from receiving the benefit from any premium over the market price of our common shares offered by a bidder in a potential takeover. Even in the absence of an attempt to effect a change in management or a takeover attempt, these provisions may adversely affect the prevailing market price of our common shares if they are viewed as discouraging takeover attempts in the future.

For example, Group’s bye-laws contain the following provisions that could have an anti-takeover effect:

  election of directors is staggered, meaning that the members of only one of three classes of directors are selected each year;

  shareholders have limited ability to remove directors;

  the total voting power of any shareholder owning more than 9.9% of the common shares will be reduced to 9.9% of the total voting power of the common shares;

  the board of directors may decline to register any transfer of common shares if it has reason to believe that the transfer would result in:

    i)   any person that is not an investment company beneficially owning more than 5.0% of any class of the issued and outstanding share capital of Group,

    ii)   any person holding controlled shares in excess of 9.9% of any class of the issued and outstanding share capital of Group, or

    iii)   any adverse tax, regulatory or legal consequences to Group, any of its subsidiaries or any of its shareholders;

  Group also has the option to redeem or purchase all or part of a shareholder’s common shares to the extent the board of directors determines it is necessary or advisable to avoid or cure any adverse or potential adverse consequences if:

    i)   any person that is not an investment company beneficially owns more than 5.0% of any class of the issued and outstanding share capital of Group,

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    ii)   any person holds controlled shares in excess of 9.9% of any class of the issued and outstanding share capital of Group, or

    iii)   share ownership by any person may result in adverse tax, regulatory or legal consequences to Group, any of its subsidiaries or any other shareholder.

The Board of Directors has indicated that it will apply these bye-law provisions in such manner that “passive institutional investors” will be treated similarly to investment companies. For this purpose, “passive institutional investors” include all persons who are eligible, pursuant to Rule 13d-1(b)(1) under the U.S. Securities Exchange Act of 1934, to file a short-form statement on Schedule 13G, but excluding any insurance company or any parent holding company or control person of an insurance company.

Applicable insurance laws may also have an anti-takeover effect.

Before a person can acquire control of a U.S. insurance company, prior written approval must be obtained from the insurance commissioner of the state where that insurance company is domiciled. Prior to granting approval of an application to acquire control of a domestic insurance company, a state insurance commissioner will consider such factors as the financial strength of the applicant, the integrity and competence of the applicant’s board of directors and executive officers, the acquiror’s plans for changes to the insurance company’s board of directors and executive officers, the acquiror’s plans for the future operations of the insurance company and any anti-competitive results that may arise from the consummation of the acquisition of control. Because any person who acquired control of Group would thereby acquire indirect control of its insurance company subsidiaries in the U.S., the insurance change of control laws of Delaware, California and Georgia would apply to such a transaction. This could have the effect of delaying or even preventing such a change of control.

Investors in Group may have more difficulty in protecting their interests than investors in a U.S. corporation.

The Companies Act 1981 of Bermuda (the “Companies Act”), differs in material respects from the laws applicable to U.S. corporations and their shareholders. The following is a summary of material differences between the Companies Act, as modified in some instances by provisions of Group’s bye-laws, and Delaware corporate law that could make it more difficult for investors in Group to protect their interests than investors in a U.S. corporation. Because the following statements are summaries, they do not address all aspects of Bermuda law that may be relevant to Group and its shareholders.

Alternate Directors.    Group’s bye-laws provide, as permitted by Bermuda law, that each director may appoint an alternate director, who shall have the power to attend and vote at any meeting of the board of directors or committee at which that director is not personally present and to sign written consents in place of that director. Delaware law does not provide for alternate directors.

Committees of the Board of Directors.    Group’s bye-laws provide, as permitted by Bermuda law, that the board of directors may delegate any of its powers to committees that the board appoints, and those committees may consist partly or entirely of non-directors. Delaware law allows the board of directors of a corporation to delegate many of its powers to committees, but those committees may consist only of directors.

Interested Directors.    Bermuda law and Group’s bye-laws provide that if a director has a personal interest in a transaction to which the company is also a party and if the director discloses the nature of this personal interest at the first opportunity, either at a meeting of directors or in writing to the directors, then the company will not be able to declare the transaction void solely due to the existence of that personal interest and the director will not be liable to the company for any profit realized from the transaction. In addition, after a director has made the declaration of interest referred to above, he or she is allowed to be counted for purposes of determining whether a quorum is present and to vote on a transaction in which he or she has an interest, unless disqualified

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from doing so by the chairman of the relevant board meeting. Under Delaware law, an interested director could be held liable for a transaction in which that director derived an improper personal benefit. Additionally, under Delaware law, a corporation may be able to declare a transaction with an interested director to be void unless one of the following conditions is fulfilled:

  the material facts as to the interested director’s relationship or interests are disclosed or are known to the board of directors and the board in good faith authorizes the transaction by the affirmative vote of a majority of the disinterested directors,

  the material facts are disclosed or are known to the shareholders entitled to vote on the transaction and the transaction is specifically approved in good faith by the holders of a majority of the voting shares; or

  the transaction is fair to the corporation as of the time it is authorized, approved or ratified.

Transactions with Significant Shareholders.    As a Bermuda company, Group may enter into business transactions with its significant shareholders, including asset sales, in which a significant shareholder receives, or could receive, a financial benefit that is greater than that received, or to be received, by other shareholders with prior approval from Group’s board of directors but without obtaining prior approval from the shareholders. In the case of an amalgamation, in which two or more companies join together and continue as a single company, a resolution of shareholders approved by a majority of at least 75% of the votes cast is required in addition to the approval of the board of directors, except in the case of an amalgamation with and between wholly-owned subsidiaries. If Group was a Delaware corporation, any business combination with an interested shareholder (which, for this purpose, would include mergers and asset sales of greater than 10% of Group’s assets that would otherwise be considered transactions in the ordinary course of business) within a period of three years from the time the person became an interested shareholder would require prior approval from shareholders holding at least 66 2/3% of Group’s outstanding common shares not owned by the interested shareholder, unless the transaction qualified for one of the exemptions in the relevant Delaware statute or Group opted out of the statute. For purposes of the Delaware statute, an “interested shareholder” is generally defined as a person who together with that person’s affiliates and associates owns, or within the previous three years did own, 15% or more of a corporation’s outstanding voting shares.

Takeovers.    Under Bermuda law, if an acquiror makes an offer for shares of a company and, within four months of the offer, the holders of not less than 90% of the shares that are the subject of the offer tender their shares, the acquiror may give the nontendering shareholders notice requiring them to transfer their shares on the terms of the offer. Within one month of receiving the notice, dissenting shareholders may apply to the court objecting to the transfer. The burden is on the dissenting shareholders to show that the court should exercise its discretion to enjoin the transfer. The court will be unlikely to do this unless there is evidence of fraud or bad faith or collusion between the acquiror and the tendering shareholders aimed at unfairly forcing out minority shareholders. Under another provision of Bermuda law, the holders of 95% of the shares of a company (the “acquiring shareholders”) may give notice to the remaining shareholders requiring them to sell their shares on the terms described in the notice. Within one month of receiving the notice, dissenting shareholders may apply to the court for an appraisal of their shares. Within one month of the court’s appraisal, the acquiring shareholders are entitled either to acquire all shares involved at the price fixed by the court or cancel the notice given to the remaining shareholders. If shares were acquired under the notice at a price below the court’s appraisal price, the acquiring shareholders must either pay the difference in price or cancel the notice and return the shares thus acquired to the shareholder, who must then refund the purchase price. There are no comparable provisions under Delaware law.

Inspection of Corporate Records.    Members of the general public have the right to inspect the public documents of Group available at the office of the Registrar of Companies and Group’s registered office, both in Bermuda. These documents include the memorandum of association, which describes Group’s permitted purposes and

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powers, any amendments to the memorandum of association and documents relating to any increase or reduction in Group’s authorized share capital. Shareholders of Group have the additional right to inspect Group’s bye-laws, minutes of general meetings of shareholders and audited financial statements that must be presented to the annual general meeting of shareholders. The register of shareholders of Group also is open to inspection by shareholders without charge, and to members of the public for a fee. Group is required to maintain its share register at its registered office in Bermuda. Group also maintains a branch register in the offices of its transfer agent in the U.S., which is open for public inspection as required under the Companies Act. Group is required to keep at its registered office a register of its directors and officers that is open for inspection by members of the public without charge. However, Bermuda law does not provide a general right for shareholders to inspect or obtain copies of any other corporate records. Under Delaware law, any shareholder may inspect or obtain copies of a corporation’s shareholder list and its other books and records for any purpose reasonably related to that person’s interest as a shareholder.

Shareholder’s Suits.   The rights of shareholders under Bermuda law are not as extensive as the rights of shareholders under legislation or judicial precedent in many U.S. jurisdictions. Class actions and derivative actions are generally not available to shareholders under the laws of Bermuda. However, the Bermuda courts ordinarily would be expected to follow English case law precedent, which would permit a shareholder to bring an action in the name of Group to remedy a wrong done to Group where the act complained of is alleged to be beyond the corporate power of Group or illegal or would result in the violation of Group’s memorandum of association or bye-laws. Furthermore, the court would give consideration to acts that are alleged to constitute a fraud against the minority shareholders or where an act requires the approval of a greater percentage of Group’s shareholders than actually approved it. The winning party in an action of this type generally would be able to recover a portion of attorneys’ fees incurred in connection with the action. Under Delaware law, class actions and derivative actions generally are available to stockholders for breach of fiduciary duty, corporate waste and actions not taken in accordance with applicable law. In these types of actions, the court has discretion to permit the winning party to recover its attorneys’ fees.

Limitation of Liability of Directors and Officers.    Group’s bye-laws provide that Group and its shareholders waive all claims or rights of action that they might have, individually or in the right of the Company, against any director or officer for any act or failure to act in the performance of that director’s or officer’s duties. However, this waiver does not apply to claims or rights of action that arise out of fraud or dishonesty. This waiver may have the effect of barring claims arising under U.S. federal securities laws. Under Delaware law, a corporation may include in its certificate of incorporation provisions limiting the personal liability of its directors to the corporation or its stockholders for monetary damages for many types of breach of fiduciary duty. However, these provisions may not limit liability for any breach of the duty of loyalty, acts or omissions not in good faith or that involve intentional misconduct or a knowing violation of law, the authorization of unlawful dividends, stock repurchases or stock redemptions, or any transaction from which a director derived an improper personal benefit. Moreover, these provisions would not be likely to bar claims arising under U.S. federal securities laws.

Indemnification of Directors and Officers.   Group’s bye-laws provide that Group shall indemnify its directors or officers to the full extent permitted by law against all actions, costs, charges, liabilities, loss, damage or expense incurred or suffered by them by reason of any act done, concurred in or omitted in the conduct of Group’s business or in the discharge of their duties. Under Bermuda law, this indemnification may not extend to any matter involving fraud or dishonesty of which a director or officer may be guilty in relation to the company, as determined in a final judgment or decree not subject to appeal. Under Delaware law, a corporation may indemnify a director or officer who becomes a party to an action, suit or proceeding because of his position as a director or officer if (1) the director or officer acted in good faith and in a manner he reasonably believed to be in or not opposed to the best interests of the corporation and (2) if the action or proceeding involves a criminal offense, the director or officer had no reasonable cause to believe his or her conduct was unlawful.

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Enforcement of Civil Liabilities.   Group is organized under the laws of Bermuda. Some of our directors and officers may reside outside the U.S. A substantial portion of our assets are or may be located in jurisdictions outside the U.S. A person may not be able to effect service of process within the U.S. on directors and officers of Group and those experts who reside outside the U.S. A person also may not be able to recover against them or Group on judgments of U.S. courts or to obtain original judgments against them or Group in Bermuda courts, including judgments predicated upon civil liability provisions of the U.S. federal securities laws.

Dividends.    Bermuda law does not allow a company to declare or pay a dividend, or make a distribution out of contributed surplus, if there are reasonable grounds for believing that a company, after the payment is made, would be unable to pay its liabilities as they become due, or that the realizable value of a company’s assets would be less, as a result of the payment, than the aggregate of its liabilities and its issued share capital and share premium accounts. The share capital account represents the aggregate par value of a company’s issued shares, and the share premium account represents the aggregate amount paid for issued shares over and above their par value. Under Delaware law, subject to any restrictions contained in a company’s certificate of incorporation, a company may pay dividends out of the surplus or, if there is no surplus, out of net profits for the fiscal year in which the dividend is declared and/or the preceding fiscal year. Surplus is the amount by which the net assets of a corporation exceed its stated capital. Delaware law also provides that dividends may not be paid out of net profits at any time when stated capital is less than the capital represented by the outstanding stock of all classes having a preference upon the distribution of assets.

RISKS RELATING TO TAXATION

If U.S. tax law changes, our net income may be reduced.

In the last few years, some members of Congress have expressed concern about U.S. corporations that move their place of incorporation to low-tax jurisdictions. Also, some members of Congress have expressed concern over a competitive advantage that foreign-controlled insurers and reinsurers may have over U.S. controlled insurers and reinsurers due to the purchase of reinsurance by U.S. insurers from affiliates operating in some foreign jurisdictions, including Bermuda. Although the existing legislation that increases the U.S. tax burden on so-called “inverting” companies does not apply to us, we do not know whether any similar legislation disadvantageous to our Bermuda insurance subsidiaries will ever be enacted into law. If it was enacted, the U.S. tax burden on our Bermuda operations, or on some business ceded from our licensed U.S. insurance subsidiaries to some offshore reinsurers, could be increased. This could reduce our net income.

Group and/or Bermuda Re may be subject to U.S. corporate income tax, which would reduce our net income.

Bermuda Re.    The income of Bermuda Re is a significant portion of our worldwide income from operations. We have established guidelines for the conduct of our operations that are designed to ensure that Bermuda Re is not engaged in the conduct of a trade or business in the U.S. Based on its compliance with those guidelines, we believe that Bermuda Re should not be required to pay U.S. corporate income tax, other than withholding tax on U.S. source dividend income. However, if the Internal Revenue Service (“IRS”) successfully contended that Bermuda Re was engaged in a trade or business in the U.S., Bermuda Re would be required to pay U.S. corporate income tax on any income that is subject to the taxing jurisdiction of the U.S., and possibly the U.S. branch profits tax. Even if the IRS successfully contended that Bermuda Re was engaged in a U.S. trade or business, we believe that the U.S.-Bermuda tax treaty would preclude the IRS from taxing Bermuda Re’s income except to the extent that its income were attributable to a permanent establishment maintained by that subsidiary. We do not believe that Bermuda Re has a permanent establishment in the U.S. If the IRS successfully contended that Bermuda Re did have income attributable to a permanent establishment in the U.S., Bermuda Re would be subject to U.S. tax on that income.

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Group.    We conduct our operations in a manner designed to minimize our U.S. tax exposure. Based on our compliance with guidelines designed to ensure that we generate only immaterial amounts, if any, of income that is subject to the taxing jurisdiction of the U.S., we believe that we should be required to pay only immaterial amounts, if any, of U.S. corporate income tax, other than withholding tax on U.S. source dividend income. However, if the IRS successfully contended that we had material amounts of income that is subject to the taxing jurisdiction of the U.S., we would be required to pay U.S. corporate income tax on that income, and possibly the U.S. branch profits tax. Prior to January 1, 2005, our principal executive offices were located in Barbados and, as a result, even if the IRS had successfully contended that we had material amounts of income that was subject to the taxing jurisdiction of the U.S., we believe that the U.S.-Barbados tax treaty would have precluded the IRS from taxing our income, except to the extent that our income was attributable to a permanent establishment maintained by us in the U.S. Since we moved our principal executive offices out of Barbados as of December 31, 2004 and since the United States and Barbados recently made effective a protocol to the U.S.-Barbados tax treaty that strengthens the limitation of benefits provisions of that treaty, the U.S.-Barbados tax treaty will no longer provide any protection to us. Nevertheless, we doe not believe that we have material amounts of income subject to the taxing jurisdiction of the U.S. If the IRS successfully contended, however, that we did have income subject to tax in the U.S., the imposition of tax on that income would reduce our net income.

If Bermuda Re became subject to U.S. income tax on its income or if we became subject to U.S. income tax, our income could also be subject to the U.S. branch profits tax. In that event, Group and Bermuda Re would be subject to taxation at a higher combined effective rate than if they were organized as U.S. corporations. The combined effect of the 35% U.S. corporate income tax rate and the 30% branch profits tax rate is a net tax rate of 54.5%. The imposition of these taxes would reduce our net income.

Group and/or Bermuda Re may become subject to Bermuda tax, which would reduce our net income.

Group and Bermuda Re currently are not subject to income or capital gains taxes in Bermuda. Both companies have received an assurance from the Bermuda Minister of Finance under The Exempted Undertakings Tax Protection Act 1966 of Bermuda to the effect that if any legislation is enacted in Bermuda that imposes any tax computed on profits or income, or computed on any capital asset, gain or appreciation, or any tax in the nature of estate duty or inheritance tax, then that tax will not apply to us or to any of our operations or our shares, debentures or other obligations until March 28, 2016. This assurance does not prevent the application of any of those taxes to persons ordinarily resident in Bermuda and does not prevent the imposition of any tax payable in accordance with the provisions of The Land Tax Act 1967 of Bermuda or otherwise payable in relation to any land leased to Group or Bermuda Re. There are currently no procedures for extending these assurances. As a result, Group and Bermuda Re could be subject to taxes in Bermuda after March 28, 2016, which could reduce our net income.

Our net income will be reduced if U.S. excise and withholding taxes are increased.

Bermuda Re is subject to an excise tax on reinsurance and insurance premiums it collects with respect to risks located in the U.S. In addition, Bermuda Re may be subject to withholding tax on dividend income from U.S. sources. These taxes could increase and other taxes could be imposed in the future on Bermuda Re’s business, which could reduce our net income.

ITEM 1B. Unresolved Staff Comments

None.

43

ITEM 2. Properties

Everest Re’s corporate offices are located in approximately 129,700 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 74,500 square feet, all of which are leased. Management believes that the above-described office space is adequate for its current and anticipated needs.

ITEM 3. Legal Proceedings

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

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

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

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

None.

44

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 2005 and 2004 were as follows:

High
Low
First Quarter 2005:     $ 90.8000   $ 85.0100  
Second Quarter 2005:    93.0000    82.2000  
Third Quarter 2005:    100.0200    91.9400  
Fourth Quarter 2005:    107.3400    90.0300  


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  

Number of Holders of Common Shares
The number of record holders of common shares as of March 1, 2006 was 67. That number does not include 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 $0.11 per share for each quarter of 2005 and $0.10 per share for each quarter of 2004. A committee of the Company’s Board of Directors declared a dividend of $0.12 per share, payable on or before March 24, 2006 to shareholders of record on March 6, 2006.

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

Recent Sales of Unregistered Securities

None.

45

Changes in Securities, Use of Proceeds and Issuer Purchases of Equity Securities


Issuer Purchases of Equity Securities  

    (a)   (b)   (c)   (d)  

Period   Total
Number of Shares
(or Units)
Purchased
  Average
Price
Paid per
Share
(or Unit)
  Total
Number of Shares
(or Units) Purchased as
Part of Publicly
Announced Plans or
Programs
  Maximum
Number (or
Approximate
Dollar
Value) of
Shares (or
Units) that
May Yet Be
Purchased
Under the
Plans or
Programs (2)
 

October 1 – 31                            0                        N/A                                0   5,000,000  

November 1 – 30                        328         $         100.32                                0   5,000,000  

December 1 – 31 (1)                            0                        N/A                                0   5,000,000  

Total                        328           $        100.32                                0   5,000,000  

(1)   The 328 shares were redeemed as partial payment of the exercise price for options exercised in the quarter.
(2)   On September 21, 2004, the Company’s board of directors approved an amended share repurchase program authorizing the Company and/or its subsidiary Holdings to purchase up to an aggregate of 5,000,000 of the Company’s common shares through open market transactions, privately negotiated transactions or both.

ITEM 6. Selected Financial Data

The following selected consolidated GAAP financial data of the Company as of and for the years ended December 31, 2005, 2004, 2003, 2002 and 2001 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.

46

Years Ended December 31,

(Dollars in millions, except per share amounts)

2005
2004
2003
2002
2001
Operating data:                        
Gross premiums written   $ 4,108.6   $ 4,704.1   $ 4,573.8   $ 2,846.5   $ 1,874.6  
   Net premiums written    3,972.0    4,531.5    4,315.4    2,637.6    1,560.1  
   Net premiums earned    3,963.1    4,425.1    3,737.9    2,273.7    1,467.5  
   Net investment income    522.8    495.9    402.6    350.7    340.4  
   Net realized capital gains (losses)    90.3    89.6    (38.0 )  (50.0 )  (22.3 )
   Losses and LAE incurred  
      (including catastrophes)    3,724.3    3,291.1    2,600.2    1,629.4    1,209.5  
   Total catastrophe losses (1)    1,403.9    390.0    35.0    30.0    213.7  
   Commission, brokerage, taxes and fees    914.8    975.2    863.9    551.8    396.8  
   Other underwriting expenses    123.5    107.1    94.6    69.9    58.9  
   Interest and fee expense    73.4    75.5    57.3    44.6    46.0  
   (Loss) income before taxes    (280.9 )  559.7    491.2    262.0    90.3  
   Income tax (benefit) expense     (62.3 )  64.9    65.2    30.7    (8.7 )
   Net (loss) income (2)   $ (218.7 ) $ 494.9   $ 426.0   $ 231.3   $ 99.0  





   Net (loss) income per basic share (3)   $ (3.79 ) $ 8.85   $ 7.89   $ 4.60   $ 2.14  





   Net (loss) income per diluted share (4)   $ (3.79 ) $ 8.71   $ 7.74   $ 4.52   $ 2.10  





   Dividends paid per share   $ 0.44   $ 0.40   $ 0.36   $ 0.32   $ 0.28  





Certain GAAP financial ratios: (5)  
   Loss and LAE ratio    94.0 %  74.4 %  69.6 %  71.7 %  82.4 %
   Underwriting expense ratio    26.2 %  24.4 %  25.6 %  27.3 %  31.1 %





   Combined ratio (2)    120.2 %  98.8 %  95.2 %  99.0 %  113.5 %





Balance sheet data (at end of period):  
   Total investments and cash   $ 12,970.8   $ 11,530.2   $ 9,321.3   $ 7,265.6   $ 5,783.5  
   Total assets    16,474.5    15,072.8    12,689.5    9,871.2    7,796.2  
   Loss and LAE reserves    9,126.7    7,836.3    6,361.2    4,905.6    4,278.3  
   Total debt    995.5    1,245.3    735.6    735.4    553.8  
   Total liabilities    12,334.8    11,360.2    9,524.6    7,502.5    6,075.6  
   Shareholders' equity    4,139.7    3,712.5    3,164.9    2,368.6    1,720.5  
   Book value per share (6)    64.04    66.09    56.84    46.55    37.19  
______________

(1)   Catastrophe losses are presented net of reinsurance and reinstatement premiums. 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. Effective in 2005, industrial risk losses have been excluded from catastrophe losses with prior periods adjusted for comparison purposes. Catastrophe reinsurance provides coverage for one event. When limits are exhausted, some contractual arrangements provide for the availability of additional coverage upon the payment of additional premium. This additional premium is referred to as reinstatement premium.
(2)   Some amounts may not reconcile due to rounding.
(3)   Based on weighted average basic shares outstanding of 57.6 million, 55.9 million, 54.0 million, 50.3 million and 46.2 million for 2005, 2004, 2003, 2002 and 2001, respectively.
(4)   Based on weighted average diluted shares outstanding of 57.6 million, 56.8 million, 55.0 million, 51.1 million and 47.1 million for 2005, 2004, 2003, 2002 and 2001, 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 64.6 million, 56.2 million, 55.7 million, 50.9 million and 46.3 million shares outstanding for December 31, 2005, 2004, 2003, 2002 and 2001, respectively.

47

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

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

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

In 2004 and 2005, market conditions weakened following hard market conditions that had developed from 2000 through 2003. Pricing for most property and casualty classes declined modestly. Competition increased modestly as well, in part due to the relative profitability achieved by many reinsurers from 2002 through 2004, the attendant buildup of capital by these participants and growing pressures to effectively redeploy this capital. However, this profitability and capital buildup varied significantly by market participant, reflecting the fact that the industry was impacted by significant catastrophe losses in the second half of 2004, generally weak investment market conditions and ongoing adverse loss development. All of these factors depressed the industry’s aggregate financial performance and perceptions of individual insurer’s financial strength during the period.

For the insurance industry, 2005 was a year of unprecedented catastrophe losses in terms of both frequency and severity, which negatively impacted the financial results of a broad number of (re)insurance market participants. The Company believes that the scope and scale of industry losses have helped to stabilize the weakening that was taking place in many sectors and will lead to generally improving market conditions during 2006 that are likely to vary by product and market. For the property catastrophe and retrocession lines, the Company expects

48

that demand and pricing will increase the most as companies reassess their risk management approach and rating agencies raise the required capital levels for many industry participants. The Company believes that price increases for these two lines will be most pronounced in peak catastrophe zones, such as the southeastern U.S. For remaining property lines, there will likely be modest rate increases, while the casualty markets have generally steadied and are expected to stabilize at adequate pricing levels in 2006 for both insurance and reinsurance.

The Company notes that it continues to see opportunities for profitable writings in a variety of classes and lines owing mainly to the general adequacy of underlying pricing. However, the Company continues to examine its view of price adequacy for property lines in light of 2005‘s unprecedented catastrophe experience from both a frequency and severity perspective. This reexamination is focused on several key factors including the magnitude and character of catastrophe exposures, the level of required capital to support the Company’s businesses from both the Company’s and rating agencies’ perspectives and the actual and potential volatility and variability of results, by product, business class and business unit, including with respect to the reliability of underlying statistical and modeling techniques.

49

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

Years Ended December 31,
(Dollars in thousands) 2005     
2004     
2003     
Gross written premiums     $ 4,108,562   $ 4,704,135   $ 4,573,802  
Net written premiums    3,972,041    4,531,488    4,315,389  

REVENUES:
  
Premiums earned   $ 3,963,093   $ 4,425,082   $ 3,737,851  
Net investment income    522,833    495,908    402,610  
Net realized capital gains (losses)    90,284    89,614    (38,026 )
Net derivative (expense) income    (2,638 )  (2,660 )  5,851  
Other (expense) income    (18,473 )  741    (1,033 )



Total revenues    4,555,099    5,008,685    4,107,253  



CLAIMS AND EXPENSES:  
Incurred losses and loss adjustment expenses    3,724,317    3,291,139    2,600,196  
Commission, brokerage, taxes and fees    914,847    975,176    863,933  
Other underwriting expenses    123,462    107,120    94,623  
Interest expense    73,394    75,539    57,288  



Total claims and expenses    4,836,020    4,448,974    3,616,040  



(LOSS) INCOME BEFORE TAXES    (280,921 )  559,711    491,213  
Income tax (benefit) expense    (62,254 )  64,853    65,185  



NET (LOSS) INCOME   $ (218,667 ) $ 494,858   $ 426,028  




RATIOS:
  
Loss Ratios   94.0 % 74.4 % 69.6 %
Commission and brokerage ratio   23.1 % 22.0 % 23.1 %
Other underwriting expense ratios   3.1 % 2.4 % 2.5 %



Combined ratio    120.2 % 98.8 % 95.2 %




Shareholders' equity
   $ 4,139.7 $ 3,712.5 $ 3,164.9



Overall, the Company was disappointed with its 2005 results. The Company generated a net loss of $218.7 million in 2005, which was $713.5 million less than 2004‘s net income of $494.9 million. This $713.5 million deterioration was principally driven by $1.1 billion of higher pre-tax catastrophe losses tempered somewhat by improved non-catastrophe prior year reserve development, which improved by $275.8 million to a total net favorable development of $26.4 million. The Company incurred $1.5 billion of pre-tax catastrophe losses in 2005 driven extensively by Hurricanes Katrina, Rita and Wilma. These three devastating events resulted in the worst catastrophe loss year in history for both the insurance industry and the Company.

Catastrophe risk is a fundamental risk element to which the Company is exposed. Its risk management framework considers such exposures carefully. As a consequence of the 2005 catastrophe experience, the

50

Company continues to re-examine and adjust its comprehensive framework of risk assessment, accumulation monitoring and risk mitigation seeking balance between risk versus reward in the context of changing market conditions.

Meanwhile, the Company is extremely well positioned to respond to generally improving market conditions in 2006 in the aftermath of unprecedented catastrophe losses in late 2005. First, the Company’s non-catastrophe operating fundamentals remain very strong. Second, the Company’s capital base is as strong as it has ever been having been recently bolstered by proceeds from secondary offerings. Third, the Company’s broad, diversified global franchise and low-cost operating platform provide a wide spectrum of business opportunities in a variety of product classes and markets. Lastly, the discipline with which the Company approaches its business remains intact causing it to look opportunistically at improving market conditions while providing its underwriters with the flexibility to decline business that does not meet its objectives regarding underwriting profitability.

Revenues.    Gross written premiums decreased 12.7% to $4.1 billion in 2005 from $4.7 billion in 2004 reflecting the Company’s disciplined response to modest market softening in most sectors, particularly earlier in the year. The Company adapted its operations to slow its growth and even decrease writings for some classes of business and reemphasize its focus on profitability as opposed to volume. The classes most affected by these actions were workers’ compensation insurance, individual risk (re)insurance, medical stop loss reinsurance, UK motor business reinsurance and select U.S. casualty reinsurance classes. As a result, the U.S. Insurance segment decreased 20.2% due to declines in its predominant workers’ compensation book, while the reinsurance segments declined 10.2% in the aggregate.

Net written premiums and net earned premiums declined 12.3% and 10.4%, respectively, to $4.0 billion in 2005 compared to 2004, consistent with the decrease in gross written premiums.

Net investment income was $522.8 million in 2005, an increase of 5.4% compared with 2004 reflecting growth in invested assets, partially offset by lower investment portfolio yields from the Company’s fixed maturities and lower returns from the Company’s equity investments in limited partnerships. The Company’s invested asset base at year-end 2005 was $13.0 billion, up $1.4 billion over prior year mainly driven by $1.1 billion of cash flow from operations and $758.3 million of common equity offering net proceeds, partially offset by $250.0 million of senior debt repayment during the period. Cash flows, which have been trending down over the past two years due to increased catastrophe losses and reduced premiums written, remain strong and are reflective of strong operating fundamentals. The embedded investment portfolio yields in 2005 were 4.5% pre-tax and 3.9% after-tax, down from 4.7% and 4.1%, respectively, in 2004, reflective of the Company’s elevated short-term investment holdings, which had the effect of reducing the Company’s asset duration and lessening the fixed income portfolio susceptibility to rising interest rates in the future.

Net realized capital gains were $90.3 million in 2005 driven by gains on the sale of the Company’s interest only strips investment portfolio and other portfolio management activities in response to interest rate and credit market movements. Other expenses increased by $19.2 million in 2005 driven primarily by foreign exchange losses.

Expenses.    Incurred losses and LAE for 2005 were $3.7 billion, an increase of $0.4 billion over 2004, principally related to $1.1 billion higher level of catastrophe losses, partially offset by a $0.4 billion decrease in non-catastrophe prior period reserve adjustments and lower earned premiums. The Company’s non-catastrophe incurred losses were down 10.5% in 2005, which is broadly in line with the 10.4% decline in net earned premiums, reflective of generally stable business trends. The Company’s 2005 incurred losses benefited from $26.4 million of favorable prior period reserve adjustments in 2005 comprised of $226.3 million of favorable reserve development on non-catastrophe, non-A&E reserves principally related to property business classes, partially offset by catastrophe reserve development of $118.5 million, mostly from 2004 Florida hurricane

51

events and A&E development of $81.4 million, mostly related to settlement activity with respect to asbestos exposures.

Commission, brokerage and tax expenses for 2005 were $914.8 million, a decrease of $60.3 million compared to 2004, principally reflecting decreases in premium volume and changes in business mix. However, the Company’s commission expense ratio increased by 1.1 points primarily due to an increase in contingent commissions and premium based taxes. Other underwriting expenses for 2005 were $123.5 million, a $16.3 million increase principally reflective of the continued build-out of the U.S. Insurance platform.

The Company generated an income tax benefit of $62.3 million in 2005 equating to an effective tax rate of 22.2% applied to its pre-tax loss of $280.9 million for the year. This elevated effective tax rate reflected the impact of the year’s catastrophe losses on U.S. operations, producing a significant tax loss, partly mitigated by continued profitable operations in the United Kingdom.

The Company generated a net loss of $218.7 million in 2005 compared to net income of $494.8 million in 2004. This $713.5 million deterioration in 2005 was principally driven by $1.1 billion of higher catastrophe losses tempered somewhat by improved non-catastrophe prior year reserve development of $0.4 billion.

The Company’s shareholders’ equity increased by $0.4 billion to $4.1 billion at year-end 2005 driven by $758.7 million of equity offering proceeds, partially offset by the $218.7 million net loss for the period and a $77.8 million reduction in net unrealized appreciation on investments, principally related to fixed-income securities affected by modestly rising interest rates.

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, with respect to pricing, risk management, monitoring aggregate exposures to catastrophic events, capital, investments and support operations. Management generally monitors and evaluates the financial performance of these operating segments based upon their underwriting results. Underwriting results include earned premium less losses and 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

52

sale and in accordance with FAS 131, the Company restated the International and Bermuda segments for the year ended December 31, 2003 to conform to December 31, 2005 and 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, 2005, 2004 and 2003:

U.S. Reinsurance
(Dollars in thousands) 2005     
2004     
2003     
Gross written premiums     $ 1,386,168   $ 1,478,159   $ 1,752,302  
Net written premiums    1,383,690    1,468,466    1,687,333  

Premiums earned
   $ 1,396,133   $ 1,473,545   $ 1,423,841  
Incurred losses and loss adjustment expenses    1,479,560    1,168,563    1,059,087  
Commission and brokerage    358,101    373,581    350,641  
Other underwriting expenses    23,981    23,390    21,670  



Underwriting loss   $ (465,509 ) $ (91,989 ) $ (7,557 )




U.S. Insurance
(Dollars in thousands) 2005     
2004     
2003     
Gross written premiums     $ 932,469   $ 1,167,808   $ 1,069,527  
Net written premiums    815,316    1,019,716    923,147  

Premiums earned
   $ 823,015   $ 937,576   $ 823,601  
Incurred losses and loss adjustment expenses    530,781    658,777    605,602  
Commission and brokerage    132,630    130,380    146,782  
Other underwriting expenses    50,491    44,834    38,569  



Underwriting gain   $ 109,113   $ 103,585   $ 32,648  




Specialty Underwriting
(Dollars in thousands) 2005     
2004     
2003     
Gross written premiums     $ 314,630   $ 487,072   $ 502,888  
Net written premiums    299,316    470,571    498,013  

Premiums earned
   $ 301,454   $ 459,284   $ 468,932  
Incurred losses and loss adjustment expenses    317,917    302,010    295,397  
Commission and brokerage    79,692    129,209    133,531  
Other underwriting expenses    6,756    7,068    6,475  



Underwriting (loss) gain   $ (102,911)   $ 20,997   $ 33,529  



53


International
(Dollars in thousands) 2005     
2004     
2003     
Gross written premiums     $ 706,584   $ 687,657   $ 520,800  
Net written premiums    704,870    684,390    518,919  

Premiums earned
   $ 683,435   $ 655,694   $ 461,607  
Incurred losses and loss adjustment expenses    574,653    419,101    267,707  
Commission and brokerage    166,968    161,106    113,091  
Other underwriting expenses    12,622    11,298    9,734  



Underwriting (loss) gain   $ (70,808 ) $ 64,189   $ 71,075  




Bermuda
(Dollars in thousands) 2005     
2004     
2003     
Gross written premiums     $ 768,711   $ 883,439   $ 728,285  
Net written premiums    768,849    888,345    687,977  

Premiums earned
   $759,056   $ 898,983   $ 559,870  
Incurred losses and loss adjustment expenses    821,406    742,688    372,403  
Commission and brokerage    177,456    180,900    119,888  
Other underwriting expenses    16,153    13,998    12,222  



Underwriting (loss) gain   $ (255,959 ) $ (38,603 ) $ 55,357  



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) 2005     
2004     
2003     
Underwriting (loss) gain     $ (786,074 ) $ 58,179   $ 185,052  
Net investment income    522,833    495,908    402,610  
Realized gain (loss)    90,284    89,614    (38,026 )
Net derivative (expense) income    (2,638 )  (2,660 )  5,851  
Corporate expenses    (13,459 )  (6,532 )  (5,953 )
Interest expense    (73,394 )  (75,539 )  (57,288 )
Other (expense) income     (18,473 )  741    (1,033 )



(Loss) income before taxes   $ (280,921 ) $ 559,711   $ 491,213  



CONSOLIDATED RESULTS OF OPERATIONS

YEAR ENDED DECEMBER 31, 2005 COMPARED TO YEAR ENDED DECEMBER 31, 2004
Premiums Written.    Gross written premiums decreased 12.7% to $4,108.6 million in 2005 from $4,704.1 million in 2004 reflecting a disciplined underwriting response to modest reinsurance market softening that affected all segments, resulting in an overall premium decline. Premiums declined 35.4% ($172.4 million) in the Specialty Underwriting operation, primarily due to a $145.4 million decrease in A&H business and a $47.9 million decrease in surety business, partially offset by a $20.9 million increase in marine and aviation business. The U.S. Insurance operation decreased 20.2% ($235.3 million), principally as a result of a $242.6 million decrease in workers’ compensation, resulting primarily from changes in the California workers’ compensation market. The Bermuda operation decreased 13.0% ($114.7 million) reflecting declines in individual risk underwritten insurance and reinsurance in Bermuda and in motor business reinsurance in the U.K. The U.S.

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Reinsurance operation decreased 6.2% ($92.0 million), principally relating to a $173.1 million decrease in treaty casualty business and a $29.3 million decrease in facultative business, partially offset by a $118.9 million increase in treaty property business. The International operation increased 2.8% ($18.9 million), resulting primarily from a $75.0 million increase in Asian business, partially offset by a $43.6 million decrease in international business written through the Miami and New Jersey offices, representing primarily Latin American business and an $11.3 million decrease in Canadian business.

Ceded premiums decreased to $136.5 million in 2005 from $172.6 million in 2004, principally resulting from the decrease in gross premiums in the U.S. Insurance operations. Ceded premiums generally relate to specific reinsurance purchased by the U.S. Insurance operation and fluctuate based upon the level of premiums written in the individual reinsured programs.

Net written premiums decreased by 12.3% to $3,972.0 million in 2005 from $4,531.5 million in 2004, consistent with the decrease in gross written premiums, combined with the decrease in ceded premiums.

Premium Revenues.    Net premiums earned declined by 10.4% to $3,963.1 million in 2005 from $4,425.1 million in 2004. Contributing to this decrease was a 34.4% ($157.8 million) decrease in the Specialty Underwriting operation, a 15.6% ($139.9 million) decrease in the Bermuda operation, a 12.2% ($114.6 million) decrease in the U.S. Insurance operation and a 5.3% ($77.4 million) decrease in the U.S. Reinsurance operation, partially offset by a 4.2% ($27.7 million) increase in the International operation. Partially tempering the decline in net premiums earned in 2005 were $81.8 million of reinstatement premiums of which $64.4 million were due to Hurricanes Katrina and Wilma. Generally, catastrophe reinsurance provides coverage for one event; however, when limits are exhausted, some contractual arrangements provide for the availability of additional coverage upon the payment of additional premium. This additional premium is referred to as reinstatement premium. There were no such reinstatement premiums for 2004. 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 the reporting patterns of ceding companies also affect premiums earned.

Expenses
Incurred Losses and LAE.    Incurred loss and LAE increased by 13.2% to $3,724.3 million in 2005 from $3,291.1 million in 2004. The increase in incurred losses and LAE was principally attributable to the increase in estimated losses due to property catastrophes, partially offset by favorable non-catastrophe prior period reserve development and a lower level of earned premiums. Incurred losses and LAE in 2005 reflected ceded losses and LAE of $95.2 million compared to ceded losses and LAE in 2004 of $141.0 million. The decrease in ceded losses was primarily the result of fluctuations in losses ceded under the specific reinsurance coverages purchased by the U.S. Insurance operation and less ceded premium period over period.

The Company’s loss ratio, which is calculated by dividing incurred losses and LAE by net premiums earned, increased by 19.6 percentage points to 94.0% in 2005 from 74.4% in 2004. This 19.6 point year over year loss ratio deterioration was primarily the result of a 29.5 point increase due to catastrophe losses, partially offset by a 10.2 point improvement in non-catastrophe prior year reserve development.

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

Segment Loss Ratios
Segment
2005     
2004     
U.S. Reinsurance      106.0 %  79.3 %
U.S. Insurance    64.5 %  70.3 %
Specialty Underwriting    105.5 %  65.8 %
International    84.1 %  63.9 %
Bermuda    108.2 %  82.6 %

The segment components of the increase in incurred losses and LAE in 2005 from 2004 were a 37.1% ($155.6 million) increase in the International operation, a 26.6% ($311.0 million) increase in the U.S. Reinsurance operation, a 10.6% ($78.7 million) increase in the Bermuda operation, partially offset by a 19.4% ($128.0 million) decrease in the U.S. Insurance operation and a 5.3% ($15.9 million) decrease in the Specialty Underwriting operation. These changes reflect variability in premiums earned and changes in the loss expectation assumptions for business written, as well as the net prior period reserve development and catastrophe losses discussed above. Incurred losses and LAE for each operation were also impacted by changes in the pricing of the underlying business, as well as variability relating to changes in the mix of business by class and type.

The following table shows the net catastrophe losses for each of the Company’s operating segments for 2005 and 2004.

(Dollars in millions)
Segment Net Catastrophe Incurred Losses
Segment
2005     
2004     
U.S. Reinsurance     $ 707.2   $ 250.7  
U.S. Insurance    1.3    1.0  
Specialty Underwriting    164.5    18.8  
International    254.7    85.9  
Bermuda    358.0    33.6  


                      Total   $ 1,485.7   $ 390.0  


Incurred losses and LAE include catastrophe losses, which include the impact of both current period events and favorable and unfavorable development on prior period events and are net of reinsurance. Individual catastrophe losses are reported net of specific reinsurance, but before recoveries under corporate level reinsurance and potential incurred but not reported (“IBNR”) loss 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. Effective for the third quarter 2005, industrial risk losses have been excluded from catastrophe losses with prior periods adjusted for comparison purposes. Catastrophe losses, net of contract specific cessions, were $1,485.7 million in 2005, related principally to aggregate estimated losses driven by Hurricanes Katrina, Rita and Wilma with catastrophe losses of $765.9 million, $151.0 million and $381.6 million, respectively, but also reflected catastrophe losses related to hurricanes Emily ($19.8 million) and Dennis ($7.0 million), floods in India ($13.2 million), Calgary ($9.6 million) and Europe ($6.2 million) and storms in Ontario ($12.9 million). The 2005 results also reflect net unfavorable reserve development on 2004 and prior catastrophes of $118.5 million. Catastrophe losses, net of contract specific cessions, were $390.0 million in 2004, related 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 2001 World Trade Center losses.

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The following table shows net prior period reserve adjustments for each of the Company’s operating segments for 2005 and 2004.

(Dollars in millions)
Segment Net Prior Period Reserve Adjustments
Segment
2005     
2004     
U.S. Reinsurance     $ 20.7   $ 77.7  
U.S. Insurance    (19.5 )  43.3  
Specialty Underwriting    (16.1 )  5.1  
International    (49.2 )  (15.1 )
Bermuda    37.7    138.4  


                      Total   $ (26.4 ) $ 249.4  


Net favorable prior period reserve adjustments for the year ended December 31, 2005 were $26.4 million compared to net unfavorable prior period reserve adjustments of $249.4 million in 2004. For the year ended December 31, 2005, the favorable reserve adjustments included net favorable non-A&E, non-catastrophe reserve adjustments of $226.3 million related primarily to property business classes, partially offset by net unfavorable prior period catastrophe adjustments of $118.5 million related primarily to the 2004 hurricanes and net unfavorable A&E adjustments of $81.4 million. For the year ended December 31, 2004, the unfavorable prior period reserve adjustments included net unfavorable A&E adjustments of $159.4 million and net unfavorable non-A&E, non-catastrophe adjustments of approximately $128.7 million relating primarily to casualty reinsurance. Partially offsetting the 2004 unfavorable development was $38.7 million of favorable catastrophe development principally related to the reduction of reserves for the World Trade Center events. It is important to note that non-A&E accident year reserve development arises from the re-evaluation of accident year results and that such re-evaluations may also impact premiums and commissions attributed by accident year, generally mitigating, in part, the impact of loss development and that such impacts are recorded as part of the overall reserve evaluation process.

The U.S. Reinsurance segment accounted for $20.7 million of net unfavorable prior period reserve adjustments for the year ended December 31, 2005, which included $72.5 million of unfavorable catastrophe prior period reserve adjustments, partially offset by favorable net non-A&E, non-catastrophe reserve adjustments of $63.3 million. Net unfavorable prior period reserve adjustments were $77.7 million for the year ended December 31, 2004, which included $102.2 million of unfavorable non-A&E, non-catastrophe prior period reserve adjustments, partially offset by $34.8 million of favorable development primarily due to reserve reduction related to catastrophe losses from the 2001 World Trade Center losses. Asbestos exposures accounted for $11.5 million and $10.3 million of unfavorable reserve adjustments for the years ended December 31, 2005 and 2004, respectively. During the late 1990s and early 2000s, there had been a proliferation of claims related 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.

The U.S. Insurance segment reflected $19.5 million of net favorable prior period reserve adjustments for the year ended December 31, 2005 and $43.3 million of net unfavorable prior period reserve adjustments for the year ended December 31, 2004. The 2005 favorable prior period reserve adjustments related principally to California workers’ compensation for the 2004 accident year as the results of benefit reform have become clearer and the 2004 unfavorable prior period reserve adjustments related principally to the casualty classes related to accident years 2000 through 2002, where the Company strengthened its reserves for California workers’ compensation insurance. While management believes the cumulative results through 2005 remain

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quite positive, there was some deterioration in claim frequency and severity related to accident years 2001 and 2002.

The Specialty Underwriting segment had $16.1 million of net favorable prior period reserve adjustments for the year ended December 31, 2005 and $5.1 million of net unfavorable prior period reserve adjustments for the year ended December 31, 2004. In 2005, net favorable prior period reserve adjustments reflected $33.0 million of non-A&E, non-catastrophe favorable development on the marine, aviation, surety and A&H classes of business, partially offset by unfavorable catastrophe development of $16.9 million. In 2004, net unfavorable prior period reserve adjustments related to the surety and A&H classes of business, partially offset by favorable development in the marine and aviation business lines.

The International segment had $49.2 million of favorable net prior period reserve adjustments for the year ended December 31, 2005 and $15.1 million of net favorable prior period reserve adjustments for the year ended December 31, 2004. The favorable development in 2005 related primarily to favorable non-asbestos, non-catastrophe reserve development on the Canadian, Asian, and international business of $66.1 million, partially offset by unfavorable property catastrophe loss development of $16.9 million on the same business. The favorable development in 2004 related primarily to 2003 Canadian property catastrophe, international and Asian business.

The Bermuda segment reflected $37.7 million of net unfavorable prior period reserve adjustments for the year ended December 31, 2005 and $138.4 million of net unfavorable prior period reserve adjustments for the year ended December 31, 2004. The development in the year ended December 31, 2005 was primarily the result of $69.9 million of unfavorable A&E prior period reserve development and $12.2 million unfavorable catastrophe development, partially offset by $44.4 million favorable non-A&E, non-catastrophe prior period reserve adjustments primarily from the UK branch produced business. The development in the year ended December 31, 2004 was primarily the result of $149.1 million of A&E reserve development. All of the development related to asbestos exposures that were assumed through the September 19, 2000 loss portfolio transfer from Mt. McKinley.

Aggregate reserve development related to A&E exposures was $81.4 million and $159.4 million for the years ended December 31, 2005 and 2004, 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 $11.5 million and the net strengthening on the acquired Mt. McKinley business was $69.9 million in 2005. 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.

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

Underwriting Expenses.    The Company’s expense ratio, which is calculated by dividing underwriting expenses by net premiums earned, was 26.2% in 2005 compared to 24.4% in 2004.

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The following table shows the expense ratios for each of the Company’s operating segments for 2005 and 2004.

Segment Expense Ratios
Segment
2005  
2004  
U.S. Reinsurance      27.3 %  26.9 %
U.S. Insurance    22.2 %  18.7 %
Specialty Underwriting    28.6 %  29.6 %
International    26.3 %  26.3 %
Bermuda    25.5 %  21.7 %

Segment underwriting expenses decreased by 4.7% to $1,024.9 million in 2005 from $1,075.8 million in 2004. Commission, brokerage, taxes and fees decreased by $60.3 million, principally reflecting decreases in premium volume and changes in the mix of business. Segment other underwriting expenses increased by $9.4 million as the Company continued to expand operations. Contributing to the segment underwriting expense decreases were a 36.6% ($49.8 million) decrease in the Specialty Underwriting operation, a 3.8% ($14.9 million) decrease in the U.S. Reinsurance operation and a 0.7% ($1.3 million) decrease in the Bermuda operation, partially offset by a 4.5% ($7.9 million) increase in the U.S. Insurance operation and a 4.2% ($7.2 million) increase in the International operation. The changes for each operation’s expenses principally resulted from changes in commission expenses related to changes in premium volume and business mix by class and type and, in some cases, changes in the use of specific reinsurance, as well as the underwriting performance of the underlying business.

The Company’s combined ratio, which is the sum of the loss and expense ratios, increased by 21.4 percentage points to 120.2% in 2005 as compared to 98.8% in 2004, with the increase principally resulting from elevated catastrophe losses, partially offset by improved prior year development.

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

Segment Combined Ratios
Segment
2005     
2004     
U.S. Reinsurance      133.3 %  106.2 %
U.S. Insurance    86.7 %  89.0 %
Specialty Underwriting    134.1 %  95.4 %
International    110.4 %  90.2 %
Bermuda    133.7 %  104.3 %

Investment Results.    Net investment income increased 5.4% to $522.8 million in 2005 from $495.9 million in 2004 reflecting growth in invested assets tempered by lower investment yields and lower returns from limited partnership investments. Investable assets increased by $1.4 billion to $13.0 billion in 2005, principally reflecting the effects of investing $1,065.7 million cash flow from operations during the year and $758.3 million net proceeds from issuance of common shares, partially offset by $250.0 million in debt repayment. The lower investment yield reflects the Company’s elevated short-term investments following its common share capital raising in the fourth quarter, which also reduced the investment income portfolio duration. Investment income for the limited partnerships for the year ended December 31, 2005 and 2004 was $12.0 million and $42.0 million, respectively.

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


2005  
2004  
Imbedded pre-tax yield of cash and invested assets at December 31      4.5 %  4.7 %
Imbedded after-tax yield of cash and invested assets at December 31    3.9 %  4.1 %

Annualized pre-tax yield on average cash and invested assets
    4.4 %  5.0 %
Annualized after-tax yield on average cash and invested assets    3.8 %  4.2 %

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. However, in 2005, with changes the Company perceived in overall investment market conditions, the Company continued to reweight its view of total return and added $440.0 million in 2005 of equity securities into the overall investment portfolio. The Company also added $125.5 million of other invested assets, principally limited partnerships. The following table provides a comparison of the Company’s total return by asset class relative to broadly accepted industry benchmarks for 2005 and 2004.


2005  
2004  
Company's fixed income portfolio total return      3.2 %  6.5 %
Lehman bond aggregate    2.4 %  4.3 %

Company's common equity portfolio total return
    13.8 %  21.9 %
S & P 500     4.9 %  10.9 %

Company's other invested asset portfolio total return
    7.2 %  43.2 %

The Company’s net realized capital gains were $90.3 million in 2005, which reflected realized capital gains on the Company’s investments of $106.2 million, including $41.3 million on the sale of interest only strips investments, partially offset by $15.9 million of realized capital losses, which included $7.0 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. 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.

The Company has outstanding seven specialized equity put options in its product portfolio at December 31, 2005. 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 was $2.6 million and $2.7 million in 2005 and 2004, respectively, reflecting changes in fair value for the specialized equity put options. See also Note 2 of Notes to the Consolidated Financial Statements.

Other Expenses.   Other expense in 2005 was $18.5 million compared to other income of $0.7 million in 2004. The change in net other expense for 2005 from net other income in 2004 was primarily due to variability in the impact of foreign exchange and share option expense under Financial Accounting Standards No. 123 “Accounting for Stock-Based Compensation” (“FAS 123”).

Corporate underwriting expenses not allocated to segments were $13.5 million for 2005 as compared to $6.5 million for 2004 as the Company expanded its infrastructure to support operations.

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Interest expense and fees in 2005 were $73.4 million compared to $75.5 million in 2004. Interest expense and fees in 2005 included $35.5 million relating to the senior notes, $37.4 million relating to the junior subordinated debt securities and $0.4 million relating to the credit line under the Company’s revolving credit facilities. Interest expense and fees 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 facilities. The lower interest expense on the senior notes was due to the retirement of the 8.5% senior notes due March 15, 2005, partially offset by the issuance of new 5.4 % senior notes on October 12, 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 generally reflect changes in the relative levels of pre-tax income between jurisdictions with different tax rates, and specifically for 2005, also reflected the significant increase in incurred losses relating to catastrophes resulting, ultimately, in a pre-tax loss for the year. The Company recognized income tax benefits of $62.3 million in 2005 compared to income tax expense of $64.9 million in 2004. The 2004 tax expense was impacted by various issues, including the transfer of the Company’s UK branch to Bermuda Re, giving rise to a net tax expense.

Net (Loss) Income.   Net loss was $218.7 million in 2005 compared to net income of $494.9 million in 2004, with the change primarily reflecting reduced underwriting profitability due to catastrophe losses, partially offset by favorable prior period reserve development, related tax benefits and improved investment income.

YEAR ENDED DECEMBER 31, 2004 COMPARED TO YEAR ENDED DECEMBER 31, 2003
Premiums Written.    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 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

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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 the reporting patterns of companies also affect premiums earned.

Expenses
Incurred Losses and LAE.    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. 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.

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 %

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. 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.

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

(Dollars in millions)
Segment Net Catastrophe Incurred Losses
Segment
2004     
2003     
U.S. Reinsurance     $ 250.7   $ 22.5  
U.S. Insurance    1.0    1.4  
Specialty Underwriting    18.8    3.2  
International    85.9    1.2  
Bermuda    33.6    6.7  


                      Total   $ 390.0   $ 35.0  


Incurred losses and LAE include catastrophe losses, which include the impact of both current period events and favorable and unfavorable development on prior period events and are net of reinsurance. Individual catastrophe losses are reported net of specific reinsurance, but before recoveries under corporate level reinsurance 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. Effective in 2005, industrial risk losses were excluded from catastrophe losses. As such, prior periods were adjusted for comparison reasons. Catastrophe losses, net of contract specific cessions, were $390.0 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 2001 World Trade Center losses. Catastrophe losses, net of contract specific cessions, were $35.0 million in 2003, relating principally to the May 2003 tornado and hailstorm events and Hurricanes Fabian and Isabel.

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

(Dollars in millions)
Segment Net Prior Period Reserve Adjustments
Segment
2004     
2003     
U.S. Reinsurance     $ 77.7   $ 150.9  
U.S. Insurance    43.3    58.7  
Specialty Underwriting    5.1    (23.9 )
International    (15.1 )  9.3  
Bermuda    138.4    1.8  


    $ 249.4   $ 196.8  


Net unfavorable prior period reserve adjustments for the year ended December 31, 2004 were $249.4 million compared to $196.8 million in 2003. For the year ended December 31, 2004, the unfavorable reserve adjustments included net unfavorable A&E adjustments of $159.4 million and net unfavorable non-A&E, non-catastrophe adjustments of approximately $128.7 million relating primarily to casualty reinsurance and workers’ compensation insurance. Partially offsetting the unfavorable development was favorable catastrophe development of $38.7 million principally related to the reduction of reserves for the World Trade Center events. For the year ended December 31, 2003, net unfavorable prior period reserve adjustments for A&E exposures were $50.2 million and net unfavorable non-A&E adjustments were $146.6 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

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retrocessional program. It is important to note that unfavorable non-A&E accident year reserve development arises from the re-evaluation of accident year results and that such re-evaluations also impact premiums and commissions attributed by accident year, generally mitigating, in part, the impact of loss development and that such impacts are recorded as part of the overall reserve evaluation process.

The U.S. Reinsurance segment accounted for $77.7 million of net unfavorable prior period reserve adjustments for the year ended December 31, 2004, which included $34.8 million of favorable development due to the reserve reduction principally related to the catastrophe losses from the World Trade Center events, as compared to net unfavorable 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 unfavorable 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 unfavorable prior period reserve adjustments for the years ended December 31, 2004 and 2003, respectively. The unfavorable prior period reserve adjustments were principally due to accident years 2000 through 2002, where the Company strengthened its reserves for California workers’ compensation insurance. This was a relatively new book of business and was written in a challenging political and economic environment. While management believes 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 unfavorable prior period reserve adjustments for the year ended December 31, 2004, principally related to net unfavorable 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 $15.1 million of favorable net prior period reserve adjustments for the year ended December 31, 2004 and net unfavorable prior period reserve adjustments of $9.3 million for the year ended December 31, 2003. The favorable development in 2004 related primarily to 2003 Canadian property catastrophe, international and Asian 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 $138.4 million of net unfavorable prior period reserve adjustments for the year ended December 31, 2004 and $1.8 million of net unfavorable 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 $33.4 million unfavorable prior period reserve adjustments related to A&E exposures, partially offset by $31.6 million favorable non-A&E adjustments. All of the development related to asbestos exposures were assumed through the September 19, 2000 loss portfolio transfer from Mt. McKinley.

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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.

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

Underwriting Expenses.    The Company’s expense ratio, which is calculated by dividing underwriting expenses by net premiums earned, was 24.4% in 2004 compared to 25.6% in 2003.

The following table shows the expense ratios for each of the Company’s operating segments for 2004 and 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 %

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 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 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.

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 %

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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 million of net proceeds from the issuance of junior subordinated debt securities in March 2004 and $250.0 million 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      4.7 %  4.8 %
Imbedded after-tax yield of cash and invested assets at December 31    4.1 %  4.1 %

Annualized pre-tax yield on average cash and invested assets
    5.0 %  5.1 %
Annualized after-tax yield on average cash and invested assets    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. However, in 2004, with changes the Company perceived in overall investment market conditions, the Company continued to reweight its view of total return and added $496.5 million of equity securities in 2004 into the overall investment portfolio. The following table provides a comparison of the Company’s total return by asset class relative to broadly accepted industry benchmarks for 2004 and 2003.


2004  
2003  
Company's fixed income portfolio total return      6.5 %  6.2 %
Lehman bond aggregate    4.3 %  4.1 %

Company's common equity portfolio total return
    21.9 %  17.0 %
S & P 500    10.9 %  28.7 %

Company's other invested asset portfolio total return
    43.2 %  26.2 %

The Company’s 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 strips 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, 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 had 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 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.

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Other Expenses.    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 related to the senior notes, $32.4 million related to the junior subordinated debt securities and $1.2 million related to borrowings under the Company’s revolving credit facility. Interest expense in 2003 reflected $38.9 million related to the issuance of the senior notes, $17.0 million related to the junior subordinated debt securities and $1.4 million related 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, which reflected improved investment income and realized capital gains, partially offset by reduced underwriting profitability due to catastrophe losses.

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 to 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, 2005 the Company had direct business reserves of $2,059.1

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million and assumed business loss reserves of $7,067.6 million, of which $255.5 million and $313.4 million, respectively, were loss reserves on asbestos 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 greater than those 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 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 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 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 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 who may only have a “peripheral” connection to asbestos; (b) a disproportionate

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percentage of claims filed by individuals with no functional impairment, which should have little to no financial value but that have increasingly been considered in jury verdicts and settlements; (c) the growth in the number and significance of bankruptcy filings by companies as a result of asbestos claims (including, more recently, bankruptcy filings in which companies attempt to resolve their asbestos liabilities in a manner that is prejudicial to insurers and forecloses insurers from participating in the negotiation of asbestos related bankruptcy reorganization plans); (d) the concentration of claims in a small number of states that favor plaintiffs; (e) the growth in the number of claims that might impact the general liability portion of insurance policies rather 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. The Company’s A&E liabilities stem from Mt. McKinley’s direct insurance business and Everest Re’s assumed reinsurance business.

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 attributable to A&E, and particularly asbestos, may be subject to more variability than are non-A&E reserves and such variation could have a material adverse effect on the Company’s financial condition, results of operations and/or cash flows. See also Notes 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 and 2005, the Company concluded such settlements or reached agreement in principle with 13 of its high profile policyholders. The Company currently has identified 10 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

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also restrict the information available to estimate the reinsurers’ ultimate exposure. See the discussion below under the heading “Financial Condition – Loss and LAE Reserves”.

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. As of December 31, 2005 and 2004, the reserve for uncollectible balances was $25.0 million and $25.0 million, respectively. 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 and “Financial Condition – Reinsurance Receivables” below.

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 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. These earned but not reported premiums are combined with reported earned 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 are 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.

The following table displays the estimated components of earned premiums at December 31 for the periods indicated:

(Dollars in thousands) Earned But Not Reported Premium By Segment
2005
2004
2003
U.S. Reinsurance     $ 549,866   $ 485,880   $ 391,885  
U.S. Insurance    21,267    38,487    38,430  
Specialty Underwriting    84,963    136,687    105,865  
International    225,664    216,632    169,847  
Bermuda    121,147    233,940    120,349  



                      Total   $ 1,002,908   $ 1,111,626   $ 826,376  



INVESTMENT VALUATION.    The Company’s investment portfolio consists of investments available for sale and equity securities. Accordingly, these securities are marked to market on a quarterly basis. Most securities are

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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. In 2005 and 2004, the Company owned interest only strips that were accounted for in accordance with EITF 99-20, which sets 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. As of December 31, 2005 and 2004, the Company had unrealized gains net of tax of $214.6 million and $292.3 million, respectively. 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 $12,970.8 million at December 31, 2005, $11,530.2 million at December 31, 2004 and $9,321.3 million at December 31, 2003. The increase in cash and invested assets in 2005 from 2004 resulted primarily from $1,065.7 million in cash flows from operations generated during 2005 and $758.3 million from net proceeds of issuance of common shares, partially offset by the $250.0 million repayment of senior notes due March 15, 2005 and $77.8 million in net pre-tax unrealized depreciation of the Company’s investments. The $2.2 billion 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, $250.0 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 $70.0 million repayment on the revolving credit agreement.

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. 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. With changes the Company perceives in overall investment market conditions, the Company is reweighting its overall portfolio to modestly increase the emphasis on total return. Additionally, the Company has invested in equity securities, principally public equity index securities, which it believes will enhance the risk-adjusted total return of the investment portfolio. Equity investments accounted for 26.4%, 17.5% and 4.9% of the Company’s shareholders’ equity at December 31, 2005, 2004 and 2003, respectively.

The Company from time to time invests in interest only strips. The Company strategically invests in interest only strips in response to movement in, and levels of, capital market interest rates. These investments are aimed at mitigating potential decreases in unrealized appreciation on the Company’s fixed income portfolio during a period where management judges that there is very high 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, mortgagors 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

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movements are generally counter to the impact of interest rate movements on the Company’s other fixed income investments. Although the Company invested in interest only strips during 2005, 2004 and 2003, the Company had liquidated its positions in interest only strips and held no such securities at December 31, 2005 and 2004.

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

2005  
2004  
2003  
Fixed maturities      77.5 %  86.3 %  93.6 %
Equity securities    8.4 %  5.6 %  1.7 %
Short-term investments    11.1 %  5.1 %  1.6 %
Other invested assets    2.2 %  1.4 %  1.1 %
Cash    0.8 %  1.6 %  2.0 %



      Total investments and cash    100.0 %  100.0 %  100.0 %


2005  

2004  
2003  
Fixed income portfolio duration    4.3 yea rs  5.2 yea rs  4.2 yea rs
Fixed income composite credit quality    A a1  A a2  A a2
Imbedded end of period yield, pre-tax    4.5 %  4.7 %  4.8 %
Imbedded end of period yield, after-tax    3.9 %  4.1 %  4.1 %

The increase in short-term investments is due principally to maintaining liquidity to pay catastrophe losses as well as to the issuance of common shares during the fourth quarter of 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. However, in 2005, with changes the Company perceived in overall investment market conditions, the Company continued to reweight its view of total return and added $440.0 million in 2005 of equity securities into the overall investment portfolio. The following table provides a comparison of the Company’s total return by asset class relative to broadly accepted industry benchmarks for the periods indicated:


2005  
2004  
Company's fixed income portfolio total return      3.2 %  6.5 %
Lehman bond aggregate    2.4 %  4.3 %

Company's common equity portfolio total return
    13.8 %  21.9 %
S & P 500    4.9 %  10.9 %

Company's other invested asset portfolio total return
    7.2 %  43.2 %

REINSURANCE RECEIVABLES.    Reinsurance receivables for both paid and unpaid losses totaled $1,048.7 million at December 31, 2005, $1,210.8 million at December 31, 2004, and $1,284.1 million at December 31, 2003. At December 31, 2005, $239.8 million, or 22.9%, was receivable from subsidiaries of London Life. These receivables are collateralized 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, $171.5 million, or 16.4%, was receivable from Transatlantic, $160.0 million, or 15.3%, was receivable from LM, whose obligations are guaranteed by The Prudential and $100.0 million, or 9.5%, was receivable from Continental,

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which is partially collaterized by funds held arrangements. No other retrocessionaire accounted for more than 5% of the Company’s receivables.

LOSS AND LAE RESERVES.    Gross loss and LAE reserves totaled $9,126.7 million at December 31, 2005, $7,836.3 million at December 31, 2004 and $6,361.2 million at December 31, 2003. The increase in 2005 is primarily attributable to increased catastrophe losses, partially offset by favorable net prior period reserve adjustments and reduced premiums earned. The increase in 2004 and 2003 is primarily attributable to increased premiums earned, increase in catastrophe losses and net prior period reserve adjustments in select areas. Normal variability in claim settlements also affected both periods.

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 to conform to December 31, 2005 and 2004 segment reporting.

The following tables summarize gross outstanding loss and LAE reserves by segment, 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, 2005
(Dollars in thousands) Case
Reserves

IBNR
Reserves

Total
Reserves

% of
Total

U.S. Reinsurance     $ 1,654,597   $ 2,423,192   $ 4,077,789    44.7 %
U.S. Insurance    583,729    948,288    1,532,017    16.8 %
Specialty Underwriting    273,369    184,719    458,088    5.0 %
International    577,276    434,541    1,011,817    11.1 %
Bermuda    618,066    779,465    1,397,531    15.3 %




Total excluding A&E    3,707,037    4,770,205    8,477,242    92.9 %
A&E    526,210    123,250    649,460    7.1 %




Total including A&E   $ 4,233,247   $ 4,893,455   $ 9,126,702    100.0 %






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 %




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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 %




The changes by segment generally reflect changes in earned premium, changes in business mix, the impact of reserve re-estimations and changes in catastrophe loss reserves, together with claim settlement activity. The fluctuations for A&E reflect the impact of reserve re-evaluations and claim settlement activity.

The Company’s loss and LAE reserves reflect estimates of ultimate claim liability. Such estimates are re-evaluated on an ongoing basis, including re-estimates of prior period reserves, taking into consideration all available information and, in particular, newly reported loss and claim experience. The effect of such re-evaluations impacts incurred losses for the current period. The Company notes that its analytical methods and processes operate at multiple levels including individual contracts, groupings of like contracts, classes and lines of business, internal business units, segments, legal entities, and in the aggregate. The complexities of the Company’s business and operations require analyses and adjustments, both qualitative and quantitative, at these various levels. Additionally, the attribution of reserves, 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 $62.1 million in 1997, representing 2.2% of the net prior period reserves for the year in which the adjustment was made, to an unfavorable $249.4 million in 2004, representing 3.7% of the net prior period reserves for the year in which the adjustment was made. The Company has noted that variability had increased for years 1999 to 2003 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, 2005 for each of the Company’s business segments.

Outstanding Reserves and Ranges By Segment (1)
As of December 31, 2005

(Dollars in thousands) As   
Reported   

Low
Range % (2)

Low    
Range (2)    

High
Range % (2)

High    
Range (2)    

Gross Reserves By Segment                                  
   U.S. Reinsurance      $4,077,789  -10.2%    $ 3,663,855  10.2%    $4,491,723 
   U.S. Insurance    1,532,017   -14.0%  1,317,676   14.0%  1,746,358 
   Specialty Underwriting    458,088   -12.6%  400,578   12.6%  515,598 
   International    1,011,817   -9.4%  916,897   9.4%  1,106,737 
   Bermuda    1,397,531   -8.0%  1,286,049   8.0%  1,509,013 





Total Gross Reserves  
   (excluding A&E)    8,477,242   -8.0%  7,797,978   8.0%  9,156,506 





   A&E (All Segments) (3) (4)    649,460   NA  649,460   NA  649,460 





Total Gross Reserves (4)      $9,126,702   NA    $8,447,438   NA    $9,805,966 





______________

(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, these reserves 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 8.0% to minus 14.0% for the low range and from plus 8.0% to plus 14.0% for the high range. Both the higher and lower ranges are associated with the U.S. Insurance 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 contracts, could have material adverse effects on the Company’s future financial condition, results of operations and cash flows.

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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 mea