10-K 1 group10k.htm GROUP 10K 2006

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, 2006

 

Commission file number 1-15731

EVEREST RE GROUP, LTD.

(Exact name of registrant as specified in its charter)

 

Bermuda

(State or other jurisdiction

of incorporation or organization)

 

98-0365432

(I.R.S Employer

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:

 

Title of Each Class

Common Shares, $.01 par value per share

 

Name of Each Exchange

on Which Registered

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

 

 


No


X

 

 

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

 

 


Yes


X

 


No

 

 

 

 

 

 

 

 

 

 

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ]

 

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, 2006, 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 $5,622.6 million.

 

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

 

 

 

At February 27, 2007, the number of shares outstanding of the registrant’s common shares was 64,037,205.

 

 

 

 

 

 

 

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 2007 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, 2006.


TABLE OF CONTENTS

 

Item

Page

 

PART I

 

 

 

1.

Business

1

1A.

Risk Factors

30

1B.

Unresolved Staff Comments

42

2.

Properties

42

3.

Legal Proceedings

42

4.

Submission of Matters to a Vote of Security Holders

43

 

 

 

 

 

 

PART II

 

 

 

5.

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

43

6.

Selected Financial Data

45

7.

Management’s Discussion and Analysis of Financial Condition and Results of Operation

47

7A.

Quantitative and Qualitative Disclosures About Market Risk

94

8.

Financial Statements and Supplementary Data

94

9.

Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

94

9A.

Controls and Procedures

94

9B.

Other Information

95

 

 

 

 

 

 

PART III

 

 

 

10.

Directors and Executive Officers of the Registrant

95

11.

Executive Compensation

95

12.

Security Ownership of Certain Beneficial Owners and Management and Related Shareholder Matters

95

13.

Certain Relationships and Related Transactions

95

14.

Principal Accountant Fees and Services

96

 

 

 

 

 

 

PART IV

 

 

 

15.

Exhibits and Financial Statement Schedules

96


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, Holdings continues to be 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 2006 of $4.0 billion with approximately 78% representing reinsurance and 22% representing insurance, and shareholders’ equity at December 31, 2006 of $5.1 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, 2006 of $2.1 billion.

1

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 2006, 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, 2006 of $377.6 million.

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, 2006 of $2.7 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, 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 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 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, provide effective management throughout the property and casualty underwriting cycle 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 offers treaty and facultative reinsurance and admitted and non-admitted insurance. The Company’s products include the full range of property and casualty reinsurance and insurance coverages, including marine, aviation, surety, errors and omissions liability (“E&O”), directors’ and officers’ liability (“D&O”), medical malpractice, other specialty lines, accident and health (“A&H”) and workers’ compensation.

3

The Company distributes its products through direct and broker reinsurance channels in U.S., Bermuda and international markets.

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

The Company’s underwriting strategy emphasizes flexibility and responsiveness to changing market conditions, such as increased demand or favorable pricing trends. The Company believes that its existing strengths, including its broad underwriting expertise, U.S., 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 providing access to business that is not available on a reinsurance basis. The Company carefully monitors its mix of business across all operations to avoid unacceptable geographic or other risk concentrations.

Marketing
The Company writes business on a worldwide basis for many different customers and for many lines of business, thereby obtaining a broad spread of risk. The Company is not substantially dependent on any single customer, small group of customers, line of business or geographic area. For the 2006 calendar year, no single customer (ceding company or insured) generated more than 6.7% 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.

Approximately 66.3%, 11.0% and 22.7% of the Company’s 2006 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 write 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 58.7% of gross written premiums in 2006, with the two largest brokers accounting for approximately 17.2% (Marsh & McLennan Companies, Inc.) and 14.2% (Willis Group, Ltd.) of gross written premiums. The Company does not believe that a reduction of business assumed from any one broker would have a materially adverse effect on the Company.

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 agents and surplus lines brokers. In 2006, 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-Risk Insurance Services, LLC, which accounted for approximately 7.8% of the Company’s 2004 gross written premiums.

4

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 agents 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, control of aggregate exposures to catastrophe events, capital, investments and support operations. Management generally monitors and evaluates the financial performance of these operating segments based upon their underwriting results. Underwriting results include earned premium less losses and loss adjustment expenses (“LAE”) incurred, commission and brokerage expenses and other underwriting expenses and are analyzed using ratios, in particular loss, commission and brokerage and other underwriting expense ratios, which, respectively, divide incurred losses, 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.

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 between property and casualty business and, for reinsurance business, between pro rata or excess of loss business:

5

Gross Written Premiums by Operation
Years Ended December 31,

(Dollars in millions) 2006

2005

2004

2003

2002
U.S. Reinsurance                                                                                                  
  Property  
    Pro Rata (1)   $ 379.7     9.5 %     $ 414.0       10.1 %     $ 339.7       7.2 %     $ 357.8       7.8 %     $ 148.7       5.2 %
    Excess    303.2     7.6 %      236.9       5.8 %      208.8       4.4 %      241.0       5.3 %      177.8       6.2 %
  Casualty  
    Pro Rata (1)    446.7       11.2 %      529.4       12.9 %      702.8       14.9 %      625.7       13.7 %      219.2       7.7 %
    Excess    207.1       5.2 %      205.9       5.0 %      226.8       4.8 %      527.8       11.5 %      348.9       12.3 %





  Total (2)    1,336.7       33.4 %      1,386.2       33.8 %      1,478.1       31.4 %      1,752.3       38.3 %      894.6       31.4 %





U.S. Insurance   
  Property  
    Pro Rata (1)    40.6       1.0 %      196.9       4.8 %      159.0       3.4 %      42.9       0.9 %      6.5       0.2 %
    Excess    -       0.0 %      -       0.0 %      -       0.0 %      -       0.0 %      -       0.0 %
  Casualty  
    Pro Rata (1)    825.7       20.6 %      735.6       17.9 %      1,008.8       21.4 %      1,026.6       22.5 %      815.0       28.6 %
    Excess    -       0.0 %      -       0.0 %      -       0.0 %      -       0.0 %      -       0.0 %





  Total (2)    866.3       21.7 %      932.5       22.7 %      1,167.8       24.8 %      1,069.5       23.4 %      821.5       28.9 %





Specialty Underwriting   
  Property  
    Pro Rata (1)    179.3       4.5 %      206.1       5.0 %      374.8       8.0 %      396.7       8.7 %      397.5       14.0 %
    Excess    37.5       0.9 %      65.2       1.6 %      65.4       1.4 %      64.3       1.4 %      43.8       1.5 %
  Casualty  
    Pro Rata (1)    28.5       0.7 %      30.7       0.7 %      34.1       0.7 %      28.1       0.6 %      41.9       1.5 %
    Excess    5.9       0.1 %      12.6       0.3 %      12.8       0.3 %      13.8       0.3 %      5.3       0.2 %





  Total (2)    251.2       6.3 %      314.6       7.6 %      487.1       10.4 %      502.9       11.0 %      488.5       17.2 %





Total U.S.   
  Property  
    Pro Rata (1)    599.6       15.0 %      817.0       19.9 %      873.5       18.6 %      797.4       17.4 %      552.7       19.4 %
    Excess    340.7       8.5 %      302.1       7.4 %      274.2       5.8 %      305.3       6.7 %      221.6       7.8 %
  Casualty  
    Pro Rata (1)    1,300.9       32.5 %      1,295.7       31.5 %      1,745.7       37.1 %      1,680.4       36.8 %      1,076.1       37.8 %
    Excess    213.0       5.3 %      218.5       5.3 %      239.6       5.1 %      541.6       11.8 %      354.2       12.4 %





  Total (2)    2,454.2       61.3 %      2,633.3       64.1 %      3,133.0       66.6 %      3,324.7       72.7 %      2,204.6       77.4 %





International (4)   
  Property  
    Pro Rata (1)    415.4       10.4 %      421.4       10.3 %      426.0       9.1 %      328.5       7.2 %      229.4       8.1 %
    Excess    195.6       4.9 %      160.4       3.9 %      159.7       3.4 %      118.6       2.6 %      78.4       2.8 %
  Casualty  
    Pro Rata (1)    53.9       1.3 %      66.4       1.6 %      51.2       1.1 %      31.3       0.7 %      30.6       1.1 %
    Excess    66.8       1.7 %      58.4       1.4 %      50.8       1.1 %      42.4       0.9 %      26.1       0.9 %





  Total (2)    731.7       18.3 %      706.6       17.2 %      687.7       14.6 %      520.8       11.4 %      364.5       12.8 %





Bermuda Operations (4)   
  Property  
    Pro Rata (1)    312.3       7.8 %      322.9       7.8 %      309.7       6.6 %      230.0       5.0 %      136.1       4.8 %
    Excess    174.3       4.4 %      151.8       3.7 %      232.5       4.9 %      239.5       5.2 %      80.5       2.8 %
  Casualty  
    Pro Rata (1)    230.7       5.8 %      208.8       5.1 %      227.0       4.8 %      175.4       3.8 %      19.8       0.7 %
    Excess    97.7       2.4 %      85.2       2.1 %      114.2       2.4 %      83.3       1.8 %      41.0       1.4 %





  Total (2) (3)    815.0       20.4 %      768.7       18.7 %      883.4       18.8 %      728.2       15.9 %      277.4       9.7 %





Total Company   
  Property  
    Pro Rata (1)    1,327.3       33.2 %      1,561.3       38.0 %      1,609.2       34.2 %      1,355.9       29.6 %      918.2       32.3 %
    Excess    710.6       17.8 %      614.3       15.0 %      666.4       14.2 %      663.4       14.5 %      380.5       13.4 %
  Casualty  
    Pro Rata (1)    1,585.5       39.6 %      1,570.9       38.2 %      2,023.9       43.0 %      1,887.2       41.3 %      1,126.5       39.6 %
    Excess    377.5       9.4 %      362.1       8.8 %      404.6       8.6 %      667.3       14.6 %      421.3       14.8 %





  Total (2)   $ 4,000.9      100.0 %     $ 4,108.6       100.0 %     $ 4,704.1       100.0 %     $ 4,573.8       100.0 %     $ 2,846.5       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 for 2003 and 2002 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. The Company also 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 large, national insurance companies.

In 2006, $587.4 million of gross written premiums were attributable to U.S. treaty property business, of which 35.4% was written on an excess of loss basis and 64.6% was written on a pro rata basis. The Company’s property underwriters utilize sophisticated underwriting methods to analyze and price property business. The Company manages its exposures to catastrophe and other large losses by limiting exposures on individual contracts and limiting aggregate exposures to catastrophes in any particular zone and across contiguous zones.

U.S. treaty casualty business accounted for $533.5 million of gross written premiums in 2006, of which 22.1% was written on an excess of loss basis and 77.9% was written on a pro rata basis. The treaty casualty business 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 2006, $70.6 million, $107.1 million, $13.2 million and $24.9 million of gross written premiums were attributable to the property, casualty, specialty and national brokerage business, respectively.

In 2006, 87.8%, 9.1% and 3.1% 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 2006, the Company’s U.S. Insurance operation wrote $866.3 million of gross written premiums, of which 95.3% was casualty, predominantly workers’ compensation insurance and 4.7% was property. Of the total business written, Everest National wrote $587.5 million and Everest Re wrote $13.9 million, principally targeting commercial property and casualty business written through general agents with program administrators. Workers’ compensation business accounted for $302.6 million, or 34.9% of the total business written, including $170.0 million, or 56.2%, of California workers’ compensation business. Non-workers’ compensation business represented $563.7 million, or 65.1% of the total business written. Everest Indemnity wrote $239.0 million, principally excess and surplus lines insurance business written through surplus lines brokers. Everest Security wrote $25.9 million, principally non-standard auto insurance written through retail agents. With respect to insurance written through general agents and surplus lines brokers, the Company supplements the initial underwriting process with periodic claims, underwriting and operational reviews and ongoing monitoring.

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

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Gross written premiums of the A&H unit in 2006 totaled $83.3 million, mostly written through brokers.

Gross written premiums of the marine and aviation unit in 2006 totaled $97.4 million, substantially all of which was written on a treaty basis and sourced through reinsurance brokers. Marine treaties represented 64.6% of marine and aviation gross written premiums in 2006 and consisted mainly of hull and energy coverage. Approximately 43.4% of the marine unit premiums in 2006 were written on a pro rata basis and 56.6% as excess of loss. Aviation premiums accounted for 35.4% of marine and aviation gross written premiums in 2006 and included reinsurance for airlines and general aviation. Approximately 82.9% of the aviation unit’s premiums in 2006 was written on a pro rata basis and 17.1% as excess of loss.

In 2006, gross written premiums of the surety unit totaled $70.5 million, 99.8% of which were written on a pro rata 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 focuses on 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 from New Jersey “home-foreign” business, which provides reinsurance on the international portfolios of U.S. insurers. Approximately 83.5% of the Company’s 2006 international gross written premiums represented property business, while 16.5% 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 71.9% of the Company’s international business was written through brokers, with 28.1% written directly with ceding companies.

Gross written premiums of the Company’s Canadian branch totaled $152.1 million in 2006 and consisted of pro rata property (29.0%), excess property (24.4%), pro rata casualty (15.4%) and excess casualty (31.2%). Approximately 74.5% of the Canadian premiums consisted of treaty reinsurance, while 25.5% was facultative reinsurance.

The Company’s Singapore branch covers the Asian markets and accounted for $143.0 million of gross written premiums in 2006. This business consisted of pro rata property (53.6%), excess property (40.8%), pro rata casualty (3.6%) and excess casualty (2.0%).

International business written out of Everest Re’s Miami and New Jersey offices accounted for $435.7 million of gross written premiums in 2006 and consisted of pro rata treaty property (67.6%), pro rata treaty casualty (5.8%), excess treaty property (15.6%), excess treaty casualty (3.5%) and facultative property and casualty (7.5%). Of this international business, 59.8% was sourced from Latin America, 21.7% was sourced from the Middle East, 8.5% was sourced from Africa, 8.3% was “home-foreign” business, 1.5% was sourced from Asia and 0.2% was sourced from Europe.

Bermuda Operation.   The Company’s Bermuda operation writes property and casualty insurance and reinsurance through Bermuda Re and property and casualty reinsurance through its UK branch. In 2006, the Bermuda operation had gross property and casualty written premiums of $267.5 million accounting for virtually all of its business, of which $47.6 million or 17.8% was facultative reinsurance or individual risk insurance and $218.6 million or 81.7% was treaty reinsurance.

In 2006, the UK branch of Bermuda Re wrote $547.5 million of gross treaty reinsurance premium consisting of pro rata property (44.1%), excess property (18.8%), pro rata casualty (23.6%) and excess casualty (13.5%).

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

Underwriting
The Company’s ability to write 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 “lead” in as many of the reinsurance treaties it underwrites as possible. The lead reinsurer on a treaty generally accepts one of the largest percentage shares of the treaty and is in the strongest position to negotiate price, terms and conditions. Management believes this strategy enables it to obtain more favorable terms and conditions on 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 on 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 subject exposures and loss experience. The Company does not separately evaluate each of the individual risks assumed under its treaties. The Company does, however, 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 monitor adherence to underwriting guidelines. Underwriting audits focus on the quality of the underwriting staff, pricing and risk selection and rate monitoring 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 performance monitoring mechanisms.

Risk Management of Underwriting and Retrocession Arrangements
Underwriting Risk and Accumulation Controls.   Each segment and business unit manages its underwriting risk in accordance with established guidelines. 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, geographic location and risk hazards. In each case, the guidelines permit limited exceptions, which must be authorized by the Company’s senior management. Management regularly reviews and revises these guidelines in response to

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changes in business unit market conditions, risk versus reward analyses and the Company’s underwriting risk management processes.

The operating results and financial condition of the Company can be adversely affected by catastrophe and other large losses. 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 and contiguous zones;

purchasing retrocessional protection to the extent that such coverage can be secured cost-effectively. 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. A large catastrophic event can be expected to generate insured losses to multiple reinsurance treaties, facultative certificates and across lines of business.

The Company focuses on potential portfolio losses that could result from any single event or series of events 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 forecast frequency and severity of expected losses on a probabilistic basis.

No single universal model is currently capable of projecting the amount and probability of loss in all global geographic regions in which the Company conducts business. In addition, the form, quality and granularity of underwriting exposure data furnished by ceding companies is not uniformly compatible with the data requirements for the Company’s licensed models, which adds to the inherent 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. The combination of techniques potentially adds to the imprecision of the Company’s estimates. Also, while most models have been updated in 2006 to better incorporate factors that contributed to unprecedented industry storm losses in 2004 and 2005, such as flood, storm surge and demand surge, catastrophe model projections are inherently imprecise. In addition, uncertainties with respect to future climatic patterns and cycles add to the already significant uncertainty of loss projections from models using historic long-term frequency and severity data.

Nevertheless, when combined with traditional risk management techniques and sound underwriting judgment, catastrophe models are a useful tool for underwriters to price catastrophe exposed risks and for providing management with quantitative analyses with which to monitor and manage catastrophic risk exposures by zone and across zones for individual and multiple events.

Projected catastrophe losses 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 PML will vary depending upon the severity of modeled simulated losses and the make-up of the in force book of business. The projected severity levels are described in terms of “return periods”, such as “100-year events” and

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“250-year events”. For example, a 100-year PML corresponds to the estimated loss from a single event which has a 1% probability of being exceeded in a twelve month period. Conversely, it corresponds to a 99% probability that the loss from a single event will fall below the indicated PML. It is important to note that PMLs are estimates. Modeled events are hypothetical events produced by a stochastic model. As a result, there can be no assurance that any actual event will align with the modeled event 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 endeavors to manage its catastrophe risk profile such that the projected economic loss from its largest 100-year event does not exceed approximately $500 million. Economic loss is viewed as the gross PML loss reduced by estimated reinstatement premiums to renew coverage and income taxes. The impact of income taxes on the PML depends on the distribution of the losses by corporate entity, which is also affected by inter-affiliate reinsurance. 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 process enables management to identify exposure accumulations to integrate into enterprise 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, 2007:

(Dollars in millions)
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                            
   Southeast U.S., Wind   $ 368   $ 575 $777   $ 1,045   $ 1,227   $ 1,296  
   Europe, Wind    288    539    702    809    915    952  
   California, Earthquake    235    410    532    686    872    1,045  

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, 2007. The Company continues to evaluate the availability and cost of various retrocessional products and less mitigation approaches in the marketplace.

The projected economic losses for the three highest 1 in 100 PML losses in the above table are as follows: for the Southeast U.S. wind storm, $471 million; for the European windstorm, $462 million and for California earthquake, $350 million. The projection for the Southeast windstorm does not consider any impacts from the recently enacted Florida insurance reform that increases insurers’ access to the Florida Hurricane Catastrophe Fund, thus potentially reducing the amount of reinsurance purchased from the private reinsurance markets. The Company is unable to predict if this will reduce future reinsurance coverage in Florida and correspondingly reduce the PML for a Southeast windstorm.

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, perhaps by a material amount. Nor can there be assurance that the Company will not experience events

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impacting multiple zones, or multiple severe events that could, in the 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. 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 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

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December 31, 2005, the Company had ceded the maximum limits under all three contracts. The Company has not purchased similar corporate level coverage subsequent to December 31, 2001.

All of the Company’s retrocessional agreements transfer significant reinsurance risk and therefore, are 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, 2006, the Company carried as an asset $772.8 million in reinsurance receivables with respect to losses ceded. Of this amount, $169.4 million, or 21.9%, was receivable from Transatlantic Reinsurance Company (“Transatlantic”), $100.9 million, or 13.1%, was receivable from LM, $100.2 million, or 13.0%, was receivable from Founders Insurance Company Limited (“Founders”), which is partially collateralized by a trust, $100.0 million, or 12.9%, was receivable from Continental Insurance Company (“Continental”), $52.5 million, or 6.8%, was receivable from subsidiaries of London Reinsurance Group (“London Life”), which is fully collateralized by letters of credit, and $42.7 million, or 5.5%, was receivable from Munich Reinsurance Company (“Munich Re”). 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 London Life and Continental are managed on a funds held basis, which means that the Company has retained the premiums earned by the retrocessionaire to secure obligations of the retrocessionaire, recorded them as a liability, credited interest on the balances at a stated contractual rate and reduced the liability account as payments become due. As of December 31, 2006, such funds had reduced the Company’s net exposure to Continental to $33.2 million. 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 who 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. Senior management and claim management personnel meet 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 regard to changes in 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 for 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 in 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 1996 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 are revised 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 estimate of the ultimate liability.

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Since the Company has international operations, some of its loss reserves are established in foreign currencies and converted to U.S. dollars for financial reporting. Changes in conversion rates from period-to-period impact the U.S. dollar value of carried reserves and correspondingly, the cumulative redundancy/(deficiency) line of the table. However, unlike other reserve development that affects net income, the impact of currency translation is a component of other comprehensive income. To differentiate these two reserve development components, the translation impacts for each calendar year are reflected in the table of Effects on Pre-tax Income Resulting from Reserve Re-estimates.

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 1999 for $100,000, was first reserved in 1996 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 1996 through 1998 shown below. Conditions and trends that have affected development of the ultimate 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) 1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
Net Reserves for unpaid                                                
  loss and LAE   $ 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   $ 8,078.9  
Paid (cumulative) as of:  
  One year later    331.2    450.8    484.3    673.4    718.1    892.7    902.6    1,141.7    1,553.1    2,116.9      
  Two years later    619.2    747.9    955.3    1,159.1    1,264.2    1,517.9    1,641.7    1,932.6    2,412.3          
  Three years later    813.7    1,101.5    1,295.5    1,548.3    1,637.5    2,033.5    2,176.8    2,404.6              
  Four years later    1,055.9    1,363.1    1,575.9    1,737.8    2,076.0    2,413.1    2,485.2                  
  Five years later    1,253.0    1,592.5    1,693.3    1,787.2    2,286.4    2,612.3                      
  Six years later    1,450.2    1,673.4    1,673.9    1,856.0    2,482.5                          
  Seven years later    1,510.2    1,665.3    1,711.1    2,017.5                              
  Eight years later    1,516.1    1,669.3    1,799.2                                  
  Nine years later    1,503.2    1,731.6                                      
  Ten years later    1,544.9                                          
Net Liability re-estimated  
as of:  
  One year later    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    8,419.8      
  Two years later    2,575.9    2,802.2    2,921.6    2,977.2    3,484.6    3,901.8    4,635.0    5,407.1    6,740.5          
  Three years later    2,546.0    2,794.7    2,910.3    3,070.5    3,688.6    4,400.0    4,705.3    5,654.5              
  Four years later    2,528.0    2,773.5    2,924.5    3,202.6    4,210.3    4,516.7    5,062.5                  
  Five years later    2,515.7    2,765.2    3,002.2    3,430.3    4,216.5    4,814.0                      
  Six years later    2,507.9    2,778.9    2,997.8    3,338.1    4,379.3                          
  Seven years later    2,510.1    2,767.3    2,941.6    3,356.7                              
  Eight years later    2,517.3    2,738.7    2,931.5                                  
  Nine years later    2,517.6    2,738.4                                      
  Ten years later    2,528.1                                          
Cumulative redundancy/  
  (deficiency)   $ 23.5   $ 71.6   $ 22.0   $ (379.3 ) $ (1,014.4 ) $ (1,341.5 ) $ (1,166.7 ) $ (496.1 ) $ 26.5   $ (244.4 )    











Gross liability-  
  end of year   $ 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   $ 8,888.0  
Reinsurance receivable    746.6    688.7    915.7    727.8    488.8    883.5    1,090.0    1,266.3    1,119.7    999.7    809.1  











Net liability-end of year    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    8,078.9  











Gross re-estimated  
  liability at  
  at December 31, 2006    3,914.0    3,992.3    4,142.4    4,605.9    5,491.9    6,194.1    6,402.2    6,986.3    7,860.3    9,397.5      
Re-estimated receivable  
  at December 31, 2006    1,386.0    1,253.8    1,210.9    1,249.2    1,112.6    1,380.1    1,339.7    1,331.8    1,119.8    977.7      










Net re-estimated liability  
  at December 31, 2006    2,528.1    2,738.4    2,931.5    3,356.7    4,379.3    4,814.0    5,062.5    5,654.5    6,740.5    8,419.8      










Gross cumulative  
(deficiency)/redundancy   $ (595.6 ) $ (493.6 ) $ (273.2 ) $ (900.7 ) $ (1,638.2 ) $ (1,838.1 ) $ (1,416.4 ) $ (561.6 ) $ 26.3   $ (222.5 )    










______________

(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.

Six of the most recent seven years in the above table reflect cumulative deficiencies, also referred to as adverse development, with the largest indicated cumulative deficiency in 2001. Three active classes of business were the principal contributors to those deficiencies in the years 1999 through 2003: professional liability reinsurance, general casualty reinsurance and workers’ compensation insurance. In 2005, the cumulative deficiency was

16

principally due to adverse development of property catastrophes. 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 under 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 businesses. 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 2006 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 these reserves will not need to be increased in the future, management believes that the Company’s existing reserves, reserving methodologies and retrocessional arrangements reduce 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, 2006. 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) 1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
Accident Year
Accident Years                                                  
1996 & prior   $ 3.2   $ (27.5 ) $ 29.9   $ 18.0   $ 12.3   $ 7.8   $ (2.2 ) $ (7.2 ) $ (0.3 ) $ (10.5 )    $ 23.5  
1997        1.3    4.1    (10.4 )  8.9    0.4    (11.5 )  18.8    28.8    10.8       51.2  
1998            1.4    (11.0 )  (9.8 )  (22.5 )  (64.0 )  (7.2 )  27.6    9.8       (75.8 )
1999                (4.3 )  (3.3 )  (79.1 )  (54.4 )  (232.1 )  36.0    (28.7 )     (365.9 )
2000                    (7.9 )  (26.4 )  (71.9 )  (294.1 )  (98.3 )  (144.2 )     (642.9 )
2001                        (20.4 )  (85.2 )  23.5    (110.6 )  (134.4 )     (327.1 )
2002                            32.3    15.9    46.4    (60.0 )     34.7  
2003                                170.3    133.7    109.7       413.7  
2004                                    69.9    140.7       210.5  
2005                                        (137.6 )     (137.6 )
Total calendar  











  year effect   $3.2 $(26.2 ) $35.4 $(7.8 ) $0.0 $(140.1 ) $ (256.9 ) $ (312.0 ) $ 133.3 $ (244.4 )    $(815.6 )
Canada (2)    9.6    8.3    (11.0 )  4.9    7.4    (1.4 )  (26.6 )  (16.3 )  (6.6 )  (0.5 )       
Translation Adjustment    49.3    -    (17.0 )  (26.9 )  (17.7 )  38.4    86.7    78.9    (100.3 )  109.3         










Re-estimate of net reserve after translation adjustmen   $62.1   $(17.9 ) $7.4   $(29.8 ) $(10.3 ) $(103.1 ) $(196.8 ) $(249.4 ) $26.4 $(135.6 )       










______________

(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 described 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 unfavorable development experienced in the 2005 accident year relates primarily to property catastrophes from the unprecedented hurricanes of 2005.

18

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

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

Reconciliation of Reserves for Losses and LAE

Years Ended December 31,

(Dollars in millions) 2006
2005
2004
Gross reserves at beginning of period     $ 9,126.7   $ 7,836.3   $ 6,361.2  



Incurred related to:  
   Current year    2,298.8    3,750.7    3,041.7  
   Prior years    135.6    (26.4 )  249.4  



      Total incurred losses    2,434.4    3,724.3    3,291.1  



Paid related to:  
   Current year    522.7    664.9    607.1  
   Prior years    2,116.9    1,553.1    1,141.7  



      Total paid losses    2,639.6    2,218.0    1,748.8  



Foreign exchange/translation adjustment    109.3    (100.3 )  78.9  
Change in reinsurance receivables on unpaid losses and LAE    (190.7 )  (115.6 )  (146.1 )



Gross reserves at end of period   $ 8,840.1   $ 9,126.7   $ 7,836.3  



Development of prior year incurred losses was $135.6 million unfavorable in 2006, $26.4 million favorable in 2005 and $249.4 million unfavorable in 2004. 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 2006, 7.4% 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 endeavors 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 eight 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.

19

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

Everest Re’s book of assumed reinsurance is relatively concentrated within a modest number of A&E exposed relationships. 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) 2006
2005
2004
Case reserves reported by ceding companies     $ 135.6   $ 125.2   $ 148.5  
Additional case reserves established by the Company (assumed reinsurance) (1)    152.1    157.6    151.3  
Case reserves established by the Company (direct insurance)    213.7    243.5    272.1  
Incurred but not reported reserves    148.7    123.3    156.4  



Gross reserves    650.1    649.6    728.3  
Reinsurance receivable    (138.7 )  (199.1 )  (221.6 )



Net reserves   $ 511.4   $ 450.5   $ 506.7  



______________

(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 that period. See Note 1F of Notes to Consolidated Financial Statements.

20

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

Years Ended December 31,
(Dollars in millions) 2006
2005
2004
Balance at beginning of year     $ 133.2   $ 152.2   $ 205.3  
Liabilities assumed    0.3    0.2    0.3  
Adjustments to reserves    3.0    11.6    8.5  
Benefits paid in the current year    (35.5 )  (30.8 )  (19.5 )
Contract terminations    -    -    (42.4 )



Balance at end of year   $ 101.0   $ 133.2   $ 152.2  



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 Company’s principal investment objectives are to ensure funds are available to meet its insurance and reinsurance obligations and to maximize after-tax investment income while maintaining a high quality diversified investment portfolio. Considering these objectives, the Company views its investment portfolio as having two components; 1) the investments needed to satisfy outstanding liabilities and 2) investments funded by the Company’s shareholders’ equity.

For outstanding liabilities, the Company invests in taxable and tax-preferenced fixed income securities with an average credit quality of Aa, as rated by the independent investment rating service of Moody’s. 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. This fixed maturity portfolio is externally managed by an independent, professional investment manager using portfolio guidelines approved by the Company.

Over the past few years, the Company has reallocated its shareholders’ equity investment portfolio to include 1) publicly traded equity securities, primarily exchange traded funds, and 2) private equity limited partnership investments. The objective of this portfolio diversification is to enhance the risk-adjusted total return of the investment portfolio by allocating a prudent portion of the portfolio to higher return asset classes. The Company has limited its allocation to these asset classes because 1) the potential for volatility in their values and 2) the impact of these investments on regulatory and rating agency capital adequacy models. At December 31, 2006, the market value of investments in equity and limited partnership securities approximated 40% of shareholders’ equity.

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 prepayments. 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, 2006, is estimated at approximately 3.8 years based on the estimated payouts of underwriting liabilities using standard duration calculations.

The duration of the fixed income portfolio at December 31, 2006 was 4.1 years, down from 4.3 years at the prior year end. This shortened duration mainly reflects the Company’s elevated short-term investment holdings in response to relatively low interest rates combined with a flat to negative yield curve. 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.

21

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 mortgage rates decline, mortgagors are more likely to prepay their mortgage loans, which decreases the average life of a mortgage pool and decreases expected cash flows. Conversely, as mortgage rates rise, repayments are more likely to slow and ultimate cash flows will tend to rise. Accordingly, the market value of these investments tends to increase as general interest rates rise and decline as general interest rates fall. These movements are generally counter to the impact of interest rate movements on the Company’s other fixed income investments. The Company held no interest only strip investments at December 31, 2006.

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 10.5% 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 14.7%, 13.4%, and 11.7% of the Company’s revenues for the years ended December 31, 2006, 2005 and 2004, respectively. The Company’s cash and invested assets totaled $14.0 billion at December 31, 2006, which consisted of 85.1% fixed maturities and cash of which 97.6% were investment grade, 11.6% equity securities and 3.3% other invested assets. The average maturity of fixed maturities was 7.4 years at December 31, 2006, and their overall duration was 4.1 years. As of December 31, 2006, 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, 2006, the Company’s common stock portfolio, which is comprised primarily of publicly traded equity index funds, had a market value of $1,613.7 million, comprising 11.6% 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

2006     $ 13,446.5 $ 629.4  4.68 % $35.1 $131.7
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
______________

(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, 2006 and 2005:





(Dollars in millions) Amortized
Cost

Unrealized
Appreciation

Unrealized
Depreciation

Market
Value

December 31, 2006:                    
   U.S. Treasury securities and obligations of U.S.  
      government agencies and corporations   $ 229.2   $ 1.3 $(3.8 ) $226.7  
   Obligations of states and political subdivisions    3,633.2    164.4    (5.2 )  3,792.4  
   Corporate securities    2,877.1    33.9    (55.0 )  2,856.0  
   Mortgage-backed securities    1,626.0    2.8    (34.8 )  1,594.0  
   Foreign government securities    1,019.9    18.6    (10.1 )  1,028.4  
   Foreign corporate securities    824.8    11.4    (13.8 )  822.4  




      Total   $ 10,210.2   $ 232.4 $ (122.7 ) $10,319.9





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




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



2006
2005
Rating Agency Credit Quality Distribution
(Dollars in millions)

Market
Value

Percent of
Total

Market
Value

Percent of
Total

AAA     $ 6,301.9    61.1 %       $ 5,923.0    59.0 %
AA    1,213.3    11.7 %      1,087.4    10.8 %
A    1,628.5    15.8 %      1,794.8    17.9 %
BBB    886.6    8.6 %      943.3    9.4 %
BB    197.0    1.9 %      208.2    2.1 %
B    80.8    0.8 %      74.4    0.7 %
Other    11.8    0.1 %      11.0    0.1 %




   Total   $ 10,319.9    100.0 %     $ 10,042.1    100.0 %




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The following table summarizes fixed maturities by contractual maturity as of December 31, 2006:



(Dollars in millions) Market
Value

Percent of
Total

Maturity category:            
   Less than one year   $ 637.1    6.2 %
   1-5 years    2,479.7    24.0 %
   5-10 years    2,008.1    19.5 %
   After 10 years    3,601.0    34.9 %


Subtotal    8,725.9    84.6 %
   Mortgage-backed securities (1)    1,594.0    15.4 %


Total   $ 10,319.9    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 ratings are particularly important for reinsurance companies. Ceding companies must rely on their reinsurers to pay covered losses well into the future. As a result, a highly rated reinsurer is generally preferred.

Operating Subsidiary

A.M. Best


Standard & Poor's


Moody's
Everest Re      A+ (Superior)          AA- (Very Strong)        Aa3 (Excellent)  
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. Standard & Poor’s states that the “AA-” rating is assigned to those insurance companies which, in its opinion, have very strong financial security characteristics with respect to their ability to pay under its insurance policies and contracts in accordance with their terms. Moody’s states that insurance companies rated “Aa” offer excellent financial security. Together with the Aaa rated companies, Aa rated companies constitute what are generally known as high-grade companies, with Aa rated companies generally having somewhat larger long-term risks.

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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)     Baa1   (Adequate security)

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

Competition
The worldwide reinsurance and insurance businesses are highly competitive, as well as cyclical by product and market. 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 in aggregate across the reinsurance industry more generally, contributing, in combination with 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, which can be a significant competitive advantage. In addition, the lack of strong barriers to entry into the reinsurance business and the potential for securitization of reinsurance and insurance risks through capital markets provide additional sources of potential reinsurance and insurance capacity and competition.

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In 2006, the Company observed strong price increases, and more restricted limits, in those property lines and regions that were most affected by the catastrophe events of 2005, principally Hurricanes Katrina, Rita and Wilma. Reinsurance capacity in these areas was constrained, particularly for catastrophe reinsurance, which includes southeastern U.S. exposures and in the retrocession and energy lines. The record catastrophe losses of 2005 have also generally led to modest strengthening for U.S. property lines that have little or no substantive catastrophe exposure and price stabilization in most casualty insurance and reinsurance markets. However, certain of the Company’s U.S. casualty lines continue to exhibit weaker market conditions led by the medical stop loss and D&O reinsurance classes, as well as the California workers’ compensation insurance line. The Company believes that U.S. casualty reinsurance generally remains adequately priced; however, increased price competition at the insurance company level and cedants’ increased appetite for retaining more profitable business net following several years of hard-market conditions, may result in modestly softer reinsurance pricing. The Company’s U.S. insurance operation is less affected by these standard casualty insurance market conditions given its specialty insurance program orientation. Finally, the Company continues to observe generally stable property reinsurance market conditions in most countries outside of the U.S., except for hardening property market conditions in Mexico following Hurricane Wilma, while casualty rates are softening.

U.S. property reinsurance market conditions tightened, particularly within peak catastrophe zones, during 2006. This market hardening was particularly pronounced in third quarter renewals with incrementally higher rate changes and even more restrictive coverage terms than earlier in 2006. As a result, many reinsurance buyers were not able to fully place their reinsurance program and have been forced to raise retention levels and/or reduce catastrophe limit purchases. In turn, insurance companies continue to adjust limits and coverages and increase the premium rates they charge their customers. Together, these trends have generally resulted in insurance companies retaining more property risk exposure and being more prone to potential future earnings volatility than in past years. This trend reflects an imbalance between reinsurance supply and demand. As a result of this imbalance and higher rates, additional competition is entering the market in the form of new companies and alternative risk transfer mechanisms. In January 2007, the Florida legislature enacted insurance reform that increases insurer’s access to the Florida Hurricane Catastrophe Fund, thus potentially reducing the amount of reinsurance purchased from the private reinsurance market. The Company is unable to predict the impact on future market conditions from the increased competition and legislative reform. In addition to these market forces, reinsurers continue to reassess their risk appetites and rebalance their property portfolios to reflect improved price to exposure metrics against the backdrop of: (i) recent revisions to the industry’s catastrophe loss projection models, which are indicating significantly higher loss potentials and consequently higher pricing requirements and (ii) elevated rating agency scrutiny and capital requirements for many catastrophe exposed companies.

In light of its 2005 catastrophe experience, the Company reexamined its risk management practices, concluded that its control framework operated generally as intended and made appropriate portfolio adjustments to its property reinsurance operations during the first nine months of 2006. This portfolio repositioning, particularly within peak catastrophe zones, including Southeast U.S., Mexico and Gulf of Mexico, has enabled the Company to benefit from these dislocated markets by carefully shifting the mix of its writings toward the most profitable classes, lines, customers and territories and enhancing portfolio balance and diversification.

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

Employees
As of February 1, 2007, the Company employed 736 persons. Management believes that employee relations are good. None of the Company’s employees are subject to collective bargaining agreements, and the Company is not aware of any current efforts to implement such agreements.

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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. 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.

The Insurance Companies Act of Canada 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 and liquidity 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, 2006, Bermuda Re and Everest International exceeded 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 $2,704.1 million at December 31, 2006, and only after it has given 10 days prior notice to the Delaware Insurance Commissioner.

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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. Accordingly, the maximum amount that will be available for the payment of dividends by Everest Re in 2007 without triggering the requirement for prior approval of regulatory authorities in connection with a dividend is $270.4 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 focused on 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 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. 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.

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

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licensed for reinsurance only. Such licensing enables U.S. domestic ceding company clients to take credit for uncollateralized reinsurance receivables from Everest Re in their statutory financial statements.

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, 2006, 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.

Bermuda.   Under 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

29

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.

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 to become subject to U.S. income tax; there could be a material adverse effect on the Company’s financial condition, results of operations and cash flows.

United Kingdom.   Bermuda Re’s UK branch conducts business in the UK and is subject to taxation in the UK. Bermuda Re believes that it has operated and will continue to operate its Bermuda operation in a manner which will not cause them to be subject to UK taxation. If Bermuda Re’s Bermuda operations were to become subject to UK income tax there could be a material adverse impact on the Company’s financial condition, results of operations and 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

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

RISKS RELATING TO OUR BUSINESS

Our results could be adversely affected by catastrophic events.

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

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Calendar year
Pre-tax catastrophe losses
2006     $ 287.9   million
2005   $1,485.7  million
2004   $ 390.0  million
2003   $ 35.0  million
2002   $ 30.0  million

Our losses from future catastrophic events could exceed our projections.

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

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.

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 we employ actuarial and statistical projections. The information received from our ceding companies is not always timely or accurate, which can contribute to inaccuracies in our loss projections. Because of the uncertainties that surround our estimates of loss and LAE reserves, we cannot be certain that ultimate loss and LAE payments will not exceed our estimates. If our reserves are deficient, we would be required to increase loss reserves in the period in which such deficiencies are identified which would cause a charge to our earnings and a reduction of capital. By way of illustration, during the past five calendar years, the reserve re-estimation process resulted in a decrease to our pre-tax net income in four of the years:

Calendar year
Effect on pre-tax net income
2006     $ 135.6   million decrease
2005   $ 26.4   million increase
2004   $ 249.4  million decrease
2003   $ 196.8   million decrease
2002   $ 103.1   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.

The difficulty in estimating our reserves is significantly more challenging as it relates to reserving for potential A&E liabilities. At year-end 2006, roughly 7% of our gross reserves were comprised of A&E reserves. A&E

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liabilities are especially hard to estimate for many reasons, including the long delays between exposure and manifestation of any bodily injury or property damage, difficulty in identifying the source of the asbestos or environmental contamination, long reporting delays and difficulty in properly allocating liability for the asbestos or environmental damage. Legal tactics and judicial and legislative developments affecting the scope of insurers’ liability, which can be difficult to predict, also contribute to uncertainties in estimating reserves for A&E liabilities.

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

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

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

Our active insurance company subsidiaries currently hold financial strength ratings assigned by third-party rating agencies which assess and rate the claims paying ability and financial strength of insurers and reinsurers. Our active subsidiaries carry an “A+ (“Superior”)” rating from A.M. Best. Everest Re, 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 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.

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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 to us 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.

2006
2005
2004
2003
2002
Percentage of ceded written premiums to gross written premiums      3.1 %  3.3 %  3.7 %  5.6 %  7.3 %

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 claims experience.

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

Our industry is highly competitive and subject to pricing cycles that can be pronounced. We compete globally in the U.S., Bermuda and international reinsurance and insurance markets with numerous competitors. Our competitors include independent reinsurance and insurance companies, subsidiaries or affiliates of established

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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, in which 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. 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 58), and Executive Vice President and Chief Financial Officer, Craig Eisenacher (age 59). Of those three officers, we have employment contracts with Mr. Taranto and Mr. Eisenacher. Mr. Taranto’s 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. Mr. Eisenacher’s contract has been previously filed with the SEC on December 5, 2006 for a term of employment from December 18, 2006 until December 19, 2008. We are not aware that any of the above three officers are planning to leave 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. The Company has an employment contract with Mr. de Saram, which was previously filed with the SEC and was most recently amended on October 31, 2006 to extend Mr. de Saram’s term of employment from November 1, 2006 until November 1, 2008.

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

A significant portion of our investment portfolio consists of fixed income securities and smaller portions consist of equity securities and other investments. Both the fair market value of our invested assets and associated

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

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

Because all of our fixed income securities are classified as available for sale, temporary changes in the market value of these investments 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 reduces our capital or could 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, 2006


% of Total
Fixed income:                        
Mortgage-backed securities      $ 1,593,974       11.4 %
Other asset-backed       419,833       3.0 %



   Total asset-backed       2,013,807       14.4 %
Other fixed income       8,306,043       59.5 %



   Total fixed income       10,319,850       73.9 %
Equity securities       1,613,678       11.6 %
Other invested assets       467,193       3.3 %
Cash and short-term investments       1,556,366       11.2 %



   Total Investments and Cash      $ 13,957,087       100.0 %



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. dollar may materially impact our results and financial position. In 2006, we wrote approximately 28.6% of our reinsurance coverages in non-U.S. currencies; as of December 31, 2006, we maintained approximately 13.3% of our investment portfolio in investments denominated in non-U.S. currencies. During 2006, 2005, 2004, the impact on our quarterly pre-tax net income from exchange rate fluctuations ranged from a loss of $6.5 million to a gain of $5.9 million.

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RISKS RELATING TO REGULATION

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

We are subject to extensive and increasing regulation under U.S., state and foreign insurance laws. These laws limit the amount of dividends that can be paid to us by our operating subsidiaries, impose restrictions on the amount and type of investments that we can hold, prescribe solvency, accounting and internal control standards that must be met and maintained and require us to maintain reserves. These laws also require disclosure of material inter-affiliate transactions and require prior approval of “extraordinary” transactions. Such “extraordinary” transactions include declaring dividends from operating subsidiaries that exceed statutory thresholds. These laws also generally require approval of changes of control of insurance companies. The application of these laws could affect our liquidity and ability to pay dividends, interest and other payments on securities, as applicable, and could restrict our ability to expand business operations through acquisitions of new insurance subsidiaries. We may not have or maintain all required licenses and approvals or fully comply with the wide variety of applicable laws and regulations or the relevant authority’s interpretation of the laws and regulations. If we do not have the requisite licenses and approvals or do not comply with applicable regulatory requirements, the insurance regulatory authorities could preclude or temporarily suspend us from carrying on some or all 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.

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

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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,

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

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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, other than an 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 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,

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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 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

39

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, Delaware 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.

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,

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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 were 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 would 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”) were to successfully contend 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 were to successfully contend 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 were to successfully contend 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.

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

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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 do 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 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 would 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 would reduce our net income.

ITEM 1B.   Unresolved Staff Comments

None.

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 thirteen locations occupy a total of approximately 75,000 square feet, all of which are leased. Management believes that the above-described office space is adequate for its current and anticipated needs.

ITEM 3.   Legal Proceedings

In the ordinary course of business, the Company is involved in lawsuits, arbitrations and other formal and informal dispute resolution procedures, the outcomes of which will determine the Company’s rights and

42

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.

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 2006 and 2005 were as follows:

High
Low
2006          
First Quarter:   $ 103.03   $ 91.51  
Second Quarter:    94.06    85.87  
Third Quarter:    99.63    86.87  
Fourth Quarter:    102.51    96.92  

2005
    
First Quarter:   $ 90.80   $ 85.01  
Second Quarter:    93.00    82.20  
Third Quarter:    100.02    91.94  
Fourth Quarter:    107.34    90.03  

Number of Holders of Common Shares
The number of record holders of common shares as of February 15, 2007 was 62. 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.

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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 $0.12 per share for the first three quarters of 2006, $0.24 per share for the fourth quarter of 2006 and $0.11 per share for each quarter of 2005. A committee of the Company’s Board of Directors declared a dividend of $0.48 per share, payable on or before March 23, 2007 to shareholders of record on March 5, 2007.

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.

44

Performance Graph
The following Performance Graph compares cumulative total shareholder returns on the Common Shares (assuming reinvestment of dividends) from December 31, 2001 through December 31, 2006, with the cumulative total return of the Standard & Poor’s 500 Index and the Standard & Poor’s Insurance (Property and Casualty) Index.



* $100 invested on 12/31/01 in stock or index-including reinvestment of dividends. Fiscal year ended December 31.

Copyright © 2007 Standard & Poor’s, a division of The McGraw-Hill Companies, Inc. All rights reserved. www.researchdatagroup.com/S&P.htm

ITEM 6.   Selected Financial Data

The following selected consolidated GAAP financial data of the Company as of and for the years ended December 31, 2006, 2005, 2004, 2003 and 2002 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.

45

Years Ended December 31,
(Dollars in millions, except per share amounts)
2006
2005
2004
2003
2002
Operating data:                        
   Gross written premiums   $ 4,000.9   $ 4,108.6   $ 4,704.1   $ 4,573.8   $ 2,846.5  
   Net written premiums    3,875.7    3,972.0    4,531.5    4,315.4    2,637.6  
   Premiums earned    3,853.2    3,963.1    4,425.1    3,737.9    2,273.7  
   Net investment income    629.4    522.8    495.9    402.6    350.7  
   Net realized capital gains (losses)    35.1    90.3    89.6    (38.0 )  (50.0 )
   Incurred losses and loss adjustment  
      expenses (including catastrophes)    2,434.4    3,724.3    3,291.1    2,600.2    1,629.4  
   Total catastrophe losses (1)    283.0    1,403.9    390.0    35.0    30.0  
   Commission, brokerage, taxes and fees    883.3    914.8    975.2    863.9    551.8  
   Other underwriting expenses    138.0    129.8    114.9    98.0    71.3  
   Interest, fee and bond issue cost  
      amortization expense    69.9    74.4    76.6    58.0    45.1  
   Income (loss) before taxes    991.8    (280.9 )  559.7    491.2    262.0  
   Income tax expense (benefit)    150.9    (62.3 )  64.9    65.2    30.7  
   Net income (loss) (2)    840.8    (218.7 )  494.9    426.0    231.3  





   Net income (loss) per basic share (3)   $ 12.99   $ (3.79 ) $ 8.85   $ 7.89   $ 4.60  





   Net income (loss) per diluted share (4)   $ 12.87   $ (3.79 ) $ 8.71   $ 7.74   $ 4.52  





   Dividends paid per share   $ 0.60   $ 0.44   $ 0.40   $ 0.36   $ 0.32  





Certain GAAP financial ratios: (5)  
   Loss ratio    63.2 %  94.0 %  74.4 %  69.6 %  71.7 %
   Other underwriting expense ratio    26.5 %  26.3 %  24.6 %  25.7 %  27.4 %





   Combined ratio (2)    89.7 %  120.3 %  99.0 %  95.3 %  99.1 %





Balance sheet data (at end of period):  
   Total investments and cash   $ 13,957.1   $ 12,970.8   $ 11,530.2   $ 9,321.3   $ 7,265.6  
   Total assets    17,107.6    16,474.5    15,072.8    12,689.5    9,871.2  
   Loss and LAE reserves    8,840.1    9,126.7    7,836.3    6,361.2    4,905.6  
   Total debt    995.6    995.5    1,245.3    735.6    735.4  
   Total liabilities    11,999.9    12,334.8    11,360.2    9,524.6    7,502.5  
   Shareholders' equity    5,107.7    4,139.7    3,712.5    3,164.9    2,368.6  
   Book value per share (6)    78.53    64.04    66.09    56.84    46.55  

(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 caused 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 64.7 million, 57.6 million, 55.9 million, 54.0 million and 50.3 million for 2006, 2005, 2004, 2003 and 2002, respectively.
(4) Based on weighted average diluted shares outstanding of 65.3 million, 57.6 million, 56.8 million, 55.0 million and 51.1 million for 2006, 2005, 2004, 2003 and 2002, 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 other underwriting 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 65.0 million, 64.6 million, 56.2 million, 55.7 million and 50.9 million shares outstanding for December 31, 2006, 2005, 2004, 2003 and 2002, respectively.

46

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”.

INDUSTRY CONDITIONS
The worldwide reinsurance and insurance businesses are highly competitive, as well as 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 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, 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 2006, the Company observed strong price increases, and more restricted limits, in those property lines and regions that were most affected by the catastrophe events of 2005, principally Hurricanes Katrina, Rita and Wilma. Reinsurance capacity in these areas was constrained, particularly for catastrophe reinsurance, which includes southeastern U.S. exposures and in the retrocession and energy lines. The record catastrophe losses of 2005 have also generally led to modest strengthening for U.S. property lines that have little or no substantive catastrophe exposure and price stabilization in most casualty insurance and reinsurance markets. However, certain of the Company’s U.S. casualty lines continue to exhibit weaker market conditions led by the medical stop loss and D&O reinsurance classes, as well as the California workers’ compensation insurance line. The Company believes that U.S. casualty reinsurance generally remains adequately priced; however, increased price competition at the insurance company level and cedants’ increased appetite for retaining more profitable business net following several years of hard-market conditions, may result in modestly softer reinsurance pricing. The Company’s U.S. insurance operation is less affected by these standard casualty insurance market conditions given its specialty insurance program orientation. Finally, the Company continues to observe generally stable property reinsurance market conditions in most countries outside of the U.S., except for hardening property market conditions in Mexico following Hurricane Wilma, while casualty rates are softening.

U.S. property reinsurance market conditions tightened, particularly within peak catastrophe zones, during 2006. This market hardening was particularly pronounced in third quarter renewals with incrementally higher rate changes and even more restrictive coverage terms than earlier in 2006. As a result, many reinsurance buyers were not able to fully place their reinsurance program and have been forced to raise retention levels and/or

47

reduce catastrophe limit purchases. In turn, insurance companies continue to adjust limits and coverages and increase the premium rates they charge their customers. Together, these trends have generally resulted in insurance companies retaining more property risk exposure and being more prone to potential future earnings volatility than in past years. This trend reflects an imbalance between reinsurance supply and demand. As a result of this imbalance and higher rates, additional competition is entering the market in the form of new companies and alternative risk transfer mechanisms. In January 2007, the Florida legislature enacted insurance reform that increases insurer’s access to the Florida Hurricane Catastrophe Fund, thus potentially reducing the amount of reinsurance purchased from the private reinsurance market. The Company is unable to predict the impact on future market conditions from the increased competition and legislative reform. In addition to these market forces, reinsurers continue to reassess their risk appetites and rebalance their property portfolios to reflect improved price to exposure metrics against the backdrop of: (i) recent revisions to the industry’s catastrophe loss projection models, which are indicating significantly higher loss potentials and consequently higher pricing requirements and (ii) elevated rating agency scrutiny and capital requirements for many catastrophe exposed companies.

In light of its 2005 catastrophe experience, the Company reexamined its risk management practices, concluded that its control framework operated generally as intended and made appropriate portfolio adjustments to its property reinsurance operations during the first nine months of 2006. This portfolio repositioning, particularly within peak catastrophe zones, including Southeast U.S., Mexico and Gulf of Mexico, has enabled the Company to benefit from these dislocated markets by carefully shifting the mix of its writings toward the most profitable classes, lines, customers and territories and enhancing portfolio balance and diversification.

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

48

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

Years Ended December 31,
Percentage Increase/(Decrease)
(Dollars in thousands) 2006
2005
2004
2006/2005
2005/2004

Gross written premiums
    $ 4,000,870   $ 4,108,562   $ 4,704,135       -2.6 %      -12.7 %
Net written premiums    3,875,714    3,972,041    4,531,488    -2.4 %    -12.3 %

REVENUES:
  
Premiums earned   $ 3,853,153   $ 3,963,093   $ 4,425,082       -2.8 %     -10.4 %
Net investment income    629,378    522,833    495,908       20.4 %     5.4 %
Net realized capital gains    35,067    90,284    89,614       -61.2 %     0.7 %
Net derivative expense    (410 )  (2,638 )  (2,660 )     84.4 %     0.8 %
Other income (expense)    112    (11,116 )  9,562       N M     N M



Total revenues    4,517,300    4,562,456    5,017,506       -1.0 %     -9.1 %



CLAIMS AND EXPENSES:  
Incurred losses and loss adjustment expenses    2,434,420    3,724,317    3,291,139       -34.6 %     13.2 %
Commission, brokerage, taxes and fees    883,254    914,847    975,176       -3.5 %     -6.2 %
Other underwriting expenses    137,977    129,800    114,870       6.3 %     13.0 %
Interest, fee and bond issue  
   cost amortization expense    69,899    74,413    76,610       -6.1 %     -2.9 %



Total claims and expenses    3,525,550    4,843,377    4,457,795       -27.2 %     8.6 %



INCOME (LOSS) BEFORE TAXES    991,750    (280,921 )  559,711       453.0 %     -150.2 %
Income tax expense (benefit)    150,922    (62,254 )  64,853       342.4 %     -196.0 %



NET INCOME (LOSS)   $ 840,828   $ (218,667 ) $ 494,858       484.5 %     -144.2 %



RATIOS:               Point Change        Point  Change


Loss ratio    63.2 %  94.0 %  74.4 %     (30.8 )     19.6  
Commission and brokerage ratio    22.9 %  23.1 %  22.0 %     (0.2 )     1.1  
Other underwriting expense ratio    3.6 %  3.2 %  2.6 %     0.4       0.6  





Combined ratio    89.7 %  120.3 %  99.0 %     (30.6 )     21.3  






December 31,

(Dollars in millions) 2006
2005
2004
Shareholders' equity   $ 5,107.7   $ 4,139.7   $ 3,712.5       23.4 %     11.5 %




(NM, not meaningful)
  

The Company’s 2006 results were very strong with net income of $840.8 million compared to a net loss of $218.7 million for 2005. This significant earnings improvement reflects the favorable effect of a benign U.S. hurricane season relative to unprecedented Company and industry hurricane losses experienced in 2005, as well as favorable underlying underwriting fundamentals.

49

Gross written premiums declined for 2006 compared to 2005 as the Company continued its disciplined underwriting and risk management practices. In particular, the Company repositioned its U.S. property reinsurance portfolio resulting in improved pricing, but lower premium volume. The premium volume decline also reflects much lower premiums due to the run-off insurance credit program business and a cut back in treaty casualty writings in response to market softening in many U.S. casualty reinsurance classes.

Investment income increased from the growth of the invested asset base and greater income from limited partnership investments.

The Company’s shareholders’ equity increased by $1.0 billion to $5.1 billion in 2006, principally attributable to the record net income generated during the year. This compares to an increase of $0.4 billion to $4.1 billion in 2005.

Revenues.   Gross and net written premiums declined 2.6% and 2.4%, respectively, for 2006 compared to 2005, while net premiums earned declined 2.8% in 2006 compared to 2005. The decrease in full year net premiums earned was primarily due to a decline in the U.S. insurance segment of 7.5%, reflective of: i) a reduction in credit business from an auto loan insurance program which is in run-off; and ii) continued reductions in the California workers’ compensation writings due to competitive market conditions. In addition, net premiums earned for the worldwide reinsurance segments in the aggregate decreased by 1.5% for 2006, reflecting multiple segment level factors, including a significant return premium for a Florida property quota share contract cancelled in 2006, the absence of sizable reinstatement premiums triggered in 2005 from severe catastrophic events, as well as the exercise of continued underwriting disciplines which emphasizes potential profitability over volume.

Net investment income increased 20.4% for 2006 compared to 2005, reflecting continued year-over-year growth in invested assets from positive cash flow from operations and a $43.2 million increase in income from limited partnership investments. The average investment portfolio yields for 2006 were 4.6% pre-tax and 4.0% after-tax, slightly higher compared to the prior year.

Net realized capital gains were modest in relation to the Company’s invested asset base, mainly reflecting normal portfolio management activities in response to changes in interest rates and credit spreads.

Expenses.   The Company’s incurred losses and loss adjustment expenses (“LAE”) decreased 34.6% in 2006 compared to 2005, primarily due to the relative absence of current year catastrophe losses.

The Company’s loss ratio improvement of 31 points for 2006 compared to 2005 included a 30 point improvement due to the relative absence of current year catastrophes.

Commission, brokerage, and tax expenses decreased by 3.5% in 2006 from 2005. The 2.8% decline in earned premiums in 2006 compared to 2005 was the principal driver of the decrease in this directly variable expense. Other underwriting expenses for 2006 increased by 6.3% compared to 2005, all due to growth in corporate non-allocated expenses.

The Company’s effective income tax rate for 2006 was 15.2% compared with the effective tax rate for 2005 of 22.2%, which was impacted by the large catastrophe losses.

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, treaty and facultative reinsurance, through reinsurance brokers, as well as directly with ceding companies within the U.S. The U.S. Insurance operation writes property and casualty insurance primarily through general agents and

50

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 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, control of aggregate exposures to catastrophic events, capital, investments and support operations. Management 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 produced. For selected financial information regarding these segments, see Note 18 of Notes to Consolidated Financial Statements.

The following tables present the relevant underwriting results for the operating segments for the three years ended December 31, 2006, 2005 and 2004:

U.S. Reinsurance
(Dollars in thousands) 2006
2005
2004
Gross written premiums     $ 1,336,728   $ 1,386,168   $ 1,478,159  
Net written premiums    1,331,677    1,383,690    1,468,466  

Premiums earned
   $ 1,281,055   $ 1,396,133   $ 1,473,545  
Incurred losses and loss adjustment expenses    851,172    1,479,560    1,168,563  
Commission and brokerage    298,111    358,101    373,581  
Other underwriting expenses    24,946    23,981    23,390  



Underwriting gain (loss)   $ 106,826   $ (465,509 ) $ (91,989 )




U.S. Insurance
(Dollars in thousands) 2006
2005
2004
Gross written premiums     $ 866,294   $ 932,469   $ 1,167,808  
Net written premiums    753,324    815,316    1,019,716  

Premiums earned
   $ 761,685   $ 823,015   $ 937,576  
Incurred losses and loss adjustment expenses    519,904    530,781    658,777  
Commission and brokerage    123,087    132,630    130,380  
Other underwriting expenses    48,918    51,911    49,277  



Underwriting gain   $ 69,776   $ 107,693   $ 99,142  



51


Specialty Underwriting
(Dollars in thousands) 2006
2005
2004
Gross written premiums     $ 251,209   $ 314,630   $ 487,072  
Net written premiums    243,819    299,316    470,571  

Premiums earned
   $ 244,501   $ 301,454   $ 459,284  
Incurred losses and loss adjustment expenses    163,925    317,917    302,010  
Commission and brokerage    67,829    79,692    129,209  
Other underwriting expenses    6,559    6,756    7,068  



Underwriting gain (loss)   $6,188 $(102,911 ) $ 20,997  




International
(Dollars in thousands) 2006
2005
2004
Gross written premiums     $ 731,745   $ 706,584   $ 687,657  
Net written premiums    730,717    704,870    684,390  

Premiums earned
   $ 719,475   $ 683,435   $ 655,694  
Incurred losses and loss adjustment expenses    382,839    574,653    419,101  
Commission and brokerage    180,541    166,968    161,106  
Other underwriting expenses    13,830    12,622    11,298  



Underwriting gain (loss)   $ 142,265   $ (70,808 ) $ 64,189  




Bermuda
(Dollars in thousands) 2006
2005
2004
Gross written premiums     $ 814,894   $ 768,711   $ 883,439  
Net written premiums    816,177    768,849    888,345  

Premiums earned
   $ 846,437   $ 759,056   $ 898,983  
Incurred losses and loss adjustment expenses    516,580    821,406    742,688  
Commission and brokerage    213,686    177,456    180,900  
Other underwriting expenses    17,193    16,153    13,998  



Underwriting gain (loss)   $ 98,978   $ (255,959 ) $ (38,603 )



52

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 three years ended December 31:

(Dollars in thousands) 2006
2005
2004
Underwriting gain (loss)     $ 424,033   $ (787,494 ) $ 53,736  
Net investment income    629,378    522,833    495,908  
Net realized capital gains    35,067    90,284    89,614  
Net derivative expense    (410 )  (2,638 )  (2,660 )
Corporate expenses    (26,531 )  (18,377 )  (9,839 )
Interest, fee and bond issue cost amortization expense    (69,899 )  (74,413 )  (76,610 )
Other income (expense)    112    (11,116 )  9,562  



Income (loss) before taxes   $ 991,750   $ (280,921 ) $ 559,711  



CONSOLIDATED RESULTS OF OPERATIONS

YEAR ENDED DECEMBER 31, 2006 COMPARED TO YEAR ENDED DECEMBER 31, 2005
Premiums Written.   Gross written premiums decreased 2.6% to $4,000.9 million in 2006 from $4,108.6 million in 2005. The Specialty Underwriting operation decreased 20.2% ($63.4 million), driven by a $53.2 million reduction in A&H premiums, as pricing for this business continues to be difficult and a $23.6 million decrease in marine and aviation premiums, partially offset by a $13.4 million increase in surety premiums. The U.S. Insurance operation decreased 7.1% ($66.2 million), mainly reflecting continued reductions in the California workers’ compensation business and run-off of the credit business. The U.S. Reinsurance operation decreased 3.6% ($49.4 million), principally reflecting a $72.7 million decrease in treaty casualty business, partially offset by a $16.4 million increase in treaty property business and by an $11.6 million increase in facultative business. Partially offsetting these declines was a 6.0% ($46.2 million) increase in the Bermuda operation, reflecting increases in treaty business in the UK, Europe and Bermuda, partially offset by decreased facultative business in Bermuda. The International operation increased 3.6% ($25.2 million), primarily due to a $47.1 million increase in international business written through the Miami and New Jersey offices, representing primarily Latin American business and by a $22.8 million increase in Canadian business, partially offset by a $44.1 million decrease in Asian business. The Company endeavors to write only business that meets its profit criteria; generally, increases and decreases in a line of business or region are the result of changing perceptions of the profit opportunities in the various markets.

Ceded premiums decreased to $125.2 million in 2006 from $136.5 million in 2005. 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 2.4% to $3,875.7 million in 2006 from $3,972.0 million in 2005, reflecting the $107.7 million decrease in gross written premiums and the $11.4 million decrease in ceded premiums.

Premium Revenues.  Net premiums earned decreased by 2.8% to $3,853.2 million in 2006 from $3,963.1 million in 2005. Contributing to this decrease was an 18.9% ($57.0 million) decrease in the Specialty Underwriting operation, an 8.2% ($115.1 million) decrease in the U.S. Reinsurance operation, a 7.5% ($61.3 million) decrease in the U.S. Insurance operation, partially offset by an 11.5% ($87.4 million) increase in the Bermuda operation and a 5.3% ($36.0 million) increase in the International operation. Additional premiums, related to catastrophe business, included in net earned premiums contributed $4.9 million and $81.8 million for 2006 and 2005, respectively. The changes reflect period to period changes in net written premiums and business mix, together with normal variability in earning patterns. Business mix changes occur not only as the Company shifts emphasis between products, lines of business, distribution channels and markets, but also as individual

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contracts renew or non-renew, almost always with changes in coverage, structure, prices and/or terms and as new contracts are accepted. 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 daily underwriting decisions, can and does introduce appreciable variability in various underwriting line items. Changes in estimates of the reporting patterns of ceding companies also affect premiums earned.

Expenses
Incurred Losses and LAE.   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, recently reported loss and claim experience related to prior periods. The effect of such re-evaluations is recorded in incurred losses for the current period.

The following table shows the components of the Company’s incurred losses and LAE for 2006 and 2005:

December 31, 2006 December 31, 2005
(Dollars in millions) Current
Year


Prior
Years


Total
Incurred

Current
Year


Prior
Years


Total
Incurred

All Segments                                                          
Attritional (a)   $ 2,283 .2    $ (243 .3)    $ 2,039 .9    $ 2,383 .6    $ (226 .3)    $ 2,157 .2
Catastrophes    15 .6     272 .3     287 .9     1,367 .2     118 .5     1,485 .7
A&E    -       106 .6     106 .6     -       81 .4     81 .4






Total All segments   $ 2,298 .8    $ 135 .6    $ 2,434 .4    $ 3,750 .7    $ (26 .4)    $ 3,724 .3






Loss Ratio    59.7 %     3.5 %     63.2 %     94.6 %     -0.7 %     94.0 %

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

The Company’s incurred losses and LAE decreased 34.6% to $2,434.4 million in 2006 from $3,724.3 million in 2005, due to significantly reduced current year catastrophe losses and a reduction in current and prior years attritional losses, partially offset by increased prior years reserve development on catastrophe and A&E losses. Incurred losses and LAE in 2006 reflected ceded losses and LAE of $109.5 million compared to ceded losses and LAE in 2005 of $95.2 million.

The Company’s loss ratio, which is calculated by dividing incurred losses and LAE by current year net premiums earned, improved by 30.8 points to 63.2% over the comparable 2005 period, principally due to a 34.1 point improvement of current year catastrophe losses, partially offset by 4.2 points related to an increase in prior years reserve strengthening.

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The following table shows the U.S. Reinsurance segment components of incurred losses and LAE for 2006 and 2005:

December 31, 2006 December 31, 2005
(Dollars in millions) Current
Year


Prior
Years


Total
Incurred

Current
Year


Prior
Years


Total
Incurred

Attritional     $ 683 .6     $ (50 .4)     $ 633 .2     $ 824 .3     $ (63 .3)     $ 760 .9
Catastrophes    8 .9     181 .7     190 .6     634 .6     72 .5     707 .2
A&E    -       27 .4     27 .4     -       11 .5     11 .5






Total segment   $ 692 .5    $ 158 .7    $ 851 .2    $ 1,458 .8    $ 20 .7    $ 1,479 .6






Loss Ratio    54.1 %     12.4 %     66.4 %     104.5 %     1.5 %     106.0 %

(Some amounts may not reconcile due to rounding.)
  

The U.S. Reinsurance segment’s incurred losses and LAE decreased 42.5%, or $628.4 million, for 2006 compared to 2005, primarily due to significantly reduced current year catastrophe losses, principally within the treaty property unit and decreased earned premiums. The segment’s loss ratio improved by 39.6 points from 2005 due to a decrease in catastrophe losses, coupled with an improvement in the overall attritional loss ratio. The segment’s attritional loss ratio improvement generally results from more favorable current year pricing, principally on the property business.

The following table shows the U.S. Insurance segment components of incurred losses and LAE for 2006 and 2005:

December 31, 2006 December 31, 2005
(Dollars in millions) Current
Year


Prior
Years


Total
Incurred

Current
Year


Prior
Years


Total
Incurred

Attritional     $ 588 .0     $ (68 .5)     $ 519 .5     $ 548 .9     $ (19 .5)     $ 529 .5
Catastrophes    -       0 .4     0 .4     1 .3     -       1 .3






Total segment   $ 588 .0    $ (68 .1)    $ 519 .9    $ 550 .2    $ (19 .5)    $ 530 .8






Loss Ratio    77.2 %     -8.9 %     68.3 %     66.9 %     -2.4 %     64.5 %

(Some amounts may not reconcile due to rounding.)
  

The U.S. Insurance segment’s incurred losses and LAE decreased 2.0%, or $10.9 million, for 2006 as compared to 2005, primarily due to reduced earned premiums, which related to the continued reduction in the California workers’ compensation business and run-off of a credit program. The segment’s loss ratio increased 3.8 points from 2005, primarily due to higher losses on the credit program.

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The following table shows the Specialty Underwriting segment components of incurred losses and LAE for 2006 and 2005:

December 31, 2006 December 31, 2005
(Dollars in millions) Current
Year


Prior
Years


Total
Incurred

Current
Year


Prior
Years


Total
Incurred

Attritional     $ 141 .2     $ (38 .2)     $ 103 .0     $ 186 .5     $ (33 .0)     $ 153 .4
Catastrophes    -       60 .9     60 .9     147 .6     16 .9     164 .5